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Employee Ownership Drives Efficiency
High-growth companies need “drivers”, not “passengers”
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 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 executive. Having said that, getting all employees to understand the basics of the financial health of the business is critical for employees to truly feel like they can make a difference.
Overhiring: We are too familiar with this one, based on all the recent tech layoffs. Lots of companies were rapidly 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 that were given out to employees were enormous, which caused unsustainable investor dilution rates.
Everyone everywhere was paid top-tier compensation. Maybe startups shouldn’t compete with Google on cash compensation 🤷♂️. Paying everyone top-tier San Francisco compensation regardless of location is not sustainable for most companies.
Financial trade-offs were not performed. Companies wanted experienced folks and those individuals wanted even more inflated titles and compensation.
High-growth companies were hiring for the type of person they needed in 2 years (assuming high growth rates never stopped) and not who they needed for the next 18 months.
The tough hiring market didn’t help with compensation 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 and have real ROI.
Just look at how much SaaS spend has increased from 2020 to 2022 based on this recent Vendr report.
Software doesn’t manage itself (at least yet…) so as the number of tools skyrockets, more people are required to manage it. The people costs are where the significant inefficiencies happen. Inexperienced managers forget to fully consider the people cost of all the new software purchases.
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.
Who drives financial 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 team (the folks who have budget responsibility).
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 as way that the cuts are actually destructive to overall profitability goals.
The departments that were extraordinarily bloated still have tons of fat. If the CFO just tells everyone 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 often the sales leader (I promise they are better negotiators than G&A folks) but could be anyone else to varying degrees.
Forcing department leaders to reduce budgets from prior years is usually met with a response like “over my dead body”. Once a leader has a tool or additional headcount, those things become “absolutely mission critical”….In my experience, this often isn’t true though.
What’s the solution?
Companies need to empower leaders and employees to take full ownership and responsibility for their department’s financials. The CEO/CFO should set the tone at the top, but real/positive changes will likely come from enabling employees to drive those decisions. If employees are treated and given the responsibility of an owner, then they will act like an owner.
Some things that should be top of mind when helping employees act like owners:
1. Accurate, timely, and organized financial reporting
Leaders need detailed visibility and control of their department’s spend. If budget owners can’t get well organized and complete financial reporting of their department’s spend then 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 product (Empower) does this and is geared toward larger companies and includes budgeting, real-time visibility, and spend controls. Other tools with varying levels of functionality include Navan, MineralTree, Tipalti, Airbase, Bill.com, etc.
2. Strong finance knowledge
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 direction quickly.
Share my Substack with your colleagues so they can build their finance knowledge 😉
3. Partner with finance on forecasting
Leaders are responsible for aligning their department objectives with the objectives of the company, which includes the financial objectives and forecasts. 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
Tools: There are also tools such as Casual, Adaptive, and Mosaic for forecasting and to help team collaboration.
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 or experience as the company leaders.
Make sure there are appropriate processes and policies in place to keep SaaS sprawl limited. As I mentioned above, a big cost that people frequently forget is that someone has to manage all the software tools…
Tools: Companies like Vendr can help with price negotiations and cutting down wasted software spend.
5. Zero-Based Budgeting
Performing zero-based budgeting is a great way to help prevent department leaders from just holding a tight grip on the budget given to them in prior years.
Zero-based budgeting is an approach that involves developing a new budget from scratch every year, versus starting with the previous period’s budget and incrementally adding to it. While the budgeting process takes longer with this approach, it makes leaders work with finance to continually justify the spend and ROI of investments each year.
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 to make sure any tool you choose is appropriate for your company's stage, growth, and resources. As I mentioned, SaaS tools require people to manage them so understand what the people requirement is before purchasing a tool.
Also, good ‘ole Excel works just fine sometimes for certain processes - particularly at the earlier stages.
I love Frank Slootman’s discussion on “drivers vs passengers” below. Startups and high-growth software companies, unfortunately, became safe bets for leaders who are just “passengers”. These folks could coast, take home a comparable paycheck to the FAANGs, and potentially earn an outsized equity return.
Leaders who are passengers might work at Google or Microsoft, but it certainly doesn’t work at high-growth startups. 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 take ownership of their department’s financials and ensure it aligns with overall company objectives. If you are a high-growth company and have leaders who are passengers, then 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 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.