How to measure the health of business development activities in a Services firm
Applying weighting factors to opportunities to assess the strength of a business pipeline is a common practice in sales. However, professional services firms should handle this type of information with care as it is potentially flawed. There are more appropriate ways to monitor the health of business development.
Applying weighting factors to opportunities to assess the strength of a business pipeline is a common practice in sales. However, professional services firms should handle this type of information with care as it is potentially flawed. There are more appropriate ways to monitor the health of business development.The process seems simple enough. You assign a percentage weighting against each sales opportunity based on your perceived chances of winning. Sometimes these percentages are left to the individual opportunity owner to assess (such as a percentage of anything less than 10% for unqualified leads). Maybe you have standard weightings depending on the stage of the sales cycle reached (say 60% for all opportunities for which you have sent in a proposal regardless of how likely you think you are to win). Perhaps you have a hybrid of the two where standard percentages are the defaults but can be modified depending on the judgment of the opportunity owner or sales manager on a case by case basis.
In a CRM tool or spreadsheet, you multiply the percentage weighting of each opportunity by its revenue value and record the total. This ‘weighted total’ is then tracked as a key performance indicator (KPI) for the health of the sales pipeline. The expectation is that the higher it goes the better your likely out-turn of business will be and vice versa. The firm’s management team monitor this KPI each month and only take action when it reduces. This is a dangerous practice to adopt in a Services firm.
In product sales businesses (e.g. software license sales) where the offerings are virtually identical (just vary by number of prospective users) and the sales cycle is well established then the weighted total probably gives a reasonable indication. However, in a Services business then there is normally a much wider variation between what is being requested in the different opportunities. It is much harder to make generalizations about opportunities.
Consider the pipeline from firm A, which consists of 1 opportunity at 90% probability with an un-weighted revenue value of $1m against the pipeline from firm B, which consists of 10 opportunities each of $1m and each with a 10% probability. On the KPI chart of firm A the weighted pipeline would be $900k (90% x 1 x $1m) and for firm B it would be $1m (10% x 10 x $1m). So without looking at the detail the Leadership Team of firm B would be happier than that of firm A. Yet knowing the detail I am sure we’d all prefer to be in firm A. If you also consider the length of the sales cycle of professional services and the dependency on resource availability (compared to product sales where if you win a piece of business you are not normally dependent on product availability), then the differences between the health of the pipelines of firms A and B are more marked.
Obviously, this is an extreme example. But it does highlight the need for sales managers in professional services firms to regularly review the ‘quality’ of the pipeline in more detail, especially where the mix of opportunities is of a large proportion of high value and low probability deals.
The other problem that arises is that when salespeople know that their management is simply monitoring the overall weighted pipeline then the temptation is to fill the pipeline with lots of very speculative deals. In professional services firms, where ‘pre-sales’ resource is always at a premium it is more productive to focus on a smaller number of better-qualified opportunities and make sure you focus on winning this. One global service firm I advised got their Leadership Team to hold a review of all the deals in their pipeline over $1m at 10% or less probability. They found that over half were actually for opportunities which had originally been expected to close 6 months previously and had been down-graded in percentage likelihood of close. The KPI which gave an overall weighted percentage had shown steady growth and so they had not picked up this problem until this exercise. They removed them from the pipeline and focused their pre-sales effort on the remaining 50%.
My recommendation for a KPI to monitor the health of a professional services business is the value of business that you convert from a particular stage of the sales process. I normally pick a point that is difficult to ‘manipulate’ such as the point at which a proposal is sent to a customer (this includes even quotations for a single resource on a time and materials basis). Record the potential revenue value of the amount of business that you quote in these proposals. Then track the amount of revenue you convert from this point. You can then track (on say a monthly basis) your running percentage of unweighted business you actually close.
You will be surprised how consistent this conversion percentage normally is from month to month. If you apply this ‘standard’ conversion percentage to the potential revenue value of your business from proposal stage to close (or lost) you will end up with an accurate forecast of what you will eventually convert. As you can imagine Kimble has been designed to monitor this type of information automatically, but I have not seen it done in another system.
Normally this ‘conversion’ percentage stays pretty consistent. But if you find it going down or rising significantly then it is a sign that something is changing. If you are dropping then perhaps you have a problem is closure you need to address. Perhaps you are actually not qualifying well enough with too much business going to proposal stage that you know you are unlikely to win. Either way by monitoring this percentage you can pick up problems early. If the number is rising then maybe then you have a problem looming in the future where you will run out of available resources to deliver the work and so you need to start recruiting. If you have multiple horizontal or vertical business units you can also break down this conversion percentage and compare the effectiveness of the business development activities between units. If you are undertaking due diligence on acquisition target then you can also apply this approach to compare the conversion rate of the firm you wish to buy with your own to highlight potential problems in their sales operation.
Try it for your own business. I would be interested to discover what you find.