June 2021 Newsletter

Monthly Edit: The Role of Finance in SaaS

The SaaS industry has exploded with the advancement and proliferation of technology over the past 20 years. Through its short history, it has developed a reputation for hyper-growth, casual attire, and expensive cities. However, one of the most interesting developments has been the industry-wide culture of challenging the status quo of corporate hierarchies.

The Chief Financial Officer (CFO) and Chief Operating Officer (COO) are well-known roles in the traditional business hierarchy. The CFO role has traditionally been limited to managing the accounting books, mitigating tax exposure, the tracking of cash flow, and general compliance. Conversely, the Chief Operating Officer focuses on physical demands, such as supply chain, production efficiency, and vendor management.

Recent industry trends have seen a revolution to this model. Increasingly, finance organizations are expected to move beyond traditional recording and reporting activities to take a more active role in supporting day-to-day operations including project management, continuous improvement programs, and operational guidance. In the SaaS environment in particular, this dynamic is leading many organizations to consolidate operational leadership roles with financial leadership roles. While not appropriate (or possible) for all industries, SaaS is a prime candidate for this type of innovation for four main reasons:

  1. Stay Nimble – A common tool used to assess organizational efficiency is a simple spans and layers analysis. Generally speaking, the more layers you have the less responsive your organization is. Further, the more chiefs you have the less aligned your organization is. By eliminating one chief, you help flatten the organization. And a flatter organization can be more responsive to changing customer dynamics which is especially important for SaaS companies.

  2. Asset Light – An obvious uniqueness of SaaS platforms is that they are asset light to the point of needing almost no physical assets outside of computers and servers. All products and services are housed in the digital world and maintained in the cloud on remote servers. This drastically reduces the need for a formal COO. Rather, the cost of a COO can be forgone and portion of that budget can be reallocated to hire a better CFO.

  3. Confluence of CAPEX and OPEX – Within the SaaS environment, new product development is critical to business success, and the financial return on development projects needs to be closely monitored. As a result of this dynamic, constant financial input has become necessary to manage product development. Mixed with the maturity of product managers within these organizations, the reporting relationship to finance has become more natural.

  4. Sales-Focused – While all companies must focus on sales to grow, SaaS is unique in that its widgets are intangible. The cost to produce the first widget is high. The cost to produce the second widget is zero. This leads to a pricing challenge that is drastically different from companies producing physical widgets with incremental costs and COGS. In response, SaaS sales organizations must be led by executive management to properly price their widgets. This is where the CFO must play a pivotal role. The responsibility should and must fall on the shoulders of the CFO to drive cost visibility, customer metrics (such as ARR), and properly align incentive plans to realize management’s growth plan.

While we have seen great success with this trend, there are still inherent risks. To maximize the chance of success, a SaaS company looking to consolidate its CFO and COO role into one should first consider the following points. First, the SaaS company must be able to attract, hire, and retain a strong CFO that can lead strategically and not just manage reporting. Second, the more complex the company’s organizational structure and customer base, the more difficult it will be to successfully implement this strategy. It is important that highly acquisitive SaaS companies pay particular importance to this as a portfolio of SaaS platforms will be harder to manage than an organically developed ecosystem.

Once thought to only start in Silicon Valley or a founder’s garage, SaaS has matured as an industry with industrial hubs popping up all over the country in places like Austin, Miami, and even Madison, WI and Salt Lake City, UT. And, like the industry, it is time for its executive management structure to mature as well.

If you have questions about how your SaaS business can improve its organizational structure, sales incentive plans, or KPI visibility – we would love to talk.


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