All companies are now operating in a digital economy, where customer demands change almost constantly and where senior executives struggle to create flexible business strategies that can cope with this persistent state of flux.
So in such an market, how does the finance chief know if the company is on the right track? At an event held by subscription software vendor Zuora, execs at software as a service (SaaS) companies described how the role of the CFO is changing, and how companies in all sectors need to find a new set of metrics to measure success.
1. Focus on metrics that reflect the changing nature of business
Tyler Sloat, CFO at Zuora, says business models are now very different to 10 years ago. Terms like experience, stickiness, and behaviour are now as crucial as traditional metrics like profit and loss. "Modern business is extremely complex," he says. "Unless you understand your benchmarks, you're going to be driving blind."
At a top level, Sloat focuses on three key metrics: growth efficiency index, customer churn rate, and recurring profit margin. "Once you have a handle on your recurring profit, you can decide whether to spend your money on areas like growth and research and development," he says.
Sloat dedicates a great deal of time to market knowledge in order to hone his approach. He speaks with other CFOs, with analysts, and even has dedicated team members who monitor the models of other firms.
"Traditional metrics don't work in the digital economy," he says. "All businesses face that reality. You have to plan ahead. And as your firm shifts, you have to insert something different into your business model. You have to decide why metrics matter and how you will make your business run in a particular way."
At a broader level, Sloat focuses on five performance metrics: pipeline, acquire, deploy, run, and expand. His team sends information on these factors to employees every week. "It's a great communications mechanism for the rest of the business," he says.
"As CFO, you want to drive certain behaviours. You'll have to use sticks and carrots to encourage strong performance in the areas that you think will help drive growth. Keep flexible compensation terms for workers, as you'll need to support the right kind of behaviour."
2. Find new key performance indicators to measure success
Peter Ulander, CFO at workforce management specialist Quinyx, says SaaS-based software forms the core of the firm's identity. The business decided to take a rapid growth journey across Scandinavia and is now building a customer base in the UK. Quinyx has about 400 customers and 300,000 users.
The key question for FDs, says Ulander, is: how can you measure success in such a growth-focused environment? "How do you benchmark?" he asks. "How do you know you're focusing on the right things, especially in a fast-moving area like SaaS?"
Ulander says cash is crucial for fast-growing firms. With enough money in the bank, businesses can move quicker into new markets. For this reason, he keeps a keen eye on monthly recurring revenue and also the speed of deployment.
"As a business, we want to see good returns on a monthly basis," says Ulander. "We have to trust our numbers. And it means my role, and the role of CFO in modern firms, is absolutely crucial."
In total, the firm uses 23 different key performance indicators (KPIs) to monitor success. The information is not just confined to the boardroom. Ulander and his colleagues make the knowledge public to all employees.
"We want to push a common understanding of business performance across the entire organisation," he says. "Benchmarking is tricky but it's crucial that everyone around the firm understands the factors for success."
Most importantly of all, perhaps, Ulander says he would look to use a similar model in a traditional enterprise. The nature of business is changing across all sectors and firms can no longer afford to simply focus on simple profit and loss measures.
"By moving beyond those factors, we start to focus on the drivers that really matter to the business," he says." I'd do the same in any business and wouldn't look to act that differently."
3. Use customer data to change behaviour across the organisation
Alex Sloley is CFO of big data specialist Brandwatch, whose employees listen to conversations on the social web and create insights for major brands. Like Quinyx, the UK-based firm has grown quickly and now has five offices around the globe.
Brandwatch was still focused on total contract value when Sloley joined the firm in 2012. "I flipped us over to a different model," he says.
As with Ulander at Quinyx, Sloley says monthly recurring revenue is crucial for fast-growing firms in the digital age. Without an awareness of incomings, agile businesses will not be able to take a tight grip on profit and loss.
Churn rate is another key metric for Sloley. A subscription-based business that manages to retain its customer base will be able to keep growing its revenue stream.
The final key metric, he says, is the number of months it takes to receive payback on the acquisition of a new customer. As cash flow is crucial for fast-growing companies, time to receive payments really matters. Sloley says payback of 12 months for a subscription business is considered good; 24 months is too long.
To make sure the business makes the most of its focus on revenue, churn, and payback, Sloley has pushed a huge investment in data science during the past 18 months. In-house specialists now produce an information pack on performance against key metrics.
This pack consists of about 20 slides on customer behaviour and is presented to executives alongside the monthly board report. Sloley says the impact has been tremendous. "People only want to talk about that behavioural data and it drives ideas across the whole business, particularly in regards to how our customers are using our services," he says.
The key message, once again, is that all firms must look to move away from simple profit and loss measures. "If you start thinking of every customer as a repeat opportunity, you can start to change the game and create a business model that is much more interesting," says Sloley.
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