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Gauging the Growth Stage
                 Enterprise Software Business
                                 Dave Litwiller
                             Executive in Residence
                                 Communitech
                                   July 2012




© David J. Litwiller, 2012
Introduction


                   Functional dashboard of select measures which empirically
                   provides strong indication of future growth and performance

                   Profiles whether an enterprise software producer is likely in, and
                   to remain in, the top quintile of its peer group as it moves
                   through the band from $10 million in annual sales to over $30
                   million (typically, from 40 to 100 employees and beyond)

                   A set of guidelines I’ve developed operating and overseeing B2B
                   enterprise software businesses

                   Bias toward quantitative measures

© David J. Litwiller, 2012
Sales -
                                 New Rep Productivity

                   The average new sales representative achieves
                   productivity after two quarters
                           Productive is defined as generating period billings with gross
                           margin greater than 2* the rep’s fully loaded costs
                           Applies to on premise or I/P/SaaS offerings

                   Otherwise, there are usually issues with product-market
                   fit, the selling formula and collaterals have not been
                   sufficiently distilled, or the C-suite is still too involved in
                   winning deals to have a fully scalable growth stage
                   business

David J. Litwiller, 2012
Sales -
                                            Win Rate


                   Win 90%+ of deals that reach a proof-of-concept
                   implementation or pilot in the top three verticals
                   Win 80% to 85% of deals that reach a similar stage in
                   other target verticals
                           Lower close rates mean too much time is being spent on
                           deals that aren’t well enough qualified, taking time away
                           from deals that are winnable
                           Higher close rates indicate the company isn’t stretching
                           enough, and winnable opportunities are being defaulted
                           to the competition
David J. Litwiller, 2012
Sales –
                             Forecast Accuracy


                   Over the trailing twelve months, the company has
                   largely met its sales forecast each quarter

                   Forecast visibility became progressively more
                   accurate as each quarterly reporting period draws
                   nearer

                   Accuracy relates both to the total revenue amount, as
                   well as the identity of major deals and customers
David J. Litwiller, 2012
Sales -
                                  Reportable Pipeline


                   Reportable pipeline is greater than 5* the amount of
                   business expected to close over the forward twelve
                   months
                           Reportable pipeline = Opportunities rated at 50%
                           probability of close over the next year, and above
                           Provides enough buffer for the natural optimism of
                           sales staff self-reporting



David J. Litwiller, 2012
Sales -
                                    Close Rate


                   Over 67% of deals close in the projected period which
                   were rated as 75% and above probability to close in
                   the period – broad indicator of sales funnel accuracy
                   and upstream funnel health




David J. Litwiller, 2012
Marketing -
                                               Corporate

                   80% of marketing communication establishes and reinforces the
                   brand image of the company, its thought leadership, and ability to
                   drive revenue or save costs or risk for customers
                           20% is dedicated to particular products or features

                   Every marketing communications event has a quantified target for
                   active and accepted leads, which is then measured and reflected
                   upon – especially e-mail, trade shows, SEO and ads (on- and off-line)

                   E-mail marketing with sufficient tuned targeting to achieve
                   response rates above 5% - e-mail is typically the most productive
                   marketing channel for B2B, so high performance e-mail campaigns
                   correlate strongly with leading financial and strategic results

David J. Litwiller, 2012
Marketing -
                                   Analyst


                   Analyst marketing is based predominantly on a steady
                   stream of reference-able - ideally, delighted - new
                   customers with measurable, multi-faceted Return-on-
                   Investment and softer benefits




David J. Litwiller, 2012
Marketing -
                                          Social Media


                   50% of opportunities which reach 50% probability of
                   closing come originally from social media and word-
                   of-mouth
                           An unambiguous sign of thought leadership in a subject
                           matter that has currency
                           Filling the front end of the sales funnel with many low
                           quality leads is easy; filling the middle of the funnel is a
                           more discriminating test of whether the business has
                           real social media impact

David J. Litwiller, 2012
Marketing -
                                                Product

                   Major new releases announced 70% through development, and APIs
                   50% of the way
                           Late enough that specifications will be relatively stable and freeze of
                           market for current release minimized
                           Early enough to provide partners sufficient reaction time to build
                           likelihood of strong interoperability at release

                   Internal roadmap looking out 18 months showing major new
                   capabilities to be launched at major trade shows or industry events

                   Marketing and sales regularly synchronize so that they are in step by
                   the time they are addressing the buying public


David J. Litwiller, 2012
Development -
                                   Recruiting


                   Candidate developers write code during the interview
                   process – it is very difficult to B.S. code authoring, and
                   it shows a lot about innovation under
                   constraints, thinking style and documentation
                   training




David J. Litwiller, 2012
Development -
                   New Features and Functions (I)

                   Requirements, specifications and high level design are all
                   inspected, since about 50% of defects originate there
                           Related indicator of health: More defects are identified during
                           inspection of requirements, specifications, and high level
                           design, than during system test, because of the much lower cost
                           of finding defects early
                   Kanbans of two weeks – fast feedback, little scope creep
                   Work is estimated to half day increments – no exceptions
                   Development estimates of effort come in within 25% of actual
                   Work is visible through visual, self-reported status controls
                   Project managers have deep customer insight with which to
                   make trade-offs

David J. Litwiller, 2012
Development -
                           Features and Functions (II)

                   Code inspections are practiced for the most
                   difficult, sensitive, or defective portions of the code base
                   The proprietary and modified code base is under 250K
                   SLoC; productivity is best when the code is very tight and
                   limited to 50K SLoC
                   Daily builds with regression testing for unit and integration
                   test
                   Less than eight builds at system test to achieve shippable
                   product
                   Fewer than 10 defects per KSLoC are found at system test
David J. Litwiller, 2012
Development -
                                           Maintenance

                   Less than 33% of development effort is spent refactoring and
                   sustaining legacy functionality

                   Average age of the proprietary and modified code base is less than
                   four years
                           Otherwise, internal and external architecture tend to become
                           outdated, impacting development productivity versus the highest
                           performing competitors

                   Maintenance changes to the code are inspected, because of the
                   high risk of regression setbacks, and, typically, only partial
                   maintenance programmer understanding of the involved module


David J. Litwiller, 2012
Developer Productivity


                   Growth of development headcount is one third or less
                   of the rate of revenue growth – strong sign of
                   scalability, technical wherewithal, and market
                   relevance




David J. Litwiller, 2012
SQA (I)


                   Tests and test suites are documented as vigorously as the
                   code, and link directly to use cases
                   Test plans and test cases are inspected
                   60% of test cases dedicated to regression, 40% to new
                   features
                   Fast changeovers of
                   environments, versions, configuration, and databases
                   Monitoring of defect yield by test case and test suite, with
                   regular pruning and renewal of the tests and test suites
David J. Litwiller, 2012
SQA (II)


                   Tracking of defects by code module
                   Defects reported in the first year after wide release
                   are less than 20% of the number found during system
                   test
                           Less than 0.5% of defects reported from the field take
                           more than one week to resolve
                           Over 70% of defects reported from the field can be fixed
                           in one day or less

David J. Litwiller, 2012
Product Instrumentation


                   Instrumentation of the product to identify high- and
                   low-frequency use paths, and why they are used

                   Watch and learn from best customers about
                   replicable best practices

                   Look at unusual cases for innovative product
                   expansion opportunities

David J. Litwiller, 2012
Implementation and Professional
                         Services


                   Achieve gross margin of 50% or higher, including
                   customer and channel partner training

                   Professional services generate less than 30% of
                   revenue, to promote ongoing scalability and drive
                   valuation



David J. Litwiller, 2012
Customer Support


                   Each full time support person supports more than 500
                   licensed end users (in B2B. Can be much higher in B2C)

                   Response to 90% of customer issues within 90 minutes
                   during business hours

                   Development spends 10% of its time doing direct customer
                   support, to maintain contact with customer challenges and
                   external architectural issues and trends
David J. Litwiller, 2012
Revenue Growth


                   On premise: Growing over 50% per year – if you’re
                   not, someone else usually is and winning share faster

                   *aaS: Growing over 100% per year – as
                   above, plus, lower growth means that the scaling
                   advantages of greater environmental stability are not
                   being realized


David J. Litwiller, 2012
Revenue per Staff


                   Over US$350,000 per full-time employee per year




David J. Litwiller, 2012
OpEx, Cash Flow
                           and Operating Income


                   Sales and Marketing expense is roughly two times
                   R&D expense (R&D includes SQA and Product
                   Management)

                   EBITDA over 30%

                   EBIT approaching 30%


David J. Litwiller, 2012
Growth Capital


                   Growth is funded through gross margin and timing of
                   working capital in- and out-flows, no longer with
                   investment capital




David J. Litwiller, 2012
Customer Acquisition and
                                 Retention Margin

                   The cost of acquiring each new customer is known on a
                   real-time basis
                           First year gross profit exceeds all sales and technical costs of
                           winning and onboarding the customer

                   The cost of sustaining each customers is known on a real-
                   time basis
                           The long term portion of a customer’s revenue stream is the
                           most profitable, and above 90% gross margin beyond year
                           three of the relationship – a joint measure of customer
                           preference/satisfaction and technical stability

David J. Litwiller, 2012
Customer Satisfaction and Retention


                   Customer retention after initial contract term well
                   above 90% annually
                           Otherwise customer churn takes away too much of the
                           long term profit stream, and, too much of current selling
                           has to go to replacing lost business to sustain high
                           growth




David J. Litwiller, 2012
Culture


                   Every employee vigorously sells the value proposition of the
                   company’s products and services through their words and actions

                   There is deeply held and shared pride in what the company
                   does, and the impact it has for customers, partners and users

                   Firefighting and diving catches are seen as being caused by
                   something to be fixed, not an enduring source of heroics to be
                   lionized

                   Good and fast are not at odds, the best individuals and teams get
                   better results and better speed simultaneously by constantly
                   reflecting upon and improving processes , tools and techniques
David J. Litwiller, 2012

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Gauging the growth stage enterprise software business litwiller - july 2012

  • 1. Gauging the Growth Stage Enterprise Software Business Dave Litwiller Executive in Residence Communitech July 2012 © David J. Litwiller, 2012
  • 2. Introduction Functional dashboard of select measures which empirically provides strong indication of future growth and performance Profiles whether an enterprise software producer is likely in, and to remain in, the top quintile of its peer group as it moves through the band from $10 million in annual sales to over $30 million (typically, from 40 to 100 employees and beyond) A set of guidelines I’ve developed operating and overseeing B2B enterprise software businesses Bias toward quantitative measures © David J. Litwiller, 2012
  • 3. Sales - New Rep Productivity The average new sales representative achieves productivity after two quarters Productive is defined as generating period billings with gross margin greater than 2* the rep’s fully loaded costs Applies to on premise or I/P/SaaS offerings Otherwise, there are usually issues with product-market fit, the selling formula and collaterals have not been sufficiently distilled, or the C-suite is still too involved in winning deals to have a fully scalable growth stage business David J. Litwiller, 2012
  • 4. Sales - Win Rate Win 90%+ of deals that reach a proof-of-concept implementation or pilot in the top three verticals Win 80% to 85% of deals that reach a similar stage in other target verticals Lower close rates mean too much time is being spent on deals that aren’t well enough qualified, taking time away from deals that are winnable Higher close rates indicate the company isn’t stretching enough, and winnable opportunities are being defaulted to the competition David J. Litwiller, 2012
  • 5. Sales – Forecast Accuracy Over the trailing twelve months, the company has largely met its sales forecast each quarter Forecast visibility became progressively more accurate as each quarterly reporting period draws nearer Accuracy relates both to the total revenue amount, as well as the identity of major deals and customers David J. Litwiller, 2012
  • 6. Sales - Reportable Pipeline Reportable pipeline is greater than 5* the amount of business expected to close over the forward twelve months Reportable pipeline = Opportunities rated at 50% probability of close over the next year, and above Provides enough buffer for the natural optimism of sales staff self-reporting David J. Litwiller, 2012
  • 7. Sales - Close Rate Over 67% of deals close in the projected period which were rated as 75% and above probability to close in the period – broad indicator of sales funnel accuracy and upstream funnel health David J. Litwiller, 2012
  • 8. Marketing - Corporate 80% of marketing communication establishes and reinforces the brand image of the company, its thought leadership, and ability to drive revenue or save costs or risk for customers 20% is dedicated to particular products or features Every marketing communications event has a quantified target for active and accepted leads, which is then measured and reflected upon – especially e-mail, trade shows, SEO and ads (on- and off-line) E-mail marketing with sufficient tuned targeting to achieve response rates above 5% - e-mail is typically the most productive marketing channel for B2B, so high performance e-mail campaigns correlate strongly with leading financial and strategic results David J. Litwiller, 2012
  • 9. Marketing - Analyst Analyst marketing is based predominantly on a steady stream of reference-able - ideally, delighted - new customers with measurable, multi-faceted Return-on- Investment and softer benefits David J. Litwiller, 2012
  • 10. Marketing - Social Media 50% of opportunities which reach 50% probability of closing come originally from social media and word- of-mouth An unambiguous sign of thought leadership in a subject matter that has currency Filling the front end of the sales funnel with many low quality leads is easy; filling the middle of the funnel is a more discriminating test of whether the business has real social media impact David J. Litwiller, 2012
  • 11. Marketing - Product Major new releases announced 70% through development, and APIs 50% of the way Late enough that specifications will be relatively stable and freeze of market for current release minimized Early enough to provide partners sufficient reaction time to build likelihood of strong interoperability at release Internal roadmap looking out 18 months showing major new capabilities to be launched at major trade shows or industry events Marketing and sales regularly synchronize so that they are in step by the time they are addressing the buying public David J. Litwiller, 2012
  • 12. Development - Recruiting Candidate developers write code during the interview process – it is very difficult to B.S. code authoring, and it shows a lot about innovation under constraints, thinking style and documentation training David J. Litwiller, 2012
  • 13. Development - New Features and Functions (I) Requirements, specifications and high level design are all inspected, since about 50% of defects originate there Related indicator of health: More defects are identified during inspection of requirements, specifications, and high level design, than during system test, because of the much lower cost of finding defects early Kanbans of two weeks – fast feedback, little scope creep Work is estimated to half day increments – no exceptions Development estimates of effort come in within 25% of actual Work is visible through visual, self-reported status controls Project managers have deep customer insight with which to make trade-offs David J. Litwiller, 2012
  • 14. Development - Features and Functions (II) Code inspections are practiced for the most difficult, sensitive, or defective portions of the code base The proprietary and modified code base is under 250K SLoC; productivity is best when the code is very tight and limited to 50K SLoC Daily builds with regression testing for unit and integration test Less than eight builds at system test to achieve shippable product Fewer than 10 defects per KSLoC are found at system test David J. Litwiller, 2012
  • 15. Development - Maintenance Less than 33% of development effort is spent refactoring and sustaining legacy functionality Average age of the proprietary and modified code base is less than four years Otherwise, internal and external architecture tend to become outdated, impacting development productivity versus the highest performing competitors Maintenance changes to the code are inspected, because of the high risk of regression setbacks, and, typically, only partial maintenance programmer understanding of the involved module David J. Litwiller, 2012
  • 16. Developer Productivity Growth of development headcount is one third or less of the rate of revenue growth – strong sign of scalability, technical wherewithal, and market relevance David J. Litwiller, 2012
  • 17. SQA (I) Tests and test suites are documented as vigorously as the code, and link directly to use cases Test plans and test cases are inspected 60% of test cases dedicated to regression, 40% to new features Fast changeovers of environments, versions, configuration, and databases Monitoring of defect yield by test case and test suite, with regular pruning and renewal of the tests and test suites David J. Litwiller, 2012
  • 18. SQA (II) Tracking of defects by code module Defects reported in the first year after wide release are less than 20% of the number found during system test Less than 0.5% of defects reported from the field take more than one week to resolve Over 70% of defects reported from the field can be fixed in one day or less David J. Litwiller, 2012
  • 19. Product Instrumentation Instrumentation of the product to identify high- and low-frequency use paths, and why they are used Watch and learn from best customers about replicable best practices Look at unusual cases for innovative product expansion opportunities David J. Litwiller, 2012
  • 20. Implementation and Professional Services Achieve gross margin of 50% or higher, including customer and channel partner training Professional services generate less than 30% of revenue, to promote ongoing scalability and drive valuation David J. Litwiller, 2012
  • 21. Customer Support Each full time support person supports more than 500 licensed end users (in B2B. Can be much higher in B2C) Response to 90% of customer issues within 90 minutes during business hours Development spends 10% of its time doing direct customer support, to maintain contact with customer challenges and external architectural issues and trends David J. Litwiller, 2012
  • 22. Revenue Growth On premise: Growing over 50% per year – if you’re not, someone else usually is and winning share faster *aaS: Growing over 100% per year – as above, plus, lower growth means that the scaling advantages of greater environmental stability are not being realized David J. Litwiller, 2012
  • 23. Revenue per Staff Over US$350,000 per full-time employee per year David J. Litwiller, 2012
  • 24. OpEx, Cash Flow and Operating Income Sales and Marketing expense is roughly two times R&D expense (R&D includes SQA and Product Management) EBITDA over 30% EBIT approaching 30% David J. Litwiller, 2012
  • 25. Growth Capital Growth is funded through gross margin and timing of working capital in- and out-flows, no longer with investment capital David J. Litwiller, 2012
  • 26. Customer Acquisition and Retention Margin The cost of acquiring each new customer is known on a real-time basis First year gross profit exceeds all sales and technical costs of winning and onboarding the customer The cost of sustaining each customers is known on a real- time basis The long term portion of a customer’s revenue stream is the most profitable, and above 90% gross margin beyond year three of the relationship – a joint measure of customer preference/satisfaction and technical stability David J. Litwiller, 2012
  • 27. Customer Satisfaction and Retention Customer retention after initial contract term well above 90% annually Otherwise customer churn takes away too much of the long term profit stream, and, too much of current selling has to go to replacing lost business to sustain high growth David J. Litwiller, 2012
  • 28. Culture Every employee vigorously sells the value proposition of the company’s products and services through their words and actions There is deeply held and shared pride in what the company does, and the impact it has for customers, partners and users Firefighting and diving catches are seen as being caused by something to be fixed, not an enduring source of heroics to be lionized Good and fast are not at odds, the best individuals and teams get better results and better speed simultaneously by constantly reflecting upon and improving processes , tools and techniques David J. Litwiller, 2012