There are certain things that the CFO of a SaaS business should know about the service delivery aspects of the solution their company provides. This posting outlines five of the most important.
First, they should have a good understanding of the current gross margin of the service and any projects which are intended to improve margins. The biggest piece of the gross margin usually is the infrastructure cost and for both the gross margin and the infrastructure cost they should know what the industry averages and ideal ranges are for these numbers. Usually a gross margin of 75-85% is considered a good range. A good range for infrastructure as a percentage of revenue is usually 15-20%. Both of these numbers can be compared to survey numbers and gross margins can be compared to public SaaS companies. As part of the gross margin understanding the % of the available capacity is important to understand. If the service is using 50% of the capacity that is an important thing to know, however agreement on definition is important here since theoritical 100% usage of capacity may be very different than the practical 100% use of capacity.
The second area that the CFO should understand is customer retention and up sell percentages since both of these have a substantial impact on profitability. Customer retention >95% is generally considered good and up sell numbers range substantially based on the kind of business. I think it is better to measure customer retention differently from up sell since they are usually driven and changed by different things.
Third, they should understand the cash and investment requirements as the business grows. Depending on the type of infrastructure the cash requirements may be substantial to buy servers, software, more datacenter space, etc. If infrastructure as a service or platform as a service are used then the investment requirements will be minimal for infrastructure, one of the strong advantages of using one of these for the SaaS infrastructure. The inherent “lumpiness” of datacenter space and major infrastructure items make this area an important area to plan for.
The CFO should of course have a good understanding of all of the financial terms in any purchase contracts of course including the normal items of price and payment terms. They should also understand the financial impact of the more subtle service related items such as SLA payment risk and upgrade and downgrade terms. For example, if clients have to sign up for a year or multiple years of service whenever they add a user or have a minimum number of users that has a different effect on revenue during a down business cycle than if there is no minimum number of users or minimum time for added users.
Finally the CFO should understand the relationships of investments which may improve the above financial areas. For example an investment in customer experience tools for customer support will end up reducing the gross margin but would have a positive effect on customer retention. The timing of that expense and the value may not come at the same time. R & D investments are more straightforward but the same thing applies where an R&D investment might improve customer retention or improve the gross margin over a period of time.
The CFO can’t and shouldn’t know everything about service delivery but understanding the above five items are important for a good strategic and operational understanding of service delivery. If you are responsible for SaaS service delivery at your company then these are the things that you should sit down and discuss with your CFO. A good mutual understanding of these five issues is a good baseline if financial challenges, problems or investment opportunities come up with service delivery.