by Jim Cantrell, President & CEO, SSD
 One of the most frequently asked questions we get is “what is the right level of investments to be made for business development?” It’s a sensitive topic and there are as many opinions offered as there are those who hold those opinions. This question is most often asked by small business owners, commercial leaders, and business development managers who never believe there is enough money invested in business development activities. In the context of mergers and acquisitions, this is also an important question to answer since the target of the acquisition will no doubt have an existing business development organization. Additionally, future investments to sustain or improve growth will have to be factored into the offering price.
My answer to this question of how much should be invested in business development is that it depends. This is possibly why my answer is often disregarded. There is no correct answer to this question because every case is individual. The only thing to do is to evaluate your organization against benchmarks of others in the industry to compare investment levels and resulting success. Even then, there will be many factors that affect whether those benchmark comparisons are accurate. Nonetheless, there is incredible value in looking at investment benchmarks for your business development efforts and understanding how that data might apply to your investment level. So let’s begin by looking at the appropriate factors to consider and examining some survey data.
Based on our 15 years experience in business development, the primary factors that will influence business development expenditures are the following elements:
1. Revenue size. Clearly the larger the revenue, the larger amount of money is required to continue developing new sources of money. This is always the good news/bad news scenario for business owners experiencing growth. When a large program is won, that is the good news. The bad news is that there is now a need for additional money to be invested to continue replacing this growth opportunity. It is completely surprising to me how many business owners do not think of this and later find themselves in a revenue shortfall and essentially cede the hard-earned growth. Generally, business development investments will be measured as a percentage of the gross receipts on sales. This percentage will vary for large and small businesses. Generally, small businesses will require a higher percentage while larger businesses will require a smaller percentage. Often small businesses will show a measurably small percentage but often close examination of the situation reveals that this is accomplished with uncompensated overtime and efforts on the part of company officials.
2. Revenue goals. Simply put, if you want to grow, you have to invest more in business development than if you are planning to maintain constant revenues. The reality for business growth is that you have to invest now and for several years to eventually attain the desired revenue performance.
3. Industry type. Government and commercial industries will vary greatly. Generally, government-based industries will have to spend 25%-50% more on business development as compared to commercial industries. This is due to the fact that government business often requires more overhead for proposals and longer lead times for each opportunity in comparison with commercial industries, which tend to act quicker and require less bureaucratic proposals.
4. Products and services being sold. Generally “box type” suppliers have the lowest cost of acquiring new business of all defense and aerospace industries and average about 2%-3% of the gross revenues. Software tends to be the highest with averages being up to 35% of gross revenue. Other hardware and system suppliers will comprise numbers between these two extremes.
5. Types of revenue. There are essentially two types of revenue in the aerospace industry – service revenue and hardware revenue. Generally, hardware revenue, dollar for dollar, will require twice as much B&P investment to attain the same level of revenue.
6. Efficiency/maturity of efforts. Obviously, more experienced organizations with mature business development processes will require less money than new organizations that are just starting up.
The foregoing qualifications still do not answer the question of “how much should be invested?” As there are not many data sources to answer the question, the one data source that I have relied on and through experience has proven to be accurate is from Anderson Consulting (now Accenture). They conducted operating ratio surveys for defense electronics and hardware manufacturers producing interesting results. On the whole, the average business development and sales activities in the industry were 14%-15% depending on the year of the survey. Typical deviations on this number would be from a low of approximately 2% to a high of over 50% (some software development reported these amounts).
From these data points, a few example companies each earning $10M USD per year in gross revenues demonstrate the following:
1. Small electronics box manufacturer would require typically 3% of gross revenues on a BD budget of about $300,000 per year. If they desired to grow the revenue to $20M per year in 5 years and the market would support this additional growth, investments of $600,000 to $700,000 per year would be justified.
2. A mid-level spacecraft manufacturer with $10M in gross revenues would be a small operation. If it were selling spacecraft valued at $20M per unit and at least one spacecraft every other year, we would recommend an annual B&P investment of $800,000 to $1,000,000 per year to sustain this growth. This would accommodate a small core BD staff and about 2-3 proposals per year with average proposals costing $200-$300K each and an expected 20%-50% win rate. Should less investment be contemplated, higher win rates would be required.
3. A software developer selling COTS products (as opposed to custom software which more resembles service industries) would be spending $3M per year on sales and business development. This would cover advertising costs, a sales team (as opposed to a traditional BD team), sales commissions, and a traditional BD team working the larger opportunities. Note that proposal costs in this type of industry would be less intensive and would be more along the lines of simple quotes. However, in this industry there is a larger requirement for face-to-face selling and product demonstration, drastically driving up the cost of bringing in new revenue as compared to hardware industries.
By now you can see why the answer to “how much?” is highly dependent on primary factors – company size, revenue goals and industry type. Further, industry statistics are just that – statistics. Your own experience will reflect the variations behind those numbers and can be more or less than the statistics would indicate. Hopefully, we have provided a basis for thoughtful evaluation of what level of investments are appropriate for your business development activities. |
