Incenting Success in Technology Organizations
As we’ve discussed before in articles like Be A Leader!, the primary job of a CTO is to help the executive team maximize shareholder value. Notice our choice of verb in the last sentence, “maximize”. It is a much stronger word than what an average performing company would select – that word typically being “create”. Maximizing shareholder value is the goal of a high performing team – a team which desires to say that “no other team in our position could provide the type of shareholder return that we do”.
The CTO however cannot maximize shareholder value and potentially can’t even prove that he or she is creating shareholder value without a set of aggressive goals along with the metrics and measurements that help define success or failure enroute to achieving those goals.
We prefer to group our goals thematically, making it easier to determine how the goals impact the maximization of shareholder value. Our themes include the reduction of cost, availability, the efficiency of engineering spend, the effectiveness of our product selection process, quality, and time to market.
No list of aggressive goals is complete without finding a set of goals to minimize the cost of operating a SaaS site. In our experience, the best cost metrics are those normalized by transaction (cost per transaction) or normalized by cost of transaction type (cost per checkout, cost per signup, etc). The associated goal is to reduce the cost by some relative value over time or to reduce the cost to an absolute value thereby increasing profit and shareholder returns.
No SaaS site can realistically operate in this day and age without considering the impact of availability on revenue. Our desire here is to identify the lost opportunity (in most cases lost revenue) associated with outages rather than just the amount of downtime a site has. While measuring absolute downtime is valuable and should be tracked if possible, the measurement of revenue loss as a percentage calculation is more easily associated with shareholder value maximization (less revenue loss the better) and further takes into consideration that most sites don’t produce as much revenue in the middle of the night as they do during the middle of the day.
Engineering Efficiency and Productivity
You can’t be maximizing shareholder value if you aren’t measuring and improving your engineering team. These measurements are arguably difficult, but we try to break them into two component parts:
1) Efficiency – How many engineering days are you getting out of the theoretical maximum? This is a measurement of how many engineering days you lose due to environment issues, training problems, tool issues, etc. Most organizations that don’t measure this are surprised that their engineers spend well over 33% of their time on things other than designing systems and writing code.
2) Productivity – How much do you produce per engineering day? This one is tougher and there are lots of metrics out there from which you can select, KLOC, stories, function points, etc. All of them have issues, but that’s no excuse not to select the best for you and measure how well you are doing.
Simply put, this is a measure of how your product choices are performing. You undoubtedly have more ideas than you can implement in any given year. Are you choosing the right things? Are you hitting your key metrics such as increasing revenue, decreasing drop outs, or increasing signups?
Time to Market
Assuming that you are building the right things, are you getting them out to the market in time to create barriers to entry and/or switching costs? Are you faster or slower than your competitors?
How defect dense is your product? Are you fixing the problems in engineering and product management that lead to bugs in production? Are you making the right time, cost and quality tradeoffs? How many defects do you introduce per new release, line of code or story?
You may have several other key metrics that you use and which you find valuable and we’d love to hear about them. What you cannot do, at least without significantly damaging shareholder value, is ignore the need for improvement. You simply cannot improve your team’s performance without a core set of metrics against which you measure absolute and relative performance. And if you are not measuring your performance you simply cannot increase and ideally maximize shareholder value.