In the labyrinthine world of SaaS, understanding the ‘Theory of Constraints’ (TOC) isn’t just an intellectual exercise—it’s akin to uncovering the Rosetta Stone of your business’s growth. Eliyahu M. Goldratt’s brainchild, TOC, is one of the founding principles of Lean management and widely applied in manufacturing. It can however also serve as a magnifying glass for identifying the bottleneck that’s throttling your SaaS’s growth. To use the imagery of my previous post: picture yourself on a trade journey through the Sahara with a train of camels, but you can only go as fast as the slowest camel in your pack. That camel, my friends, is your bottleneck.
A Tale of Sales and Unmet Expectations
Consider the case of a sales manager, zealous in his mission, who kept onboarding new salespeople to meet ambitious targets. Yet, despite the growing team, the results remained underwhelming. The root issue? A drought of leads. The marketing department was the bottleneck, yet the focus had mistakenly been on expanding the sales team. The situation is akin to hiring more drivers for a fleet of taxis, while neglecting to repair the engines. The drivers are ready, but the vehicles aren’t going anywhere.
The Unsettling Revelation: Product as the Bottleneck
My experience at a previous company further illuminates the importance of accurately identifying bottlenecks. Post the launch of a new product version, sales plummeted. The CEO, quick to judge, pointed fingers at the sales team. The response? Hiring Krauthammer, a renowned sales training institute, to conduct an audit. The audit’s revelation was startling – it wasn’t the sales team that was the bottleneck; it was the product itself. Early implementations had been disastrous, instilling a deep-seated fear in the sales team to even suggest the product to customers. Here, the CEO’s assumption that sales was the bottleneck had blinded him to the actual issue.
Marketing, Sales, Delivery, and Product: The Interconnected Quartet
In SaaS businesses, the interconnectedness of departments means that a bottleneck in one area can have cascading effects on others. A marketing team that fails to generate sufficient leads can demoralize a talented sales force. Conversely, an exceptional sales team is rendered ineffective if the product they are selling is unstable or underwhelming. Similarly, even if sales and marketing are performing flawlessly, a bottleneck in the delivery and implementation process can lead to customer dissatisfaction and high churn rates.
Applying the Goldratt Touch Across the Board
Applying Goldratt’s Theory of Constraints involves a holistic view of the business. It’s about identifying that slow camel in your caravan, whether it be in marketing, sales, delivery, or the product itself. Once identified, it’s crucial to focus resources and efforts on this area. For instance, if the product is the bottleneck, as it was in my previous company, the focus should shift to enhancing product stability and user experience. Investing in more sales and marketing to fight your 50% first-year churn is like rowing harder in a leaky boat already sloshing with water. You should first fix the leak before you can go faster.
The rule of thumb to find the ‘bottleneck’ in manufacturing is to look where ‘stuff’ piles up in the production process. Surprisingly enough, this also holds for your SaaS business.
Three Ways to Spot your Bottleneck
- Look at ‘Inventories’ and Throughput: In a SaaS context, ‘inventory’ can be the number of leads waiting to be contacted, pending support tickets, signed contracts that haven’t been implemented, features waiting to be developed, etc. A pile-up in any area indicates a potential bottleneck.
- Analyze Metrics and Data: Review performance metrics across different departments. (And make sure you are using the right metrics, as explained in this article). Low conversion rates might point to a sales or marketing issue, whereas high customer churn might indicate a problem in product or customer service.
- Listen to Staff and Customers: Often, employees and customers can provide insights into where delays or frustrations occur. Talk to your customers to understand, not to upsell (see also how this can help you optimize your pricing as explained in this article)
The Balancing Act: Harmonizing the SaaS Symphony
Addressing one bottleneck will move the ‘constraint’ to another. This is a normal process of ‘continuous improvement’ and a delicate balancing act, requiring constant vigilance and adjustment. Having the best product and dev team will not bring you any results if you can’t sell. Inversely, even a super sales and marketing team can’t stop the churn if the product doesn’t do what was promised on the tin. Each department must not only perform its part flawlessly but also stay attuned to the performance of the others.
In Conclusion: Embracing the Goldratt Way in SaaS
Embracing Goldratt’s Theory of Constraints in your SaaS business is not merely about identifying problems; it’s about revealing opportunities for growth and improvement. It’s a recognition that the true bottleneck might not always be where you expect it to be. Whether it’s a marketing team struggling to generate leads, a sales team hesitant to sell an unstable product, or a delivery team overwhelmed by the demands of implementation, the key lies in identifying and addressing these bottlenecks.
So, embark on this journey of discovery and transformation. Remember, in the grand symphony of your SaaS business, every department plays a critical role. Finding and addressing your bottleneck isn’t just about resolving a single issue; it’s about harmonizing your entire operation, ensuring each department plays its part to perfection, and guiding your business towards a future of success and stability.
