

Ranking tech companies by revenue per employee - spivey
http://37signals.com/svn/posts/2283-ranking-tech-companies-by-revenue-per-employee

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ShabbyDoo
These numbers are interesting, but using them as a ranking method is absurd.
Revenue/Employee punishes vertical integration. Let's say that Facebook,
instead of developing Casandra in-house, decided to use millions of dollars
worth of Oracle RAC. Their revenue/employee would go up, presuming that they
could have avoided hiring those good developers. But, their profits would
likely be lower. What's the revenue per employee of a private equity firm?
Isn't Chrysler an LLC wholly owned by Cerberus? Revenue per employee must be
well over $10M!

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sparky
Agreed. When I worked at a fabless semi company, we compared ourselves to
other fabless semi companies using this metric, and given similar levels of
vertical integration, it's not a bad metric. Using it to compare a hedge fund
and a fast food chain is indeed absurd.

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jakarta
Haha - indeed. Centaurus Energy (TX based hedge fund) would amount to $88.2M
per employee.

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fnid2
When I was investing in public companies, this metric was one I used to decide
where to put my money. I think it is many times companies settle for hiring as
many people as possible to get their profit margins slim. This MO produces
companies with a lot of fat who need to lay off employees when the inevitable
down turn arrives. They often times over promise and under deliver.

Most public companies I researched had revenue/employee between $100,000 and
$200,000. This simply isn't high enough to provide any cushion.

The reason here, that Craigslist is at the top, is because they outsource
information management to the community through flagging and karma
assignments. Most of the work of the employees is handling the exceptions to
the algorithms, which usually result in the form of an email to craig or a
post to the feedback or help topics. These may result in a kind email from
craig or banning of a spammy account.

They are so good, they already have phone based account validation. None of
the other companies on this list have that. CL focuses their employee time and
energy on what is important -- stuff only humans can do. The rest is done by
computers and this is a brilliant sign that they are doing it right.

Most companies handle exceptions with bureaucracy, filling up revenue with
salaries until the boat sinks.

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azanar
_I think it is many times companies settle for hiring as many people as
possible to get their profit margins slim._

Do you have any insight about the motivation to settle for slim profit
margins?

This seems counter-intuitive, unless by shrinking margins, they make a
significant increase in the bottom-line. (i.e. they would rather make 1% of 40
billion than 20% of 100 million)

Is this sort of trade-off common? Does it work out favorably often enough that
it can be backed by something other than managerial fashion?

~~~
fnid2
In large organizations, the decisions made by the employees are often not
related to the bottom line. They'd rather have more direct reports than
increase profit margins. Middle managers feel powerful because they tell many
people what to do, not because they do more with fewer people.

Of course the investors want the company to be more efficient, but not always.
This is true in the retail industry where razor thin margins are the goal.
Software is the opposite. Imagine if Walmart made 35% margins like many
software vendors. They'd be seen as gouging their customers and their prices
would be too high. Target would create slimmer margins and take walmart's
customers.

Also, employee salaries are tax deductible as expenses, so companies that are
intent on employee satisfaction -- something seen as beneficial for successful
organizations -- tend to pay out much, if not all profits as bonuses. If a
company is making lots of profits, they have to put that money somewhere,
either investments in either infrastructure or labor and it's fairly easy to
hire people. Otherwise, it goes to the government and no one likes that.
Employees are expensive and hiring more is a quick way to legitimize a budget.
Really, investors care about revenue growth more than anything. A company that
is growing revenues and growing the share price is considered good. The
profits could be paid out as dividends, but fewer companies are doing that and
they are double taxed, so capital is more efficient if left in the
organization. Exceptions are very large, old and stable companies, but that's
a different kind of investor. Those are income investors, not growth investors
like I was.

It seems counter-intuitive because investors seldom have control over this
kind of spending and revenue/employee isn't a popular metric for investing
like PE, PEG, OM, or PM. For example, look at the key statistics for MSFT at
yahoo. <http://finance.yahoo.com/q/ks?s=MSFT+Key+Statistics> The number of
employees appears nowhere and thus calculating revenue/employee is beyond the
ability of most investors. Sometimes you can get # of employees on the profile
page: <http://finance.yahoo.com/q/pr?s=MSFT+Profile>

Essentially, the rev/emp metric when making investment decisions is "outside
the box." Most investors don't care or even think about using it as a filter,
nor is it even really possible without better investing tools.

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yequalsx
I don't follow the logic as it pertains to retail. It's quite easy to get
revenue per employee to be as close to zero as you want. Simply hire more
workers. Investors in retail stocks are not looking for revenue per employee
to be as low as possible. They are more focused on things like sales per
square foot of their stores.

Razor thin margins are the goal but only if it is achieved through the right
process. Hence, people look at other metrics.

~~~
fnid2
Razor thin margins are a sign that the retail business is operating as
efficiently as possible.

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plinkplonk
Apple: 46710 million / 34300 employees = 1.36180758 million/employee

Dell: 52 900 / 94 300 = 0.56097561

Microsoft: 58690 / 93 000 = 0.631075269

Intuit: 7800 / 3260 = 0.417948718

Intel: 38280 / 79800 = 0.479699248

The stuffy large companies seem to make about 0.5 million /employee /year. The
more aggressive ones(Amazon, Apple, FaceBook, Google etc) seem to make about a
million/employee. ALmost certainly doesn't hold up statistically. Just
something that struck me.

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Frazzydee
This stuff is interesting, and we should add more companies.

I took this table from wikipedia
([http://en.wikipedia.org/wiki/List_of_the_largest_global_tech...](http://en.wikipedia.org/wiki/List_of_the_largest_global_technology_companies)),
put it in a spreadsheet, and added a column for revenue/employees. Anybody can
edit, so feel free to update with more recent figures and add other companies.

[http://spreadsheets.google.com/ccc?key=0AqI3DInWs2nKdDdMcXlL...](http://spreadsheets.google.com/ccc?key=0AqI3DInWs2nKdDdMcXlLVFZXQlJNdV82ODFTdVpObVE)

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smountcastle
What happened to that spreadsheet? It's been completely cut down (and not even
to the top-N as there are many other tech companies with better numbers that
were removed). Folks added many more companies than are currently showing and
we had columns for Profit and Profit per employee (which I think is a much
better metric).

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johnrob
Some micro economics: An enterprise is supposed to add resources until the
marginal revenue equals the marginal cost. In this case, it means the
additional revenue produced by the employee equals the salary.

Some of these 'efficient' companies are likely leaving value on the table by
not adding resources to the point of zero marginal profit.

~~~
Goladus
It's kind of strange to call Craigslist an enterprise, in that case.

Realize that the chart you are reading is revenue divided employees. It is not
a measure of the actual revenue generated by each employee divided by his
individual salary. Calculating marginal revenue and marginal costs is not that
simple for the sort of IT companies listed.

~~~
johnrob
The point I was trying to make was that the proposed corporate 'metric' could
easily oppose basic economic best practice.

That said, it should be no surprise that Craigslist is at the top - they might
be leaving more value on the table than any other company in the world.

~~~
jasonwatkinspdx
Strategic choices don't exist in isolation however.

Craigslist owes it's success to a deliberate focus on pleasing it's audience
(well that and luck of course). If the prevailing attitude had been on of
extracting all available value, it's likely craigslist would't have survived
to see it's current success. They would have wasted away at some local
maximum.

While in theory it's true that you should always make moves that are +ev, in
reality we cannot approach the complexity of operating a business that way.
Change has a huge cost in organizations, and the larger and more varied the
lines of business you're dealing in, the more expensive that change is.

Put a different way: organizations aren't markets. Organizations can't be
ignorant of economic principles, but economic principles alone, particularly
microeconomic ones, do not completely prescribe strategy.

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petenixey
This article implies that employing more people per dollar revenue is
inefficient. However this is only true for comparisons in a particular
industry segment.

Starbucks' revenue per employee is less than any of those but it doesn't make
it less inefficient, just a different model.

If you flip the logic round and apply it to customers, 37Signals looks very
inefficient. Oracle has few high paying customers whilst 37Signals has many
cheap ones.

Comparisons of rev/customer or rev/employee are always interesting but only
meaningful in a single industry segment.

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asimjalis
This feels a little like asking the revenue per pound of a person. If two
people earn the same amount, and one if more slender than the other, the
slimmer person makes more per pound than his friend. If he were to increase
his weight would his earnings increase? I suspect they won't. This is like the
view that Craigslist could increase their earnings by hiring employees.
Companies like people are organic complicated things. Reducing them to ratios
is essentially meaningless.

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runT1ME
This is silly in the sense that it really doesn't consider companies who have
attempted to scale horizontally in attempts to capture different markets than
their core interest.

I'm going to go out on a limb here and say Microsoft, absolutely could fire
everyone not related to developing/selling/supporting Windows, still make 5
billion dollars a quarter from software sales, and easily be at the top of
this list.

Likewise, Google's pure search and adwords team is probably much more
'efficient' at generating revenue than say the Android team, but you get
diminishing returns at a certain point with your core product line. The smart
thing for a company to do is to grow the company's revenue (and hopefully
profit) when the time is right into other, less high margin sectors.

CraigsList is at the top because they do one thing very well. In five years,
if they were a public company, their shareholders wouldn't be too happy if
they kept their #1 efficiency spot but didn't continue their growth.

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TorKlingberg
This metric puts a high advantage on companies that outsource people-heavy
parts to other companies. Buying your customer support from an outside company
greatly increases your revenue/employee even if the cost for support is the
same or higher than in-house.

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vtail
Interesting comparison, yet there are so many _wrong implications_ that can be
made from it that I don't Even know where to start.

Compare to: short guys in glasses earn 100x as much as tall athletic guys.
"Proof": compare Warren Buffett and Bill Gates with the local college
basketball team.

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maukdaddy
They're not really drawing implications in that article. Profit(or
revenue)/employee does provide a fairly decent, albeit rough, measure of
efficiency. I think it's an interesting metric that more companies should look
at. If that metric starts declining while your hiring is increasing, then it
might be a good sign that you're becoming too large and bloated.

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vtail
"Dividing revenue by employee gives us a better look at which companies are
the most efficient. And that’s what you see in the chart at the top of this
post."

craigslist's numbers are misleading here. Sure, they're extremely efficient by
the above metric, because they were lucky enough to become a de-facto standard
marketplace. I challenge anybody to find another example of a software company
with 30 employees that is nearly as successful.

MSFT revenue per employee is $631k, between eBay and Facebook.

Source:
[http://www.wolframalpha.com/input/?i=microsoft+revenue+/+num...](http://www.wolframalpha.com/input/?i=microsoft+revenue+/+number+of+employees)

(PS. Do I deserve extra karma for posting this cool WolframAlpha link ? :)

~~~
maukdaddy
How is CL misleading? They make a shitload of money with very few employees.
Saying they were lucky isn't even relevant to the argument. Based on revenue
per employee, they are fantastically efficient.

MSFT was "lucky" enough to become the de-facto standard in their market, yet
they aren't as efficient as CL.

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justliving
very interesting and gives a good idea!

still a very high-level view of things and rather imprecise (as probably most
comparisons) ...

cheers

