The New Metrics for Scaling Tech Businesses—Part I

This is part one of a two part article detailing HR considerations for quarterly board reporting. This article is a contribution from Daneal Charney, Executive in Residence for MaRSDD Momentum companies, Top 25 Human Resource Winner and Certified Leadership Coach. VIEW PART II HERE

Venture capital (VC) and private equity (PE) firms often talk about betting on a management team when choosing to invest in a company. Surprisingly, this bet is mostly based on word-of-mouth and intuition at a pre-deal stage (and even post deal) rather than any formal assessment of the executive teams and other critical talent.

I have had several conversations with VC or PE firms where they ‘feel’ their management teams have exceptional leadership skills, yet this clearly is not the sentiment or experience amongst employees or prospective candidates. They are not aware of some of the warning signals e.g. high turnover numbers, employer reputational issues or above industry time-to-hire numbers. How can they be, this level of detail is not part of their regular conversations with portfolio companies?

Just like other key assets, investors need to have visibility into how their portfolio companies are maximizing the contribution value of key people and creating a strong organizational culture (or not).

Ensuring people metrics are part of their regular board reporting is a great way to support portfolio companies and uncover any blind spots and risks that need appropriate action.

There are 6 driving people metrics that businesses should include in their quarterly board reporting. Here are the first three:

1) Output

What it is?

A general proxy for output is Revenue Per Employee however depending on your company’s business model you may also calculate human output in other ways.  You may also breakdown output by business area.

Why is it important?

Revenue Per Employee is a good indicator of efficiency although needs to account for external and internal factors. Businesses who are much lower may have hired ahead of growth or are at an early stage.

What is the benchmark?

The average Revenue Per Employees for mid-to-late stage software companies tend to hover between $150-200k. Considering the average tech hire may average 100k and much more all-in, 200k is a good target to strive for.  More mature companies who are close to IPO, they can expect much higher numbers.

Bottom line:

On its own revenue per employee does not paint a complete picture but is a measure of how efficiently a company is leveraging its human capital.

2) Tenure

What it is?

This metric tells you how long an employee generally stays with a company. Tip: average tenure at a company can be accessed through a Premium LinkedIn account.

Why is it important?

Average tenure per employee should be beyond the time to ramp them up to productivity or you do not gain the economic value. By creating benefits that your employees enjoy, you can extend their time spent in your business.  Ultimately more time equals more economic value for your business (all things being equal).

When you combine output (revenue per employee) and tenure you can calculate the lifetime value of an employee.  This is an important predictor of the revenue you will receive over the lifetime of an employee.

What is the benchmark?

While the average tenure in high-growth tech is ~2 years, this is not what you should aspire to. Especially with difficult-to-replace executive or critical talent, retention & succession plans are critical to future business growth.

Bottom line:

Pay attention to evidence that employees are NOT committed to you long-term. On the question, “Would you recommend this company to a friend?”, Amazon for example receives a mere 64% and has a tenure of just over 1 year. Even large companies with deep pockets are not immune to tenure issues.

3) Turnover

What it is?

This metric should be reviewed monthly and on a rolling basis. Patterns in who left, when and why should be tracked and investigated. Exit interviews, stay interviews, and skip interviews are all good ways of collecting evidence to ensure you are managing your people operations properly and mitigating future turnover.

Why is it important?

Pre-mature turnover erodes value creation for your business and creates business instability.  It can impact your customer retention, ability to build your product or expand into new markets. As an investor you should ask for general and specific turnover numbers and include non-regrettable and regrettable turnover.  A pattern of increasing turnover should be a red flag and dealt with swiftly.

What is the benchmark?

While the average turnover in tech is 12-15% this must be broken down and tracked by targeted segments (executives, new employees, front line managers, critical employees). Downward trends need to be addressed versus explained away. Even non-regrettable turnover should not be ignored and is often a sign of weak people systems e.g. bad hiring processes or lack of critical feedback or training to support in-role success.

Bottom line:

Above average turnover will impact future revenues and be costly to your business. With every employee leaving, a company loses both its financial investment in recruitment, onboarding, and training costs, as well as its non-financial investment (that can sometimes weigh harder) in knowledge, workplace collaboration and competitiveness.


About the Author: This article is a contribution from Daneal Charney, Executive in Residence for MaRSDD Momentum companies, Top 25 Human Resource Winner and Certified Leadership Coach.


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