The cost of cost savings.
When spending less costs you more.
Ben Gammell
·
4 min read
4 min read
The cost of cost savings.
When spending less costs you more.
Ben Gammell
·
4 min read
4 min read
To save or grow
With the rise in interest rates and the subsequent operating and fundraising pressure on the tech sector, the conventional wisdom for companies has been to spend less, and this is broadly correct. However, as seasoned operators and investors know, companies cannot cut their way to market leadership.
In order to build a big business, companies need to spend money, often more money than their operations generate, which is the reason venture capital exists. As a longtime operator across many business functions, I think it’s important to acknowledge this dynamic, but also ensure you have the visibility and tools to approach it strategically.
"As seasoned operators and investors know, companies cannot cut their way to market leadership."
Fresh financial frameworks
Even in the current challenging macroeconomic and interest rate environment, growth is paramount. The public stock markets still reward fast-growing companies with higher multiples, especially those that grow gross profit quickly, which is a better proxy for cash flow growth than revenue alone. In fact, some have started to question the ubiquitous Rule of 40 metric — a tradeoff between growth and margin — because it views growth and margin as a 1:1 tradeoff, rather than recognizing the outsized importance of growth.
As a result, many investors, venture capitalists, and operators are referencing new metrics such as The Rule of X, which puts a 2x premium on growth relative to margins. Importantly, the Rule of X acknowledges that the tradeoffs between growth and margin can differ at different points in the macroeconomic cycle. I’d add that it’s not just the macroeconomic cycle, but also industry dynamics and company lifecycle that impact how much a company wants to spend in support of growth.
Under budget is not always ideal
Finance teams often have a very loud — and respected — voice, advocating for controlling spend, especially on marketing for example, which is one of the largest and most discretionary spend categories. Within growth companies, this can manifest in the form of lightweight financial planning and reporting to a “reign of terror” approach where marketers are scared to spend.
As a result, often many marketers will spend less — and sometimes much less — than their full allocated budget. After arriving at Brex, for example, CMO Scott Holden commented, “For the last 2 years running, I’ve been under budget at both ThoughtSpot and Brex. There's so much pressure and fear around overspending that we end up under — and sometimes by a meaningful amount.”
At first glance, it might sound great to have a team under budget, but leaders should want their marketing teams to spend their budgets — especially given how much those budgets are scrutinized in the first place. In fact, I'd rather have a marketing team that comes slightly over budget than under, because often that means they’re trying out one or two opportunistic avenues to acquire additional customers. The famous John Wanamaker quote — “Half the money I spend on advertising is wasted; the trouble is I don't know which half” — has some truth to it. While performance marketing and martech have improved this, the reality of marketing is that to be successful, you need to try new things and iterate on strategies. For the vast majority of businesses, this means spending money without 100% certainty of the ROI of every dollar.
Therefore, if you want to be a growth company, you want to avoid creating a dynamic in which marketers and those in charge of driving growth are unable to do so fully.
"The reality of marketing is that to be successful, you need to try new things and iterate on strategies."
How to implement
So what do you do differently, especially considering how precious resources are in 2024? To my fellow CFOs, I offer a spicy take: are you a growth governor or a growth accelerator? Are you trying to just control spend, or are you trying to empower your teams to spend responsibly? The Rule of X says it’s twice as important to enable growth as it is to control spend alone.
The best CFOs will use financial tools and systems to control spend and keep it within guardrails, while giving CMOs (and other leaders) better visibility into their budgets. Systems have moved to the cloud, and spend management tools now offer real-time data on spend and budget tracking. If marketers can see that they’re going to come in under budget earlier and more clearly, they can make decisions faster with data and hopefully run that additional campaign or experiment to realize real ROI. Conversely, a CMO who can foresee marked dollars at risk of going unused — maybe that big-ticket video project got scheduled after the quarter — can reallocate that money to the next best thing.
Therefore, it is critical that finance teams use spend management software that gives them — and stakeholders across the organization — visibility into spend while also providing robust controls and guardrails.
“It's critical that finance teams use spend management software that gives them visibility into spend while also providing robust controls and guardrails.”
Striking a balance
The ideas I am advancing here are in no way meant to impugn the important work that finance teams do to control budgets and enforce discipline. This work is critical and its absence can mean catastrophe.
Marketing teams must be held to important metrics like customer acquisition cost and payback periods. But there is nuance in all aspects of business, and organizations must be careful to avoid cutting too much and restricting spending so tightly such that businesses eschew growth.
For more on how to strategically align your financial controls with the goals of your business, check out these Grow CFO insights.