The Dark Art of Forecasting Consulting Income
It is very easy to report on consulting billings after a fiscal quarter has ended. Add up all the billable work, check if there were any acceptance criteria or milestone payments, and you have your number. However, unless you have a working crystal ball, the following question from your senior partner or CFO probably sends chills down your spine:
“Hi! Can you give me an estimate of the consulting billings for this quarter?”
It’s even better when that email comes in the first week of a new quarter while you are still actively digging out from the last quarter.
The human tendency in Professional Services or Sales is to base an estimate on the deals you know will close. This results in dismal forecasts that are lower than expected. You may have heard the term “sandbagging” used more than once if you’ve tried this technique.
For purposes of this example, let’s say you have twenty people on your consulting staff. To make the math easy, they all bill at a rate of $200 per hour. Moreover, let’s say that ten of them are booked for four weeks of the quarter, each. The math looks like this:
If you want to see your senior partner cringe, tell them you are on track for $320k that quarter.
The reason this estimate is wrong is that it assumes that nothing else is going to get scheduled that quarter. If that is the case, you’ll want to schedule some time with a recruiter so that they can help you look for a new job!
How much could your services organization deliver under this fictional model?
While impressive, $1.3m is not necessary the estimate that you’d give to your senior partner, either. There are two primary factors that affect this estimate.
Is there sufficient backlog to convert into billings? It is very nice to say that you can deliver $1.3m, but if your organization only has $650k in backlog and $200k in the pipeline, there is no way your organization can deliver this amount. You will need to use judgment and discretion in presenting the forecast, particularly if it is based on the pipeline which has not yet booked. By comparison, if your backlog exceeds your delivery capacity, this is a comparatively safe estimate.
Unless the backlog is of dubious quality. Not all clients who sign a Statement of Work or a Work Order will take delivery of all the hours or milestones associated with the opportunity. Periodic and strategic purges of the backlog will help prevent this situation from influencing an estimate of billings. For example, if your organization has $1m in backlog, but $100k of it is from a two-year-old deal where the customer will not return your phone calls, odds are your real backlog is only $900k. Unless you are willing to forecast against the pipeline closing and being scheduled early in the quarter, the top-line delivery is limited by your real backlog. Similarly, if you know that several of your customers cannot take delivery until a later quarter due to competing priorities, you cannot include those in the billings estimate.
Therefore, the best way to forecast billings for a quarter is to:
- add up the billings for all the work that you already have scheduled
- look at how many unsold person-days you have left on the calendar
- assume that you’ll hit your utilization goals (so if your goal is 70% and you have 10 days unscheduled, you can estimate that 7 days will be billable)
- apply an average billing rate
- Finally, confirm that the resulting estimate is not a higher amount than what’s in backlog.
Be prepared to revise this estimate on a monthly basis as the quarter progresses and work is delivered. Although this method is not perfect, an estimate is not intended to be perfect. Rather, this is enough billing guidance so that your firm can make reasonable decisions.