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Benchmarking in a SaaS World
Benchmarking in a SaaS World
Benchmarking in a SaaS World
Benchmarking in a SaaS World
Benchmarking in a SaaS World
Benchmarking in a SaaS World
Benchmarking in a SaaS World
Benchmarking in a SaaS World
Benchmarking in a SaaS World
Benchmarking in a SaaS World
Benchmarking in a SaaS World
Benchmarking in a SaaS World
Benchmarking in a SaaS World
Benchmarking in a SaaS World
Benchmarking in a SaaS World
Benchmarking in a SaaS World
Benchmarking in a SaaS World
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Benchmarking in a SaaS World

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Research shows the most successful companies use metrics and benchmarking as a key information and management tool. Benchmarks are used to help set internal targets, and gain agreement on the …

Research shows the most successful companies use metrics and benchmarking as a key information and management tool. Benchmarks are used to help set internal targets, and gain agreement on the appropriate targets by providing neutral data to set performance expectations among the executive team. It is very easy to point fingers when you are only looking at internal data – using 3rdparty neutral data tends to focus everyone on problem solving rather than blaming or defensiveness.

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  • OPEXEngine focuses on operational areas like Finance, Sales and Marketing, G&A, and R&D productivity. In the SaaS sector, we also benchmark a number of critical customer and pipeline metrics.We provide data to help companies fine tune their business model and figure out course corrections. We deliver peer comparisons for a variety of internal management purposes, as well as for valuations, exits, and outside investors. Since we tend to work with high growth, metrics-driven companies, it’s a dynamic business as quite a number of our clients, both the largest ones, and the smaller ones, tend to get acquired… Luckily, there’s always new tech companies coming along and in the course of 6 years, with 50-100% growth rates, we’ve seen early stage companies grow up and become public and expect we will continue to do so.
  • One of the key SaaS benchmarks, as is often discussed, is churn. We track it by the number of customers up for renewal, as well as the total dollar value up for renewal and now also by the number of seats up for renewal. A couple of trend observations: generally, smaller companies have higher churn than larger. Part of why larger companies get larger is that they don’t have as high churn. But the reality is that most companies have higher churn when they are small because they are still fine-tuning their sales and marketing model, and they may not yet have the best customer support organizations, which are critical to maintaining the customer relationship and renewals. Part of successfully growing your SaaS business is attacking the churn beast. We also see a similar difference in churn rates between companies selling large contract value subscriptions – typically more of an enterprise solution – and companies selling high volume, low cost subscriptions. It makes sense because customers who choose to purchase an expensive software application, even if it is delivered as a SaaS application, typically went through a longer sales cycle, the purchase was more strategic, and they aren’t going to drop it quickly. At the same time, customers that buy a cheaper SaaS application, especially if there is a fair amount of competition in the market for that problem, after a short sales cycle and less invested, may churn more easily.
  • Here we see a few of the typical SaaS expense ratios. The interesting thing to see is how the Cost of Revenue benchmark doesn’t change dramatically as revenue increases, its about 37% for SaaS companies averaging around $10M, and drops slightly for companies averaging about $30M in revenues, then only drops to about 34% for the largest SaaS vendors over $100M. For the biggest SaaS company, SalesForce, they showed Cost of Revenue as a percent of recognized revenue at 19.5% for FY2011. While Cost of Revenue ratios don’t drop dramatically as revenue grows, R&D as a percent of revenue definitely drops after the early stage under $20M, going from about 24% for the early stage companies dropping by about half for both the mid-sized private companies and average public companies over $100M in revenues at about 12%.Sales as a percentage of revenues drops nicely from 34% to 25% to 15% for the largest companies, although coupled with Marketing, you still tend to see something like 45-50%, or even higher, on sales and marketing among the largest companies.
  • The market is definitely rewarding recurring revenue model with higher revenue to market cap multiples than “traditional” software firms, even though those SaaS firms are spending at a higher rate, and some even are in the red in some profitability metrics.
  • This slide was developed by one of our clients, Rally Software, a fast growth vendor of Agile development tools based in Colorado. Hopefully this visual doesn’t represent the budget process at your company, but onemay recognize this budget process chaos. In the traditional budgeting process, Finance sends out operating expense templates to each department with some direction on how much to either grow or decrease expenses, meanwhile Finance is working the topline revenue projections with the head of Sales and CEO and the various elements of the budget go back and forth between departments, finance and the CEO until the plan is finalized and in the end, everyone is just glad when the process is over, regardless of the outcome. In the new model budget process, the finance department sends out its regular package to each operating department, but also includes a copy of relevant operating expense benchmarks for peer companies, and includes benchmarks for all parts of the company, so executives can see how the whole thing fits together, instead of just focusing on their department. Then, department heads come together to discuss each department’s needs and the overall model, and how the company is doing compared to peers and leadership companies. Because of the new process, executives found the budget process to be much more friction-free, and productive (department heads even say they like the budget process!).
  • So, in the new process, Rally Finance used benchmarking analysis to drive a process whereby department heads could make informed budget requests. Subsidiary benefits to the new process were :increased transparency of the process,It was highly collaborative, the management team felt very strong ownership of the plan, and the overall process helped build credibility with the Board of Directors. And while Finance put the whole thing together and drove the process to a productive and efficient conclusion, no one felt like Finance was the heavy but in contrast, the executive team felt Finance had led a very successful, strategic planning process.
  • So, to summarize some of the best practices we’ve seen in our benchmarking work with clients. First and foremost – share the data! Finance owns the data but you need informed inputs from the rest of the operations of the company. You’ll get better buy-in on the model from everyone else if you are all on the same page. That also means ensuring that you are all using the same definitions: for example, on revenue recognition, or on customer profitability – which is something that Finance needs to lead. It doesn’t work if Sales has one definition of revenue recognition and Finance has another, or Marketing has a different view of customer profitability than Finance.In conclusion, critical operating investments and performance targets are set all the time without good quality comparisons of those numbers to peer data, especially in small and mid-sized companies. Part of that is because companies don’t have access to easy-to-use benchmarking tools to help them make operational decisions – and OPEXEngine is working to change that. Most of the data tools that are out there today were developed to help the investment community analyze investments, or to help companies present themselves to the investment community, but OPEXEngine is focused on helping operating executives use benchmarks and peer comparisons to improve business outcomes..
  • Transcript

    • 1. Benchmarking in a SaaS World Lauren Kelleywww.opexengine.com
    • 2. OPEXEngine MissionTo provide operating executives with key financial and performance benchmarking and analysis tools to improve business outcomes.OPEXEngine was founded by operating executives with decades of experience in building high growth tech businesses and in the investment communityTwo information product lines:1) Proprietary Annual Confidential Software Benchmarking2) EDGAR Dashboards for Financial, Sales and Marketing, R&D, and G&A www.opexengine.com
    • 3. Why Benchmark? For information For early warning signs For efficient decision-making“We’ve participated in OPEXEngine’s confidential software benchmarking for thepast four years and find the data highly useful. As a fast growth, mid-sized, publicsoftware company, we are data-driven in our management and planning processesand OPEXEngine’s software benchmarking is a critical information source.” RalphBryant, VP Finance, RightNow (RNOW) www.opexengine.com
    • 4. Data Driven Decision-Making Shift from intuition and “gut instinct” decision- making to data-based analytics and “DDD” One-standard-deviation increase toward data and analytics correlated with 5 to 6 percent improvement in productivity and a slightly larger increase in profitability in those same firms  Prof. Erik Brynjolfsson, MIT Sloan Correlation between DDD and market value CFO owns the data – across departments www.opexengine.com
    • 5. Critical SaaS Metrics TrackedRevenue Metrics: Churn/Renewal Rates:• CMRR • Customer Renewal Rate• Change in CMRR • Dollar Renewal Rate• Net New Monthly CMRR • Seat Renewal RateCustomer Metrics: Payment Terms• Subscriber #• Average Contract Value per Customer Hosting Expense• Average Customer Lifetime Value• Cost of Customer Acquisition (COCA)• Cost of Revenue• Monthly gross margin per customer• # months to break even• Customer profitability• Omniture‟s Magic Number for putting on gas in sales and marketing www.opexengine.com
    • 6. SaaS Renewal Rates Improve www.opexengine.com
    • 7. SaaS Expense RatiosSource: 2011 OPEXEngine Software Benchmarking Industry Report www.opexengine.com
    • 8. Early Stage Software Company $1M-$20M recognized revenue Typically venture-backed, A&B round Focus on figuring out scalable Sales and Marketing and product refinement for target market Building infrastructure for a growth company, while managing cash www.opexengine.com
    • 9. Early Stage Benchmarks < $5M $5M - $20M1 Year Revenue Growth 50% 32%RateOperating Income - 19.8% -13.6%Sales Expense 32.2% 30%Marketing Expense 21% 13.1%Head Count 23 62Net Cash from -50% 5%Operations as a % ofRecognized RevenueSource: 2011 OPEXEngine Software Benchmarking Industry Report www.opexengine.com
    • 10. Mid-Sized, Private SoftwareCompany $20-$50M recognized revenue Target market and customer profile well defined Seeing economies of scale but also putting on gas for high revenue growth and market leadership Additional venture funding for major growth push Profitability “a choice” www.opexengine.com
    • 11. Mid-Sized Private Benchmarks $20M - $50M1 Year Revenue Growth 34.4%RateOperating Income -6.4%Sales Expense 30%Marketing Expense 14.2%Headcount 186Net Cash from Operations -0.8%as a % of RevenueSource: 2011 OPEXEngine Software Benchmarking Industry Report www.opexengine.com
    • 12. Public Markets Rewarding SaaSFINANCIAL DASHBOARD OPEXEngineCompany CRM N RNOW SFSF TLEOTime Period First Half 2012 First Half 2011 First Half 2011 First Half 2011 First Half 2011($000s)Market Cap (priced as of the period end date) $19,549,308 $2,606,369 $1,167,955 $2,319,719 $1,516,341Annualized Revenue to Mrkt Cap Multiplier 9 12 5 8 5Recognized Revenue $1,050,366 $111,274 $107,145 $140,448 $141,206 Product Revenue as % of Recognized Revenue 93.6% 84.5% 81.5% 75.7% 85.1% Services Revenue as % of Recognized Revenue 6.4% 15.5% 18.5% 24.3% 19.5%Recognized Revenue (Prior Period) $771,185 $91,339 $85,556 $94,238 $111,322 Revenue Growth / Prior Period 36.2% 21.8% 25.2% 49.0% 26.8% 3 Year Revenue CAGR 28.1% 17.8% 17.4% 43.6% 23.4% Total Cost of Revenue as a % of Recognized Revenue 21.3% 30.1% 31.6% 31.7% 34.0% S&M Expense as a % of Recognized Revenue 51.2% 52.1% 44.3% 48.0% 35.4% G&A Expense as a % of Recognized Revenue 16.1% 14.6% 11.7% 21.0% 19.3% SG&A Expense as a % of Recognized Revenue 67.2% 66.6% 56.0% 68.9% 54.7% R&D Expense as a % of Recognized Revenue 13.2% 18.3% 10.4% 20.9% 18.9% Total Operating Expense as % of Recognized Revenue 80.4% 84.9% 66.4% 86.2% 73.6% Total Operating Expense as % of Rev Rec + Change in DefRev 64.7% 73.7% 60.3% 59.8% 61.4% Total Operating Profit Margin 0.8% -13.6% 5.5% -15.0% -5.2% Total Net Margin -0.4% -15.7% 1.5% -3.0% -7.3%EBITDA $105,204 $5,433 $8,184 ($9,659) $6,276Total Headcount (Year End) 5,306 1,084 920 1,047 1,164 Total Revenue Per Employee $198 $103 $116 $134 $121 Total Operating Expense per Employee $159 $87 $77 $116 $89 Total Operating Profit per Employee ($3) ($15) $2 ($24) ($9) EBITDA Per Employee $20 $5 $9 ($9) $5 www.opexengine.com
    • 13. Case Study: Traditional Budget Process No Fnce Work Send „Final‟ Present Meet Topline topline targets Prelim to target Targets with Yes out to Mgmt CEO ? Team SalesStart What Target?Here Send out Dept Mgrs work with Send to Dept Head HC & Opex teams to deliver reviews input Templates Mgrs in recommendations from Mgrs each Dept No Meet What Target? dept target No ? Finance & Yes Close Meet Finished CEO make target Send to Finance Operating any additional ? for Overall Plan changes company Rollup Yes www.opexengine.com
    • 14. New Approach Using Benchmarks to Support the Budget Process MKTG Depts Present to Bench- UpdateStart Team forHere marking, an Support Sales PS Bench- feedback alysis & Fin marking & and rollup Fin Rollup discussion R&D www.opexengine.com
    • 15. Best Practices Incorporate benchmarking data up front in budgeting and planning process and review against it monthly/quarterly/annually Communicate benchmarks regularly to all executive departments and with Board to drive Executive Team ownership and collaboration and build credibility with the Board
    • 16. OPEXEngine‟s Annual ConfidentialBenchmarking – Feb/March 2012 Comprehensive benchmarking of private and mid-cap software industry with revenues from $1M -$400M Companies input their data directly into our secure, on-line survey form where data is aggregated and blinded 5 years of software benchmarking, database of 50,000+ datapoints Hundreds of software companies participate Individual Company Report and 60+ page Software Industry Benchmarking Report covering over 150 individual financial and operating benchmarks New interactive tools and secure, on-line portal to develop custom benchmarking reports
    • 17. lauren@opexengine.com 617-674-4218 www.opexengine.com www.opexengine.com

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