Target Win Rates

Every April, with the start of a new baseball season, my friends often ask, “How do you think the Sox will do this year?” I’m an avid baseball fan from Boston, so I usually tell them, “Terribly.” This serves two functions: either they’re terrible, and I’m right; or they aren’t and I’m happy to be proven wrong.

General Managers of sports teams who are tasked with assembling a winning roster don’t have the luxury of being pleasantly surprised pessimists. They need to understand the composition of their roster each season to make decisions around when to play for a championship by bringing in high-priced veterans and when to keep payroll down for a season or two while young players mature and find their footing.

It’s unlikely your agency has a scouting department, a hierarchy of minor league affiliates, and an exemption from anti-trust law (Federal Baseball Club vs. National League, 1922), but you too are running a team. So it would be helpful to have a sense of how much revenue you can expect to generate in the coming months or year. But projecting revenue often feels like black magic. So agencies either:

1. Don't establish revenue targets; they just manage the projects in front of them and to what’s in the business development pipeline, or
2. They use key performance indicators (KPIs) to set revenue targets (e.g., 15% year-over-year growth)

Active Projects & Pipeline

The issue with not establishing revenue targets and operating the business based off of active and potential projects is you’re making business decisions with very little data and data that doesn’t correlate to future performance.

In my experience, the average small to mid-sized agency only has 45 to 90 days of work booked out (maybe with a few clients with 6-month or 12-month commitments), and the average lead-to-close time is ~60 days. That creates a pipeline with diminishing levels of accuracy. If your resourcing plan pencils in confirmed and potential work:

• The forecast for the next 30 days captures 90% of actual future work
• Days 31 to 60: may capture 70 - 90% of future work
• Days 61 to 90: may capture 50 - 70% of future work

So the first 30 days is already more or less known with little you can do to change the outcome. The next 30 days thereafter you can adjust for in some circumstances (e.g., adjusting variable labor). And 60 days out, there is such high variance that it’s rarely worth worrying about (again, if your lead-to-close average is 60 days, you haven’t received leads for the work that will be in this period).

KPIs

Using KPIs to set revenue targets is a classic example of an anti-pattern known as "managing to KPIs."

Imagine you have a wedding you need to travel to this weekend, and it's 120 miles away. You know that if you get there in 2 hours, you will have traveled an average speed of 60 miles per hour. This doesn't mean you get on the road and just start driving 60 mph regardless of traffic. You drive to the best of your ability and the average speed at the end of the trip tells you how efficient you were. The miles per hour as a KPI is an indicator of how efficient your travel was – it's not prescriptive.

If an agency establishes a revenue target of 15% growth relative to last year, it sets the stage for the team to make unintended tradeoffs in other areas of the business. A classic example would be: the company hits its 15% revenue growth target, but it burns out the team along the way, folks leave after bonuses get paid out, and the following year, the company performs worse than it did in year 1.

The other issue with setting revenue targets by KPIs is that they may be unattainable. If the team doesn't think a goal is realistic, ownership of the goal never really materializes and accountability slips. Failure to meet the goal becomes a self-fulfilling prophecy. The situation can really compound if other goals (e.g., hiring) are then orchestrated around an unattainable revenue target.

A Formula for Revenue

So how do you approach revenue projections without a crystal ball?

Let’s look at a formula for how we calculate revenue and see if we can focus on the separate pieces. Revenue is a function of three variables: the number of proposals you send, the rate at which you win them, and the size of those projects when you do.

revenue = average deal size × number of proposals × win rate

Average deal size is the average amount of revenue you generate from 1 proposal (within the timeframe you’re looking at). Don’t forget to include follow-on revenue here if you have multiple Statements of Work from a single proposal.

An agency's win rate or "close rate" is how often a proposal turns into won business. A simple way to think of it is: on average, we win 1 project for every 2 proposals we send (50% win rate), or every 3 proposals (33% win rate), or 4 (25% win rate), etc. Division.

Average Deal Size and Number of Proposals

All other things being equal, an agency can sustain a lower win rate if it wins larger deals that cover the gap. And if you can estimate your win rate by deal size, you can extrapolate a great deal more about your business. On the sales and marketing front, you can calculate:

• The number of proposals you need to send to reach a specific number of wins
• The number of leads you need to generate those proposals

Average deal size and number of proposals are largely a function of positioning, pricing, and lead-gen investment, all of which move on slower timescales than your win rate.

Win Rate

Your win rate is correlated to the number of proposals you send. Generally speaking, the more proposals you send, the lower your win rate will be once you start sending proposals on less qualified opportunities. Counterintuitively, it's possible to have a win rate that’s too high (what a nice problem to have). For example, if you only need a win rate of 25% to keep your team utilized and meet your profit targets, you’re “leaving money on the table” if you operate with a 33% win rate.

So how do you project what your win rate will be in the future? The same way a General Manager constructs a team roster: you use historical performance to underpin forecasts.

Win Rate Targets

Tracking Opportunities

To get started, you need to be tracking opportunities to deliver your services. Opportunities go through different stages which will vary depending on your business development process, but your process should have a stage for "proposal sent" at the very least.

In addition to stages, your opportunity should have a concept of state, which captures whether an opportunity is active, lost, or has been won, at the very least. You can break lost out into more fine-grained categories to help in retrospectives later:

• Lost (canceled): the project isn't moving forward
• Lost (budget): the client is working with another vendor due to budget constraints
• Lost (timeline): the client is working with another vendor who can start sooner or deliver faster
• Lost (domain-expertise): the client is working with another vendor who demonstrated greater domain or industry expertise
• Lost (work quality): the client is working with another vendor who demonstrated strong work quality
• Lost (BD experience): the client is working with another vendor due to their experience with our business development process (e.g., proposal turnaround time took too long)
• Lost (unsure): you have no hypothesis as to why you lost or why the client never responded to the proposal

The final property you’ll want to track in order to establish a target win rate is win expectancy. Opportunities can have a win expectancy of:

• Expected win
• Even
• Unlikely

The win expectancy should be less about the business developer’s gut feel and more about how aligned the opportunity is to the work the agency does. In this respect, win expectancy will also force your agency to think deeply about its strategy.

What you'll find is, the less clear your strategy is, the more difficult it will be to identify opportunities that you expect to win. This is because your strategy articulates a value proposition to the buyer: are you the cheapest (then don't lose on price), the fastest (don't lose on timeline), the domain expert (don't lose due to lack of expertise), or the master craftsperson (don't lose when quality is priority)? An agency that has weak positioning will find itself with a high number of opportunities tagged “even,” because it's pursuing opportunities where it can always be in the running but can rarely differentiate itself.

Creating Scenarios

We’re not going to create a single forecast; instead, we’re going to create scenarios for a strong future performance and a weak one.

Strong Performance Scenario

To project our strong performance, we're going to look at lost opportunities that could have been won. This will give us a realistic, best-case win rate for projecting revenue, because we're essentially saying: this is what our win rate could have looked like over the previous period. If you can crack the code on winning these types of projects in the future, you have a win rate that's grounded in actual, real-world experience.

Part of your team's business development ritual needs to become reviewing losses in an objective manner. What feedback did the client provide around their decision to work with another vendor, if any? Revisit the criteria you used to qualify the lead: did the client have a suitable budget for the work? Did your team establish a connection with the clients' decision-makers? How urgent was the project and did the timeline in our proposal align with important dates on the client's roadmap?

Based on client feedback and how qualified the opportunity was, your team should have a sense of which projects were winnable and which ones should be disqualified in the future.

Let’s work off some fictional numbers:

In the previous 12 months, we've had 62 opportunities settle; 19 of them were won for a 31% win rate. This is our actual historical win rate.

Let’s start to find winnable opportunities by looking at projects that had an "Expected" win expectancy but which we lost. We have 3 such opportunities. If we can convert 2 of those in the future, our 19 wins would become 21 wins (34% win rate).

Next, we can look at projects that had an "Even" win expectancy. For these, we might look at a specific category of loss to improve upon: we see that we lost 3 opportunities due to "BD experience." The team understands that 1 of these opportunities had an unrealistic turnaround time for their proposal, so that could not convert into a win; but the other 2 opportunities we simply didn't put the best proposal in front of the client that we could have. That's +2 winnable opportunities in the future, and our win rate creeps up to 37% with 23 wins.

We know that the agency is going to be focusing on delivering work faster in the coming quarters. There's internal projects underway to make it happen, and we need to plan around improvements here, so let's plan to win a couple additional projects that in the previous 12 months we lost due to timeline: of the 7 losses in that category, 3 had an "Even" win expectancy, so let's convert 1 of those to a future win. We now have 24 wins out of 62 opportunities for a win rate of 39%.

We've gone from a 31% win rate to a 39% win rate in our strong performance scenario, and more importantly, we've done so with logic underpinning each new win. As a leader, you can justify the numbers behind the future win rate to the team and the improvements needed to get there.

Weak Performance Scenario

To generate our weak performing scenario we’ll remove some wins: of the 19 wins over the last 12 months, 1 of them had an "Unlikely" win expectancy so you easily could have had only 18 wins (a 29% win rate). This is by no means a worst-case scenario, but if our strong and weak performing scenarios differ too greatly, it will be impractical to plan around.

Taking action

With scenarios for what the win rate might look like, you can plan for the changes you need to make in other areas of the business, including:

• Establishing lead generation targets to offset a lower win rate
• Pricing that offsets a lower win rate or increases utilization
• Hiring needs to service revenue from an increased win rate
• Tailoring your services to future opportunities

Agencies have more to learn from their losses than they might think. Start tracking those opportunities and using them to inform the future trajectory.