In today’s market,  companies need to think differently about their overall approach to company health — the “growth-at-all-costs” model adopted by many companies over the past few years is no longer creating the same results as the way the market determines value shifts, Chris Cabrera, founder and CEO of intelligent revenue service Xactly, said. The Los Gatos, Calif.-based company uses technologies such as predictive analytics to help companies create and implement revenue plans or improve sales performance.

“I think everybody that was in that growth at all costs model is just facing the reality that the market doesn't value those companies the way they used to,” Cabrera said.

Businesses and their financial leaders facing economic headwinds must reconsider the way they think about their firms’ growth strategies in the current market. Companies such as software-as-a-service (SaaS) entities may be used to thinking about growth by using what is known as the “rule of 40,” for example, a growth metric popularized in 2015 which states that when adding a software company’s growth rate and profit margin, the combined total should exceed 40%, according to a 2018 report by Bain & Company. 

Rethinking growth, profitability balance

Businesses today are attempting to reduce cost pressures while they struggle to both find top talent and to deal with issues such as “quiet quitting” — a phenomenon that represents an “existential threat” to many companies, Cabrera said.   

As companies tighten spending in the face of such challenges, the market focus has shifted away from growth to profitability metrics such as earnings before interest, taxes, depreciation, and amortization (EBITDA). 

Cabrera pointed to Xactly’s own company history — the firm was started in 2005 and went public in 2015, when they were, at that point, a $100 million company which did not make “one penny” of EBITDA, and was not asked to do so. “All people cared about was growth,” he said.

Companies would be considered rule of 40 firms if they were “40% growers” with “0% EBITDA,” Cabrera said, but taking a more balanced approach to that rule  — a 20/20 split, for example — would create a “much, much healthier company, because you're dumping all this profit, and that’s what people are valuing today,” Cabrera said.

The shift to focus more on profitability is already affecting certain companies; Cabrera highlighted so-called unicorn companies, that were previously being valued by high-growth percentage with low revenue figures and which are now “just getting killed,” he said.

“Imagine if you're in the boardroom of those companies right now,” he said. “You're burning cash like crazy, you’ve got an outsized valuation you’ll never grow into and you're likely going to need to raise money. That is a very bad problem.”

The cost of growth is also exponential, Cabrera said, and with companies no longer being rewarded for hitting such markers, dropping down their top-line growth means money will move to the company’s bottom line — contributing to bigger savings, while also enabling the company to manage with potentially less salespeople or less support.

“That's why you're seeing so many of these companies do these pretty big layoffs, it’s because they're adjusting for that growth at all cost versus a more balanced approach,” Cabrera said.

Using data to drive education, opportunities 

Making the switch to a more balanced model is a good correction, he said — the belief is that hopefully, “smart leaders will not view this as a pendulum swing,” because building “a balanced rule of 40 business, having a business that has a balance of growth and profitability is a much healthier business in the long run,” he said.

“I'm hopeful that companies will make the shift for quality and stay there and not try to chase the market and…just focus on building quality businesses,” Cabrera said.

For CFOs and other executive leaders, the key to making the shift to a more balanced growth and profitability model is focusing on building “quality revenue,” he said — meaning they need access to key information.

“One of the things that we espouse in a big way is using data,” Cabrera said. “There's lots of companies out there talking about data. But to me, data is not very valuable. What I want is information — so use that data to somehow educate me or show me an opportunity.”

Upping investments in digital capabilities is one move CFOs could take that could potentially aid them in making the shift to a more balanced model. Many CFOs are already viewing digital investments as a key goal; an October study by the Everest Group found 70% of CFOs agreed implementing digital technologies that could improve efficiency, effectiveness and stakeholder experiences was now a top priority, for example.  

“Wisely, a lot of CFOs and CEOs like myself are saying, ‘Look, we know it's not a great time. We know the next months aren't going to be our best performing period,” Cabrera said. “’Why don't we use this time to get our house in order, to get some of those back-office systems working?’”