Sourced pipeline is the wrong number to give a board

Most board packs in business-to-business software contain a slide I used to enjoy presenting. It shows the value of the sales pipeline that marketing sourced in the quarter, usually as a rising bar with a dotted goal line beneath it. The number is large, it moves in the right direction and it gives directors something concrete to ask about. I stopped presenting it at Yarrowby in 2021, and I now think most software boards would be better informed without it.

My objection is not that the figure is dishonest. The people who compile it are usually careful. The trouble is that sourced pipeline measures a claim rather than an outcome. It records that marketing touched an opportunity first, and it values that opportunity at whatever a salesperson typed into the forecast field on the day it was created. Both halves of that sentence carry more judgement than the slide admits.

How the number inflates itself

Consider how an opportunity comes into being in a typical software company. A payroll manager downloads a guide to award interpretation. Our marketing system scores the download, adds points when she opens two emails and passes her name to a sales development representative once the score crosses a threshold. The representative calls, has a pleasant conversation and, because his own quota rewards meetings booked, creates an opportunity with an estimated value based on her company's headcount. From that moment the pipeline report counts her as marketing-sourced pipeline worth perhaps A$60,000 a year.

Nothing in that chain is false. Yet nobody has confirmed that her organisation intends to change payroll systems, that she has any part in the decision, or that the estimated value bears any relation to what she would buy. Multiply that by a few thousand conversations a year and the figure grows steadily, because every incentive along the way rewards creating opportunities and none rewards closing the empty ones.

When I joined Yarrowby, our reported marketing-sourced pipeline for the year was A$61 million. We went through it opportunity by opportunity with the sales team. A$23 million had reached a scoped demonstration with a named owner of the payroll decision. The rest ranged from genuine early interest to calls that had ended politely. I had seen the same pattern a decade earlier at a Melbourne managed-services company, where a board had been shown A$90 million of pipeline that produced A$28 million of signed contracts. The ratio was not a local failing. It is what the measure produces.

Attribution makes it worse. A mid-market employer considering a new payroll system usually meets us by several routes: an accountant's recommendation, a search, a webinar, a conversation at an industry event. Assigning the opportunity to whichever touch the system recorded first is a convention, not a finding. Different conventions move millions of dollars of credit between marketing, sales and partners, and each function has a view about which convention is fair. Boards then watch those functions argue over credit for revenue that has not yet arrived.

What I report instead

We replaced the old measure with a smaller set that sales, finance and marketing define together and that I cannot adjust on my own.

The first is qualified opportunities, defined jointly with our chief revenue officer: a discovery call has been held with someone who owns or shares the payroll decision, the headcount and current system are confirmed, and a demonstration is booked. Marketing does not create these. Sales accepts them, and the definition is written down where finance can audit it.

The second is cohort conversion. For each quarter's qualified opportunities we track what share became customers, at what recurring revenue and after how many days. A cohort takes three or four quarters to mature, so the board sees a table rather than a single bar, with the most recent rows marked as incomplete.

The third is the cost of acquiring a customer, loaded with both marketing and sales costs, and the number of months of gross margin needed to recover it. Finance cares about this measure most, and marketing and sales succeed or fail on it together.

The fourth is retention by source. We report what share of customers from each route, whether direct, partner-referred or self-service, are still with us after eighteen months. A channel that produces customers who leave is not a cheap channel, however low its cost per opportunity looks.

We still record where opportunities come from, including a question on our order form asking customers how they first heard of us. That answer is often more revealing than the system's first touch. But we use it to divide budget between programmes, not to claim credit in the boardroom.

The change cost something. Our reported pipeline fell by about 40 per cent overnight, and our chief financial officer, who had quoted pipeline coverage to investors, had to explain the difference. Two of my own managers, whose bonuses had depended on lead volume, left within the year. For two quarters we had no clean before-and-after comparison, because I had not kept the old measure running in parallel. Next time I would.

Three questions for a director

Over the following three years, win rates on qualified opportunities rose from 19 to 27 per cent, and the months needed to recover acquisition cost fell from 31 to 22. Some of that came from better targeting, some from a stronger brand and some from sales disciplines that owed nothing to marketing. I do not claim all of it. What I do claim is that our board now argues about the right things: which customer groups are worth more, which channels keep customers, and whether we spend enough to reach employers who have not yet heard of us.

A director who wants to test a software company's marketing can do so with three questions. Who, outside marketing, can audit the definition of a qualified opportunity? What share of last year's qualified opportunities became customers, and what share of those customers are still paying? And how long does it take to recover what each customer cost to acquire?

A management team that can answer those questions quickly is measuring its market. One that answers with sourced pipeline is measuring its own activity, and the bar on that slide will keep rising whether or not customers follow.