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 Ive 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 reps 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 arent well enough qualified, taking time away from deals that are winnable Higher close rates indicate the company isnt 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-onInvestment 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 wordof-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 youre 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 realtime basis

The long term portion of a customers 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 companys 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