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Driving efficiency through ownership

High-growth companies need drivers, not passengers.


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Driving efficiency through ownership

High-growth companies need drivers, not passengers.

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OnlyCFO

OnlyCFO is a finance executive with experience building finance teams at high-growth software companies. He writes about finance, SaaS, metrics, and running finance organizations. Subscribe to his newsletter and follow OnlyCFO on Twitter.

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OnlyCFO

Finance executive

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OnlyCFO is a finance executive with experience building finance teams at high-growth software companies. He writes about finance, SaaS, metrics, and running finance organizations. Subscribe to his newsletter and follow OnlyCFO on Twitter.

There has been a lack of financial ownership from company leaders amongst overfunded software companies for a long time. Market conditions drove incentives for leaders to not take full financial ownership and responsibility. The focus was squarely on top-line revenue metrics with almost complete disregard for the related efficiency and durability of that growth. This behavior ran deep within lots of companies and created a culture of financial irresponsibility.

Lack of financial ownership.

There are several bad behaviors that we have seen result from an over-focus on revenue growth and not enough financial responsibility amongst company leaders.When I refer to “company leaders,” I am referring to everyone who has budget responsibility. At huge companies, budgets can get pushed down several management layers. At a 200-person company, it might all sit with a department VP.

  • Overhiring: Based on all the recent tech layoffs, we are too familiar with this one. Lots of companies were hiring on an accelerating revenue growth pipe dream and weak rationale.

“Large staffs of successful startups are probably more the effect of growth than the cause.”

— Paul Graham

  • Wage & equity inflation: A few points here.

Stock option (or RSU) amounts given out were disregarded, causing unstainable investor dilution rates.

Everyone everywhere was paid top-tier compensation. Maybe startups shouldn’t compete with Google on compensation 🤷‍♂️. Paying everyone top-tier San Francisco compensation regardless of location is not sustainable for most companies.

Financial trade-offs weren’t performed. Companies wanted experienced folks and they provided them with inflated titles and compensation.

High-growth companies were hiring for the type of person they needed in three years (assuming high growth continued) and not who they needed for the next 18 months.

The tough hiring market didn’t help with the comp inflation.

  • Software sprawl: If a company could move just a bit faster toward top-line revenue goals, then they would throw software at the problem — regardless of ROI. I am all for spending on software that adds leverage to the existing team, but it has to be stage appropriate.

Software doesn’t manage itself (at least not yet…) so as the number of tools skyrockets, more people are required to manage it. The people costs are where the significant inefficiencies happen

More SaaS tools require more people and those new people will want more tools. This is a vicious cycle that will create inefficiencies quickly if budget ownership is weak.

Listen: Understand when to centralize (or decentralize) reporting and budgeting processes

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Who drives real change?

The current tech recession has opened people’s eyes to the problem. Lots of software companies right now are forcing top-down changes from the CEO/CFO to become more efficient as a result of current economic conditions. But the real driver of efficiency is the broader company leadership.

The CEO/CFO can squeeze out some efficiency by forcing top-down arbitrary amounts of cuts throughout the organization, but there are problems with this approach:

  • The departments that were already efficient are forced to make cuts that cause important processes to break down, affecting revenue growth and/or efficiency in such a way that the cuts were actually destructive to overall profitability goals.

  • The departments that were extraordinarily bloated still have tons of fat. If the CFO just tells them to cut 10%, then that is exactly what they will do (and not $1 more).

  • The loudest, best negotiator will keep the most budget. This is usually the sales leader but could be anyone else to varying degrees.

What’s the solution?

Companies need to empower leaders to take full ownership and responsibility for their financials. These leaders need to be dialed into the financial objectives of the company and create department alignment with those goals.

1. Complete and detailed financial reporting.

Leaders need detailed visibility and control of their department’s spend. If budget owners can’t get organized and complete financial reporting of their department’s spend, it is incredibly difficult for them to know how to improve efficiencies.

Tools:
Companies like Brex offer consolidated spend management and travel software solutions. Brex's new platform (Empower) is geared toward larger companies and includes budgeting, real-time visibility, and spend controls. Other tools with varying levels of functionality include TripActions, Tipalti, Airbase, etc.

2. Strong financial acumen.

Leaders need to understand SaaS metrics and have strong financial acumen so they can drive their departments toward the company’s financial objectives. If leaders don’t understand finance then the ship will get steered in the wrong financial direction.

3. Partner with finance on forecasting.

Leaders are responsible for aligning their department objectives with the objectives of the company, which importantly includes the financial objectives. Creating a strong partnership with finance is important for ensuring this alignment.

Leaders need to work with finance to understand their department’s financial and non-financial benchmarks — where they are today and where they should be in the future. But relying on benchmarks alone can be dangerous for many reasons — see my previous article: A List of SaaS Benchmarks & Potential Dangers

This is why every leader who has budget responsibility needs to understand finance and how their piece of the company relates to the short- and long-term financial goals of the company.

Tools: Planning tools such as Casual, Pigment, or Mosaic make forecasting and collaboration with department leaders much easier.

4. Manage vendor contracts.

Leaders need to take a more active role in vendor management. This is not to say that leaders shouldn’t trust their people to make decisions, but sometimes they don’t have the same context as leaders.

Make sure there are appropriate processes and policies in place to keep SaaS sprawl limited. A lot of folks say, “SaaS tools are relatively cheap so why not just throw tools at the problem?” The problem is that someone has to manage those tools … so you add people … then those people want more tools. It’s a vicious cycle.

Tools: Companies like Vendr can help with price negotiations and cutting down wasted software spend. I know … SaaS managing SaaS spend … but if you have a lot of tools it can definitely make sense.

Finance tech stacks.

I mentioned a few tools above, but there are tons of finance tools that can help drive ownership amongst budget owners. My advice is only to make sure any tool you choose is appropriate for your company's stage and resources. As I mentioned above, SaaS tools require people to manage so understand what the people requirement is before diving into a tool.

Good ole Excel works just fine sometimes for certain processes — particularly at the earlier stages.

Concluding thoughts.

I love Frank Slootman’s discussion on “drivers vs. passengers” below. Startups and high-growth software companies became safe bets for leaders who are passengers. They could coast, take home a comparable paycheck to the FAANGs, and potentially an outsized equity return.

Leaders who are passengers might work at Google or Microsoft, but it certainly doesn’t work at startups and high-growth companies. That culture permeates throughout the organization, and the company ends up with a lot of passengers with no one driving the car.

Companies need leaders who are drivers and will really own their financials and efficiency. If you are a high-growth company and have leaders who are passengers, get rid of them fast.

In dynamic, high-growth environments there is a premium on drivers — people who make things happen, who move dials, who stop at literally nothing.

Drivers are people with demanding expectations, needing like-minded people around them, a bit of a chip on their shoulder, independent as well as original thinkers. They are looking for opportunities to break loose, sometimes just intuitively.

So, what about passengers? Passengers go to the same place as drivers but they are mostly overhead and deadweight. If they were to disappear overnight, it would take some time before anybody noticed them missing. That’s why they are often the object of RIFs, or reductions in force.

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