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Do you even have a crystal ball? Every design firm leader can glimpse into the future to one degree or another. Most firms can see down the road a week or two, maybe a couple of months. But to make well informed decisions about your practice, you need know what your firm’s net fees are likely to be on a rolling 12 month basis.
Once you have your profit plan in place (Do You Have a Profit Plan?) it’s time to turn your attention to building your ‘pipeline’ - otherwise known as your crystal ball.
Practice leaders have easy access to data describing what happened in the distant and recent past. That’s your rearview mirror. It’s reflected in your financial statements. But that’s not very helpful when making decisions about the future. You need to be looking through the windshield, on your navigation screen, around the next corner, and beyond the horizon.
For a design firm that means being able to estimate your firm’s 12-month pipeline. This is the quality and quantity of fees you expect to be working on over the next 12 months. It’s composed of four parts. Two of them you can estimate and two you can’t.
Part I is the current work your firm has been contracted to execute. Your ‘backlog’ is the contracted work that has not yet been completed. You can estimate the size of your backlog and the quality of your backlog with a high degree of accuracy. You already know how much net fee remains and you can estimate the length of time required to complete that work.
Part II is the work that you have a high probability of securing. These are your ‘prospects.’ You don’t have contracts in place for this work. This is the result of your lead generation (lead-gen) activities. If yours is a Strong firm, with unique expertise and intimate knowledge of your target clients, then you’ll be well positioned to accurately predict the potential net fees and profit margin of those prospects.
Part III which you can not estimate with any degree of accuracy, is referred to as ‘blue-sky.’ Your blue-sky prospects are composed of projects that are too far into the future, making it inherently difficult to make predictions. However, you need to keep a close watch on your blue-sky opportunities so you can eventually convert them to ‘prospects’ as they come more clearly into view.
Part IV is what I call ‘coconuts.’ These projects drop on the ground right in front of you and it’s up to you to decide if you’re going to pick them up or walk by. The only sure thing about coconuts is that they will happen from time to time but you don’t know when or how frequently.
So now you need to organize these 4 parts to create a more accurate view of what your next 12 months of net fee is going to look like. Some software programs have features that allow you to input this data. For small and midsized practices, a simple spreadsheet is all you need to build and maintain your pipeline.
An accurate pipeline is dependent on your ability to estimate realistic probabilities. With enough projects in the pipeline, your overly optimistic predictions are generally counterbalanced by your pessimistic predictions. Some of your backlog may be delayed, prospects might take longer to materialize than you originally thought, some blue-sky projects inevitably materialize sooner than you thought, and coconuts may fall into your lap at any moment. As your estimating ability increases, the pipeline ‘crystal ball’ becomes clearer. This is not a task for interns or admin folks. You as the leader of your small to midsized firm are responsible for lead-gen. You are the one who has to become more proficient at estimating probabilities.
The pipeline is your view of the future. It’s the basis of all your decision making in the firm. How many staff you’ll need in 6 months, what your profit margin potential is for the year, how much effort needs to go into marketing and sales, and on and on. Whether your firm is growing, contracting, or maintaining it’s current size, you need to build and maintain a pipeline. Although not easy to achieve, having a pipeline that’s in excess of your annual net fees is what you want to see when you look at your crystal ball.
For more detail on pipelines and how they relate to overall practice financials, check out my book Scoreboard Your Practice: 7 Numbers to Understand Your Design Firm’s Financials (Available at Amazon).