Gauging the Growth StageEnterprise Software

BusinessDave Litwiller

Executive in ResidenceCommunitech

July 2012

© David J. Litwiller, 2012

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

Introduction

© David J. Litwiller, 2012

David J. Litwiller, 2012

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

Sales - New Rep Productivity

David J. Litwiller, 2012

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

Sales - Win Rate

David J. Litwiller, 2012

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

Sales – Forecast Accuracy

David J. Litwiller, 2012

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

Sales - Reportable Pipeline

David J. Litwiller, 2012

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

Sales - Close Rate

David J. Litwiller, 2012

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

Marketing - Corporate

David J. Litwiller, 2012

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

Marketing - Analyst

David J. Litwiller, 2012

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

Marketing - Social Media

David J. Litwiller, 2012

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

Marketing - Product

David J. Litwiller, 2012

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

Development - Recruiting

David J. Litwiller, 2012

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

Development - New Features and Functions (I)

David J. Litwiller, 2012

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

Development - Features and Functions (II)

David J. Litwiller, 2012

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

Development - Maintenance

David J. Litwiller, 2012

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

Developer Productivity

David J. Litwiller, 2012

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

SQA (I)

David J. Litwiller, 2012

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

SQA (II)

David J. Litwiller, 2012

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

Product Instrumentation

David J. Litwiller, 2012

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

Implementation and Professional Services

David J. Litwiller, 2012

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

Customer Support

David J. Litwiller, 2012

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

Revenue Growth

David J. Litwiller, 2012

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

Revenue per Staff

David J. Litwiller, 2012

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

EBITDA over 30%

EBIT approaching 30%

OpEx, Cash Flow and Operating Income

David J. Litwiller, 2012

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

Growth Capital

David J. Litwiller, 2012

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

Customer Acquisition and Retention Margin

David J. Litwiller, 2012

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

Customer Satisfaction and Retention

David J. Litwiller, 2012

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

Culture