When asked, “how is it going?” many companies will respond with something akin to, “things are looking strong, the pipeline is up to $50M.”
Not a bad statement, but certainly an imprecise one. “Over what timeframe?” you might ask. To which you’ll typically hear one of two answers
- “Uh, that’s the whole thing.” I don’t love this answer as many companies –particularly the ones who answer with all-quarter pipeline — let junk opportunities get parked in the 5Q+ pipeline. (You can fix this by including a timeframe as part of the definition of opportunity and ensuring you review the entire pipeline whenever you do a pipeline scrub.)
- “That’s the rolling four-quarter (R4Q) pipeline.” I don’t love this answer either because, in my experience, companies who focus on R4Q pipeline as their top pipeline metric tend not to put enough emphasis on pipeline timing. It’s too easy to say in January, “this year’s number is $20M and we’ve got $50M in the pipeline already (2.5x pipeline coverage) so we are golden.” The problem, of course, is if 80% of that pipeline is backloaded into Q4, then while “the year may look great,” you’re going to need to survive three wasteland quarters to get there. Even if that $40M Q4 pipeline were real, which it usually isn’t, most sales VPs won’t be around in October to close it.
I never look at rolling-four-quarter pipeline for the simple reason that I’ve never had a rolling-four-quarter sales target. We have quarterly targets. Instead of looking at R4Q pipeline and hoping it’s well distributed (over time and across sellers), my philosophy is the opposite:
Let’s focus on ensuring we start every quarter with 3.0x pipeline coverage. If we do that, the year takes care of itself, as does the year after that.
Once you accept this viewpoint, a few things happen:
- Someone needs to start forecasting day-1 next-quarter pipeline coverage. What’s the point of focusing on next-quarter coverage if no one is tracking it and taking corrective actions as needed? As mentioned, I think that person should be the CMO.
- We need to start tracking the progression of the pipeline over time. This quarter’s starting pipeline is largely composed of last-quarter’s next-quarter pipeline and so on. Since there are so many ebbs and flows in the pipeline the best way to track this is via periodic snapshots.
Towards that end, here’s a chart I find useful:
Let’s examine it.
- Each row is a snapshot of the pipeline, broken down by quarter, taken on the first day of the quarter. (Some allow a week or two, for pipeline cleanup before snapshotting, which is fine.)
- We’re tracking pipeline dollars, not opportunity count, which generally works better if you have a range of deal sizes and/or a multi-modal distribution of average sales prices. Doing so, however, can leave you overconfident if you create new opportunities with a high placeholder value. (See this post for what to do about that.)
- We show pipeline coverage in the block on the right. Most people want this-quarter coverage of around 3.0. Targets for next-quarter and N+2 quarter are usually less well understood because many people don’t track them. Coverage needed in the out quarters is a function of your sales cycle length, but the easiest thing is to just start tracking it so you get a sense for what out-quarter coverage normally is. If you’re worried about that 1.6x next-quarter coverage shown on the 7/1 snapshot, read this post for ideas on how to generate pipeline in a hurry.
- It’s good to carry at least one year’s prior snapshots so you can see historical progression. Even more is better.
- I’m assuming bigger deals and longer sales cycles (e.g., 6 to 12 months) so you will actually have material pipeline in the out-quarters. For a velocity model with 25-day sales cycles, I’d take this template but just switch the whole things to months.
The most fun part of this chart is this you read it diagonally. The $7.5M in starting this-quarter pipeline at the 7/1/21 snapshot is largely composed of the $6.5M in next-quarter pipeline at the 4/1/21 snapshot and the $3M in pipeline at the 1/1/21 snapshot. You can kind of see the elephant go through the snake.
When you add this chart to your mix, you’re giving yourself an early warning system for pipeline shortages beyond simply forecasting starting next-quarter pipeline. You should do this, particularly with big deals and long sales cycles, because one quarter’s notice is usually not enough time to fix the problem. Yes, you can and should always try to mitigate problems (and never give-up saying, “looks like we’re going to hit the iceberg”), but if you give yourself more advance notice, you’ll give yourself more options and a better chance at reaching the goal: starting every quarter with 3.0x coverage.
Add this slide to your QBR template now!
Great post, Dave! I do something similar, but on a more frequent basis. It’s really helpful to assess the likelihood of starting a future quarter with sufficient pipeline, and take corrective action to increase the pipeline if we’re falling short.
Love this post. Just discovered you blog so I will be reading more!