General Business

Praying for a Hockey Stick

It’s about halfway through the 4th quarter for the companies I work with (all have fiscal year = calendar year).  About this time during each quarter I reach a point that I think of as the hockey stick turning point, the point at which I move from being confident that there will be no bookings or revenue hockey stick during the current period to praying that there will be one.  After all, if you haven’t already made a reasonable percentage of bookings or revenue by now, you gotta make it up in the back end, right?

A hockey stick (most often referred to as a fu*&%$ing hockey stick) is the shape of the curve representing the disproportional percentage of revenue and/or bookings coming in late in any fiscal period.  It’s bad because it’s difficult to plan around, can cause cash flow nightmares, brings about a huge amount of uncertainty and pulls the organization in more ways than it’s often able to deal with in order to close so much business in such a short period of time.

Hockey stick bookings or revenue issues happen for a variety reasons.  Some of them are . . .

  1. The sales force drains it’s pipeline in order to meet the previous quarter’s financial goals, making it rebuild it’s pipeline during the early part of the following quarter and close those deals during the later weeks.
  2. There are subtle and, most often, unintentional rewards built into the sales plan that encourage sales people to close deals late.
  3. Customers wait for a new, late-quarter, product release because they have no incentive to buy earlier.
  4. Customers wait to pay for renewals, upgrades, service, maintenance, etc. until the last possible day they can.
  5. Customers wait until late in the quarter to try to squeeze the supplier for bigger discounts.

These problems, sometimes several of them working together insidiously, often result in hockey sticks rearing their ugly heads in every quarter, with the fourth quarter frequently being the worst because it is, generally, the largest quarter, financially speaking.  If you then draw a trend line through all the quarters, you see that the year’s bookings/revenues are a hockey stick as well.

I spent most of my career in an industry with a relatively small number of very large customers.  Generally speaking, these large companies had well-trained purchasing departments that knew how to manipulate the sales process of their suppliers.  As a result, I dealt with my largest customers pushing deal closings to the last possible minute of every quarter.  As such, I struggled with hockey sticks all the time. 

While I never was able to completely slay the beast, I was able to make some changes that worked – at least incrementally.  If your target market is small, big changes are tough, but some of these suggestions may help you out.

  1. Look at your sales compensation plan.  Yes, I know you’ve done it before, but do it again.  In my experience, almost all sales plans unintentionally encourage some behavior that isn’t aligned with the company’s tactics or strategy.  Sometimes implicit rewards in the plan (not always financial – sometimes they just allow one salesperson to brag that they’re better than another) make it desirable for an individual sales person to delay sales or consolidate them late in the quarter.  Add rewards to your plan for bringing in sales as early as possible in the period.
  2. Change your fiscal year (or set it wisely at the start).  I had the opportunity to do this once and jumped on it.  It made a tremendous difference.  In my case, I moved it to February – keeping it away from the holidays and summer months when you may not have a full-staff available to deal with the added pressure.  It effectively (although not completely) dealt with the problems of the large purchasing departments manipulating our quarters while helping us balance out cyclical buying cycles.
  3. Never pre-announce the delivery of a product that keeps the customer from buying today (like Microsoft shipping Vista in January, missing the holiday season AND killing XP sales).  At the very least, reward customers with a free upgrade to the new version if they buy the current product now.
  4. While the common wisdom is that recurring revenue models (as opposed to perpetual models) take care of the problem, this is only true with slow-growth companies.  If you’re building on a small base of sales and you’re growing fast, you still have to bring many new customers in.  Closing those customers late in the financial period, no matter what your model is, will cause a hockey stick problem.  Of course, recurring revenue does a great job at flattening things out once your numbers get big and growth is slower.
  5. Don’t live hand-to-mouth.  If you’re sucking your pipeline dry all the time, you’ll be praying for a hockey stick all the time.  A big pipeline with many prospects in play will give you the most flexibility and the greatest likelihood of reasonably being able to control the shape of you revenue/bookings curve.
  6. Have a nice mixture of small and large deals.  If your sales force is encouraged to only be going after the biggest customers or biggest sales, it’s going to be difficult to predict when they will close or for how much.  This increases the likelihood of a hockey stick.  If they can close some smaller deals while nurturing the bigger ones, the business will be more healthy.

When you’re tight on cash, are goal-driven or have to report your results (like a public company), hockey sticks can ruin your day (er . . . quarter).  Life is just better when bookings and revenue come in at a pretty consistent rate throughout the fiscal period.  The business is easier to manage, the future is easier to plan and you can decrease your Maalox budget substantially.

 

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6 Comments

  1. I had 2 questions – I’ve been at companies where the annual curve had a better Q2 than Q3 (customers want to wrap up business before the summer vacation), is that an exception to the norm? The other was on moving the fiscal year – this does seem to be a great way to get around purchasing departments that let everything sit until the last week of the quarter, why don’t more companies do this? Is it just such a monumental effort in accounting to switch the calendar?

  2. I had 2 questions – I’ve been at companies where the annual curve had a better Q2 than Q3 (customers want to wrap up business before the summer vacation), is that an exception to the norm? The other was on moving the fiscal year – this does seem to be a great way to get around purchasing departments that let everything sit until the last week of the quarter, why don’t more companies do this? Is it just such a monumental effort in accounting to switch the calendar?

  3. Hey John, great questions! I’ve seen that many companies across industries are seeing lower Q3 numbers.  When you’re lucky, that results in bookings or revenue shifts from Q3 to Q2 and not a loss of bookings or revenue all together.  It used to be that Europe went dead during Q3, Japan picked up a bit and the US remained a little flat with respect to Q2.  More recently, I’ve seen a global depression during Q3.  Perhaps all economies are shifting to vacation-mode during the third calendar quarter.  So, I don’t think what you’re seeing is an exception – this is happening in many markets. You’re right about changing the fiscal year.  It’s just complex and difficult.  Audits have to be redone for historical years.  If you have substantial bookings or revenues, it obviously gets even more difficult.  It also stirs up all kinds of problems with revenue recognition and with with licenses granted to customers that might become unaligned with the fiscal year.   If you’re early on in your venture, however, and you think it can help you in ways the post talks about, it may be worth the pain.  It’s certainly worth considering if you’re just creating a new enterprise, of course. Hope that helps . . . Will

  4. Hey John, great questions!

    I’ve seen that many companies across industries are seeing lower Q3 numbers.  When you’re lucky, that results in bookings or revenue shifts from Q3 to Q2 and not a loss of bookings or revenue all together.  It used to be that Europe went dead during Q3, Japan picked up a bit and the US remained a little flat with respect to Q2.  More recently, I’ve seen a global depression during Q3.  Perhaps all economies are shifting to vacation-mode during the third calendar quarter.  So, I don’t think what you’re seeing is an exception – this is happening in many markets.

    You’re right about changing the fiscal year.  It’s just complex and difficult.  Audits have to be redone for historical years.  If you have substantial bookings or revenues, it obviously gets even more difficult.  It also stirs up all kinds of problems with revenue recognition and with with licenses granted to customers that might become unaligned with the fiscal year.  

    If you’re early on in your venture, however, and you think it can help you in ways the post talks about, it may be worth the pain.  It’s certainly worth considering if you’re just creating a new enterprise, of course.

    Hope that helps . . . Will

  5. Thanks Will, that’s interesting. That would be nice if a summer shutdown evolved so that there were 3 silent weeks and 9 normal ones rather than 12 slow weeks in the summer. I hadn’t thought about having to go back and do past audits, that would be a nightmare, especially if you’ve had multiple rounds of funding or any changes of staff in the accounting department…

  6. Thanks Will, that’s interesting. That would be nice if a summer shutdown evolved so that there were 3 silent weeks and 9 normal ones rather than 12 slow weeks in the summer.

    I hadn’t thought about having to go back and do past audits, that would be a nightmare, especially if you’ve had multiple rounds of funding or any changes of staff in the accounting department…

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