The hidden metric that’s getting more important

Companies (and investors) are laser focused on efficiency – so expect your CEO to start tracking revenue per employee (if they aren’t already).

👋Hi, it’s Greg and Taylor. Welcome to our newsletter on everything you wish your CEO told you about how to get ahead.

At Section, we’re on pace to do more than $7 million in revenue this year, with 24 full time employees. I’m not bragging yet – we haven’t yet cracked the next major startup milestone: $10 million in annual revenue. 

However, we will accomplish this revenue with fewer employees than ever before. For example, in 2022, we did $5 million in revenue with 40 employees. In fact, in the last four years, we’ve increased revenue per employee from $82,000 to nearly $300,000.

That journey has been painful – it’s included three layoffs, transforming our product portfolio, and changing how we make our courses. We hire more contractors, and we usually wait until it’s painful for the team to hire a new full-time employee. 

Revenue per employee is an important metric for SaaS and services organizations. In these companies, people are usually the greatest expense. So the more revenue you generate per employee, the more efficient your company is. 

This thinking is also spreading to non-SaaS/service companies: GM just laid off 1,000 salaried software engineers and managers from their tech services division.They clearly think this group can be much more capital efficient. 

As investors continue to prioritize capital efficiency and AI promises increased productivity, revenue per employee will only become more relevant. So as a leader in your organization, you need to first understand it, and then figure out how you can influence it.

Here’s our guide on revenue per employee – and our advice for how you can make it relevant to you, even if your department doesn’t directly drive revenue.

– Taylor

Why revenue per employee matters

Revenue per employee is simple to calculate: it’s the amount of revenue a company makes divided by full time employees. It’s one shorthand for operational efficiency or leverage – the higher your revenue per employee, the more efficient your company is.

Revenue per employee isn’t a perfect metric, partly because it’s difficult to compare across industries. Asset-light industries like banking or software typically have higher revenue per employee than asset-heavy industries like retail or manufacturing. Additionally, revenue per employee may drop when a company increases headcount to support future growth, so comparisons also have to be couched in company size and stage.

But for software and services organizations, revenue per employee is a strong business indicator, since employees are usually the lion’s share of a company’s costs. Think about a consulting firm or agency – in these organizations, the cost of goods sold is mostly the cost of headcount.

In successful companies, revenue per employee grows (rather than declines) as the company grows – this indicates economies of scale. According to Openview, great revenue per employee is around $268K for companies with $5-20 million in ARR – it’s above $350K for companies with more than $50 million ARR. 

Source: OpenView 2023 SaaS Benchmarks Report

But achieving best-in-class and growing revenue per employee is tough, because as companies grow, they usually add new departments and roles like HR, finance, legal, project management, and strategy – non-revenue generating functions. So investors and the public markets usually place a premium on companies with higher or growing revenue per employee – it signals efficiency.

Revenue per employee has always been important, but it’s getting more important, and the benchmark for what “great” looks like is increasing – largely for two reasons:

• A focus on capital efficiency – Interest rates are high and capital is expensive. And when capital is expensive, investors want to invest in efficient organizations.

• AI – We know you’re tired of hearing about it, but AI’s promise is increased productivity. Boards and investors will expect companies to generate more revenue with the same (or less) headcount.

The new knowledge workforce 

Employers don’t often talk about revenue per employee – it’s not a metric discussed in all hands or even in company earnings calls, as most people don’t like to be reminded that their company is focused on their individual efficiency and productivity. 

But at companies that prioritize efficiency (and therefore have higher revenue per employee), hiring full time employees (FTEs) often feels like a last resort. 

These companies typically hire contractors, outsource work, or have FTEs doing two jobs before they make an additional full time hire. Since FTEs are more like a fixed cost (vs. variable) they remain the same (or increase) whether revenue increases or declines. So these companies prioritize a workforce including contractors or agencies whose costs can easily vary month-to-month as revenue grows and contracts.

At Section, our team is stretched thin for longer, and we rely on contractors much more than we used to, especially for roles that aren’t full time (like running a conference) or for roles with unclear ROI (i.e. distribution partnerships). Today, 30% of our workforce is contractors. We’re a more efficient company because of it – and our revenue per employee has increased substantially.

As a focus on capital efficiency continues, more and more workforces will behave like this. Expect the ratio of FTEs to contractors to shift from 80-20 to 60-40 in most knowledge organizations over the next decade.

Output per employee matters

Understanding business drivers like revenue per employee is critical for leaders – especially in today’s capital efficient economy. But the best leaders take this thinking and apply it to their own team.

At the end of the day, revenue per employee is about quantifying output per employee. So you can do the same thing for your team. Think about the most important output that your team generates. It should be an output that’s influenced directly by most members of your team. Then, set a target for output generated per employee.

Here are some examples by department:

• Marketing – leads per employee or MQLs per employee

• Sales/Customer Success – new ARR per employee or retained revenue per employee

• Recruiting – candidates screened per employee

• Customer support – tickets resolved per employee

• IT – issues resolved per employee

• Engineering – pull requests merged per employee

Choose the metric and figure out your baseline – what’s your output per employee today? You may not (yet) want to share this metric with your boss – but pay attention to it, try to improve it and be ready with the data when your CFO asks about your headcount. Consider how you could improve it with more efficient processes (AI?) or make the cost more variable (less FTEs). 

Our advice

As we said when we wrote about NDR, leaders want to work with others that understand the key drivers of their business. And as capital remains expensive, and AI becomes more useful, revenue per employee will get talked about more and more.

It’s also a valuable way to think about yourself, your team, and your organization – the output you generate vs. your largest expense. 

Non-knowledge industries like manufacturing have quantified efficiency this way for decades – measuring units produced per employee or labor hour. It’s also already prevalent in some parts of the knowledge workforce – call center efficiency is easily measured by calls per employee; sales organizations are easily measured by quota per employee.

But with the rise of AI, this type of thinking is coming to all of knowledge work. Your CFO will be thinking this way and your board will be thinking this way. So you should be thinking this way. 

Know your company’s revenue per employee and figure out how you can start to measure output per employee on your own team.

To the next 10 years,

Greg & Taylor