Hiring and retaining skilled and productive employees in SaaS companies is an ongoing, competitive exercise. Human assets are the biggest investment and a huge driver of SaaS company valuations – but a lot of organizations don’t check SaaS HR benchmarks regularly or keep it in front of management the way they do customer lifetime value, retention and cost to acquire. However, when companies are preparing for IPO or being acquired, employee productivity is a critical valuation metric.
Employees are a SaaS company’s largest single expense.
Average compensation and benefits for SaaS companies ranges from 105% of revenue for companies between $1M-$10M to just under 70% of revenue for companies between $250M-$450M. That’s measuring direct comp & benefits expense and does not include any of the expenses associated with attracting and retaining skilled works, like your HR investment, free lunches, etc., not to mention rent, and other expenses associated with making your employees productive.
Skilled SaaS Employees are Hard to Find
What SaaS company has an easy time filling all the open positions? Each year, in our benchmarking, we ask companies to submit their expected employee growth rate as well as their headcount at the end of the previous year. We compared 2 years survey data for 30 private, venture-backed SaaS companies and found that most of them actually hired fewer people last year than they planned. The average was 5% fewer employees at the end of 2017 than were in the FY 2017 budget. There were definitely a few companies that hired more than planned or even on plan, but the majority were under plan. We hear from companies in our benchmarking community that senior positions tend to be the hardest to fill, especially CFOs and as well as experienced leaders in Sales, Marketing and R&D.
In doing this analysis, we excluded companies that IPO’ed in 2017 or 2018, or companies that had significant M&A activity as the IPO companies usually are actively managing employee metrics. Most of the IPO companies that we looked at actually planned little or no employee growth in the year before IPO, most likely in order to improve the employee productivity metric. For companies undertaking M&A in the period we looked at, we excluded them as well since M&A tends to distort employee numbers and employee productivity in that fiscal year.
SaaS HR Benchmarking – Employee Productivity
Employee productivity is calculated simply by dividing the employee number into the revenue or ARR number for a pure subscription company. It is a straightforward metric with little complexity or variance in how it is measured. We like to use “Full-time equivalent (FTE)” instead of “employee,” as the norm today is to use contractors and employees. We want to measure the full number of “heads” that it takes to get a company’s work done.
We find that employee productivity benchmarks vary by:
- company size or stage
- the business model, ie., portion of revenue from professional services versus subscription revenues
- amount of invested capital which often correlates to growth rates (companies with alot of venture money tend to grow faster than companies with limited invested capital)
A Few Observations on Why Employee Productivity Benchmarks Vary
Firstly, employee productivity should increase as a company grows. It should not take the same number of employees to produce $1 of revenue at $10M, $100M, and $1B. However, in SaaS, metrics often are not linear and companies go thru various ups and downs with employee productivity. We often see companies with better employee productivity early on as they are working with a small team to prove the model and product/market fit, then as they raise capital, productivity goes down, then they catch up, but may raise another round, bringing it down again, and so on.
Secondly, a pure subscription business usually has higher employee productivity as compared to a company with a large professional services organization. In addition to the professional services organization, there may also be a significant investment in the customer support as the application may be more complex than a more self-service type application.
Thirdly, we find that highly funded, fast growth SaaS companies tend to have lower employee productivity overall. This is especially true in the year following large venture rounds when a lot of hiring happens, but the resulting revenue expected from the investment in hiring hasn’t yet happened. In addition, given the intense competition for skilled SaaS employees, especially in the major markets on the coasts, if companies have the capital to cover the investment, it is worth snapping up skilled labor faster than you can make them productive and catch up later. However, for SaaS companies planning an IPO, they need to ensure a higher employee productivity leading up to the IPO date.
Bottom Line: Employee Metrics Are Important to Put in Front of Management Regularly
It is our experience that many SaaS finance organizations do not make employee productivity and employee metrics a high priority for senior management. Like most benchmarks, employee productivity should not be looked at in isolation, but in combination with the major drivers of productivity.
Skilled employees are a SaaS company’s biggest expense, and contributor to company valuation. On top of that, given that hiring skilled workers is challenging in most areas, it is doubly important that management reports look at benchmarks for employee metrics like employee hiring, retention and productivity as part of the overall financial dashboard for the company.
Here’s a list of the metrics that OPEXEngine benchmarks for all the SaaS HR cohorts we track (by revenue size, average contract size, revenue growth, invested capital, etc.):
|Total HR Headcount|
|Total Company Recruiting and Hiring Expense (include HR associated with recruiting and hiring)|
|FTEs per HR Headcount|
|Total FTEs (EoY)|
|Average Number of FTEs during year|
|Budgeted Growth in FTE Number by end of upcoming year|
|% Male Employees|
|% Female Employees|
|Hiring & Retention|
|New Hires in year|
|% New Hires of Total FTEs|
|Cost to Recruit and Hire per new employee|
|Exits during period|
|Retention rate during period|
|Benefits expense per employee|
|Recognized Revenue per FTE|
|ARR per FTE|
|Compensation & benefits expense per FTE|
|Benefits Expense per FTE|
|Total Operating Expenses per FTE|
|Operating Income Per FTE|
|EBITDA per FTE|
|Travel and Entertainment Expenses per FTE|
|IT Expenses (including communications and email expense) per FTE|
|Facilities Costs Per FTE|
Let us know if you are interested in learning more about what employee and SaaS HR benchmarks would be appropriate for your company. We can help you measure and compare yourself to peers and market leaders.