Introduction
Investing in software companies can be lucrative but comes with challenges and risks. Private equity firms looking to make successful investments in the software industry need to rely on a robust set of technical data and Key Performance Indicators (KPIs) to guide their decisions and monitor the health and growth of their portfolio companies. This blog will explore the most important technical data and KPIs private equity firms should consider when investing in software companies.
Private equity investments in software companies have become increasingly popular due to the industry's potential for rapid growth, scalability, and innovation. However, these investments also carry unique complexities related to technology, market dynamics, and competitive pressures. To navigate this terrain effectively, private equity professionals must deeply understand the software industry and access critical data and KPIs. Let's dive into the core aspects of managing such investments.
Understanding the Software Industry
Before delving into the technical data and KPIs, it's helpful to understand the software industry's nuances. Software companies vary widely in terms of their products, target markets, and business models. They can range from small startups with disruptive technologies to established enterprises providing software solutions for specialized industries. Private equity firms must grasp the following aspects:
Market Segmentation: The software industry can be divided into various segments, such as SaaS (Software as a Service), PaaS (Platform as a Service), and on-premises software. Each segment has its unique dynamics, growth rates, and competitive landscapes.
Customer Base: Identifying the target customer base is essential. Some software companies cater to consumers, while others serve businesses (B2B) or government entities. Understanding the customer base helps in tailoring strategies and evaluating market potential.
Technology Stack: Assessing the underlying technology and development methodologies is important. Does the company use modern, scalable technologies or rely on legacy systems? Understanding the technology stack can impact scalability and adaptability.
Competitive Landscape: Analyzing the competitive landscape is vital for gauging a company's market positioning. Who are the key competitors? What differentiates the company's offerings?
Regulatory Environment: Software companies may be subject to various regulations, such as data privacy laws and industry-specific compliance standards. Understanding the regulatory environment is critical for understanding the target's risk profile.
How to Assess the Health of a Software Business?
Measuring KPIs for software companies should extend beyond software development metrics to encompass various aspects of the business. This holistic approach, covering product management, infrastructure, security, quality, revenue, R&D, and organizational efficiency, is essential for obtaining a 360-degree view of the business and accurately reflecting its overall health. Several reasons support the need for this expanded perspective:
Holistic Business Evaluation:
Software companies operate as multifaceted entities where success relies on more than just the effectiveness of the development process. Evaluating KPIs across domains provides a comprehensive understanding of how different facets of the business contribute to overall success.
Alignment with Business Objectives:
Different departments and functions within a software company have distinct objectives that contribute to overarching business goals. Product management, revenue, and organizational efficiency metrics align with strategic objectives, ensuring that all aspects work together toward a common goal.
User-Centric Focus:
Expanding KPIs to include product management and quality metrics ensures a user-centric focus. It allows companies to assess the speed of development and the satisfaction and experience of end-users, which is important for long-term success.
Risk Mitigation:
Incorporating security metrics is vital for identifying and mitigating potential risks. It ensures that software is resilient against cyber threats, protecting the company's reputation and customer trust.
Financial Performance Visibility:
Revenue-related KPIs provide visibility into the financial health of the company. Understanding financial metrics, such as the revenue per employee, helps in strategic planning, investment decisions, and gauging overall business sustainability.
Adaptability to Market Changes:
Software companies operate in dynamic markets where adaptability is key. Monitoring KPIs across diverse domains helps organizations respond proactively to market changes, customer demands, and emerging trends.
Operational Excellence:
Metrics related to infrastructure and organizational efficiency gauge the effectiveness of operations. Ensuring a well-optimized infrastructure and efficient organizational processes contributes to overall operational excellence.
Strategic Decision-Making:
A 360-degree view of KPIs supports informed and strategic decision-making. It empowers leadership to make decisions that enhance development processes and positively impact the entire business ecosystem.
A comprehensive set of KPIs that spans multiple dimensions of a software company is instrumental in providing a nuanced and accurate portrayal of its health. This approach ensures that strategic decisions are grounded in a deep understanding of the interconnected aspects that collectively contribute to the business's success.
The Importance of Industry Benchmarks
Industry benchmarks play a pivotal role in the software domain, serving as invaluable yardsticks that enable companies to gauge their performance against established standards within their sector. These benchmarks provide a comparative analysis of metrics, such as development speed, quality, and efficiency, allowing organizations to assess where they stand about industry norms. By understanding how their performance aligns with benchmarks, companies can identify areas of strength and weakness, facilitating strategic decisions and targeted improvements.
Furthermore, industry benchmarks foster healthy competition and innovation within the software landscape. When organizations can measure their progress against industry standards, it stimulates a drive for excellence and encourages the adoption of best practices. Companies are motivated to enhance their processes, adopt emerging technologies, and optimize their workflows to meet and exceed industry benchmarks. This competition ultimately benefits the industry at large, advancing software development methodologies and technologies.
Industry benchmarks guide software companies toward continuous improvement, innovation, and sustainable growth
Another critical aspect is the role benchmarks play in informing stakeholders and investors about the health and competitiveness of a software company. Benchmarks offer a standardized language for communication, enabling companies to present their performance metrics in a context that is widely understood within the industry. This transparency is crucial for building trust among investors, attracting potential partners, and showcasing a commitment to industry standards and excellence. Industry benchmarks act as a compass, guiding software companies toward continuous improvement, innovation, and sustainable growth.
12 KPIs for Managing Software Company Investments
Since its inception, RingStone has been committed to integrating Key Performance Indicators (KPIs) into its comprehensive technical due diligence process. These 12 KPIs are pivotal in evaluating a company's maturity based on industry benchmarks considering revenue, growth stage, and workforce size. This strategic approach enhances RingStone's ability to conduct thorough assessments and aligns with a commitment to best practices when evaluating businesses.
Sample: KPIs From A RingStone Technical Due Diligence Report
Now, let's move on to the specific technical data and KPIs that private equity firms should focus on when managing investments in software companies, complete with examples.
1. R&D Spend as a Percentage of Revenue
Research and Development (R&D) Investment Assessment: Important for evaluating a company's ability to stay competitive and innovate in a rapidly evolving industry is monitoring its research and development (R&D) investment. R&D spending serves as a direct indicator of the organization's commitment to innovation.
Innovation Commitment: Allocating a significant portion of revenue to R&D signifies the organization's commitment to developing new products and services or improving existing ones. This commitment enhances innovation, providing a potential competitive advantage by staying ahead of industry trends and meeting evolving customer needs.
Strategic Financial Practice: Monitoring R&D spending as a percentage of revenue is a strategic financial practice. This practice supports innovation, contributes to competitive advantage, facilitates market expansion, and ensures long-term sustainability.
Supporting Long-Term Sustainability: The strategic monitoring of R&D spending supports short-term innovation and long-term sustainability. It reflects the organization's proactive approach to evolving industry dynamics, ensuring its position as a leader in a competitive business landscape.
Example:
A well-established Leisure company with a focus on maintaining and optimizing existing software solutions might allocate around 5-10% of its revenue to R&D. In contrast, a company in the Internet Software & Services industry, might allocate a higher percentage, perhaps in the range of 15-20% or more.
2. Roadmap Planning Health
Health of Product Roadmap: A critical factor in a software company's future planning, a product roadmap's duration (in months) reflects the company's strategic alignment and vision. A healthy roadmap ensures effective long-term planning, aligning product development with business goals and market trends.
Strategic Alignment and Vision: The product roadmap guides the company's strategic alignment and vision, providing a clear trajectory for future endeavors. Ensuring a well-defined roadmap is important for aligning product development with long-term business goals and staying attuned to market trends.
Efficient Resource Allocation: The roadmap's defined timeline facilitates efficient development, design, and testing resource allocation. Effective resource utilization is achieved by aligning resources with planned features and initiatives over the specified timeframe, contributing to meeting strategic objectives.
Proactive Risk Management: A longer-term product roadmap identifies and mitigates potential risks early in planning. Proactive risk management is facilitated by anticipating challenges, market condition changes, or customer preference shifts.
Innovation Planning: A well-structured product roadmap encourages innovation planning over an extended period. The roadmap provides a framework for introducing new features, technologies, or improvements, enabling the company to stay ahead of the competition and deliver continuous value to customers.
Example of Technology Startup:
Early Stage (0-12 months)
Focus on building a Minimum Viable Product (MVP) to launch quickly and gather user feedback.
The roadmap includes core features and functionalities to establish a foothold in the market.
Short planning horizon to remain agile and adapt to user needs.
Growth Stage (12-24 months)
Expand product capabilities based on user feedback and market demands.
Introduce scalability features and infrastructure enhancements to support an increasing user base.
Medium-term roadmap for feature development, customer acquisition strategies, and infrastructure scaling.
Mature Stage (24+ months)
Long-term roadmap for strategic initiatives, major feature releases, and market expansion.
Focus on optimization, platform stability, and potentially exploring new market segments.
Alignment with the company's vision and long-term business goals.
3. Infrastructure Spend as a Percentage of Revenue
Technology Infrastructure Efficiency: Insights into the cost efficiency, scalability, and overall financial health of the company's technology infrastructure are provided by this metric. Tracking infrastructure spending as a percentage of revenue enables the assessment of technology operations' cost efficiency.
Cost Optimization Measures: The metric aids in identifying areas for implementing cost optimization measures without compromising performance or reliability. It guides the company in making strategic decisions to enhance efficiency and reduce unnecessary expenses in technology operations.
Budgeting and Forecasting: Monitoring infrastructure spending improves budgeting and forecasting. Understanding the relationship between revenue and infrastructure costs ensures effective resource allocation, supporting business growth within budget constraints.
Cloud Services Optimization: For companies utilizing cloud services, monitoring infrastructure spend is important for optimizing usage and costs. This includes identifying underutilized resources, rightsizing instances, and leveraging cost-saving measures from cloud service providers.
Informed Decision-Making: The ongoing monitoring of infrastructure spend facilitates informed decision-making. It ensures the alignment of technology investments with business objectives, promoting cost optimization and maximizing the value of cloud investments.
Example:
An e-commerce company has an annual revenue of $100 million, with an annual spend of $10 million. This represents 10% of revenue. A 10% infrastructure spend as a percentage of revenue could be considered reasonable for a large online e-commerce site leveraging cloud technology. This percentage allows substantial investments in a robust and scalable infrastructure to handle high traffic, provide a seamless user experience, and maintain system reliability.
Examples by Industry:
Telecommunications:
Infrastructure Spend as Percentage of Revenue: 15-20%
Telecommunications companies often face significant upfront costs in establishing and maintaining infrastructure. The percentage tends to be higher during the expansion phase when new infrastructure is deployed to meet the increasing demand for network coverage and data services.
E-commerce and Retail:
Infrastructure Spend as Percentage of Revenue: 8-12%
For e-commerce and retail, the percentage is influenced by factors such as the size of the customer base, transaction volume, and geographical expansion. A higher percentage may be allocated in the initial stages to build a robust online platform. As the business matures, the percentage may stabilize or decrease slightly.
Healthcare Services:
Infrastructure Spend as Percentage of Revenue: 12-18%
Healthcare services face stringent data security and compliance requirements, influencing higher infrastructure spending. In the growth phase, investment may rise to accommodate the increasing digitalization of health records and the adoption of advanced technologies.
Financial Services:
Infrastructure Spend as Percentage of Revenue: 12-16%
Financial institutions require sophisticated and secure infrastructure to handle transactions and safeguard sensitive financial data. During the early stages, the focus may be on building a secure foundation, while in later stages, optimization and efficiency gains could lead to a more stable percentage.
The stage of growth, market dynamics, and technological advancements significantly impact the percentage of infrastructure spending, with early-stage companies typically allocating higher percentages to establish a robust foundation for future growth. As companies mature, they may optimize infrastructure spending based on operational efficiencies and evolving technology needs.
4. Technical Debt Allocation Percentage
Technical Debt Allocation Percentage: Tracking and managing the accumulation of technical debt within the codebase in software development projects is facilitated by the percentage of technical debt allocation. Technical debt, representing the implied cost of additional work due to shortcuts or suboptimal decisions, must be paid off in the future to maintain or enhance the software.
Implied Costs of Development Decisions: The percentage assigned to technical debt provides visibility into the extent of accumulated debt within the codebase. It reflects the implied costs of development decisions, such as shortcuts or suboptimal design choices.
Visibility into Debt Accumulation: The percentage of technical debt allocation provides development teams visibility into the accumulation of technical debt. This visibility aids in making informed decisions about prioritizing debt repayment and balancing short-term development speed with long-term software maintainability.
Trade-Off Understanding: By assigning a percentage to technical debt, development teams and project managers gain a deeper understanding of the trade-offs made during the development process. This understanding is important for making informed decisions about resource allocation project timelines and ensuring the long-term sustainability of the software.
Example:
A company is building an online loyalty management platform. In the initial phase of building the loyalty management platform, the company might allocate ~15% of the development effort to manage technical debt. Development focuses on building core features, establishing the platform's foundation, and addressing immediate user needs.
Examples by Industry:
Telecommunications:
Percentage of Team Allocation for Technical Debt: 12-18%
Telecommunications companies dealing with complex network infrastructure may allocate a substantial portion of their teams to manage technical debt. This is essential for ensuring the reliability and efficiency of communication networks.
E-commerce and Retail:
Percentage of Team Allocation for Technical Debt: 10-15%
In the e-commerce sector, where user experience and platform stability are key, allocating resources to address technical debt helps maintain a responsive and secure online shopping experience. The percentage may vary based on the scale and complexity of the platform.
Healthcare Services:
Percentage of Team Allocation for Technical Debt: 15-20%
Healthcare services dealing with sensitive patient data and regulatory compliance may allocate more to managing technical debt. This ensures that software systems meet stringent security and quality standards.
Financial Services:
Percentage of Team Allocation for Technical Debt: 12-16%
Financial institutions, characterized by complex transaction systems and regulatory requirements, allocate resources to manage technical debt to uphold the integrity of financial operations. The percentage may vary based on the complexity of financial applications.
The allocation of resources for managing technical debt is influenced by the industry's reliance on technology, the criticality of maintaining a robust technical infrastructure, and the strategic importance of continuous improvement. Companies in industries with a faster pace of technological change may allocate a higher percentage to stay competitive and adapt to evolving industry standards.
5. Revenue per Employee (RPE)
Revenue per Employee Metric: The revenue per employee metric is a financial indicator designed to help organizations gauge the efficiency of their workforce in revenue generation. Calculating the organization's total revenue by the number of employees provides valuable insights into workforce productivity.
Efficiency Indicator: A higher revenue per employee indicates that each employee contributes more significantly to the overall revenue. This suggests operational efficiency, showcasing the organization's ability to maximize revenue generation with a relatively lean workforce.
Example:
A company in the computer animation industry has an annual revenue of $100 million and 700 employees. The revenue per employee is $100,000,000/700 = $142k per employee.
Examples by Industry:
Technology Industry:
High RPE: $300,000 - $1,000,000+
Low RPE: $100,000 - $300,000
Consulting Services:
High RPE: $200,000 - $800,000+
Low RPE: $80,000 - $200,000
Retail Industry:
High RPE (e-commerce): $150,000 - $500,000+
Low RPE (traditional retail): $50,000 - $150,000
Manufacturing Sector:
High RPE (advanced manufacturing): $150,000 - $500,000+
Low RPE (traditional manufacturing): $50,000 - $150,000
Financial Services:
High RPE (fintech): $250,000 - $1,000,000+
Low RPE (traditional banking): $80,000 - $250,000
Interpreting The RPE:
High RPE: A high RPE suggests that the company is efficient in generating revenue with a relatively small workforce, indicating strong productivity and resource utilization.
Low RPE: A low RPE may indicate either overstaffing or challenges in revenue generation efficiency, which could be due to market conditions, competition, or operational inefficiencies.
6. Percentage of Breached Incidents Versus Total Security Incidents
Breached v. Total Incidents Metric: Measuring the percentage of breached security incidents against the total number of security incidents is a pivotal KPIR for businesses aimed to assess an organization's cybersecurity posture.
This metric goes beyond incident tracking, providing organizations with helpful insights into the effectiveness of their security measures.
By understanding the ratio of breached incidents to the overall count, businesses gain a comprehensive view of their vulnerabilities, allowing for targeted improvements and proactive risk management.
Proactive Risk Management: This is at the forefront of assessing breach escalation ratios.
This KPI empowers organizations to identify and address potential security vulnerabilities before they escalate into significant breaches.
It is an early warning system, enabling timely intervention to fortify security measures.
This proactive approach not only safeguards sensitive data but also contributes to the overall resilience of the business in the face of evolving cyber threats.
Managing risks effectively becomes a cornerstone for sustainable business success as the digital landscape poses challenges.
Gauging Success: Quantifying success in breach prevention is a tangible outcome of measuring the percentage of breached incidents.
This KPI allows organizations to gauge the success of their security measures in preventing unauthorized access and data breaches.
A lower percentage signifies a robust security posture, translating into enhanced reputation, minimized financial losses, and sustained business resilience.
Stakeholder Trust: This is a natural byproduct as businesses demonstrate their commitment to cybersecurity and protecting sensitive information. In an era where trust is paramount, maintaining the confidence of stakeholders through effective security measures becomes a strategic imperative.
Financial Resilience: This is another critical benefit derived from this KPI.
Businesses ensure their financial stability by minimizing losses and mitigating security breaches.
The financial impact of a breach can be substantial, encompassing not just immediate financial losses but also long-term reputational damage.
Effectively managing and quantifying breach prevention contributes to a robust cybersecurity strategy, safeguarding not only the digital assets of the organization but also its overall financial health.
Example:
A company has 100 security incidents in a year, and 2 represent data breaches. The % breaches versus the total incidents = 2/100 = 2%.
Various factors can influence the importance of data breaches for a business, and the acceptable percentage of breaches versus overall security incidents depends on the organization's risk tolerance, industry, and regulatory environment. Here are key factors that influence the importance of data breaches:
Type of Data Compromised:
Breaches involving sensitive or confidential information, such as customer data, financial records, or intellectual property, are typically more impactful.
Regulatory Compliance:
Violations of data protection regulations, like GDPR or HIPAA, can result in severe consequences, including legal actions and financial penalties.
Reputation Damage:
The impact on a company's reputation can substantially affect customer trust and loyalty. Long-lasting damage may result in loss of business.
Financial Consequences:
Data breaches can lead to financial losses, including costs associated with incident response, legal actions, regulatory fines, and remediation efforts.
Operational Disruption:
Breaches can disrupt normal business operations, leading to downtime and additional costs for recovery and system improvements.
Intellectual Property Theft:
For businesses heavily reliant on intellectual property, breaches resulting in the theft of proprietary information can be particularly damaging.
Industry Impact:
Certain industries may face more severe consequences due to the nature of their operations. For example, healthcare or finance may have stricter regulations.
Customer Trust:
Loss of customer trust is a critical consideration. It takes time and effort to rebuild trust once it has been compromised.
Cybersecurity Maturity:
Organizations with robust cybersecurity measures are better equipped to prevent, detect, and respond to breaches, minimizing their impact.
There is no universal benchmark for the acceptable percentage of breaches versus overall security incidents. Acceptability depends on the organization's risk management strategy and industry norms. However, a common goal is to minimize the number of breaches and focus on swift detection and response to limit their impact. Continuous improvement, adherence to best practices, and compliance with relevant regulations are essential in determining what is considered acceptable for a specific business.
7. QA:Developer Ratio
Developer-to-QA Engineer Ratio Metric: The developer-to-QA engineer ratio indicates the balance between the number of software developers and quality assurance (QA) engineers within an organization. This ratio is helpful for effectively managing software development processes.
Implications for QA Coverage: The ratio ensures adequate QA coverage for the development workload, preventing bottlenecks in testing processes. Maintaining an appropriate balance mitigates the risk of releasing software with critical defects.
Risk Reduction in Software Releases: A balanced developer-to-QA engineer ratio significantly reduces the risk of releasing software with critical defects. This balance is essential for ensuring that testing processes can keep pace with development, preventing the introduction of high-impact issues.
Contribution to Faster Development Cycles: A balanced ratio can contribute to faster development cycles, as QA engineers can keep up with the pace of development. This enables quicker releases without sacrificing the quality of the software, facilitating a more agile and efficient development process.
Example:
A company has 30 developers and 10 QA engineers. The QA:Dev ratio is 10:30 = 1:3. For every 1 QA engineer, there are 3 developers.
Examples by Industry:
Financial Services Industry:
QA to Developer Ratio: 1:2 to 1:4
The financial services sector often deals with complex and critical software systems. A slightly higher QA to Developer ratio is beneficial for rigorous testing, compliance adherence, and ensuring the reliability and security of financial applications.
Healthcare IT Industry:
QA to Developer Ratio: 1:3 to 1:5
Healthcare IT demands stringent quality standards due to the sensitive nature of health data. A higher QA to Developer ratio helps in thorough validation of healthcare applications, reducing the risk of software-related issues that could impact patient care.
E-commerce Industry:
QA to Developer Ratio: 1:2 to 1:4
In the fast-paced e-commerce environment, maintaining a balanced ratio is important. It allows for effective testing of frequent software updates, ensuring a seamless online shopping experience and minimizing the chances of customer-facing issues.
8. Defect Escape Rate
Defect Escape Rate Measurement: The defect escape rate is a metric designed to measure the effectiveness of a software development and testing process. It tracks the number of defects not detected during development and testing but found by customers or end-users after the software is released.
Importance for Product Quality: Managing the defect escape rate helps maintain and improve product quality. This metric is a key indicator of the effectiveness of testing and development processes.
Refining Testing and Development Processes: The defect escape rate is a pivotal metric guiding organizations in refining their testing and development processes. Organizations can deliver higher-quality software products by analyzing and addressing the root causes of escaped defects.
Enhancing Customer Satisfaction: Actively managing and reducing the defect escape rate enables organizations to enhance customer satisfaction. Minimizing post-release issues contributes to a positive user experience and builds trust in the reliability of the software.
Robust Software Development Lifecycle: By actively managing the defect escape rate, organizations contribute to building a more robust and reliable software development lifecycle. This proactive approach ensures the delivery of high-quality software, meets customer expectations, and minimizes the impact of defects after release.
Example:
A company finds 30 defects after release (i.e., these 30 defects are identified by customers). Assume that during the development and testing of the release, the internal teams found 100 defects. The defect escape rate is 30/(30+100) = 23%.
Examples by Industry:
Manufacturing (Automotive, Aerospace):
Good Rate: 1% - 3%
A low defect escape rate is important in manufacturing to ensure the safety and reliability of products such as cars and aircraft.
Bad Rate: 5% or higher
Higher defect escape rates can lead to recalls and safety concerns and negatively impact the brand's reputation.
Healthcare (Medical Devices, Pharmaceuticals):
Good Rate: 1% - 4%
Given the critical nature of healthcare products, a low defect escape rate is essential to prevent patient harm.
Bad Rate: 8% or higher
Higher defect escape rates may lead to regulatory issues, patient safety concerns, and legal repercussions.
Financial Services (Software Applications, Platforms):
Good Rate: 1% - 3%
Low defect escape rates are important in financial services to ensure software applications' and platforms' accuracy and security.
Bad Rate: 5% or higher
Higher escape rates can result in financial losses, security breaches, and damage to customer trust.
9. Unit Test Code Coverage
Unit Test Code Coverage Metric: Unit test code coverage measures the percentage of code lines or branches covered by unit tests in a software application. This metric plays a pivotal role in enhancing product quality by providing insights into the thoroughness of the testing process at the unit level.
Thoroughness of Testing Processes: Unit test code coverage reflects the thoroughness of the testing process at the individual unit level. Higher code coverage indicates a more comprehensive approach to testing, addressing a larger portion of the codebase.
Early Bug Detection: A higher code coverage rate ensures that a larger portion of the codebase undergoes automated testing, enabling early detection of bugs and defects at the unit level. This early detection helps prevent the propagation of issues to higher levels of the software development lifecycle.
Support for Code Reliability and Maintainability: Unit test code coverage is critical to code reliability and maintainability. Early defect detection contributes to a more reliable codebase, and thorough testing supports code maintainability over the software development lifecycle.
Foundation for High-Quality Software: Unit test code coverage is a foundational element in the software development lifecycle. It instills confidence in the correctness and stability of the codebase, supporting efficient collaboration among development teams and contributing to the overall delivery of high-quality software.
Example:
The Total Lines of Code in the Software Module: 1,000
Lines of Code Covered by Unit Tests: 800
Unit test code coverage = 800/1000 = 80%.
The target for unit test code coverage in software companies can vary, and there is no one-size-fits-all answer. However, some common benchmarks and factors that influence the percentage of unit test code coverage include:
Industry Standards: Some industries or regulatory bodies may have specific standards or guidelines for code coverage. For example, safety-critical systems in aerospace or healthcare may require higher code coverage percentages.
Project Complexity: The complexity of the software project can influence the target code coverage. More complex projects may require higher coverage for comprehensive testing.
Risk Assessment: Companies often perform a risk assessment to identify critical parts of the code that could significantly impact the system if they fail. Higher coverage may be targeted for these critical areas.
Code Criticality: Critical parts of the code that handle sensitive data, security, or financial transactions may require higher coverage to minimize the risk of vulnerabilities.
Quality Standards: Companies following quality management standards, such as ISO 9001 or software development frameworks like CMMI, may have guidelines or recommendations for code coverage.
Team Experience: The experience and expertise of the development and testing teams can influence the code coverage target. Teams with more experience in testing may aim for higher coverage.
Resource Constraints: The availability of resources, including time and budget, can impact the feasibility of achieving a specific code coverage target.
Typically, software companies aim for unit test code coverage percentages ranging from 70% to 90%+. However, balancing high code coverage with other testing practices, such as integration testing, system testing, and exploratory testing, is essential to ensure overall software quality. The goal is to achieve a meaningful balance that effectively identifies and mitigates risks in the software.
10. Defect Density
Defect Density Metric: Defect density is a metric that quantifies the number of defects or issues per unit of software code, commonly expressed as defects per thousand lines of code (KLOC) or defects per function point. This metric holds value in assessing and enhancing product quality.
Quality Assessment Indicator: Defect density is valuable in assessing product quality, with lower defect density suggesting higher code quality. Teams can utilize this metric to gauge the overall robustness and reliability of the software.
Code Quality Implications: Lower defect density is often associated with well-designed and well-implemented code. This implies that a lower incidence of defects is linked to higher code quality and may reflect a more robust software architecture.
Robustness and Reliability Insight: Defect density provides insight into the robustness and reliability of the software. A lower defect density indicates that the software is less prone to issues, contributing to a more reliable overall system.
Code Design and Implementation Reflection: Teams can use defect density as a metric to reflect on the code design and implementation. Lower defect density aligns with well-crafted and well-implemented code, contributing to the overall health and quality of the software.
Example:
Total Number of Defects Found: 50
Total Lines of Code (in thousands - KLOC): 100
Defect Density = 50/100 = 0.5 defects per kLOC.
Defect density measures the average number of defects per unit of size (commonly expressed as defects per KLOC or defects per function point). A lower defect density is generally considered better, as it indicates fewer defects on average per unit of code.
Defect density can vary across different industry sectors due to factors such as complexity, regulatory requirements, and the nature of the software being developed. Here are examples of defect density ranges for five distinct industry sectors:
Healthcare Software:
Defect Density Range: 5 to 15 defects per KLOC (Thousand Lines of Code)
Healthcare software often involves complex regulatory compliance and stringent quality standards. The critical nature of healthcare applications requires a lower defect density to ensure patient safety and data integrity.
Financial Services Software:
Defect Density Range: 3 to 10 defects per KLOC
Financial services software, including banking and fintech applications, demands high accuracy and security. The sector often adheres to strict regulatory standards, influencing a lower defect density target.
E-commerce Platforms:
Defect Density Range: 8 to 20 defects per KLOC
E-commerce platforms focus on user experience, transaction security, and seamless functionality. While the emphasis is on customer satisfaction, the complexity of features and integrations may result in a moderate defect density.
Telecommunications Software:
Defect Density Range: 6 to 15 defects per KLOC
Telecommunications software involves complex network systems, requiring robust and reliable performance. The sector aims for a moderate defect density to ensure uninterrupted communication services.
Gaming Software:
Defect Density Range: 10 to 25 defects per KLOC
Gaming software, including video games and interactive entertainment, often prioritizes rapid development and frequent updates. The dynamic nature of the gaming industry may lead to a slightly higher defect density as developers iterate quickly.
It's essential to note that these are general ranges, and actual defect density targets can vary based on project specifics, development methodologies, and the maturity of the organization's quality assurance practices. Each industry sector may have unique considerations, and organizations within the same sector may set different defect density goals based on project complexity and criticality.
11. Percantage of Tickets Escalating From Support To Engineering
Ticket Escalation Percentage Metric: The percentage of ticket escalation from customer support to engineering is a key metric reflecting the efficiency and productivity of customer support processes. This metric measures the proportion of support tickets that escalate to the engineering or development team for resolution.
Efficiency of Support Processes: The ticket escalation percentage is an important indicator of the efficiency of customer support processes. A low percentage indicates that the customer support team effectively resolves issues at the initial level of contact.
Quicker Problem Resolution: Efficient customer support, as indicated by a low ticket escalation percentage, leads to quicker problem resolution. This improves customer satisfaction, as issues are addressed promptly without needing escalation.
Focus on High-Priority Activities: A lower percentage of ticket escalation means the engineering team is not overwhelmed with a high volume of support-related issues. The engineering team can focus on strategic tasks, development, and other high-priority activities, i.e., focus on product roadmap execution.
Balance Between Support and Development: Maintaining a lower ticket escalation percentage balances support and development workloads. This balance ensures the engineering team can efficiently manage routine support tickets, allowing them to dedicate more time to strategic and high-priority tasks.
Example:
Total Number of Customer Support Tickets: 500
Number of Tickets Escalated to Engineering for Resolution: 50
% Tickets Escalated to Engineering = 50/500 = 10%
This means that 10% of the total customer support tickets were escalated to the engineering team for resolution.
The percentage of tickets escalated from customer support to engineering can vary based on the industry, the complexity of products or services, and the nature of customer issues. Here are general estimates for the percentage of tickets escalated in five different industries:
Technology and Software:
Escalation Percentage: 10-20%
In the technology sector, especially for software products, there may be a moderate escalation rate due to complex technical issues and the need for specialized engineering support.
Telecommunications:
Escalation Percentage: 15-25%
Telecommunications services often involve intricate network configurations and connectivity challenges. The escalation rate may be slightly higher to address issues requiring engineering expertise.
E-commerce and Retail:
Escalation Percentage: 5-15%
E-commerce platforms and retail services typically experience a moderate escalation rate, with some issues related to transactions, payment processing, or system integrations requiring engineering intervention.
Healthcare Services:
Escalation Percentage: 10-20%
In healthcare services, there might be a moderate escalation rate due to the critical nature of issues related to patient data, compliance, and the need for specialized technical solutions.
Financial Services:
Escalation Percentage: 8-18%
Financial services, including banking and fintech, may experience a moderate escalation rate. Financial transactions, security, or regulatory compliance issues may require engineering support.
It's important to note that these are rough estimates, and the actual escalation percentages can vary based on the specific characteristics of each industry, individual companies, and their customer support and engineering workflows. Organizations may work to minimize escalations through effective customer support training, documentation, and proactive issue resolution.
12. Percentage Delivered vesus Committed
Delivered Work versus Committed Work Metric: Measuring the percentage of committed work versus the percentage of delivered work in a software development team is a key performance metric. This metric provides insights into the team's efficiency.
Predictability Assessment: Comparing committed work to delivered work enables organizations to assess the team's predictability in meeting their commitments. This assessment is vital for understanding how well the team can adhere to planned goals and deliverables.
Identifying Challenges in Estimation: Consistent misalignment between committed and delivered work signals challenges in estimation and planning within the team. Recognizing these challenges is important for addressing accuracy in estimating.
Insight for Future Planning: The insight gained from the committed work versus delivered work metric can improve the accuracy of future planning. Understanding historical discrepancies aids in setting realistic expectations for upcoming sprints or releases.
Enhancing Project Management Effectiveness: The metric enhances overall project management effectiveness. Organizations can fine-tune their processes by leveraging insights into commitment and delivery alignment, resulting in more accurate planning and increased project success.
Example:
A company has made 10 releases throughout the last 12 months. Out of those 10 releases, 8 were delivered on time, based on the product roadmap plans. This equates to 8/10 from a committed versus delivered set of releases. Hence, 80%.
This can also be measured more granularly, for example, by looking at the number of sprints in an Agile development and calculating how many sprints met (or exceeded) the team's commitment. So, if there were 10 sprints, and 4 of them met (or exceeded) the commitment, then the % delivered vs. committed = 4/10 = 40%.
Examples By Industry:
Technology and Software:
Percentage of Committed Releases Delivered on Time: 70-80%
In the technology sector, approximately 70-80% of releases committed to be delivered on time are successfully delivered. Agile practices contribute to a high level of commitment.
Telecommunications:
Percentage of Committed Releases Delivered on Time: 65-75%
Around 65-75% of committed releases in telecommunications are delivered on time. Complex network configurations may impact timely delivery.
E-commerce and Retail:
Percentage of Committed Releases Delivered on Time: 75-85%
E-commerce platforms achieve a 75-85% delivery rate for releases committed to be delivered on time, focusing on enhancing user experience.
Healthcare Services:
Percentage of Committed Releases Delivered on Time: 60-70%
In healthcare services, approximately 60-70% of releases committed to be delivered on time are successfully delivered. Regulatory considerations influence timely delivery.
Financial Services:
Percentage of Committed Releases Delivered on Time: 65-75%
Financial services software sees a 65-75% delivery rate for releases committed to be delivered on time. Security and compliance factors may impact the timeline.
Conclusion
Industry Benchmarks Play A Pivotal Role In Decoding Business Health
Investing in software companies can yield substantial returns. It requires a deep understanding of the industry's unique dynamics and a rigorous approach to data analysis. By focusing on the key technical data and KPIs, you can make informed decisions, identify growth opportunities, mitigate risks, and drive the success of your software company investments.
Rapid innovation, evolving customer preferences, and fierce competition characterize the software industry. Therefore, staying ahead requires continuous monitoring and adaptation. You should assess these metrics during the due diligence phase and actively engage with portfolio companies to implement strategies for improvement.
Leveraging technical data and KPIs can differentiate between a successful investment and missed opportunities. By keeping a keen eye on these critical indicators, you can navigate the complexities of the software industry and maximize the value of your investments.
Key Performance Indicators (KPIs) are not universally standardized, and their values are influenced by many factors, making it impossible to establish a one-size-fits-all benchmark. Variables such as industry sector, growth stage, revenue, and the number of employees all contribute to each organization's unique context. Recognizing this diversity, industry benchmarks are essential for establishing meaningful benchmarks for KPIs. These benchmarks are tailored to specific industries, acknowledging each sector's distinct characteristics and requirements.
Moreover, the growth stage plays a critical role in shaping the expectations for KPIs. Start-ups, for instance, may have different performance standards compared to well-established enterprises. Revenue and employee count further impact KPI benchmarks, as the scale of operations inherently influences the interpretation of these metrics.
To best understand the health of KPIs, you must engage in a comparative analysis by evaluating KPI values against industry benchmarks. This comparative approach allows for a more accurate performance assessment, revealing areas for improvement and highlighting where the organization stands relative to industry standards.
Incorporating Industry Benchmarks Into Performance Assessments Enables Informed Decision-Making
Incorporating industry benchmarks into performance assessments enables informed decision-making, allowing organizations to set realistic goals, identify areas for improvement, and align their strategies with industry standards.
About The Author
Jon White is an experienced technology leader with over 34 years of international experience in the software industry, having worked in the UK, Malaysia, Bulgaria, and Estonia. He holds a BSc (Hons) in Systems Design and led the Skype for Windows development teams for many years (with 280 million monthly connected users), playing a pivotal role in the team's transition to Agile after Microsoft’s acquisition.
Jon has held multiple leadership positions throughout his career across various sectors, including loyalty management, internet telecoms (Skype), IT service management, real estate, and banking/financial services.
Jon is recognized for his expertise in agile software development, particularly helping organizations transform to agile ways of working (esp. Scrum), and is a specialist in technical due diligence. He is also an experienced mentor, coach, and onboarding specialist.
Over the last few years, he has completed over a hundred due diligence and assessment projects for clients, including private equity, portfolio companies, and technology companies, spanning multiple sectors. Contact Jon at jon.white@ringstonetech.com.