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The Single Biggest Myth about MBOs and OKRs

I’m a big believer in written quarterly goals.

The old way to do this was to adopt “management by objective” (MBO) and to write down a set of MBOs for each quarter for each team member.  Most folks would do this either in Word, or if they liked weightings and scores as part of calculating an MBO bonus, Excel.  Over time, larger enterprises adopted HR performance management software to help with managing and tracking those MBOs.  When writing individual objectives, you were advised that they be SMART (specific, measurable, attainable, realistic, time-bound).

Despite best intentions, over time MBOs developed a bad rap for several reasons:

  • People would make too many of them, often drowning in long lists of MBOs
  • Few people could write them well, so would-be SMART objectives ended SQUISH (soft, qualitative, unintelligible, imprecise, slang, and hazy) instead.
  • They were often hard-linked to compensation, encouraging system-gaming

The objective / key result (OKR) system is a more modern take on objective setting popularized by, among others, Google and venture capitalist John Doerr.  OKRs fix some of the key problems with MBOs.

  • A strong guideline to have no more than about 5 OKRs per person to avoid the drowning-in-MBOs problem.
  • Adding a tiny bit of structure (the key results) helps enormously with producing objectives that are specific and measurable.
  • A realistic and intelligently calibrated scoring system whereby 70% is considered a “good” grade.  The defeats a lot of the system gaming.

But, regardless of which system you’re using, you can still hear the following myth from some managers and HR professionals:

“Oh, wait.  The objectives shouldn’t list things in your core job.  They should be the things on top of your core job.”  Sometimes followed by, “who’d want to pay you a bonus just for doing your core job?”

This is just plain wrong.

Let’s make it clear via an example.  Say you’re a first-line technical support person whose job is to answer 20 cases per day.  To ensure you’re not just closing out cases willy-nilly, your company performs a post-case customer satisfaction (CSAT) survey and wants you to maintain a post-case CSAT rating of 4.5 out of 5.0.  In addition, the company wants you to do 6 hours of skills training and write 4 knowledge-base articles per month.

If you live by the myth that says written objectives should be above and beyond your core job then this person should have two quarterly objectives:

  • Write 4 knowledge-base articles per month.
  • Attend 6 hours of skills training per month.

This is simply insanity.  You are going to the trouble of tracking written objectives, but overlooking 90%+ of what this person actually does.  This person needs to have 3 quarterly objectives:

  • Close 100 cases per week with a 4.5+ CSAT rating
  • Write 4 knowledge-base articles per month
  • Attending 6 hours of skills training per month

And if we’re tying these to a bonus, most of the weight needs to be on the first one.

While I know I’ve argued this via reductio ad absurdum, I think it’s the right way to look at it.  If you’re going to track written objectives — by either MBO or OKR — then you should think about you the  entire job scope, be inclusive, and weight them appropriately.

 

My SaaStr 2018 Presentation: Ten Non-Obvious Things About Scaling SaaS

Below please find the slides from the presentation I gave today at SaaStr 2018, about which I wrote a teaser blog post last week.  I hope you enjoy it as much as I enjoyed making it.

I hope to see everyone next year at SaaStr — I think it’s the preeminent software, SaaS, and startups conference.

My SaaStr Talk Abstract: 10 Non-Obvious Things About Scaling SaaS

In an effort to promote my upcoming presentation at SaaStr 2018, which is currently on the agenda for Wednesday, February 7th at 9:00 AM in Studio C, I thought I’d do a quick post sharing what I’ll be covering in the presentation, officially titled, “The Best of Kellblog:  10 Non-Obvious Things About Scaling SaaS.”

Before jumping in, let me say that I had a wonderful time at SaaStr 2017, including participating on a great panel with Greg Schott of MuleSoft and Kathryn Minshew of The Muse hosted by Stacey Epstein of Zinc that discussed the CEO’s role in marketing.  There is a video and transcript of that great panel here.

saastr

For SaaStr 2018, I’m getting my own session and I love the title that the folks at SaaStr came up with because I love the non-obvious.  So here they are …

The 10 Non-Obvious Things About Scaling a SaaS Business

1. You must run your company around ARR.  Which this may sound obvious, you’d be surprised by how many people either still don’t or, worse yet, think they do and don’t.  Learn my one-question test to tell the difference.

2.  SaaS metrics are way more subtle than meets the eye.  Too many people sling around words without knowing what they mean or thinking about the underlying definitions.  I’ll provide a few examples of how fast things can unravel when you do this and how to approach SaaS metrics in general.

3.  Former public company SaaS CFOs may not get private company SaaS metrics.  One day I met with the CFO of a public company whose firm had just been taken private and he had dozens of questions about SaaS metrics.  It had never occurred to me before, but when your job is to talk with public investors who only see a limited set of outside-in metrics, you may not develop fluency in the internal SaaS metrics that so obsess VC and PE investors.

4.  Multi-year deals make sense in certain situations.  While many purists would fight me to the death on this, there are pros and cons to multi-year deals and circumstances where they make good sense.  I’ll explain how I think about this and the one equation I use to make the call.

5.  Bookings is not a four-letter word.  While you need to be careful where and when you use the B-word in polite SaaS company, there is a time and place to measure and discuss bookings.  I’ll explain when that is and how to define bookings the right way.

6.  Renewals and satisfaction are more loosely correlated than you might think.  If you think your customers are all delighted because they’re renewing, then think again.  Unhappy customer sometimes renew and happy ones don’t.  We’ll discuss why that happens and while renewal rates are often a reasonable proxy for customer satisfaction, why you should also measure customer satisfaction using NPS, and present a smart way to do so.

7.  You can’t analyze churn by analyzing churn.  To understand why customers churn, too many companies grab a list of all the folks who churned in the past year and start doing research and interviews.  There’s a big fallacy in this approach.  We’ll discuss the right way to think about and analyze this problem.

8.  Finding your own hunter/farmer metaphor is hard.  Boards hate double compensation and love splitting renewals from new business.  But what about upsell?  Which model is right for you?  Should you have hunters and farmers?   Hunters in a zoo?  Farmers with shotguns?  An autonomous collective?  We’ll discuss which models and metaphors work, when.

9.  You don’t have to lose money on services.  Subsidizing ARR via free or low-cost services seems a good idea and many SaaS companies do it.  But it’s hell on blended gross margins, burns cash, and can destroy your budding partner ecosystem.  We’ll discuss where and when it makes sense to lose money on services — and when it doesn’t.

10.  No matter what your board says, you don’t have to sacrifice early team members on the altar of experienced talent.  While rapidly growing a business will push people out of their comfort zones and require you to build a team that’s a mix of veterans and up-and-comers, with a bit creativity and caring you don’t have to lose the latter to gain the former.

I hope this provides you with a nice and enticing sample of what we’ll be covering — and I look forward to seeing you there.

Speaking of India: Five Lessons on India-Based Product Development

One of the interesting new challenges I faced when I joined Host Analytics about 5 years ago was working with an offshore development team in India.  Host was originally co-founded in both the US and India, so literally from inception we had employees in both places.  While this has proven to be a huge advantage for us in the market, I learned a few important lessons along the way that I thought I’d share in this post.

Lesson 1:  Read Speaking of India.

When I lived abroad in France for 5 years (which I’ve written a bit about, here), my team discovered a book, French or Foe, that we gave to every new expat when they arrived.  The book explained many important basics of language and culture that we referred to frequently as we tried to make sense of our day-to-day experiences.

Consequently, the first thing I did in approaching India was to search for a book to help me.  I found a great one, Speaking of India, which is all about communications (and how they go wrong) between people from US and Indian work cultures.

For example, see this excerpt which demonstrates “the Indian no” (i.e., the absence of saying yes) in action.

MARIAN: I’m fine, thanks. I was wondering, Kumar, what you would think if we decided to move up the date for the systems test?

KUMAR: Move it up?

MARIAN: Just by a week, at the most.

KUMAR: I see. Do you think it’s possible?

MARIAN: Should be. But what do you think?

KUMAR: Me? I guess you don’t see any problems?

MARIAN: Not really. My people can be ready at this end if your people can be up to speed by then.

KUMAR: I see.

Kumar is basically screaming no here while Marian might very well be hearing yes.

These kinds of misunderstandings are common and if you teach yourself listen appropriately then you can actually hear what is, or in this case, is not being said.

You’ll learn this — and much more — in the Speaking of India.  And you can learn some unique Indian-English words/expressions (e.g., a fresher) as well.

Lesson 2:  Show Up.

It’s hard to get to India.  From San Francisco, it’s 16 hours to Dubai and then 3.5 to Hyderabad (or 14 hours to Hong Kong and then 6 hours to Hyderabad). It takes me a full week to get about 3.5 days of actual work time there.  And let’s not even talk about the 12.5 to 13.5 hour time difference.

But that’s the point.  Because it’s hard, too many people don’t do it, preferring conference calls at odd hours over noisy telephone lines.  If you are serious about your India development center and the people in it, then you need your top executives to show up — at least a few times per year — to get to really know the people and the work environment.

I go three to four times per year with a agenda that typically looks like:

  • A large number of 1-1 meetings
  • Attendance at a few regular group/team meetings
  • A few special, topical meetings
  • An all-hands meeting at the end where I report back on what I’ve learned
  • A few dinner / drinks meetings along the way

Remember the old Woody Allen quote, 80% of success is showing up.  It’s a great rule to follow when thinking of your India development team.

Lesson 3:  Think of Product Management as a Giraffe.

I first came up with the giraffe analogy when I was at Business Objects in Paris.  While our development team (the body) was in France, we needed to have our eyes and ears in the US market if we wanted to be globally competitive.  Hence, product management needed to be the long neck that connected the two.

Concretely, this means you need to staff product managers in both locations, typically putting a greater number of more specialized product managers (PMs) in the USA and a lesser number of more generalized PMs in India. This means your PM investment might be higher than it would be with a co-located model, but it’s worth it.

Some people believe you should call the US-based staff product managers and the India-based staff product owners (POs), but I prefer to call them all product managers.  The reality is the job will inherently be different as a function of location — the USA PMs more customer-facing and the India PMs more engineering-facing — but in the end they are all product managers in my view.

Lesson 4:  Do Real Work.

The fact that we build our core SaaS offering in Hyderabad is a big attraction for talent.  Too many companies use India to do only lower-value work (e.g., porting, localization) which sets up a self-fulfilling prophecy of getting lower-quality talent.  We have found that when you do real work in India — core, critical stuff — that you will have a much easier time attracting talent to do it.

Lesson 5:  Do More Than Development.

Finally, we’ve increasingly been leveraging our footprint to do additional work — such as customer support, customer success, professional services, and even some marketing — which helps transform the environment from purely a “development center” to a generalized satellite office.   This is great because it provides developers and product managers with more direct access to the business — because people in other customer-facing functions are working right across the hall.   Practically, this helps with 24×7 operations (e.g., techops, customer support) as well, where we can provide customers with round-the-clock monitoring and services without having to ask too many people to work the graveyard shift.

I hope you’ve learned something from my journey.  Please feel free to share lessons from yours.

Handling Conflict with the “Disagree and Commit” and “New Information” Principles

In every executive team there are going to be times when people don’t agree on certain important strategic or operational decisions.  Some examples:

  • Should we split SDRs inbound vs outbound?
  • Should we map SCs to reps or pool them?
  • How should we split upsell vs new business focus in mid-market reps?
  • Should CSMs get paid on upsell or only renewals?
  • Should we put the new buzzword (e.g., AI, ML, social) into the release plan?
  • Should we change the company logo ?

The purpose of this post is to provide a framework to get decisions made and executed, without certain decisions becoming a form of weekly nagging at the e-staff meeting, a topic of discussion at every board meeting, or worst of all, a standing joke among the team.

The Disagree-and-Commit Principle

The first time I heard disagree-and-commit I thought it was corporate, doublespeak garbage.  What the heck did it mean?  I’m supposed to go to a meeting, say that I believe we should go left, get overrun by the group who eventually decides to go right, and then I’m supposed to say “sure, everybody, just kidding, let’s go right.”  How disingenuous — everybody knows I wanted to go left.  How controlling of the establishment.  How manipulative.  This is thought control!

“You may disagree, but you must conform … (wait, was that our outside voice) …  you must commit.”

(Recall my first professional job was as at a company we referred to as The People’s Republic of Ingres.)

Let’s just say I missed the point.  My older, wiser self now thinks it’s a great, but often misunderstood, rule.  (And that’s not just because now I am the establishment.)

Here’s a nice definition of disagree-and-commit from The Amazon Way via this blog post.

Leaders are obligated to respectfully challenge decisions when they disagree, even when doing so is uncomfortable or exhausting. Leaders have conviction and are tenacious. They do not compromise for the sake of social cohesion. Once a decision is determined, they commit wholly.

I always missed two things:

  • I took commit to mean change your mind (or “get your mind right” in the Cool Hand Luke sense). It actually means committing to execute the decision wholly, i.e., as if it were the one you had voted for.  You can’t undermine or sabotage the decision just to prove yourself right.  This is a great rule.  People aren’t always going to agree, but if you want to work at the company, you must execute our decisions wholeheartedly once they are made.  There is no other option.

 

  • The obligation to disagree.  I love this part because some people lack the courage to speak up in the meeting, and then want to passive-aggressively work against the decision and/or attempt a pocket veto by going to the person who was in charge of the meeting and saying, “well, I didn’t feel comfortable saying this in the meeting, but, ….” Such behavior creates a potential paradox for the executive in charge — particularly if she agrees with the pocket veto argument.  Does she overrule the group decision based on the new argument (and reward dysfunctional behavior) or does she stick with a decision she no longer prefers in order to avoid incenting pocket vetoes.  In my opinion, in 95% of the cases you want say, “Sorry Joe, I wish you’d said something in the meeting because that’s an interesting point, but the decision stands.” Worst case call another meeting.  Never, ever just overrule the decision.

Explicitly embracing the disagree-and-commit principle is one great way to end endless, nagging disagreements:  we met to discuss the issue, we came to a conclusion, I know you didn’t agree with it, but you need to commit to execute it wholeheartedly.  (Else we’re going to have a conversation about insubordination.)  We want a rational culture.  We debate ideas.  But we need to make and execute decisions, and you’re not going to agree with every one.

The New Information Principle

But what if the issue keeps coming up anyway?  Perhaps via periodic serious requests to reconsider the decision.  Perhaps through a series of objections coming from someone not responsible for executing the decision (so “commit” is less relevant) — but who just can’t stand the idea.  Or maybe someone has a personal ax to grind (e.g., I know we’ve talked about this before, but can we please relocate the office) and who just won’t take no for an answer.

The problem is if you always shut down these requests, then you risk creating a big problem with corporate agility.  On one hand you want to shut down the constant nagging about adding data mining capabilities from the data mining zealot. On the other hand, you don’t want to make the subject taboo because maybe your top competitor launched a new data-mining addition last month and it’s hurting you in sales.

So, the principle is simple:  if you want to re-open discussion on something we’ve already decided, do you have any new information that wasn’t available at the time we made the decision?

If the answer is no, we’re not re-opening it here, and we can do at either next quarter’s ops review or next year’s strategy offsite (pending prioritization against other topics).

If the answer is yes, find out what the new information is, and then decide if it warrants an immediate or deferred re-examination of the decision.

With this principle you can keep a firm hand against those who won’t give up on an issue while still being open to new information that might cause the need for a  valid re-examination of it.

Using Pipeline Conversion Rates as Triangulation Forecasts

In this post we’ll examine how we to use pipeline conversion rates as early indicators of your business performance.

I call such indicators triangulation forecasts because they help the CEO and CFO get data points, in addition to the official VP of Sales forecast, that help triangulate where the company is going to land.  Here are some additional triangulation forecasts you can use.

  • Salesrep-level forecast (aggregate of every salesperson’s forecast)
  • Manager-level forecast (aggregate of the every sales manager’s forecast)
  • Stage-weighted expected value of the pipeline, which takes each opportunity and multiplies it by a stage- and ideally time-specific weight (e.g., week 6 stage 4 conversion rate)
  • Forecast-category-weighted expected value of the pipeline, which does the same thing relying on forecast category rather than stage (e.g., week 7 upside category conversion rate)

With these triangulation forecasts you can, as the old Russian proverb goes, trust but verify what the VP of sales is telling you.  (A good VP of sales uses them as part of making his/her forecast as well.)

Before looking at pipeline conversion rates, let me remind you that pipeline analysis is a castle built on a quicksand foundation if your pipeline is not built up from:

  • A consistent, documented, enforced set of rules for how opportunities are entered into the pipeline including, e.g., stage definitions and valuation rules.
  • A consistent, documented, enforced process for how that pipeline is periodically scrubbed to ensure its cleanliness. [1]

Once you have such a pipeline, the first thing you should do is to analyze how much of it you convert each quarter.

w3 tq

This helps you not only determine your ideal pipeline coverage ratio (the inverse of the conversion rate, or about 4.0x in this case), but also helps you get a triangulation forecast on the current quarter.  If we’re in 4Q17 and we had $25,000K in new ARR pipeline at week 3, then using our trailing seven quarter (T7Q) average conversion rate of 25%, we can forecast landing at $6,305K in new ARR.

Some folks use different conversion rates for forecasting — e.g., those in seasonal businesses with a lot of history might use the average of the last three year’s fourth-quarter conversion rate.  A company that brought in a new sales VP five quarters ago might use an average conversion rate, but only from the five quarters in her era.

This technique isn’t restricted to this quarter’s pipeline.  One great way to get sales focus on cleaning next quarter’s pipeline is to do the same analysis on next-quarter pipeline conversion as well.

w3 nq

This analysis suggests we’re teed up to do $6,818K in 1Q18, useful to know as an early indicator at week 3 of 4Q17 (i.e., mid/late October).

At most companies the $6,305K prediction for 4Q17 new ARR will be pretty accurate.  However, a strange thing happens at some companies:  while you end up closing around $6,300K in new ARR, a fairly large chunk of the closed deals can’t be found in the week 3 pipeline.  While some sales managers view this as normal, better ones view this as a sign of potentially large problem.  To understand the extent to which this is happening, you need perform this analysis:

cq pipe

In this example, you can see a pretty disturbing fact — while the company “converted” the week 3 ARR pipeline at the average rate, more than half of the opportunities that closed during the quarter (30 out of 56) were not present in the week 3 pipeline [2].  Of those, 5 were created after week 3 and closed during the quarter, which is presumably good.  However, 25 were pulled in from next quarter, or the quarter after that, which suggests that close dates are being sandbagged in the system.

Notes

[1] I am not a big believer in the some sales managers “always be scrubbing” philosophy for two reasons:  “always scrubbing” all too often translates to “never scrubbing” and “always scrubbing” can also translate to “randomly scrubbing” which makes it very hard to do analytics.  I believe sales should formally scrub the pipeline prior to weeks 3, 6, and 9.  This gives them enough time to clean up after the end of a quarter and provides three solid anchor points on which we can do analytics.

[2] Technically the first category, “closed already by week 3” won’t appear in the week 3 pipeline so there is an argument, particularly in companies where week 1-2 sales are highly volatile, to do the analysis on a to-go basis.

Using Time-Based Close Rates to Align Marketing Budgets with Sales Targets

This post builds on my prior post, Win Rates, Close Rates, and Milestone vs. Flow Analysis.  In it, I will take the ideas in that post, expand on them a bit, and then apply them to difficult problem of ensuring you have enough marketing demand generation budget to hit your sales targets.

Let’s pretend it’s 4Q17 and that we need to model 2018 sales based solely on marketing-generated SALs (sales accepted leads).  To do that, we need to decompose our close rate over time because knowing we eventually close 40% of SALs is less useful than knowing the typical timing in how they close over time.

decompose closed

In a perfect world, we’d have 6-8 cohorts, not two.  The goal is to produce the last line, the average of the in-quarter, first-quarter, second-quarter, and so on close rates for a SAL.

Using these time-based average close rates, we can build a waterfall that takes historical, forecast (for the current quarter), and planned 2018 SALs and converts them into deals.

waterfall

This analysis suggests that with the currently planned SALs you can support an ARR number of $16.35M.  If sales needs more than that, you either need to assume an improvement in close rates or an increase in SAL generation.

Once you’ve established the required number of SALs, you can then back into a total demand-generation budget by knowing your cost/SAL, and then building out a marketing mix of programs (each with their own cost/SAL) that generates the requisite SALs at the targeted overall cost.