Which metric does your business’s success hinge on in any given year? It changes depending on a company’s lifecycle, financial state, customer base, market trends, business model shifts, and a slew of other factors.
Maybe a CFO is trying to tilt the revenue mix in a specific direction, stop high customer churn, or underscore an income line item that will lead to a higher valuation.
Or perhaps investor relations needs to give industry analysts data that tells a richer story or that provides a toehold for modeling a new revenue stream.
Whatever the goals, tracking the right metrics or key performance indicators (KPIs) is critical for creating long-term value and allowing stakeholders to understand the
rationale behind management’s business decisions.
Since CFOs have more data than ever at their fingertips, we wondered which metrics they planned to watch closely in 2021. We found five finance chiefs focusing on different perspectives of their company’s performance and leveraging specific metrics to influence decisions and behavior far beyond the finance department.
Customer Attrition Cycle
John Collins, LivePerson
LivePerson CFO John Collins is big on creating “data advantages” at the brand-to-consumer messaging company he became finance chief of mid-2020. He is transforming all of the company’s data flows into useful information for strategic decision-making and is building a data-lake architecture as the foundation. Since LivePerson’s products help brands measure and respond to customer signals in real-time, it’s no surprise that the company aims for that level of responsiveness and reaction time within its own operations.
LivePerson uses information gleaned from the sales cycle to forecast contract closes and determine when a course-correction is needed in a given quarter. But what about the other side of the coin — gauging when a customer might be thinking of ditching the platform?
One of the key performance indicators Collins has been rethinking is customer attrition. “In the context of large enterprise sales, the risk-reward profile of attrition is asymmetrical: big revenue can vanish with less than a year of notice, but expanding a newly won customer to that same level often requires multiple years,” Collins says.
Ironically, at least in software-as-a-service (SaaS) products for large enterprises, the probability of attrition arguably increases with a customer’s tenure and economic commitment. Why?
“Because people relationships are a driving force for adoption and expansion within the enterprise,” Collins says. When a key stakeholder like a chief marketing officer or a chief technology officer exits a customer’s organization, “which invariably happens over a long-enough time horizon, that single event puts years of revenue expansion at risk.”
How does a company track attrition signals? Given the timing differences between when attrition becomes known and when it becomes effective (i.e., reduces revenue), simply tracking actuals is likely to understate the genuine risk, Collins says. To get ahead of potential attrition events, an “attrition cycle” must be established with the same level of rigor as the traditional sales cycle.
An attrition cycle with objectively defined stages of progression, like the product champion left the company or the platform is being underused, “is the minimum viable framework to systematically reduce the risk of big revenue attrition,” Collins says.
Collins wants to transform attrition and the signs of attrition into a source of growth. So, he is going a step further by rethinking incentive systems for the field, for one. For example, the company is paying higher commission rates for successful renewals that have indicators of risk and enter the attrition cycle.
LivePerson is also feeding automatically captured data from conversations with customers into machine learning models. “Just as we leverage many data features to predict bookings accurately, we’re training models on historical indicators of risk to better assess the corresponding probability of lost business,” Collins says.
That might give LivePerson more time to act to offer the customer some solutions proactively. Says Collins: “We see an opportunity for the models to learn successful mitigation strategies and prescribe concrete actions to the reps.”
CAPS and ARR
Kieran McGrath, Avaya
Taking over corporate finance for a veteran technology company thought of as a hardware company but now transitioning to cloud solutions would be a test for any finance chief. Add on top of that the headaches of the company being newly public again, and you understand what Avaya CFO Kieran McGrath has been up against since joining Avaya in February 2019.
“We’ve been focused on changing who we are as a company and also changing the image of who we are as a company,” says McGrath. For him, image-building means building credibility with the public markets.
That might sound strange for a company with hundreds of thousands of customers that sells in 190 countries. But Avaya is a turnaround story, having declared bankruptcy in 2017. Now, the company is in complete transformation to a cloud-subscription revenue base.
Avaya has created two new metrics to help change perceptions. One is called CAPS — Cloud, Alliance, Partner, Subscription. The metric provides transparency into the composition of Avaya’s new cloud-facing revenue in any given quarter, McGrath says. In fiscal 2020 (ended September 30), Avaya generated 26% of its revenue from CAPS; it hopes to hit 40% of revenue in fiscal 2021. “We move this metric by continuing to rapidly transition our existing customer base to a subscription model and by rapidly growing our public and private CCaaS (contact-center-as-a-service) offerings through existing and new customers,” says McGrath.
Avaya’s next “turn of the crank” was to introduce an annual recurring revenue (ARR) metric so that investors and analysts could see recurring cloud revenue not just in the current period but also in the future. ARR represents an estimate of the annualized revenue run-rate of specific components from active OneCloud contracts at the end of the reporting period. (OneCloud is Avaya’s full suite of public, private, and hybrid cloud products and subscription offerings.)
Avaya closed out fiscal 2020 with quarterly ARR of $191 million and increased its financial guidance for 2021. The topline is growing slower — it rose 4% in 2021’s first quarter.
“At the top, you see only a business that’s growing modestly, but the new metrics show the dramatic change taking place within the business,” says McGrath. “We’ve given [analysts and investors] the metrics that they can use to compare us to other companies that use these recurring revenue metrics. They can understand the traction that we’re getting, and it’s been well-received.”
Internally, this year, the CAPS and OneCloud ARR metrics are being tied to compensation. Regional sales leaders have the metric goals as a critical component of their fiscal 2021 financial objectives, McGrath says, and product leaders are also measured on them.
“We’re methodically giving investors increased visibility, increased commitment in terms of metrics, and increased comparability,” says McGrath.
Adherence and Utilization
John McLean, Current Health
“One of the biggest focus areas for an early-stage company is customers,” says John McLean, named finance chief of Current Health, a provider of remote patient management technology, in June 2020. “Nothing kills a company faster than selling to a customer and then moving on to a new one, leaving the first customer floundering and not having a great experience.”
McLean has brought that focus on existing customers to Current Health, a company founded in Scotland in 2015. On a mission to deliver patient care “outside the four walls of the hospital,” the Current Health solution combines a wearable vital signs sensor that connects to the health care provider and a patient’s tablet device; a symptoms chatbot; and video doctor visits. Health care providers get real-time information on a remote patient who’s recuperating or dealing with a chronic condition.
Focusing on customer satisfaction for Current Health means two key metrics: utilization and adherence. Utilization is, “if we sent a health system 100 devices, how many do they have out on patients?” says McLean. On the other hand, adherence is patient-based: If 90 of the 100 devices are being worn by patients, how many of them are wearing it more than 20 hours per day?
Utilization is vital because McLean believes a “land and expand” strategy will be the path to future bookings. It can help spot upselling opportunities: If a company uses the system on 100 oncology patients, does it make sense for it to try it on another 100? Perhaps the oncology department can help introduce the Current Health device to doctors in its system treating chronic obstructive pulmonary disease (COPD), congestive heart failure (CHF), or other established use cases.
With adherence — essentially, patient adherence to the regimen — “the best success happens when the physician explains to the patient the need for the device and what it’s doing,” says McLean.
To boost adherence, Current Health has spent a lot of time focusing on patient ease of use. First, it has shrunk the sensor from iPhone-size to Oreo cookie size. Second, the company has made setup a breeze — the user gets a tablet that can be up and running and transmitting back to the doctor in five minutes, McLean says, no Bluetooth pairing or Wi-Fi passwords required.
While devices like Current Health’s often see adherence rates in the 20% range, Current Health’s system hit adherence rates in the 90% range (“way outside of any norm in the space”) when it was used in parts of Britain’s National Health System.
As the device’s use expands, Current Health may find it’s just scratching the surface on the metrics. For example, is adherence sometimes condition-specific — do CHF patients tend to wear the device more than oncology patients? McLean looks forward to spotting trends in that kind of data.
“If we’re 100% focused on sales and growth, we need to be 150% focused on customer satisfaction,” he says.
Kevin Ingram, FM Global
The market for commercial property insurance can turn on an insurer quickly. Natural disasters and other events — like the winter storm in Texas — can cause claims to soar.
That’s why Kevin Ingram, CFO of commercial property insurance carrier FM Global, keeps a very close eye on whether the company’s underlying insurance book of business is generating a profit.
Profit is significant to a mutual insurance company like FM Global. “Our only ability to grow our capital is through our underwriting results and investment income, and our capital is what allows us to provide the large, stable underwriting capacity that our policyholders have come to expect,” explains Ingram.
The metric that captures profit and its components tidily is the “combined ratio” — a measure that shows overall profitability by taking insured loss costs plus expenses as a ratio to the company’s earned premium. Earned premium is the premium collected by an insurance company for the portion of a policy that has expired.
Many insurance companies like the combined ratio because it leaves out investment income and focuses only on profit earned through efficient management and underwriting discipline.
The underlying profitability of FM Global’s business was a key focus in light of the pandemic and the remote work environment over the past year, Ingram says. When the pandemic hit and commercial buildings shut down, FM Global quickly reminded policyholders of the dangers of neglecting closed offices, manufacturing plants, and warehouse buildings, primarily from fires, vandalism, and theft. That helped keep down claims.
Just as important as the combined ratio’s result is the period in which it is framed. While Ingram checks the metric every month, “we look at our combined ratio over a three to five-year timeline because of the inherent volatility of our business,” says Ingram.
Currently, FM Global’s combined ratio tells management that the company is in a “good place” from a profitability perspective, says Ingram. That’s “driven largely by the rising rates in insurance as a result of a hardening insurance marketplace coupled with the risk improvements policyholders made.”
If that weren’t the case, of course, FM Global would have different ways to move the needle: (1) driving down policyholders’ insured loss cost by helping clients become more resilient from a risk loss perspective; (2) reducing the company’s cost structure or (3) increasing premiums, which would boost the revenue component.
Because there’s so much that FM Global can do to improve the combined ratio, every employee is compensated in some fashion based on the result, according to Ingram. “Everyone pays close attention to it because the result impacts individual compensation as well as our business as a whole.”
Samuel Monti, Epicor Software
For finance to be a true strategic partner and influencer, it has to provide clear data, communicated effectively, that is timely and easily accessible, explains Samuel Monti, CFO of private-equity owned ERP software company Epicor. But there’s also the issue of selecting the correct data; otherwise, misalignment can occur quickly.
Monti just joined Epicor in January, but he is already focusing his efforts on a crucial metric of both growth and Epicor’s transition from the old licensed software model.
For Monti and Epicor, the right KPI is exit ARR (annual recurring revenue), a metric sometimes used by other SaaS companies. Exit ARR is the total value of annual recurring revenue for all current, committed contracts. It’s a 12-month, forward-looking measure that considers bookings that haven’t started yet or been recognized plus the revenue the company is recognizing, says Monti. Said another way, it’s the total book of business at a point in time.
“This metric best represents forward revenue and cash,” Monti says. “If the company is always growing that number, it’s on track. Exit ARR is a great way to measure progress and track revenue.”
A SaaS-based metric is vital to Epicor because while it still has clients with on-premises software licenses, the SaaS business is “growing at a very fast clip,” both in customers switching to its SaaS environment and in new customers signing on.
As to exit ARR, many factors move the number — price increases, customer retention, upsells, customer cancellations, and others. For this fiscal year, Epicor’s exit ARR is trending about 5% above the planned target, says Monti. “When SaaS companies use metrics like exit ARR, determining patterns and the materiality of the upcoming renewal base becomes more clear.”
Exit ARR is also a metric that helps value a SaaS-based company. Epicor is the first technology investment of veteran PE firm Clayton Dubilier & Rice, and it has a lot of capital to deploy on potential acquisitions. After buying Epicor last year, CD&R will inevitably be screening acquisition candidates and comparing them with Epicor’s SaaS business trajectory. Exit ARR will come in handy.
“They are big about growing this right away and taking advantage of the moment,” says Monti about CD&R. “The most important thing within software value is the recurring revenue, the repeatability and predictability of a revenue stream.”