A better way to calculate proposal efficiency

The way we think about proposal efficiency has a major impact on the results we achieve. Instead of managing proposals as a cost to be minimized, we should manage them as an investment.

Let’s start with how NOT to measure proposal efficiency

When we think of proposal efficiency as doing more proposals with less effort, we ignore ROI and focus on lowering costs using an equation like:

1. total cost of proposals divided by the number of submissions
2. total value of wins divided by the total number of submissions 
3. total value of wins divided by the cost of all proposals
4. number of submissions divided by the number of proposal staff
5. total value of wins divided by the number of staff

The first equation shows you the cost of each proposal. This is the most common way people think of proposal efficiency and yet it completely ignores ROI. This is a huge problem, because winning proposals typically return orders of magnitude more than their cost. As we’ll see, there are much better ways to measure proposal efficiency.

The second equation shows you the value of each proposal. The value of each proposal is an important metric, but it does not tell you anything about how to improve. In fact, it implies that improvement comes from bidding more, but as we’ll see, this is not the best way to maximize ROI.

The third equation shows the ratio of dollars won to dollars spent on proposals. If it’s not greater than one, your proposals cost more than your revenue. That should never happen. Your revenue should be much greater than the cost of your proposals, because when you take all of the cost of fulfillment into consideration, including both direct and indirect costs, you could still operate at a loss even though revenue is greater than the cost of your proposals. This is a good metric to track, but it tells you more about what you are pursuing than how well the proposal function is doing.

The fourth equation shows you the average number of proposals prepared by your proposal staff. It’s a measure of volume. We tend to think of productivity in terms of volume. But it tells you nothing about value. A single win that doubles the company’s revenue can be much better than a hundred wins that increase revenue 20%. Which staff performed better?

The fifth equation shows you the average value returned by your proposal staff. It can be used to approximate your ROI. It would be more accurate to compare revenue (or even better profit) to the salary cost of the staff. But headcount can be used as a crude estimate if you don’t have the salary data. This gets you closer to ROI, but still tells you more about what you are pursuing than whether the proposal function is efficient.

Win rate matters

A big problem with the five equations above is that they ignore the win rate. They focus on submissions. When you do that, you tend to reward doing lots of proposals instead of winning them. 

Win rate should be plural. You need to calculate win rate by the number of submissions/wins and well as by the value of those submissions/wins. You also may want to compute separately proposals in which you are a subcontractor vs being a prime contractor, those for current customers vs new customers, those for particular contract vehicles, different customers, and other distinctions.

Two basic equations for win rate expressed as a percentage are:

1. (Number of wins divided by the number of submissions) multiplied by 100
2. (Value of wins divided by the value of submissions) multiplied by 100

It’s better to focus on wins than submissions. But if you’re trying to track performance you need both.

Win rate tells you how you did. But it doesn’t take the cost of proposals into consideration.

A better way to define proposal efficiency

We should start thinking of proposal efficiency as:

(value of submissions * win rate) divided by the total cost of the proposals

The win rate used should be the first example above, based on the number of submissions and wins.

This equation shows the ROI — the amount won for the amount expended. Suddenly the most important number becomes your win rate and not your cost. Without increasing cost, an increase in win rate dramatically improves ROI. A cost increase that improves your win rate likely improves ROI more than the cost increase. ROI is the “efficiency” that matters.

Here's why…

Example 1

Take 100 submissions with a total value of $100 million at a win rate of 20%, produced at a cost of $300,000. This is a high-volume proposal shop. You can see they have a team of three people submitting about two proposals per week. The staff are making somewhere around $60,000/year depending on the company’s overhead and benefits. The cost of the staff used should be their fully loaded cost.

$100,000,000 in submissions * 22% / $360,000 =  $61.11 won for each dollar spent

If they increased their win rate to 30% the amount won for each dollar spent would be $100. This is a 33% increase. 

If they increased their win rate to 35%, they’d increase revenue by $13,000,000. That’s a 63% improvement in revenue for the same number and value of bids. Win rate is that important.

But how would they increase that win rate? Maybe they’d need to hire an additional person. This might increase their cost to $480,000. But if they did, their ROI would still go up a bit to $62.5.

This is important. They spent more, but also increased their ROI. The company made more for each dollar it spent because it was a successful investment and not strictly a cost. 

Example 2

Now let’s look at what might have happened if they somehow increased bid volume with the same staff by 10%. But their win rate went down by 3% because they were stretched too thin and cut corners.

$110,000,000 * 19% / $360,000 = $58.06 won for each dollar spent

Even though they submitted $10 million more in bids, their total revenue actually slipped a bit over a million dollars and their ROI went down. This is the power of win rate. Reducing proposal costs at the expense of win rate is rarely worth it. Reducing costs without reducing win rate requires looking at things differently. It requires looking at the ROI impact of your win rate impacting decisions.

Example 3

Now just for fun, let’s imagine the example above where we decrease the proposal costs by 33% and win rate only goes down by 7%, but volume remains the same. Unless you do the math, you might conclude that losing 7% of win rate in exchange for a 33% reduction in proposal cost is a good deal. However...

$110,000,000 * 12% / $240,000 = $55

Not only did ROI go down in spite of the massive cost savings, but revenue declined by $7.7 million. How’s that cost reduction working out?

Using ROI to make better decisions

Don’t just compute your ROI. Track your ROI. Use it to inform bid decisions. Before you create a proposal reuse library, think about whether reuse will hurt your win rate enough to make it cost you money instead of saving you money. Use it to inform decisions about whether to build a proposal assembly line or to invest in extensively tailoring your proposals around what it will take to win. Track your ROI so you can see when it goes up or down and what's driving it.

Instead of getting more effort out of your staff, focus on getting better win rates out of your staff. Include your business development and capture managers in this, since many bids are won or lost before the proposal even starts. Discover what it will take to win and then how to build your proposal around it. Everything you see on PropLIBRARY is based on improving how you do these two things. 

Maximizing ROI

The right definition of proposal efficiency shows that focusing on win rate is more profitable than focusing on cost. Instead of thinking of proposal efficiency in productivity measures, think of it in terms of ROI measures.

Instead of trying to get more proposals out of the same staff, take the same number of people and improve their ability to discover what it will take to win and build their proposal around it. Maybe even invest a little in that. Obsess over and improve your win rate.

Even obsess over win rate more than lead generation. If you’re still not convinced that capturing the leads you have is equally important to lead generation, redefine how you calculate proposal efficiency and then run the numbers for every scenario you can imagine. Let that convince you and help you make better decisions.