Cloudonomics: Measuring and Driving Cloud / SaaS Success

One thing that's clear to me after 10 years of working in the SaaS and cloud computing business - the financial measurement and operating metrics for cloud-based, recurring revenue businesses are very different than those for running on-premises software operations.

Adopting and embracing the new regime of cloud and SaaS centric financial and operating metrics is challenging enough for stand-alone cloud and SaaS companies - they really are that different from traditional software metrics - but moving to cloud metrics is particularly daunting for SaaS and cloud businesses contained within larger software firms. Why - because most very large public software companies are very much finance driven - and the internal financial governance and metrics used to plan, operate and measure the business are all traditional on-premises software metrics. Making things even harder, the financial systems in place (nearly always Oracle or SAP) at large software firms don't provide the data needed to calculate cloud and SaaS metrics and most importantly senior finance executives in large software companies have grown up with an on-premises, enterprise mind-set and culture.

The problem that all this exposes is that focusing on traditional software company metrics, operating principles and rules of thumb drives cloud and SaaS businesses to make poor decisions - or as my friend and SaaS finance expert Byron Deeter likes to say, "Bookings is for suckers."

The key thing to understand is that unlike on-premises license sales in traditional enterprise software, the metrics best used to run cloud-based businesses start with those of consumer-focused subscription-based businesses, like telephone, cable and satellite TV firms. But simple recurring revenue metrics aren't enough - SaaS and cloud companies sell sophisticated offerings to businesses, often through multiple channels of distribution, so the key is to take consumer subscription metrics and combine, augment and adapt them to reflect the business to business (B2B) market focus and operating structure of cloud and SaaS firms.

So SaaS and cloud businesses should start their financial planning and management process by leveraging classic consumer subscription-based metrics like MRR, Churn, ASP and ARPU to measure and operate their business. And from an operating perspective, just like with cell phone or satellite TV companies it's important to place an enormous focus on customer retention and renewal.

But because SaaS and cloud companies are primarily B2B focused, planning, measurement and valuation quickly gets much more interesting and sophisticated.

SaaS and cloud firms that enter into contracts with their clients that call for quarterly or annual payments need to be adept at revenue management as well as operating the business guided by CMRR - Contracted Monthly Recurring Revenue. Internal governance needs to be adjusted to reflect CMRR - from business planning to sales quotas to management reporting. The sales and marketing teams needs to think about Cpipe - pipeline measured in CMRR terms. When combined with renewals and churn, Net CMRR contribution becomes the key metric to focus the management team and board on month in and month out.

Cash flow is hugely important, because SaaS and cloud firms charge far less up-front for their software than on-premises enterprise software counterparts - which drives the need for a series of metrics focused on cost of customer acquisition and the lifetime value of a company - leading to core metrics like Onmiture's magic number, the CAC ratio and CLTV.

I really intended this post to be a teaser - that's why I've not tried to go into more detail about exactly what all these metrics are, how you calculate them and how you measure and use them to run your business. Mostly I wanted to make it clear that whether you are running a stand-alone SaaS or cloud company, or you are running a SaaS or cloud business unit inside of a larger firm, it's really important that you are using cloud and SaaS metrics to measure and operate your business.

Not only will these metrics help you operate better, they increasingly will be used to value your business - the venture capital and software M&A communities have already figured this out and it's certain Wall Street won't be far behind. I think it's equally important that CEOs and CFO's of larger enterprise software firms understand these metrics - using traditional software metrics for SaaS / cloud business units is a great way to destroy the potential for value.

With all of this in mind, we at Intacct have partnered with the Software and Information Industry Association (The SIIA), Bessemer Venture Partners and Adaptive Planning to put together content and a series of events on best practices for financial planning, measurement and operations for SaaS and cloud businesses that we're calling Cloudonomics.

The first installment is a webcast on February 23 2010 featuring Philippe Bottteri, VP of Bessemer Venture Partners, Rob Hull, CFO of Adaptive Planning and Marc Linden CFO of Intacct.

Whether you are a CEO or CFO of a SaaS or cloud pure-play, or you are leading an established software company moving into the cloud, I expect you will find the discussion valuable and would encourage you to register and attend.