The Power of Benchmarks - with Lauren Kelley, Founder and CEO OPEX Engine (Episode 2)

**Ray Rike** (0:00)
Hello, I'm Ray Reich, founder and CEO of RevOpSquared, and your host of the Metrics That Measure Up podcast. We talked to a wide variety of B2B, SaaS and Cloud thought leaders, executives, investors, and people just like you to discuss the metrics and benchmarks they use to make metrics informed decisions. Now on to today's show. Welcome to today's episode of the Metrics that Measure Up podcast. In this episode, we're going to continue our conversation with Lauren Kelley, the founder and CEO of OPEX Engine, to dive deeper into benchmarking and how the use of benchmarking will evolve over time as the B2B SaaS and cloud industry evolves. In this episode, we'll be covering three main topics. First of all, we're going to dig deeper into financial versus operational benchmarks. How to use them, some of the risk and rewards of using operational benchmarks more effectively and efficiently. The second, we'll talk about the opportunities and risk of benchmarking against public companies, especially their financial benchmarks. Then we'll try to cover a little bit about the need or the benefit of standardizing these B2B SaaS metrics and benchmarks. Lastly, we'll try to look at the evolution of where we see B2B SaaS metrics and benchmarking going. Lauren, thank you so much for staying with us and continuing our conversation on benchmarks and benchmarking.

**Lauren Kelley** (1:35)
Thanks, Ray. Great to be here.

**Ray Rike** (1:37)
Let's dig deeper into a topic we discussed the first episode. I'm not sure we really gave it enough time or did it enough justice. That is revisiting the difference between using benchmarks for financial performance metrics or lagging indicators of company success and using the operational metrics and benchmarks, really, the leading indicators that's going to drive the financial outcome. So can you talk a little bit more about the use of these operational benchmarks in your practice?

**Lauren Kelley** (2:11)
Absolutely. I think you said it, Ray, that financial benchmarks tend to be lagging benchmarks. They're accounting benchmarks. They're looking at the previous period or the previous couple of periods, and operational benchmarks are looking at the current state of the business and ratios that help define predictive information about how the company is going to perform. The whole value of the SaaS model and why investors are paying 20x, even 40x, the enterprise value or the market cap, I mean, the revenue to market cap multiples are so high, is because of the predictive value of SaaS companies. And those metrics aren't based necessarily on the financial numbers, they're based on the operational metrics, the retention rates, the customer lifetime value rates, which contribute to the revenue growth rate, but it's a consistent number, and that's what investors are betting on. So let me give you another example of why operational metrics are so important. So my last company, we took public in 2001, as we were an early company. I would say that probably there was not another Internet or software company out there that had as small a number of failures of customers to pay. Companies were experiencing 30 percent of their customers couldn't pay as the market crashed in 2001 and then especially after 9-11, it was even worse. We had less than 5 percent because we had a very analytical way of looking at our customers, and not looking at their payment histories or their financial numbers, but looking at their operations and looking at our sales numbers and structures within and our retention and our engagement, even back then. We had a very high payment and assurance that our customers were solid. They may have extended their payment terms, but we were tracking that kind of thing. Those are all operational metrics that give you an indication of how strong your business is.

**Ray Rike** (4:38)
Well, let's dig down into operational metrics and thus benchmarks a little bit more for our listening audience. We talked about using benchmarks informationally or strategically in the last episode. First, let's talk about operational benchmarks and how they're used in that kind of planning and budgeting process. That's the first thing I'd like you to share, give us some examples of an operational benchmark. Then we will move to more of the operational benchmarks that are used to really course correct and manage the business after we've set the budget and plan. So first of all, operational benchmarks and the budgeting and planning process. Some examples.

**Lauren Kelley** (5:17)
Perfect. So and very timely because it's fall and everyone is gearing up for their budgeting and planning process for next year. So what we see, one of the best practices, and I'll just describe this and then I'll show some of the operational benchmarks that really identify strengths or differences in companies. In terms of the budgeting process, the typical process is that from the top down, you have some targets and then from the bottoms up, the finance organization is sending out to each of the departments a budget template. And the traditional way of doing it is to send out the budget template. A better way to do it is to send it alongside a benchmark for not just the expense and the headcount for that department, but key metrics and operational metrics for that department. So for sales, looking at ratios between account execs and BDRs, sales productivity certainly, ratios between new sales, expansion sales, renewals, those kinds of things. At the same time, at the expense level and at the headcount level, the next best thing and really what we see the most strategic companies doing is they'll send along with, for example, the sales budget template and benchmarks for very specific sales operational metrics. They will send benchmarks for all the other departments of the company so that sales can see how they fit into the whole.