Archive for January, 2017

You Didn’t Have To Provide A Plan To The Board?

January 20th, 2017 Comments off

BUDGETOne of the benefits and enjoyments I get from updating my blog are the questions that I typically received from people asking for certain clarifications. This comes as no surprise since the original intent of my blog was to bring a little more transparency into how the Finance department operates relative to every other functional area in the company and what might be driving the actions or decisions of the Finance department.
With that said, I received a follow-up yesterday on the update I wrote on planning within a hyper growth environment. One of the main messages in yesterday’s post was that you really can’t plan, or at least effectively, in a hyper growth environment. With that message I was asked how the Board would accept that an operating plan wouldn’t be presented to them for the year. I have to say I was a bit amused at the question, but completely understood why it was asked. Not to mention, the Board would never allow such a hall pass from any team. There is ALWAYS an operating plan that is highly thought out, detail oriented, and usually has a number of additional scenarios that will convey what the impacts will be to cash and profitability if targets are missed or exceeded. For ballpark references, you might have the base scenario, as well as a +20% and a (20%) view. For a more mature company these ranges will obviously be tightened up when you have a higher degree of predicability and more history to base the plan off of. When you’re really just a handful of Quarters into a trajectory, which you are anticipating to double, and the trajectory starts looking like a 6-8x, then you have an entirely different beast to deal with.
So how do you plan for such a scenario? Again, as I mentioned yesterday, you really don’t “plan” for it, but you react to it and adjust the allocation of resources to support that new growth trajectory. As with any business, you have key indicators you look to gauge the health of the business and whether you are tracking to achieve the commitment made to the Board. The elements below are certainly not all inclusive, but are merely a sampling of the items that could be watched when encounter a growth rate that is entirely unplanned.
Billings & Revenues: While this is the key driver on which all spending decisions are made, the total number is not the overriding driver. There’s further review that should be done on the quality of that revenue, what the concentration is, and whether there are any key areas that are potentially missing against Plan. In the case of Cylance, we were constantly watching what our price per endpoint (PPN) was at every level. What that PPN was at a macro level, a channel level, a vertical level, as well as what they were for the duration of a deal. Looking to this number would indicate what the true health of the business was. Was there a single customer that accounted for a disproportionate share of the Quarter business, which in turn, might prompt a tapping of the brakes to ensure that hiring and spend weren’t getting ahead of themselves relative to the Plan and a normalized trajectory. Prudence should always reign supreme.
Gross Margin. Definitely a key indicator, but it also depends on what the structure of the billings are and how the terms being written may be influencing GAAP-based reporting. For a situation where multi-year deals are being done, it might be best to look at early results on a non-GAAP basis if a disproportionate amount of the activity is headed for the balance sheet as deferred income.
Headcount. For me, this was one of the key indicators as it related to our burn and this is certainly not just a single macro number, but a more complex element to dive into. First, what is the overall cost per head and what is the trend line on that figure? Are you’re costs per head staying constant or are you seeing an increase in that number, which might be tied to incentive plans that aren’t aligned with results, increasing benefit costs, or all of the above? Second, what are the average billings and revenues per employee? While the overall headcount might be increasing, this number should also be increasing with the results that are being achieved in excess of plan. It’s not a problem increasing headcount over the Plan, so long are you are seeing the achievement or increase in this planned metric. Third, what is the distribution of the headcount by functional area? Did the original Plan call for 12% within the Marketing area and now the revised number puts Marketing at 18% of the headcount? Is there a disproportionate growth in any one area because that functional area has successfully lobbied for additional staff that is not consistent with industry norms?
Facilities. This area is obviously heavily influenced by the increased headcount that is occurring to accommodate the unplanned growth. If historically Rent expense has been 2% of your operating expenses then this is the approximate metric that needs to be followed in order to stay consistent with the Plan. If you’re exceeding Plan and need more staff then this number, while increasing on a constant dollar basis, should still remain at approximately 2%. As an example, you’re planning a $25M year, which would allow for approximately $500k in rent expense. If the new trajectory is now $100M, then theoretically you would have $2M to spend on rent to accommodate the additional headcount needed to support that growth. Ideally you also start achieving economies of scale where you can actually see that number go down as a percentage of spend. If you fail to miss you billings number, hire all the folks, commit to even more rent expense…then you’re going to find yourself in a bit of bind. It’s akin to “I’m going to get a big raise next year so I’m going to buy my second home and a new car for my wife and I…”. And when it doesn’t happen?
Systems. This is another area that needs to be heavily strategized and managed in a hyper growth environment. There will be unplanned upgrades that will necessitate spending in the $500k-$1M range that, while necessary for growth, were previously balked at due to their cost and the original trajectory you thought you would be on. You might have thought you had another year…or two…to bring them online, but now seeing a 6x freight train coming at you there is no other choice than to starting throwing a ton more coal on that fire and get up to speed.
Culture. We’ll discuss this in another post…or posts.
This barely scratches the surface of “planning” in a hyper growth environment. It’s more about regulating the health of the patient, making sure the vital signs are remaining healthy, keeping your finger on the pulse and knowing how to respond. It’s the doctor that has decades of experience, treats every patient the same, only to realize he has misdiagnosed the patient and either administered the wrong medications…or too many. It’s about collaborating with the broader team in making key assessments, discussing with the team their needs, and ensuring that the resources (MONEY) are properly allocated and within the range of the original Plan that was discussed.
Thanks for reading…

Jeffrey Ishmael

Employees, Facilities, & Systems In A Hyper Growth Environment…

January 19th, 2017 Comments off

IMG_0219     I’m really enjoying the conversations that I’m having with prospective new teams, as well as the vendors that I partnered with during the hyper growth phases at Cylance. The most predominant question is “how did you guys plan that out and accommodate the growth you did?”. Really, the level of success we achieved was not planned, at least not in the timeline that it was achieved in. From the outset, we had “modest” growth that still had us doubling our billings on an annual basis. We knew early on that we were going to have a relatively aggressive trajectory, but certainly not the hyper growth we were confronted with. While it has its blessings, it also tables an entirely unique set of challenges. Challenges on finding that appropriate balance in planning out employee growth, facility growth, as well as the systems you want to put in place…all with a focus on prudent spend knowing that the wrong decisions will result in unnecessary cash burn.
Employees. While we were extremely surgical in the original hiring, there were also unplanned surprises that increased our headcount, and thus our burn. Take for example the assumptions about our product and what we were anticipating relative to the ongoing support of our customers. Early on, the assumption was that our product would be entirely turnkey, that any deployments would be extremely rapid, and that the product would be easily integrated into any customers native environment. Well…not so fast. We quickly determined that we would indeed need a more robust customer support team, and one that was going to be more than just a few people. It was not a difficult decision to make as we knew this was the best decision for the customer and the best decision in support of our product and future success. We just needed to ensure that we moderated our spend in other others to accommodate the unplanned spend. As with some of our other spend, these were not black & white spreadsheet decisions and we worked through all the shades of grey as a team. Also early on we were aggressive in the buildout of our Sales Engineering team. This team was the technical complement to our Sales team and would be responsible for any pre-sale technical questions, proof of concepts, deployment issues, etc. As we started to close more business it was determined we needed a dedicated team just to handle the proof of concepts with prospective customers. Again, not in the plan, additional headcount, and thus, an increase in our cash burn. More conversation that thad to be addressed by the broader team and ensure that the metrics that we were operating under continued increasing in the face of rapid employee growth.
Facilities. When you start out in a living room on fold up tables you tend to maintain that same prudence planning and moving into new locations. We had early support for an investor with some temporary space. Following that, it was then a big commitment for us to assume a five year lease on a 12k square foot space when we still had barely secured our first Services customer. Even more surprising was outgrowing that space in less than two years. The other three years? We had always negotiated great leases so we had no problems maintaining cash flow neutrality when we subleased that space and moved into a new 16k square foot space, but with the opportunity to expand to additional floors within the same building. Imagine our surprise when we realized that in less than a year we were going to be out of space due to a dramatic increase in bookings after we signed the lease. We then renewed our relationship with The Irvine Company to lease additional space in an adjacent building and could easily expand to additional floors. As with our earlier leases, we always ensured we had negotiated leases that we could sublease if necessary if there were any unplanned corrections to the business that had us with excess capacity. However, it wasn’t excess capacity that was the issue, but a lack of. As I had successfully worked with other companies in a campus type environment, we started leasing vacant space in adjoining buildings to accommodate the rapid growth. There was little cap ex for buildout and we had exceptional flexibility. Even as we started to occupy a significant amount of space in prominent high rise buildings adjacent to the airport, while also securing prominent building top signage, we were able to keep our facility expense to less than two percent of our total operating expenses. Building top signage on two buildings that would essentially create the Cylance corridor near the airport.
Systems. As I was handed a laptop with Quickbooks on my first day i knew that this would not be our platform moving forward and quickly looked at what we might deploy that would carry us out over the next 2-3 years…or more. It was determined that Netsuite would be the platform and we could add additional modules as we grew and our needs changed. Whether commissions, deferred revenue, fixed assets, or multi-currency, Netsuite provided an economical platform that was widely adopted and could scale. I had just completed an SAP implementation and it was clear that we didn’t need to go in the direction of Oracle or SAP, both from a complexity, as well as a cost perspective. There were also some other great platforms that we had looked at early on. As an example, we had looked at Domo as a candidate for our dashboard platform. However, at a full implementation cost approaching six figures it just didn’t make sense early on as we had very little to report on in a pre-revenue capacity. A great platform, but not for the nominal amount of financial data we were compiling. Fast forward to a year of accumulated product bookings, pipeline data, channel data, etc. and we were properly positioned to take advantage of it, which we did. As we also started to push towards employee growth of almost 500 we knew that the HR & Payroll module in Netsuite was not going to be robust enough for what we needed and determined that Workday would be the appropriate platform as the company started scaling towards a headcount in the thousands. A year prior and headcount of barely 120 there was certainly no reason to spend high six figures to license and implement Workday. However, a year later and employee count approaching 500 it became a much easier discussion to have.
So how do you plan for employees, facilities, and systems in a hyper growth trajectory? You really don’t. There is no Board meeting that your going to roll into and legitimately say your going to go from $10M to $100M in the next year…not unless you’re going to sedate them and move quickly through that slide. However, you do put the systems and decisions in place that will give you the most flexibility to continue altering your course without having to look back with the realization that you’ve incurred a significant amount of sunk costs that really didn’t deliver any value or provide you with future flexibility. Decisions have to be made in tandem with the broader team, the key vendors that you’ve established relationships with, as well as the input of the Board and key advisors. It’s a heck of a ride and one your not going to be discussing in B-schoool…although look for a Cylance case study in the future!
Thanks for reading…
Jeffrey Ishmael