How to manage runaway SaaS spend

Today’s post is written in partnership with Brex.

If you sell software, you also waste software. Kinda ironic.

70% of costs at SaaS companies walk on two legs.

Take the P&L from any venture backed tech company, and you’ll realize that anywhere from 2/3rds (on the low end) to 3/4ths (on the high end) of all spend is wrapped up in what I call “total effective labor”.

That’s the aggregation of payroll, commissions, benefits, bonuses, contractors, and consultants your company hires…the “people”.

Total Effective Labor = Payroll + Commissions + Benefits + Bonuses + Contractors

That leaves roughly ~30% of company spend that’s wrapped up in “stuff” without a heartbeat.

Each department within the org has a different mix of non people “stuff”. It’s common for teams to call people spend “direct” spend, since it’s linked directly to people, and broadly classify everything else as “indirect” spend (kinda simple, I know).

But we can go a level further and come up with some general rules of thumb, or ratios, at the department level to split out those direct and indirect costs.

Cost of Goods Sold:

33% people
- Customer support and Customer Success (if not in Sales)
33% tools or data
- Customer support tools (Ask Nicely, Zen Desk, Churnzero)
33% hosting infrastructure
- AWS, GCP, Snowflake

Sales:

75% people
- Payroll + Commissions
  - Note: if you have commissions showing up in any other department, you are doing it wrong. Commissions should be reserved specifically for sales. Any other variable comp should be classified as a management by objective (MBO) bonus.
15% tools
- CRM (Salesforce, Hubspot)
- Sales Efficiency (Gong, Zoominfo, Linkedin Sales Navigator)
- Meeting Management (Calendly, Chilipiper, Vidyard)
- Contract Management (Docusign, Linksquares)
10% travel
- Revenue generating travel: Client facing meeting, conferences
- Non revenue generating travel: Small hands, all hands, QBRs (quarterly business reviews)

Marketing:

50% people
40% programs
- Includes tools, advertising, campaigns, swag, conference sponsorships
  - This varies by company scale - you need people to deploy the marketing programs and campaigns, so at first this skews towards people (60% / 40%).
  - But overtime the ratio starts to slide in the direction of programs (40% / 60%) once you have people to spend it
  - Generally speaking though, you won’t see it move more than 70% / 30% in either direction
  - Tools you’ll commonly see pop up in your vendor report include Hubspot, Mailchimp, Marketo, Jasper.ai, SproutSocial, Podium
10% travel (and shipping)
- Lead generating travel: Conferences, and anywhere you ship that booth
  - Tangent: Sadly, it’s sometimes cheaper to buy a 42 inch Vizio TV for the booth a local Best Buy once you land, and then just leave it in the hotel room as a gift for the hotel staff, rather than paying to ship it all the way back.
  - A CMO once told me he had been doing this all year. I got wicked mad at the waste, ran the numbers, and discovered he was right by a factor of almost 2x. 🤷🏽‍♂️

Product:

70% people
25% tools
- Project Management (Miro, Clickup, Asana)
- Design (Figma, Fullstory, Adobe)

5% travel
- Customer studies: meeting with clients first hand to understand their needs. This may include advisory committees.
- Conferences: often working hand in hand with marketing to man the booth
- Internal travel: Product people really f’in love their small hands meetings, where they talk about activation metrics and gather around campfires to play the banjo.

Live look into a Product Team offsite

Engineering:

93% people,
5% tools,
- Gitlab, Docker, Postman
  - Surprising tangent - a lot of dev tools are actually relatively cheap (as a CFO, I rarely ever say this. It actually hurts that I’m writing this).
  - Most start as free. And if you are an org that’s under 200 people, there’s a good chance that more than half the tools your engineering team is using are still free.
Very minimal travel (2%?)
- If your engineering team is traveling a lot, something is very broken.
- There are no customer facing opportunities for engineering teams, and Product and Marketing people should be representing the company at conferences to better communicate the story (sorry if I’ve offended any Toast Master developers)

Finance

60% people
25% tools
- Money In, Money Out (ADP, Bill.com, Brex)
- Finance / Accounting (Quickbooks, NetSuite, Xero)
- Treasury and Procurement (Kyriba, Coupa, Ivalua)
- Cap table management (Carta)
12% professional fees
- Lawyers (Cooley, Fenwick, Goodwin, Wilson), Tax (BDO), Audit (Big Four)
3% travel

HR

80% people
10% recruiting “advertising” / “program” spend
- LinkedIn, BuiltWith, Indeed, Monster, Glass Door
  - I think of this as effectively marketing program spend but for the org’s overall brand to attract talent
7% tools
- HRIS tools (Workday, Bamboo HR, Gusto)
3% travel

“G&A” / “Exec” / “Operations”

40% People
- CEO, COO, Admins, facility workers etc.
30% Tools
- This is where I’m throwing shared tools (Zoom, Slack, GSuite) rather than allocating out to the departments
  - As you get past ~$25M in ARR you can start to allocate the larger shared costs (like rent) so G&A doesn’t look like an absolute albatross
- And I’m also throwing all security and compliance tools here (Crowdstrike, Jfrog, DataDog)
20% Rent and Overhead:
- Also includes utilities, office expenses, snacks, the disgusting Flavia coffee I had to drink at PwC etc.

Nothing like some bagged coffee to get you through that 92 page RFP

10% exec travel
- This is where you park the 150 hour NetJets card for your CEO and hope you get invited someday when you beat your revenue forecast