Why Today’s Successful SaaS Companies Use Benchmarks

Benchmark Standard Management Improvement SaaS Benchmark Concept

The software as a service (SaaS) business model requires the integration and coordination of far more operations than traditional software models. R&D, sales, marketing, customer success, finance, and operations all need to work together to produce profitable unit economics, which are the basis of a successful SaaS company.

The annual budget process is a methodical way of allocating resources (cash, headcount, etc.) to all departments. And this budget process should set achievable targets with well-allocated resources where all players know the goals and buy in to the plan. It sounds clear and straightforward, but often the corporate budget process can be more of a convoluted mess.

Having worked with thousands of software companies, we’ve seen this firsthand. As a result, we’ve developed a set of best practices from leading companies to run an effective and efficient budget process at your company this year and every year.

Build cross-departmental transparency and collaboration
Too often, the budget process is run by finance working with each department, with very little cross-departmental collaboration. This keeps everyone in the dark until the final big roll-up moment. It encourages poker-player-like behavior—“I’ll give up enough now to look like I’m a team member, but not too much because I know they will come back and get more later.”

In this department-by-department process, there’s no shared understanding of the challenges or opportunities. It is very difficult for someone from marketing to question what is going on in R&D and vice versa, even though an understanding of how marketing activities and R&D activities jointly drive customer acquisition and customer retention is critical in SaaS companies.

Instead, finance can take the lead on asking department heads to collaborate on synchronizing their programming: sales and marketing, services and sales, marketing and services, engineering and marketing, etc. When finance shares clear budget and benchmark data with each department upfront, department heads can more easily ask informed decisions of other departments. Encourage departments to work with other departments before rolling up the budget. With a highly collaborative process and one source of truth on corporate goals and how they compare to peer companies, the team has the data to ask the right questions and build consensus on an efficient operating plan.

Competition for resources is normal and can be healthy when the competition is conducted in the open and with data. If the budget process is transparent, collaborative, and data-driven, with comparisons to peer benchmarks, then it will drive management team ownership of the plan as a whole. This in turn will drive the plan’s credibility with the board.

Use benchmarks to provide context for company metrics
It is critical to incorporate benchmarks into the budget process and review progress against benchmarks throughout the year. With operational benchmarks, the management team can work off a common knowledge of the business and how its key metrics compare to similar companies. By providing benchmarks at the start of the budget process for each department, you’ll have a better company-wide understanding of how all the pieces fit together.

Benchmarks help ensure that managers don’t feel they are being pressured to work with fewer resources than other departments or to achieve performance levels that aren’t fair or are impossible.

Comprehensive benchmarks help individual managers see how all the pieces of the business puzzle fit together—peer companies also need to spend appropriate resources in each area, which makes the company, as a whole, successful. Without outside benchmarks to provide context, managers sometimes lose perspective on how much other parts of the organization need to make the whole SaaS operation successful.

An effective budget process links benchmarks and budget to a company’s strategic goals to validate and provide context for the comprehensive plan. Like strategic goals, benchmarks don’t change during the course of the year but provide consistent guidance to evaluate weekly and monthly performance toward the annual goals.

Build flexible budgets and scenarios tied to company goals
High-performance companies review budgets, actuals against budget, and benchmarks to plan regularly throughout the year. With regular review, the budget plan can be adjusted during the year based on actual performance, but the company’s annual strategic goals don’t change.

The best practice is to tie the budget to targets that support the company’s strategic goals. Efficient companies constantly evaluate whether the current budget is supporting achievement of those goals. This practice allows companies to quickly and efficiently shift allocation of resources if conditions allow.

High-performance companies often use scenario planning to create additional plans for major initiatives or major changes in the original assumptions upon which the budget was built. Using technologies that allow for what-if planning around changing conditions or new initiatives , agile companies can quickly adjust budgets without losing sight of corporate goals.

Many companies also set aside funds in the original budget for new or riskier initiatives that are developed during the year that can be shown to meet or exceed corporate targets. If the rest of the operating plan is unfolding as expected, these additional funds can be applied to new projects where the risk is higher.

A new partnership to drive SaaS benchmarks
The unique needs of software and SaaS companies have resulted in our partnership with Adaptive Insights. Today Adaptive Insights combines benchmarking from OPEXEngine, along with best-practice models and KPIs, with its Adaptive Suite integrated planning and analytics platform. The resulting solution enables Adaptive Insights’ SaaS and software customers to leverage data from 400 GAAP and non-GAAP benchmarks.

And, it must be working! The recent Forbes Cloud 100 list, a ranking of the top private cloud companies in the world, has over one-third (37 companies) that use the Adaptive Suite. A proven process that leverages comparisons of how like-companies perform relative to key SaaS metrics, such as CAC, retention, sales productivity, etc. are helping these companies rise above the rest.

Watch the webcast “Cloud Computing for Real-World Finance”

Share this: