Why close date is ‘king’ in a professional services firm
Traditionally organizations report their results on a quarterly basis. As a result internal processes develop to focus sales activity on maximizing the amount of product sold within each quarter. For sales people their incentive schemes are typically linked to this and designed to pay out for achieving a quarterly target. The behavior this drives is that sales organizations also offer incentives to customers if they buy their product within the current period end.
Much to the pleasure of many a Procurement Manager, product sales companies (like Software vendors) offer increasing levels of discount as quarter end approaches, desperate to close that extra piece of revenue to achieve a quarterly target and get their full commission.
Let’s look at a typical scenario in a sales department in a product company where the end of the first quarter is 31st March. An opportunity is identified by a sales person to sell software to an existing client at the beginning of January. He forecasts that it will close on 25th January as he believes it is non competitive. Then his contact at the client informs him that the opportunity is now being put out to tender delaying the process, so the close date is slipped to early February in the CRM system. Soon after the proposal is submitted the client contact calls to that they have made the next stage, but due to diary clashes the final presentations won’t be scheduled until February 22nd. So the sales person updates the forecast close date to February 23rd. Once the final presentation is complete the client informs the sales person that their Managing Director has gone on holiday and the final decision is delayed until his return on 9th March. The close date in the CRM system is updated to reflect this. Some weeks later the organization is shortlisted with one other company. Additional commercial discussions are scheduled with the Procurement Manager (the close date is again moved back) which proves successful and after offering an extra 5% discount to encourage them to buy by the end of quarter, the deal is finally closed on 27th March.
Everyone is happy. The Procurement Manager thinks he has a superb deal, the size of the deal was enough for the sales person to earn his full quarterly commission and for the company they were able to report to the financial markets that their quarterly revenue target was exceeded and the share-price rose. Although the close date moved several times, as the opportunity was closed before the end of the quarter then it was not a significant problem. As only software was being supplied the actual cost of the close of the deal slipping from January to late March was not significant.
Contract this with a sales organization working in a Professional Services firm. If the above example had been to supply a team of three people to undertake a project (project 1) then when the original opportunity arose the Practice Manager would have to find a group of consultants to be part of that team to start soon after the original close date of 25th January. Another project was coming to an end a few days before this and so the Practice Manager was able to allocate three permanent staff to new project 1. When project 1 slipped to early February the Practice Manager had to allocate one of the original team to a new project (project 2), which had just been won at a different client. He was asked by another account owner if he could use one of the remaining two consultants on another project (project 3), but as project 1 was still due to start only a week or so later than originally planned he decided to keep them in reserve (‘on the bench’). As he didn’t have anymore permanent staff available in the short term he lined up an independent contractor/ associate to join the team and found another to resource project 3. However, when the close date was put back to 23rd February he wasn’t able to sign up the independent contractor as they had another opportunity to go to another Professional Services firm. Fortunately one of his existing customers asked for an additional resource for a couple of weeks with immediate start and he was able to allocate one of the remaining permanent staff to that client. But when the close date of project 1 slipped again he once again had two consultants available, one of whom had now been not chargeable since the last week in January.
Whilst the opportunity at project 1 was finally closed within the quarter, there was a considerable amount of cost incurred by not being able to charge out all the time of the consultants in the intervening period. Not to mention the large amount of work that went on by the Practice Manager to continually shuffle his resources. This is lost time the company would not be able to recover. Every time the close date of the opportunity is slipped the impact is considerable. A slip of just a single day when you have a consultant waiting to start means that you have lost a day of chargeable time that you will not recover in that fiscal year. As the size of the project increases and more people are waiting to start then the lost revenue increases accordingly. The more days the close date slips the more the problem increases.
In the case of product sales then once the deal is finally closed the invoice can be sent out and the cash collected. In the case of a consulting project then the client is typically invoiced after the work has been completed or at specific milestones. Even if you win the project before the end of the quarter you can only invoice the number of days which have actually been completed. Consider an extreme example of a $1m opportunity originally forecast to close on the first day of the financial year that finally closes 12 months later on the last day of the financial year. If this opportunity was for a software license the company selling the software would still be able to report a $1m sale in their annual accounts. However, if it was a consulting project worth $1m, the Professional Services firm would only be able to recognize a single day of consulting revenue for however many people had started out on the project (and that is assuming an immediate start!).
The impact of this is that sales management in Professional Services firms need to be more focused on monitoring close dates than in Product Sales organizations. The expression I use is close date is ‘king’. This involves setting a culture within the business development team that setting an accurate close date at the start is vitally important. Start by asking the right qualification questions but also work closely with the Practice Management team to agree a realistic close date based on joint experience. Too often the business development person doesn’t appreciate the important of the close date as their commission is simply linked to the amount of business they close in a given quarter (as an aside it is worth considering whether these commission schemes need to be adjusted in Professional Services firms to encourage a more rigorous closing discipline). Regardless of commission scheme it is up to the leader of the business development team to create the disciplines which monitor close date and enforce its importance on this team. For example, do you review the deals that have slipped from original close date with the account owners at regular intervals and get them to explain each slippage? It can be as simple as that. Do your business development people realize the correlation between they close date then record and the activities this creates for the Practice Manager/ Resource Owner?
In the Kimble application we recognize the importance of the close date in Professional Services firms and have designed a range of alerts and collaboration built into the system to ensure that the impact of any slippage can be immediately reacted to and thus minimize the cost implications. We have also made it easier for Practice Managers/ Resource Owners to get a better view on resource requirements as early as possible in the sales process.