Whose Fault Is It?
Many CFO and Customer Success executive conversations fail to achieve intended outcomes. Is that the CFO’s fault?
CFOs generally understand the SaaS subscription model and relevant financial mechanics. However, many still get confused between deployment of Customer Satisfaction management and Customer Success. They get the principle that satisfied customers stick around longer and pay more money, but perhaps not the fundamentally different business strategy of Customer Success.
It’s not surprising. Many Customer Success executives aren’t very good at explaining it at a business level. Customer Success is becoming widely understood – but its implementation is not universally understood.
The CFO has managerial, fiduciary, and statutory responsibilities for the financial plan and finance functions that make it all happen. They are close to the CEO, while dealing with bookings, revenue, funding, or resourcing challenges that pop up daily. They are close to the Board, ensuring audit, compensation, and investor oversight and compliance. Altogether, not an easy job which touches many stakeholders!
Quickly Seeing Relevance
A CFO doesn’t have time to deep dive in every conversation with every function. They must quickly see relevance to the business model. If Customer Success is an integral element of driving subscription business, the whole management team should have a clear view of what it means and how it works.
A few years ago, analysts, investors and companies realized the subscription business model (in software) ‘rewrote the rules’ for valuation and showed that companies with massive sales momentum could exist with accounting losses while the company grew fast with recurring revenue. Soon after that, the realization that customer retention was a key component which also drives company valuation. CFOs get that, but not necessarily how the model is implemented.
The Legacy of Budgeting Silos
Most organizations form into silos with conventional names and roles for budgeting and allocation in legacy financial systems. It’s convenient for finance to stay with these demarcations to maintain control. When organizations and roles change, systems often can’t. There’s often a gap between how organizations look in financial systems versus how they may show up on an organization chart. The CFO and their team are constantly trying to keep track.
Many companies have transitioned to SaaS, but much confusion between that and the license/maintenance model still remains. CFOs have been at the epicenter of reconciling Cost of Goods Sold (COGS) with revenue and expense lines. Finance don’t always understand entire business model changes to SaaS put the customer at the center, rather than Sales deals.
Shifting from P & L
COGS affects Gross Margin and includes support, product development, and other costs of bringing the product to sale. Managing Customer Satisfaction wasn’t a great leap which distorted the cost base, it was a philosophy mostly served by existing support or product groups. Customer Success pushes way beyond that model into revenue growth funded from the P&L expense line and can cause chaos in accounting systems set up for COGS and Silo’s.
In a high-growth, new logo acquisition model, what is a CFO to do? If the CEO is driving for short-term, new sales acquisition above all else, seeing only churn mitigation as a Customer Success investment, you’re in trouble!
Some Customer Success management think they are running a P&L, when actually they have a cost center. When wanting to extend Customer Success into proactive renewals or upsells, they may not realize that, in the CFO’s mind, the function is being performed elsewhere – by people already paid to do it.
For instance, Customer Success often wants to minimize variable pay if taking renewals, frequently believing this will reduce costs compared with sales commissions payouts – usually a hefty line item in the P&L. Ironically, a CFO may argue the opposite as commission pays only on results therefore lowers the financial risk of poor performance. Many VP CS are surprised at this and can’t understand why the CFO isn’t instantly excited by the idea of having a more predictable cost base. The CFO may be thinking ‘why pay up front?’.
What Customer Success Leaders Can Do
A Customer Success leader must understand how to position the business not just the function. They must show how lowering retention risk and generation of up and cross-sell opportunities can be a better business model, with realistic projections attached. Assumptions must work at a theoretical, operational and financial level. For instance, if it is assumed that renewal (retention rates) will rise through CS coverage, it has to be brought down to specifics. For example, for another $1m investment in CS, what return do you get, and how, in what time frame? Why is it a better investment than sales? What dependencies are there? Have you got agreement from other functions that it will work?
What CFOs Can Do
What CFOs can do often depends upon expectations set with the CEO, Board, shareholders, investors etc. about the year and how it will unfold. VP’s of Customer Success must understand the financial strategy of their company and the implications of the changes they want to make.
Don’t expect the CFO to mediate or negotiate for you, with peers, or make a deal with you that you haven’t already made with them. That’s not their job.
CFOs need to understand the machinery of the subscription business model is different from the traditional – throughout the Customer Engagement, not partitioned into sales cost, support cost, product cost, etc… Understandably, they often need help to appreciate the terminology common to Customer Success and that they are not just former traditional functions renamed.
Overall, CFOs are becoming more strategically minded and are themselves pushing beyond the traditional finance function in which they have often been trapped, to be a true business partner to the CEO, not just a score-keeper.
Mike Roberts is Managing Partner at KPISoft, a SaaS company which provides a mobile, predictive Business Performance Management platform.Mike Roberts