Navigating Private Equity ownership. | Irrational Exuberance<br>In 2020, you could credibly argue that ZIRP explains the world,<br>but that’s an impossible argument to make in 2024 when zero-interest rate policy is only a fond memory.<br>Instead, we’re seeing a number of companies designed for rapid expansion, learning to adapt<br>to a world that expects immediate free cash flow rather than accepting the sweet promise of discounted future cash flow.<br>This chapter aims to tackle that problem head-on, taking the role of an engineering organization attempting to navigate<br>new ownership by a private equity group. It’s an increasingly frequent scenario: after many years of learning to operate under the direction of its original founders,<br>and the brief excitement of going public, now there’s a short runway to change operating models.<br>Let’s call this company Fungible Ecommerce Company. It’s a platform for supporting online commerce,<br>and this is their Engineering Leadership team’s attempt to think through<br>their options while waiting for new ownership to provide concrete guideposts.<br>This is a chapter from Crafting Engineering Strategy.
Reading this document<br>To apply this strategy, start at the top with Policy. To understand the thinking behind this strategy, read sections in reverse order, starting with Explore, then Diagnose and so on.<br>Relative to the default structure, this document has been refactored in two ways<br>to improve readability:<br>first, Operation has been folded into Policy;<br>second, Refine has been embedded in Diagnose.<br>More detail on this structure in Making a readable Engineering Strategy document.<br>Policy<br>Our policy for managing our new ownership structure is:<br>We believe our new ownership will provide a specific target for Research and Development (R&D) operating expenses<br>during the upcoming financial year planning. We will revise these policies again once we have explicit targets ,<br>and will delay planning around reductions until we have those numbers to avoid running two overlapping processes.<br>That said, looking at our R&D investment relative to a comparably growing peer set,<br>we believe that we’ll get pressure to moderately reduce our spend. We aim to accomplish<br>that reduction through a series of policies and one-off infrastructure projects, without requiring a major<br>reduction in headcount spend.
We will move to an “N-1” backfill policy , where departures are backfilled with a less senior level.<br>We will also institute a strict maximum of one Principal Engineer per business unit , with any exceptions approved<br>in writing by the CTO–this applies for both promotions and external hires.<br>These policies are effective immediately, and are based on our model of engineering-org seniority-mix.<br>We commit to this policy reducing headcount costs by approximately 5% YoY every year for the foreseeable future.
We evaluated a number of potential changes to our geographical hiring strategy,<br>but we believe that staffing engineers with cross-functional partners (Product, Marketing, Sales, and so on)<br>is a priority.<br>We have not been able to reach an agreement cross-functionally, and as such<br>we are not changing our geographical hiring strategy at this time .<br>If we can agree on a policy here, we could accomplish 10-20% reduction in cost over 2-3 years,<br>but the details matter a great deal, so we cannot commit to a specific outcome until we get<br>more cross-functional alignment.
Our infrastructure spend has grown significantly more slowly than revenue for the past two years,<br>meaning that we’ve successfully implemented our infrastructure spend strategy of<br>growing infrastructure costs more slowly than revenue.<br>We will continue our current infrastructure efficiency strategy , and believe there are relatively few high impact efficiency opportunities at this point.<br>We commit to growing infrastructure spend at no more than 5% YoY, significantly lower than our projected<br>revenue increase of 25% YoY.
There are two narrow infrastructure spend opportunities, both related to the integration of prior acquisitions<br>into our shared infrastructure and away from one-off approaches.<br>We will prioritize the post-acquisition integration work next quarter , with the goal of fully standardizing all infrastructure<br>across the company into the stack maintained by our centralized Infrastructure Engineering team.<br>We commit to a one-time reduction in infrastructure of 3% YoY.
We believe there are significant opportunities to reduce R&D maintenance investments,<br>but we don’t have conviction about which particular efforts we should prioritize.<br>We will kickoff a working group to identify the features with the highest support load.
Diagnose<br>We’ve diagnosed Fungible Ecommerce Company’s current state as:<br>Fungible Ecommerce Company’s revenue has grown 20-25% YoY for the past two years,<br>and our target for next year is 25% YoY revenue growth.<br>While this is not a guarantee, we grew slower...