Applying SaaS Metrics to HR
What is your Monthly Team Retention Rate? Your Talent Acquisition Cost?
I know a bit about SaaS metrics: MRR, ARR, CAC, CLV, CAC ratio, magic number, NDR, $Churn, #Churn, cohorts, etc.
When I designed my own SaaS executive dashboard, it was apparent that I should apply similar analysis techniques to HR.
Let’s see what it means.
Account List
The main table used for SaaS analytics is the account list.
It lists all customers with their contribution to the monthly recurring revenue (MRR), as shown in the below example.
From this mother table, you can compute leading SaaS health KPIs, apart from sales efficiency metrics where you need to know related costs.
This account table details the main revenue line of your P&L.
Employee List
What is the main cost line of your P&L? Payroll.
It’s easy to adopt a similar table for payroll: the employee table
There you put all the fixed salaries of all employees, month by month.
You can quickly identify new hires and leavers.
SaaS KPIs turned into HR KPIs.
Then you can compute headcount, resigns, and turnover (the equivalent of “#Churn”).
In the same way you analyze MRR/ARR, you can work on monthly salaries to determine how the overall cost evolves:
And calculate the twins of $churn and NDR.
By doing so, you’ll also be able to deep-dive into specific issues like:
find out which team has the worst turnover
in which team increases are the most frequent
who are the managers that have the best team retention rate
You can also apply cohort analysis to salaries to understand when we’re the most successful hires or link failures to specific timeframes.
If you forgot what it looks like, here is a classical cohort analysis chart - the sedimental version.
I wonder if HR tools provide this kind of analysis…
An interesting view when deciding how to reduce headcount.
Recurring costs vs. recurring revenue
As a CEO, I like to compare recurring costs and revenue to understand better the leeway in investing or reducing costs.
Recurring costs can be divided into three main sections:
Salaries
Office rent
Subscriptions
Wages constitute the bigger chunk.
When you have your Account List and Employee List at hand, it is easy to deduct monthly salaries from SaaS MRR and check how the compound result evolves over time.
You can also compare:
New MRR (from new accounts) with new hires’ salaries
Expansion MRR (from existing accounts) with salary increases
$Churn with $Resign
Then you can finetune objectives that will trigger hires or fires.
Talent Acquisition Cost/ Cost per Hire
In a similar way you calculate your Customer Acquisition Cost (CAC), you can calculate your Talent Acquisition Cost, which measures how much you spend in hiring costs to acquire a new employee.
TAC = $ Spent on Acquisition in previous period/ Number of Hires in the current period
Let’s say you spent $100K on talent acquisition last quarter and hired four individuals.
Your TAC would be $25K.
Acquisition costs should include the following:
Costs of your Talent Acquisition team
Costs of external sourcing or headhunting
Costs of Employer Brand Marketing
Lifetime Employee Value
What is the value of an employee over time? It is more difficult to estimate than with the LTV of customers, where value is linked to revenues.
Still, we can estimate the lifetime value as the sum of its salaries during his tenure, as their wages should be linked to their importance!
Then it’s easy to calculate the Lifetime Employee Value as the average wage per employee divided by the resignation rate (1 - retention rate). If the average salary is $60K, and your retention rate is 60%, then your LEV is $150K.
NB: The retention rate is calculated as the number of retained employees in the current period divided by the number of employees in the previous period.
LEV/TAC Ratio
Finally, the counterpart to the LTV/CAC ratio can be calculated.
In this case, the LEV/TAC ratio measures how much employee value you’ll get from your talent acquisition costs.
In the above example, the ratio is $150k/$25k = 6, which means your costs yield 6 times more value. Congrats! You should give a raise to your TA team!
If your LEV/TAC ratio is 2, you’re not hiring efficiently.
Summary
When you are comfortable with SaaS metrics, it is interesting to consider applying them to employee acquisition, retention, and costs.
The above metrics may give you an overall understanding of your acquisition and retention performance. But you should definitely double-click on specific departments to avoid mixing apples & oranges, and identify discrepancies.
As talent acquisition performance is becoming more and more crucial to execution, adding those metrics to your dashboard makes sense.
Does your HR team already provide them?
Let me know.