Pipelines for Board Members
If I could have only one metric on the health of a growth business it would be the pipeline coverage ratio. I’m amazed at how much attention board members pay to the most recent quarterly results and how little attention they pay to the pipeline. Of course I care whether the company made its most recent quarter, but what can be done about it? On the other hand, if I know the pipeline coverage ratio I have a pretty good idea about whether the company will make its next quarter, and whether management needs to build the pipeline more aggressively.
What does a good pipeline look like? It’s a complete listing of sales prospects qualified based on the likelihood of closing. For each prospect, there is an estimate of the dollar value of the deal and the quarter in which the deal should close. The real art of a good pipeline is the qualification process – that is, where the company is in the sales process with each prospect and how likely it is that a deal will close in a particular quarter. Doing this well requires a disciplined process and experienced judgment on the part of the VP of Sales and CEO.
Most companies introduce discipline into the process by breaking the sales process into measurable qualification stages (e.g., ‘customer takes a meeting’; ‘company selected in RFP process’). This sales model is unique to each company and product. Based on field experience a company can assign a ‘probability of closing’ to deals at each stage. For example:
Stage of Sales Cycle Probability of Close
Customer Inquiry 10%
Customer Meeting 25%
Request for Proposal 50%
Company Selected 70%
Contract Negotiations 90%
The qualified pipeline includes business that has a reasonable chance of closing in the coming quarter. It’s the business that sales teams should focus on. Most companies include only business that has at least a 50% chance of closing. More conservative CEOs and sales executives will use a 60% or 70% cutoff.
The pipeline coverage ratio for the coming quarter is the ratio of the qualified pipeline to the sales target. If the qualified pipeline for Q3 is $6M and the Q3 bookings target is $2M, then the pipeline coverage ratio is 3X.
What should the pipeline coverage ratio be for a healthy business? This varies, of course, by company and industry. But a good benchmark for software companies is 3X. You can bet that a software company with 2X pipeline coverage is going to struggle to make the quarter.
The pipeline coverage ratio is also a helpful diagnostic for companies that are not making plan. If the pipeline coverage ratio is low, the problem may not be sales but lead generation and qualification.
A board member can start the dialogue by asking, “What’s our pipeline coverage?”
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