With less than two months until the start of a new year, it’s time to start thinking about business development planning.
Planning begins with the setting of goals and while we all know the value of goal setting, I regularly see marketing communication firm’s business development achievements hampered by aiming at the wrong goals. Add to this common problems of poorly aligned compensation incentives and ineffective forecasting techniques and you get a toxic brew that almost ensures a labor-intensive year of much activity and not much real financial success.
In this issue of the Win Without Pitching Newsletter I try to make life simpler for you in the coming year by laying out three simple steps to improved business development planning. I begin with helping you determine the proper business development goals for your firm, then address how to properly align incentives to support the pursuit of these goals, and finally I offer some guidance on a common sales forecasting method used to predict whether or not the firm is on track to meeting these goals.
Follow these three simple steps to ensure that next year is a banner year for business development.
Step One: Set Proper Goals
Success begins by first determining what it is you want. Entering a new year without clearly stated business development goals is a great way to ensure a mediocre year. Many of us have learned this the hard way. But while success begins with setting goals, too often marketing communication firms hamper their business development efforts by selecting the wrong ones.
There are two simple but important annual business development goals to set for your firm. The first is the number of new clients you are targeting for the year, and the second is the income you would like those clients to bring you. In my experience most marketing communication firms are pretty good (although sometimes overly ambitious) at setting the second – sales volume goals, but either neglect the first part (how many clients it will take to reach that volume), or aim for too many clients. Subsequently they end up with a greater number of smaller clients, which contributes to the commoditization of the firm’s offerings and the inherent margin challenges.
Goal #1: Number of New Clients
How many new clients should you be targeting in a year? I put that question to ReCourses founder David C. Baker, management consultant to agency principals. Baker advocates a targeted approach to goal setting, specifically when it comes to the number of clients you should be working with, and the number of clients you can reasonably expect to turn over from year to year.
“You are generally looking for 8-12 active clients at any given time, regardless of size of your firm,” says Baker. “An average healthy turnover is one-third of those clients per year, [which translates to] 2-4 really great new clients every year.”
Baker explains that the primary focus of your business development efforts is to shape your future client base and manage the 20%-30% churn that you should reasonably expect from year to year. Ideally you lose the bottom 20%-30% of your client roster and replace them with clients that let you do better work at higher margin. And, if growth is your goal, that growth is attained through replacing departing clients with ones who will spend more with you – not through increasing the volume of clients.
Too many small clients is a common problem and one that should be avoided, says Baker. “First, a client that’s too small won’t allow you to make money. Second, you won’t be able to get into their situation deeply enough to make a substantial, identifiable difference on their behalf.”
Quality, not Quantity
I’m struck by how often I hear the more-clients-is-better business development goal. (I recently heard someone beam about winning 15 new accounts in 12 months.) The most profitable expert advisor firms have a manageable number of clients that spend lots of money with them at good margins. The rest are having their firms shaped by the many varied projects that come at them from all angles, bringing the myriad of problems associated with a large base of small clients.
“To a point, more clients will help you spread the risk and keep things interesting,” says Baker. “But there are far more firms suffering from too many clients than those suffering from too few. The little ‘gnat around your ankle’ clients are usually the ones who want you to execute instead of advise, and they also whine far more in proportion to their size. You could generally lop off your smallest 5 clients and live longer.”
Think for a minute about how things might change in your firm if you stopped taking small project work and forced yourself to limit your total number of clients to no more than twelve, replacing just three a year. You would instantly become more targeted in the work you pursued and more selective in the work you accepted, wouldn’t you? Would your outreach efforts change? Would the tone of your conversations with prospects change? What else about your business development efforts would be affected if your goal was just three lucrative new clients?
Goal #2: New Client Income
If we assume a client churn rate of 20%-30% a year represented by two to four clients, we can easily do the math to determine a replacement income target, and then make adjustments for any desired growth.
As an example let’s take a firm doing $1 million a year in agency gross income (AGI), with an ideal client mix of somewhere around 10 clients. In this case each client would represent on average $100k/year in AGI. Therefore, assuming a churn of 30%, the firm would need to add three clients at $100k/year each. Simple.
Setting a Minimum Level of Engagement
In the math above we see that to maintain our current annual income of $1 million in AGI, we will need to ensure that on average each new client generates $100k. This figure becomes our minimum annual engagement level. If it is our goal to grow the firm from $1 million in AGI to $2 million, we would begin to pursue this goal not through adding more clients but by raising our annual minimum to $200k and achieving this goal through managing the natural client churn from year to year. If growth is indeed your goal, then your path to growth is through better clients and through deepening your offering to allow you to bring more services to, and extract more revenue from, each client. Raising your minimum level of engagement every year is a healthy way to grow the firm at a decent pace. Generally speaking, you want to attempt to have the incoming clients be of better quality than the out-going ones, and in this way shape the future of your firm.
The Lesson of Proper Goal Setting
The lesson here is that while it’s important to set a target for new client revenue, it’s equally important to determine how many new clients this number will be spread across. If you are endeavoring to move away from an order-taker positioning to that of a more lucrative expert advisor firm, your success or failure for the year will be prescribed right here at the goal setting stage.
Align Incentives to Support Your Goals
Once your business development goals have been properly set, then make sure your incentives are properly aligned to support the pursuit of those goals. Many firms reward the more-clients-is-better approach by offering a commission on all new business revenue. This is a mistake. You never want your people to be trying to convince you to take a small client that will serve to expand your client base without appreciably adding to your AGI, and this is exactly what such an incentive structure will do. Rather, to support your more selective goal of targeting fewer more lucrative clients, make sure any incentives – be they commissions or bonuses – apply only if the client meets the minimum level of engagement. In this way you will ensure that your people are targeting clients of sufficient size.
Beyond your 8 – 12 regular clients you may have the capacity for project work from time to time, but for most firms that project work is not worth pursuing. You might take it if it makes sense at the time, but don’t offer incentives to pursue this type of work. It will seek you out without any effort on your part and your larger challenge is to not let it shape your firm and impair your ability to make good money. Make sure your people are focused on the bigger picture, targeting fewer, more lucrative clients.
Step Three: Tracking Efforts and Predicting Results
In addition to misaligned incentives there is one more culprit that serves to drive marketing communication firms to the more-clients-is-better approach, and that is weighted sales forecasts.
A weighted sales forecast is one that multiplies the value of the opportunity by the likelihood that it will close. A $100k opportunity deemed to have a 50% chance of closing is entered into the forecast as $50k in forecasted sales. In transactional industries with a high volume of sales data across many sales people and standardized products, services, and pricing, it’s possible to arrive at highly predictive models of how many new clients will be landed and how much money they will spend. For example, a telecommunications company should be able to determine that A number of dials translates to B number of conversations, to C number of new customers and D volume of sales. The transactional nature of the sale (as opposed to consultative) and the standardized offerings and pricing structures allows for a manageable number of variables, while the relevance of the services offered (everyone needs them) allows for a scale that delivers lots of data. Together, all this allows the company to make accurate predictions of what type and volume of activities will lead to what sales volume.
But telecommunications companies and marketing communication firms are different beasts, and while the weighted sales forecast is commonly used in our industry, it’s not all that applicable and it pushes a firm towards the more-clients-is-better approach to business development goal setting.
Manipulating a Weighted Sales Forecast
While a $100k opportunity deemed to have a 50% chance of closing is worth $50k in a weighted forecast, ten $100k opportunities deemed to have a 5% chance of closing also represent the same value. As do one hundred $100k opportunities at a .5% chance. In a firm where the goals are as simple as a new client representing at least 8-10% of your AGI every three or four months, weighted forecasts like these and the inventive manipulations they inspire in sales people start to seem absurd.
Yes, there are things you can measure today to try to predict success tomorrow (e.g. qualified late-stage opportunities that meet your minimum), but given simple (not to be confused with easy) sales goals and a highly consultative sales process with many variables, there’s no validity in estimating the future value of numerous early-stage opportunities and multiplying them by an arbitrary probability of closing to try to predict whether or not you will add three valuable new clients. While weighted sales forecasts are commonly used in this business, my simple advice on them is this: don’t bother.
Effective Annual Planning: A Proper Mix of Goals, Incentives & Forecasts
Prepare for next year now by setting proper goals of fewer, more lucrative clients that will help you selectively shape your client base. Make sure to align any business development incentives to support these goals, ensuring they apply only to new clients that meet your minimum level of engagement. And finally, replace your weighted forecasts with more common-sense measurements of qualified late-stage opportunities and the lead generation activities you need to undertake to generate such opportunities.
Follow the three simple steps above in your business development planning for the year and your business development efforts will become more manageable, you’ll build a more lucrative firm, and as David C. Baker reminds us, you’re likely to live longer.