Achieving Profitability through Operational Excellence.
2/3: A 3-Step Plan for Tech Scaleups.
Welcome back to Part 2 of my 3-piece series on achieving Profitability through Operational Excellence.
Let’s recap:
Last month we spoke about the universal change in investor expectations - leading to new challenges for CEOs. With profitability being the new north star for both PE and VC backed startups and scaleups, Part 1 touched upon the different means of getting there. Most notably, distinguishing between cost cutting and cost optimization - emphasizing the importance of transforming your organization into one that naturally aims to do more with the same rather than simply doing with less.
Operational Excellence as a tool for Profitability.
The 3-Step Plan.
If we dissect this last sentence, we can clearly break it down into two key components: [1.] doing more with less and [2.] shifting our behaviors to do so naturally and sustainably. Part 1 was all about steering away from cost-cutting, however, it does the trick of (temporarily) doing more with less.
As Operational Excellence (OpEx), however, is about permanently improving input-output-ratios or - in other words - “driving continuous improvement across all aspects of the business”, it suggests itself as the tool of choice to do both: making sure we embed the mentality of optimization into our day-to-day operations and keeping the desire of continuous improvement (e.g. on the use of resources) naturally top of mind.
“Operational Excellence is made up of four main categories: strategy deployment, performance management, high performance work teams, and process excellence.”
Peter Peterka, CEO of training company Global Six Sigma
As Peter Peterka, CEO of training company Global Six Sigma, suggests, OpEx is made up of four main categories that will help ensure holistic longevity on the above: strategy deployment, performance management, high performance work teams, and process excellence. For the sake of this series of articles, we will focus on the first three.
Part 1 already gave us a first glimpse into the plan that helps guide us in the transformation towards a value-driven organization with profitable growth:
defining the overall goal (Part 1),
setting functional objectives (Part 2),
and involving the teams in cross-disciplinary discussion to propagate initiatives that drive business profitability (The Profitability Canvas; Part 3).
While we already defined the overall goal (1.) in Part 1 by asking ourselves the WHY, WHAT, and WHEN about reaching profitability (i.e. “Strategy Deployment” in the world of Six Sigma), Part 2 of this series is all about setting functional objectives (i.e. both enabling “high performance work teams” and introducing “performance management” in the world of Six Sigma through key results). That is: aligning team objectives and contributions with our overarching goal of building a value-driven and profitable organization.
Let's get practical!
Setting functional objectives - aligning business goals on achieving profitability:
Create a universal understanding of what profitability is.
The pursuit of profitability cannot be successful without proper explanation. Therefore, before anything else, we need to make sure everyone understands our objective to begin with. Due to the only recent macro-economic shifts, many of us were never tasked with the mandate to build profitable operations anywhere throughout our careers. We were taught to achieve top-line growth and double down on any initiative that showed promise of growth - independent of cost. If anything, we were promising and praying for positive ROIs at scale. Creating a universal understanding among all staff, of what it means to rely on outside money to keep the lights on, is a crucial prerequisite to engaging all members of our team to think along on how we can best use the resources at our disposal. The mentality of considering margins and ROI from the get-go, to think about unit economics, and to strive for operations that sustain themselves - at much smaller economies of scale - is new to many of us.
Once most of us understand, that investors fund our adventures based on a promise for the future - with much less patience and risk appetite than in the past - and that, eventually, we need to earn their money back, we have a basis to share accountability on our objectives.Divide and conquer.
If we want to achieve profitability throughout the business, we need to engage every member of our team to think along. Scaleups - as the name suggests - have the objective that is: growth at scale. Therefore, we can neither make profitability the only objective we all chase after, nor can we simply shove it in the arms of a single department (e.g. Finance) to achieve. Instead, we need to make it an overarching mantra, a mentality, that is fully embodied in and a part of our growth strategy. We need to make sure that whatever we do anywhere in the organization: it is the best it can be, it is scalable and future-proof, and it produces a positive ROI. In the world of SaaS and finance, we often look at The Rule of 40 to determine whether we correctly balance this growth and burn.Create focus (organizationally).
Translating this philosophy into tangible business goals could - simplified - look something like this:
1. Become a high-performance organization: achieve 60% share in our core markets by EOY (EUR wallet share). 2. Become a scalable operation: maintain an average NPS of 65; decrease lead-to-live-time by 20% by EOY (YoY). 3. Become a profitable business: achieve positive EBITDA by EOY.When it comes to setting clear goals - be it through OKRs, OGSPs, or any other methodology - applying the consultancy principle of MECE is key in theory, yet not always realistic in practice. With MECE, we try to achieve mutual exclusiveness (ME) and collective exhaustiveness (CE). Meaning: we want to make sure all our desired outcomes are stimulated (e.g. growth, scalability, and profitability) while none of them contradict or overlap each other.
MECE Framework
On the above example, however, we can see that EBITDA will - in part - be driven by CLTV (Customer Lifetime Value) through overall happiness (NPS), while scalability could be considered a characteristic of a high-performance organization to begin with and - clearly - drives profitability in the long run.
Therefore, pragmatism rules when it comes to bringing theory into practice. Important is, that we prioritize the outcomes we need to achieve for any given year and focus on the initiatives that drive them.In our case, this means [1.] achieving operational profitability (EBITDA; with staff costs being the highest cost center in SaaS), [2.] keeping customers happy while streamlining our operations (i.e. improving unit economics) from Marketing over Sales, Onboarding, Product, and Support, and [3.] becoming market leader as per EUR in wallet share.
In summary, we not only focus on achieving profitability (which could have been achieved through cost cutting; see Part 1) but steer on the desire to become a value-driven (scalability) organization with profitable (profitability) growth (high-performance).Agree on what each team's purpose is within the organization.
Before we connect organizational and functional objectives, we need to determine each team’s mandate (i.e. the purpose each team has within our organization).
Bringing it down to absolute basics: it’s on Marketing to create demand, Sales to generate new revenue, Support to keep clients on board, Product to build propositions that can be sold for a profit, ... . It’s important to create clear mandates for each team, outlining where their responsibilities start and end to ensure every team understands, embraces, and supports their purpose without distraction. These mandates can vary quite drastically within every organization, however, they need to be collectively exhaustive in achieving our business goals (yet again: see MECE).
While we don’t want to create a silo’d organization and know that bigger objectives more often than not get achieved through the coordinated effort of multiple departments, focusing on what we can control and on what we are evaluated on as a team (i.e. department), makes achieving our objectives a lot easier.Create focus (functionally).
With the focus of the organization set (i.e. organizational objectives) and team mandates clear, we can finally set our functional objectives (i.e. team goals).
Too many priorities and abstract objectives, of which we feel we cannot contribute to, paralyze and distract us from executing on initiatives that actually move the needle. With our company objectives and each department's purpose in place, we can now agree on very specific levers for each team to pull to contribute to our core objectives. A simplified example for a Support organization:1. High-Performance how can we validate a high-performance team? what can we do to support our objective on market share? ▶︎ reduce average amount of tickets per customer on Top 5 most popular topics by 70% YoY. 2. Scalable how can we measure whether our work and processes are scalable without sacrificing quality? ▶︎ have 80% of support inquiries solved through the bot; maintain a CSAT of 90%. 3. Profitable how can we measure whether we produce a positive ROI? ▶︎ reduce annual churn to 3%.
The above example shows, how difficult it can be to set team objectives that are truly in line with our organizational ones. With the Support mandate of keeping clients on board and asking action-oriented questions as to HOW a team can support a given organizational objective, the exercise becomes a lot easier.
In the above case, we assume that
[1.] high customer satisfaction and a great reputation will passively enable new-business growth. We further assume, that not having to reach out to Support to find answers to questions (e.g. through great FAQs or instructional videos) increases customer satisfaction (note: NPS not CSAT, as CSAT is often used to merely look at satisfaction of customers after having reached out to Support; the goal is not having to reach out in the first place).
[2.] High-quality automated support processes are expected to help fuel overall scalability of the business, enabling us to serve customers with the same quality at scale (CSAT). While the core mandate of Support may focus on the time after a customer goes live, not having to spend time answering questions of prospects may contribute to driving down the lead-to-live time. Maintaining a high CSAT contributes to a high overall NPS.
[3.] Actively countering churn (i.e. increasing lifetime) will drive down the CAC-LTV-ratio - enabling us to reach profitability sooner.sensum, non verba spectamus - we follow the spirit of the law rather than the letter
Successfully setting these objectives up for each team means never having to balance our day-to-day and core objectives. This example also shows, however, how important pragmatism and the focus on overall outcomes is. Our High-Performance Support organization looks at NPS to drive new business while - on an organizational level - we look at NPS to help validate scalability. We also aim to drive profitability by combating churn while an increase in NPS arguably results in lower churn rates (thus, not exclusive). This can either drive us crazy and have us caught up in an infinity of goal-setting cycles (partly the reason why I have never worked in an organization that successfully set its OKRs before the start of the new year) or we can choose to accept the lack of absolute MECE and focus on the spirit of the idea and whether we believe that the objectives and key results we chose will contribute to building the organization we envision to be.
The real learning here is: As long as we do our work in line with optimizing the above levers, we are successful as a team: both on a department-level and as an organization.
Next up…
This concludes Part 2 of this series.
With the organizational and functional objectives set, the final article (Part 3) will have us use The Profitability Canvas to propagate the initiatives that drive our functional objectives and outcomes as part of cross-disciplinary discussion. These initiatives fuel our day-to-day and are the input that eventually determines whether we will achieve our objectives.
In other words: we will determine WHAT we will do (e.g. in a quarter) in order to optimize the above levers (e.g. reduce churn, increase resolution through self-help, or achieve a certain NPS).
I hope this article has provided some food for thought. Thank you already for your input, interest, and great discussions! I’m curious to hear about your experiences around reaching profitability or with applying the above exercise in your process. Please feel free to share your experiences and thoughts.