Right now, your tech company might be looking for efficiency and cost savings, so you might be looking at right-sizing.
It’s a complicated issue. “You can’t just cut 20 percent across the board,” said Grant Thornton CFO Advisory Managing Director Ronald Gothelf. “Then, everything that was efficient is now understaffed.” Understaffed areas fail to reach their goals.
Right-sizing is not about doing the same with less. Because you really can’t.
Instead, right-sizing requires a broader analysis of your business model. You might need to start at the end — with your customers.
Customers
“In times of potential downturn, it's especially important to segment your customer base and target those with the highest potential for acquisition.”
“In times of potential downturn, it's especially important to segment your customer base and target those with the highest potential for acquisition,” Gothelf said.
“Too many times, companies look at trying to appeal to everyone,” he explained. “Target a particular market segment. By going after that market segment, you can actually lower your customer acquisition costs, compared to going after everyone with slower development of a broader set of capabilities.”
“When you watch companies take the overall throw-out-the-net approach to customer acquisition, they have discounts everywhere,” said Grant Thornton Technology Industry Managing Partner Andrea Schulz. “Free trial periods go through the roof. You need to be very careful about whom you're targeting with that sort of investment and whom you’re actually going to acquire.”
The right customers
By targeting your capability set, you can better address a smaller market, so that you can win it and then expand. “You have to pick a market that has that potential for growth,” Gothelf said.
“Understanding the capacity of that target market segment, and understanding what the potential penetration is, can help you right-size your organization to go after that segment,” Gothelf said. “That can guide your advanced planning, even in a downturn, to say, ‘We're going after this segment. We expect to have this perspective.”
The right approach
To target a specific market segment, you need to differentiate your product, and win that differentiation.
“Often, you see big ERPs acquire a targeted solution,” Gothelf said. “That targeted solution then becomes genericized, and you start to see other targeted solutions emerge. They continue to penetrate, even though the ERPs have the capability, because the ERPs are maintaining a generic platform and not investing in the unique elements. Listen to what a particular customer segment wants. Build out that capability. Penetrate that element of the market, and companies will install it on top of their ERPs.”
“You can also be looking at industry verticals, because that's been a success story for a lot of B2B SaaS companies,” Schulz said. “They double down on an industry vertical and then can branch out where there are adjacencies.”
Once you right-size your target market and approach for customers, make sure your operations will efficiently acquire and retain those customers.
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Operations
To right-size your operations, align to your high-level goals and then capture information to track your progress along the way.
The right goals
“You have to think of the organization holistically,” Gothelf said. That includes not only your back-office operations but also the teams developing your products. “You need to consider both sides of it, and not just assume that the back-office operations are unimportant.”
Schulz agreed, “It's not just about the back office, but how might you need to fundamentally change the way you’re getting customers in the ecosystem?” One factor is your sales team alignment. “As you’re finding efficiencies and really homing in on the target market that you want to pursue, make sure the compensation structure for the sales team aligns with that. You don’t want to carry legacy comp plans into your more efficient and targeted environment.” Specifically, you might want to look at how to reward lower customer acquisition costs.
“Many companies, even mid-market companies, were used to making a certain level of investment or essentially buying customers to get engagement and drive growth.”
A growing number of tech companies have made it a goal to lower their customer acquisition costs. “I think a lot of companies have been trying to reconcile that since the growth-at-all-costs environment has changed, and that tone has shifted in the tech community. Many companies, even mid-market companies, were accustomed to making big investments or essentially buying customers to get engagement and drive growth.” Now, investors want to see customer acquisition costs that are scaled back and more efficient.
Every company will have unique goals for its right-sized operations. To determine your goals, start with broad questions and end with tangible results. “How are you going to tackle your operations differently? Tech companies should be tracking metrics to answer that and help drive efficiencies along the way,” Schulz said.
The right information
To align your operations, you need metrics. “There are high-level metrics that can guide you toward right-sizing, and then there are operational-level metrics that you can benchmark against other companies,” Gothelf said. “Too often, tech companies think that they can’t benchmark their operations compared to other operations. But that's just not true. “Even companies that are pre-profitability can apply a number of benchmarks, based on the nature of the business.”
“Even if you’re pre-profitability, you can look at burn rate to see how quickly you’re going through financial capital.”
Those metrics can include operational or process KPIs, but they might also include KPIs from other areas. With customers in mind, you need to watch your rate of renewals, retention, satisfaction and acquisition costs. In financial terms, you need to watch your operating expense ratios. In financial terms, growing tech companies might want to watch the invoices produced per FTE. “In some ways, that’s not even a financial metric but it's an operational metric that can be used to help right-size operations,” Gothelf said. “And, even if you’re pre-profitability, you can look at burn rate to see how quickly you’re going through financial capital.”
The starting point for operational performance is the same as it is for revenue realization —make sure you capture the data. “Make sure that the metrics which are critical to understanding the success of the business are capturable,” Gothelf said. “Often, products, tools and services are designed with insufficient information being captured to understand the profitability — and sometimes even the cost. That makes it very hard to benchmark.”
When you right-size an organization, you also need metrics about your employees… but maybe not the ones you expect.
Instead of naming the people to cut, name the people to keep.
“In the past few years, a popular metric has been revenue per head,” Schulz said. What you're seeing now, with the latest wave of layoffs, is that tech companies have gotten smarter about how they’re tracking the revenue per head. Now, they also ask, ‘Is the revenue in product lines, service offerings, or other areas where we actually want to grow and see an opportunity?’
Many companies with recent layoffs have been offsetting those reductions with hiring in other areas. “It's not just the revenue per head, but it’s a laser focus on the areas that are really responsible for driving your revenue and your growth,” Schulz said.
The right people
You need to recruit the right people and then keep the right people. “Make sure to retain the employees that are of the most value, and compare the metrics in turnover rate,” Gothelf said. “So, you're not just right-sizing the number of heads, but right-sizing the right resources so that, when the time comes to grow, you're positioned with the right people to guide that growth.”
It’s also important to remember targets for diversity and other workforce goals that still require ongoing attention. “Even in the face of right-sizing, societal and governmental pressures are focusing on ESG initiatives,” Gothelf said. Those long-term goals and cultural shifts still matter and require ongoing commitment. “Again, have mechanisms to measure against your goals, because that can be critical for obtaining investor funds. Often, they have to incorporate those metrics, too — along with your suppliers.”
“I think that's actually quite overlooked — employee satisfaction — because you still have that competition for top talent, where tech companies are willing to pay a premium to poach your top resources.”
“One final metric that’s really important, especially in potentially tumultuous times, is employee satisfaction,” Gothelf said. “It might not get at the goal of right-sizing, but it does get at the goal of retaining your most valuable staff at times when you need to reduce staff. You want to make sure you retain those people who are most valuable to you.”
“The battle for talent in technology is still very real,” Schulz said. “So, make sure that you have some stickiness with the talent that you want to retain. I think that's actually quite overlooked — employee satisfaction — because you still have that competition for top talent, where tech companies are willing to pay a premium to poach your top resources.”
When tech companies need to right-size for efficiency, they should start with a fresh focus on their target and work all the way back through to ensure that they have the right people aligned to hit their growth targets with precision.
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