The CTO's Truth Detector

The Meeting Where Everything Looked Perfect (But Wasn't). How the CTO Ratio saved my *$$ from a sinking ship.

I'm sitting in our Monday morning executive meeting. The fluorescent lights hum above us in the conference room of our Series B SaaS startup. My CEO is beaming. "Great news everyone - we just crossed $15 million in ARR!"

The room erupts in applause. Our VP of Sales high-fives the CMO. Even our typically stoic CFO cracks a smile. I manage my team of 50 engineers, and by all accounts, we're crushing it. We ship features weekly. Our uptime is 99.9%. Customer satisfaction scores are through the roof.

But something gnaws at me. A number I've been tracking in my personal spreadsheet. A ratio I discovered months ago that no one else seems to care about.

For my paid subscribers, scroll right to the bottom past the footnotes for an invitation from me to track your CTO Ratio together with me ~ Etienne

The Spreadsheet That Changed Everything

After the meeting, I pull up my spreadsheet. There it is, staring back at me like a diagnosis I don't want to accept. What I call the CTO Ratio has been declining for six straight quarters:

• Q1 2022: 2.8

• Q2 2022: 2.4

• Q3 2022: 2.1

• Q4 2022: 1.8

• Q1 2023: 1.5

• Q2 2023: 1.2

The formula is simple: Gross Margin % divided by CTO Budget %. But the story it tells is profound. We're spending more of the company's resources to maintain lower margins. We're becoming less efficient with every quarter that passes.

When Nobody Wants to Hear the Truth

I try to raise this with my CEO. "Look at these numbers," I say, sliding my laptop across his desk. "Our gross margin has dropped from 78% to 72% while my budget has grown from 28% to 60% of total company spending."

He waves it off. "Etienne, we're growing! Of course we're investing in engineering. That's how we win."

But I know better. A good rule of thumb is a SaaS business should have about an 80% Gross Margin¹. We're heading in the wrong direction, and my spending is accelerating faster than our ability to generate profitable revenue.

I bring it up again in Q3. "Our CTO Ratio is now below 1.0," I tell the board. "For every percent of company resources I control, we're generating less than one percent in gross margin. This is unsustainable."

They look at me like I'm speaking a foreign language. The VP of Sales jumps in: "But we're hitting our targets! Revenue is up 40% year over year!"

The Moment I Realized Everyone Was Looking at the Wrong Scoreboard

That's when it hits me. Everyone is looking at different scorecards. Sales celebrates revenue. Marketing celebrates leads. Product celebrates features shipped. But no one is looking at the intersection of spending efficiency and profitability contribution.

I realize the CTO Ratio isn't just another metric - it's a truth detector. It reveals whether the technology organization is truly contributing to sustainable business growth or just burning cash while everyone celebrates vanity metrics.

Over the next month, I dig deeper. I benchmark our infrastructure costs against industry standards. I analyze our engineering productivity. I map every dollar of my budget to its impact on gross margin. The picture becomes crystal clear: we're over-engineering solutions, our infrastructure is bloated, and we're hiring ahead of our ability to effectively utilize talent.

Why I Had to Walk Away (And What Happened Next)

I make the hardest decision of my career. I can't be part of a leadership team that refuses to see the truth. I give my notice, but not before documenting everything I've learned about the CTO Ratio and sharing it with the board.

Six months later, I get a call from a former colleague. The company is struggling. They've had to do two rounds of layoffs. The new CTO discovered what I'd been warning about - they were spending their way to unprofitability while celebrating growth metrics.

Today, I use the CTO Ratio in every advisory role I take. It's become my north star for evaluating whether a technology organization is healthy or heading for disaster.

The One Number Every CTO Should Know

The CTO Ratio is a single metric that reveals whether your technology organization is contributing to profitability or destroying it: Gross Margin % divided by CTO Budget % (as a percentage of total company spending).

Why Your CFO Will Love You (Or Fire You) Based on This Metric

Every CTO faces the same challenge: proving that technology spending creates business value. According to a 2024 IBM CFO study, 65% of CFOs report mounting pressure to demonstrate returns on their technology investments². The CTO Ratio cuts through the noise and shows exactly how your spending impacts the company's ability to generate profitable revenue.

Without this metric, you're flying blind. You might be shipping features, hitting deployment targets, and keeping systems running, but are you actually helping the business succeed? The CTO Ratio answers this question definitively.

The Death of "Growth at All Costs" and the Birth of Profitable Engineering

Traditional engineering metrics miss the forest for the trees. CTOs can link this to the engineering teams' ability to change according to business needs quickly³, but velocity means nothing if you're building the wrong things. Uptime is irrelevant if your infrastructure costs are eating away at margins.

The era of growth at all costs is over. As Vena CFO Melissa Howatson pointed out in her session "The Future of Finance Leadership" at this year's Excelerate Summit, market attitudes have shifted from relentless growth to a focus on efficiency⁴.

Today's boards and investors demand profitable growth. They want to see that every dollar invested in technology translates to improved margins, not just more features. The CTO Ratio gives you the language to have this conversation.

From Cost Center to Profit Driver: Your Transformation Starts Here

If you're a CTO managing a team of 40+ engineers, you're likely controlling 30-60% of your company's operating expenses. That's enormous responsibility. Yet most CTOs can't articulate whether that spending is making the company more or less profitable.

The CTO Ratio transforms you from a cost center manager to a profit contributor. It gives you a seat at the strategic table because you can directly tie your decisions to the company's financial health.

Without tracking the CTO Ratio, CTOs will continue to be surprised by layoffs, budget cuts, and "strategic realignments." They'll wonder why their technically excellent work doesn't translate to career success or company growth.

How to Calculate Your CTO Ratio in 5 Minutes

Calculating the CTO Ratio is straightforward:

1. Find your Gross Margin %: (Revenue - COGS) / Revenue × 100

2. Calculate your CTO Budget %: Total CTO Budget / Total Company Operating Expenses × 100

3. Divide: Gross Margin % / CTO Budget % = CTO Ratio

Your CTO Budget includes:

• All engineering salaries and benefits

• Infrastructure and hosting costs

• Development tools and licenses

• Contractor and outsourcing costs

• Any other spending under your control

Track this monthly. Graph it quarterly. Watch for trends.

The Goldilocks Zone: What Your Ratio Really Means

Context Matters A CTO Ratio of 2.0 might be great for a mature SaaS company but terrible for a hardware startup. Compare yourself to companies at similar stages with similar business models.

Trends Trump Snapshots One bad quarter doesn't spell doom. But six quarters of decline? That's a pattern you can't ignore. The trend tells the truth even when individual data points lie.

Finding Your Sweet Spot Too high a ratio (above 4.0) might mean you're under-investing in technology. Too low (below 1.0) means you're spending too much relative to your profit contribution. Most healthy SaaS companies operate between 1.5 and 3.0.

It's a Team Sport When Sales misses targets or Marketing fails to generate demand, your CTO Ratio suffers even if you did everything right. This is a feature, not a bug. It forces cross-functional accountability and breaks down silos.

Two CTOs, Two Ratios, Two Very Different Outcomes

Let me tell you about two companies I've worked with:

Company A: A fintech startup with 30 engineers. Their CTO Ratio was 0.8 and falling. The CTO spent lavishly on the latest technologies, hired aggressively, and built for scale they didn't have. When I helped them calculate their ratio, the CEO's jaw dropped. They immediately froze hiring, renegotiated vendor contracts, and focused on profitable features. Six months later, their ratio climbed to 1.6. They're still in business.

Company B: An e-commerce platform with 60 engineers. Their CTO Ratio was 3.5 - seemingly healthy. But when we dug deeper, we discovered they were drastically under-investing. Their infrastructure was held together with duct tape. Technical debt was mounting. Customer churn was increasing due to poor performance. They strategically increased technology spending, dropping their ratio to 2.2 but setting themselves up for sustainable growth.

Your 30-Day Action Plan to CTO Ratio Mastery

Start tracking your CTO Ratio today. Don't wait for next quarter or next year. Open a spreadsheet right now and calculate:

• Your current gross margin percentage

• Your CTO budget as a percentage of total operating expenses

• Your CTO Ratio

Do this for the last 4-6 quarters if you have the data. Graph it. What story does it tell?

Week 1: Calculate your baseline CTO Ratio

Week 2: Share it with your CFO and CEO. Explain what it means. Get their buy-in to track it monthly.

Week 3: Set a target ratio based on your business model and stage. For most SaaS companies, aim for 2.0-2.5.

Week 4: Create a monthly dashboard visible to the entire C-suite. Make the CTO Ratio as important as MRR, CAC, and other key metrics.

If your ratio is too low, identify the biggest levers:

• Can you reduce infrastructure costs without impacting performance?

• Are you over-engineered for your current scale?

• Can you improve gross margins through better technical decisions?

What Happens When You Start Tracking This Number

Initially, you might face resistance. Other executives may not want this level of accountability. Your own team might worry about budget cuts if the ratio is low.

But over time, something magical happens. Discussions shift from "we need more engineers" to "how can we improve our contribution to gross margin?" Budget conversations become strategic rather than political. You'll find yourself making better decisions because you have a North Star metric guiding you.

You'll feel clarity like never before. No more wondering if you're doing a good job. No more surprise layoffs or budget cuts. The CTO Ratio tells you exactly where you stand.

When you can tie every technology decision to its profit impact, you become indispensable. You're not just the person who keeps the lights on - you're a strategic partner in building a profitable business.

The Revolution Starts With You

Start with yourself. Track your own CTO Ratio. Share your results openly. Write about it. Talk about it at CTO meetups and conferences.

When other CTOs see the clarity this brings, they'll adopt it too. When boards see CTOs who can directly tie technology spending to profitability, they'll demand it from all their technology leaders.

This isn't just about improving your own career - it's about elevating the entire profession. For too long, CTOs have been seen as necessary cost centers rather than profit contributors. The CTO Ratio changes that narrative forever.

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The next time you're in an executive meeting celebrating revenue growth while your CTO Ratio silently screams danger, you'll know what to do. You'll have the numbers. You'll have the trends. Most importantly, you'll have the truth.

Because in the end, the CTO Ratio isn't just a metric - it's a mirror. It reflects whether your technology organization is building a sustainable future or racing toward an inevitable reckoning.

The question is: what will your ratio reveal about you?

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Footnotes

¹ Aimably, "What is the Cost of Goods Sold? Everything a CTO Needs to Know"

² AWS Cloud Enterprise Strategy Blog, "A CTO's Guide to Measuring Software Development Productivity"

³ Adelina Chalmers, "5 engineering metrics that can help the CTO build a business case for engineering spend", Medium

⁴ Vena, "Industry Benchmarks of Gross, Net and Operating Profit Margins"