Yesterday I mentioned two forecasting busts at Zayo Bandwidth. One pertained to the Installation Pipeline.
Let’s start with a definition. Pipeline is a simple concept. New orders enter one end of the pipeline at the time they are sold. They exit the pipeline when they are installed. They move through the pipeline as the various work steps between sale and installation are completed. So the definition of the installation pipeline is all installation orders that have been sold but not yet completed.
(Note: another important pipeline is the disconnect pipeline. As you could guess, the disconnect pipeline is all disconnect orders that have been received but not yet completed. More on this in subsequent posts.)
In Zayo’s August financial report, the ZB team reported its pipeline as ~$890K of MRR. In reality, it was only about $660K. That’s a difference of $230K. The difference should be zilch. That is, a well functioning process should never allow for two different views of how much has been sold but not yet installed.
Why is this such a big deal? $230K of MRR is $2.6M/year of revenue; nearly $2.0M/year of EBITDA and about $2M of success based capital. Our near term forecasts will be off by this magnitude of numbers. Said differently, a company that has this poor a grasp of its pipeline will have an equally inadequate grasp of its forward-looking revenue, EBITDA, and FCF. Besides the normal hidden costs of unpredictability, such a company is exposed to a looming disaster. This is not theoretical–I’ve seen this bring down numerous telecom companies.
The good news for ZB is that it already had processes in place that should have enabled it to be on top of its pipeline. Therefore, it was fairly straight-forward to ensure the day-to-day processes don’t get detached from the monthly forecast. However, ZB should take this as a wake up call–how do we ensure something like this never happens again? We are taking steps now to increase the visibility, clarify accountability, and tighten the processes. I will cover more about my thoughts on pipeline in subsequent posts.
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