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It’s probably not a stretch to say that when John Karnes is recruited to fill a CFO role, his C-suite peers have already stopped talking about change and want to begin driving it. Over the past decade, Karnes has stepped into CFO roles at six different companies, each one handing him a transformation mandate in one form or another.
Of course, Karnes’s most remarkable transformation chapter may be his own. Turn back the clock to the mid-1990s, when Karnes was general counsel for Apache Corporation, the large independent oil and gas company known for its intense operational focus. “Being part of this metrics-driven organization was a formative corporate experience that has really influenced me throughout my 20 years as a CFO,” says Karnes, who in the years ahead would enter the CFO office while serving as head legal counsel for yet another oil and gas company.
The jump from oil and energy to SaaS software was a more recent career chapter change and—according to Karnes—not as big a leap as you might think: “People are always taken aback a little bit when I explain that the two sectors are not all that different.” Asked to reveal a number of the common attributes of the two sectors, Karnes says, “It’s all about making the next dollar investment as prudently as you can, allocating your capital for the highest rate of return, and providing the best service at the highest profit level that you can.” –Jack Sweeney
Guest: John Karnes
Company: Vertafore
Headquarters: Denver, CO
Connect: www.vertafore.com
CFOTL: What are your top of mind metrics?
Karnes: I think about metrics sort of under three rubrics. The first is what I would think of as a customer-centric layer. Then there’s the financial performance one that we all think about as CFOs, and then there’s a very distinct operational layer. On the customer-centric layer, we think about things like SLAs, our service-level agreements with our customers, uptime, system availability. These are the things–before we get to gross margin–that really impact our success as a business and what our next quarter is going to be like. There are things like customer health scoring in your customer success organization. Happy customers don’t leave. Keeping your revenue is much cheaper than trying to go acquire new revenue. Things like NPS, net promoter score. Things that I watch very, very carefully are very customer-centric, as opposed to what’s next, which is more pure financial performance.
At the end of the day, your economics are based on your base business, your new business, and the investments that you make going forward. That’s what drives economic performance. The first thing that I look at in the morning is churn and retention. “Churn,” for those who aren’t SaaS experts, is simply our subscriptions that are terminating and my customers that are leaving me or deciding to subscribe to me in a lesser amount. So, it’s lost revenue. After that, it’s gross margin. Obviously revenue is tops. Churn is my top line. Gross margin is after my cost of goods sold and tells me how efficiently I’m delivering my product. All of these businesses are built on free cash flow. After I pay my G&A, after I pay the capex that I’ve got, how much cash am I making and am I self-sufficient or dependent on the equity markets to grow my business? That’s a really important part of the business, from a baseline.
New business costs are very important. These are things like customer acquisition costs. I’m making an investment for every customer. How quickly do I get that investment back? How many months? Is it six, 12, 18 months before I recoup that investment? And, like all good SaaSware companies, we invest a tremendous amount of money in our future through research and development. The question is, What is the rate of return that we’re engineering to for that research and development? How does this correlate with other opportunities that we may have, like acquisitions or debt repayment?
