In 1984, Eliyahu Goldratt published the bestselling novel, The Goal, detailing common process struggles and the inherent theory of constraints. While this book focused on the manufacturing industry, the theory can just as easily be applied to any industry.
As a gross boil down (we are talking molasses here), the theory revolves around the redefining all aspects of your business in terms of throughput, inventory and operational expense. One then repeatedly measures and optimizes the entire process by maximizing productivity at identified constraints as opposed to maximizing productivity at each step in the process.
This methodology can be applied to the SaaS model today:
- Throughput is your rate of new and renewing clients
- Inventory is your product/feature backlog
- Operational Expense is your labor, overhead and everything else draws down your revenue.
The obvious strategy is to increase throughput while reducing inventory and operational expense. The difficulty is found in identifying tactics and tracking the dynamic nature of the constraints.
Finding the Constraints
In an earlier post, we discussed mapping the customer journey to ensure fast value realization as well as continuous value driving to increase retention. Using this same journey mapping, one must identify and measure the important process metrics at each stage for each customer segment. The below list is by no means exhaustive, but should get the gears turning:
- Lead source scoring
- Conversion funnel (conversion rates at each step)
- Win rate
- Legal processing time
- Customer Acquisition Cost (CAC)
Implementation & Onboarding
- Time-to-data transformation
- Estimated vs actual deployment effort
- Trial conversion rate
- Time-to-value delivery
- Customer Satisfaction Score / NPS
- Support Ticket time-to-closure
- Training need time-to-closure
- Time-to-key feature usage
- Ongoing marketing cadence
- (X)BR / value reinforcement cadence
- Customer Retention Cost (CRC)
- Contract expansion/contraction rate
- Contract renewal rate
Once you have solid metrics across your current processes, you need to observe where build-ups occur (before constraints) or excess slack occurs (after constraints).
Optimizing the Constraints
After identifying the constraint(s), you have to focus on maximizing throughput while minimizing “inventory” and operational expenses.
For example, let’s say the constraint is found in converting customer trials. Looking back over our customer journey, we see two main sources for the low trail conversion rate: poor lead scoring and poor feature market fit.
Poor Lead Scoring
Your Lead Gen team is working their butts off. They have the lead pipeline stuffed. Your Account Execs convert almost every lead using a trial offer. Your implementation team runs like clockwork. You hit a trial conversion brick wall.
To increase gross trial conversion numbers, we could add more Lead Gen team members, and increase their required lead submission targets, but that would likely reduce trial conversion rates and increase your operational costs. If we were to reward the Lead Gen team based on submitting quality leads even at the expense of “operational efficiency,” we could reduce our operational expenses while increasing trial conversions and revenue.
Poor Feature Market Fit
Your product development team is working even harder. They are hitting their release schedules and nerding out over their code. The only problem is they are developing in a bubble. The industry has taken a turn and those really cool features are no longer desired.
To increase trial conversions, we could add more engineers, QC and QA and deploy the product backlog faster. While that would reduce our “inventory,” it would also increase our operational expenses. By helping the product manager monitor the pulse of the industry, they can pivot on their backlog to streamline features most important to the market and thereby increase trial conversions.
Monitoring the Constraints
Congrats! You have identified and optimized your constraint(s). Now what?
Now do it all over again. And again. And again. And again. This continual reevaluation of your process using objective metrics is key to your long term health and progress toward your goal.
Coming Up Next: Customer Success Tools…