Goals provide purpose and direction. They motivate us. They are the yardsticks by which we measure success, failure, or mediocrity. To effectively manage performance and move toward its vision, a firm must set goals around its key success factors.
As important as revenue growth goals are to a firm, there is too often a large gap between the expectations of an executive team and the level of buy-in and engagement throughout the firm. The root of this problem is a lack of facilitated collaboration among the segments and teams that will play significant roles in achieving the goals. Additionally, lofty, nebulous revenue goals are set at a high level and then handed down, without realistic, believable plans for how they will be achieved.
Should growth goals be set at the top and cascade down? Or should goal-setting begin with individuals and teams, then roll up? A hybrid approach between the two can allow top management to set the pace while also engaging teams to validate, challenge, and break down the goals into granular components and individual assignments that provide necessary structure and motivation.
When we break down a revenue growth goal into actionable parts, it can be surprising and perhaps a bit overwhelming at first to realize all the variables at play, many of which increase the perceived difficulty of the challenge. However, having clear sight of all the influencing factors, many of which can be proactively impacted, empowers teams to craft strategies and game plans that everyone can get behind.
Let’s walk through an example goal-setting process to demonstrate this breakdown of the typical components and the considerations around each.
The executives of a $5,000,000 firm set a goal to grow 10% over the next year. Rather than simply announcing that number and expecting the partners to figure out how to achieve it, they coordinate collaborative meetings of key practice teams. These meetings include facilitated exercises to validate the goal, break it down into manageable components, assign ownership, and develop realistic strategies.
Components of a Growth Goal
Net Revenue Growth (Overall Goal): Starting with the practice’s current revenue, the team considers the net growth goal it hopes to achieve within the specified time-frame. In our example, the plan is to grow a $5,000,000 practice by 10% over the next year, giving us a $500,000 goal for net revenue growth.
Recurring vs. Non-Recurring: As the first of several adjustments to the net goal, we determine what percent of the practice’s revenue typically recurs from year to year. Then we balance that with expected percentages of non-recurring project-type work and clients lost to competitors or involuntary business changes such as mergers or closures. In our example, we will estimate that 80% is recurring, with 16% non-recurring and 4% that will be lost.
Fee Increase: Here we estimate the average percentage increase in fees that will be implemented for the year and apply it to the recurring revenue figure. The typical 4% increase used in this example yields $160,000 in new revenue.
Adjusted Growth Goal: To get this, we subtract the fee increase new revenue from non-recurring (replacement revenue) and add to the net revenue growth goal. This is usually a sobering calculation when a team realizes that the amount of revenue needed to achieve their overall goal has nearly tripled. In our example, $1,000,000 (to be replaced) minus $160,000 (fee increase), plus $500,000 (incremental new revenue) equals a $1,340,000 (27%) adjusted growth goal.
Merger Revenue Target: The practice team considers whether a merger or acquisition strategy could add immediate revenue that should be included in the goal calculation. In the example, a merger target could likely add $1,000,000, taking a significant chunk of the adjusted growth goal.
Organic Growth Goal: This is the remaining amount of revenue needed (adjusted growth goal minus any anticipated revenue from a potential merger) to meet the overall practice revenue goal. In our example, we need to acquire $340,000 of new business organically.
Client Expansion (Grow Existing Clients): Having drilled down to our organic growth goal, we can plan to achieve it in one of two ways – win new business with new clients or expand our services with existing clients. It is widely agreed that it is usually far easier to do the latter. In our example, we will plan for 20%, or $68,000, to come from existing clients.
Client Targets & Revenue: In this exercise, a practice team can plan how many clients they will target for expansion, and then calculate the average additional revenue amount per client that will be needed. In this example, a focus on the practice’s top 20 clients means that only an average additional revenue of $3,400 per client will be needed. With a team of four members, each member needs to grow only five clients by the target amount.
Client Acquisition (Gain New Clients): The remaining $272,000 of the organic growth goal will need to come from new business with new clients. Once we determine what the average billable fee amount would be for target clients fitting our ideal profile, we then divide the goal by this amount. In this example, we will target average client fees of $25,000, which would mean we will need 11 new clients to meet this component of our goal.
Pipeline Metrics: For this portion, we need to consider our history of converting leads and proposals. This is easy if we have been tracking it. If not, we’ll use our best estimate and begin tracking for future analysis. First, we consider what our closing ratio (win rate) will be on qualified opportunities that get to the proposal stage. We will also consider how often we can turn a lead into a qualified opportunity (converting an initial contact with a target into an opportunity to propose on an engagement). Using these estimated percentages, we can determine how many targets we’ll need to generate enough opportunities to yield the wins. In this example, a 50% win rate will require 22 opportunities, and a 20% lead rate will require approximately 109 new targets matching our ideal profile.
Having gone through this process, the practice team has experienced these benefits:
- Gained clarity into the many factors that impact growth – and how they can influence them
- Achieved buy-in to the overall goal because they have broken it down into workable parts
- Strengthened the team through collaboration and communication around goal-setting
If you need assistance in organizing or facilitating a growth-planning process for your firm or niche practice, please Contact Us to schedule a complimentary phone consultation. You may also wish to visit our website to learn more about ways The Rainmaker Companies can help you Grow Your Firm or Grow Your Practice.
Scott Moore – Executive Vice President at The Rainmaker Companies