To optimize business development strategy, it’s crucial to understand the revenues and costs associated with each sourced deal — also known as unit economics. Part 1 of this article walks through three steps to arrive at this figure for your firm.
Once you’ve calculated the per-deal cost of your BD strategy, you can begin to explore cost-effective ways to improve output.
Here are three things to keep in mind when analyzing and implementing new strategies.
1. Look to human capital expenses first
Human capital will always be required to build and maintain relationships in the PE industry, but there are often ways to reduce the amount of time a professional spends overall on business development activities.
For example, consider another part of the business — new investment analysis/diligence. It’s routine for firms to engage outside consultants to provide industry expertise to guide the due diligence process. This process is still overseen by internal team members, but they can spend much less time on the process.
While there are similar ways to reduce the amount of time team members spend on origination, many firms nevertheless seem to take an opposite tack. Firms frequently talk about “bootstrapping,” i.e., managing deal sourcing without third party services. While it might sound like a thrifty solution, in fact the human capital required to identify, contact, qualify, and conduct BD activities with new sources often ends up costing firms in a BIG way over time.
In sales, every pre-scheduled meeting or introduction call with a qualified prospect requires about 8 hours of work. It may not take as much work to get a qualified meeting or call with a new deal source, but the concept still applies.
For example, if six investment professionals (two senior associates, two VPs, and two MDs) spent an additional hour per week on deal sourcing, it would cost their firm over $60,000+ annually.
Most firms want a seasoned team member in meetings and on the phone with market participants to lead discussions related to uncovering new opportunities. For that reason, the best opportunity to reduce time inefficiencies is in the identification, qualification, and initial contact part of the process. (This is where a business development network like Axial comes into play.)
2. Set expectations for performance
When building a plan, make sure to set reasonable expectations for improvement. If you’re adjusting your strategy and spend moderately, aim for moderate improvement. If you’re adjusting things significantly, aim for significant results.
Imagine a firm is currently spending $900,000 to bring in 500 deals, or $1800 on a per deal lead unit basis. If the firm increases spend by $20,000 overall, or $40 per deal,. it would be an extreme example of exaggerated expectations to expect 10% (50) more deals to be reviewed as a result.
3. Monitor results and make adjustments
It’s important to understand which target outcomes are measurable in the short term. For example, sometimes firms commit to new strategies with a target outcome of new quality deals closed. But this is a lagging indicator — you may not see results for 6-24 months down the line.
Pay attention to metrics that are leading indicators of improvement early in the process, so you can accurately measure and adjust your strategies. Here are a few examples:
- Deals coming from sources that have not shared opportunities in the past
- New referral relationships established with groups that are likely to bring a relevant transaction in the future
- Qualified opportunities sourced as a direct result of new strategies
Since you know your existing costs and can control your spend on new strategies, it is easy to monitor ROI of new strategies and make adjustments over time as needed.