Cloud metrics are leading indicators of future revenue. If you know your existing install base, have a solid forecast for new customers and understand your churn and upsell metrics, you can put together a pretty reliable picture of what your revenue will look like in the coming months and quarters. That is why cloud metrics are so important and why it is important that you get them right. The one metric that everyone wants to know more than anything else is bookings, and more specifically, new customer bookings.

A few years ago I was spending time with a newly acquired company that had just hit its bookings target for the quarter. There were high fives all around and the sales team was ecstatic. A month later, the euphoria started to wear off and changed to utter panic when there was a realization that there was a significant shortfall in revenues. When all is said and done, I realized that bookings are meaningless unless they tie into revenue. This realization, and the lessons I have learned along the way, have led me to the conclusion that organizations need to approach key metrics with the same level of scrutiny as they do accounting for revenue. A great way to enable this is to develop a bookings policy.

Chances are, you may already have a version of a bookings policy. If you have a compensation plan for your sales team, you probably have detail on how and when they are to be paid. This is an excellent framework from which to start to determine how your sales team is measured and compensated and the proxy for how you value new customer add on success.

Here are four keys to developing a strong bookings policy:

  1. Documentation: Documentation requirements can come in all shapes and sizes. A customer may order your product online with a credit card, or you may need to execute a 300-page Master Services Agreement (MSA). The reality is, your business processes (and your customers’) will dictate the documentation required. My experience is that the best documentation is whatever a sales representative can reasonably walk a customer or prospect through while providing reasonable parameters around what is to be delivered and what the customer is expected to pay. A properly structured MSA document (with a customer PO if necessary) is a good place to start, but this can vary from business to business.
  2. How to Value Bookings: Not all bookings should be treated the same. To forecast, you should understand what is included. Is this a new business booking, a renewal or an upsell? What is included in the amount? Are they one-time fees such as onboarding, set-up cost or other, non-recurring fees? In determining your bookings metrics, I recommend that you tie it to how you plan to build out your revenue forecasting model and ensure key stakeholders understand the value of each component to avoid any surprises.
  3. Timing: When does the revenue start? This is where things get more complicated as sales teams have little to no control over when a customer starts using a solution. Your company receives no credit for a booking that never produces revenue, regardless of whose responsibility it is. Therefore, it’s essential to ensure that revenue starts to flow within a commercially reasonable time-frame based on your business model. This could be upon contract signature, or it could be a few months from when the contract is signed. Regardless, make sure to carefully evaluate your criteria to ensure the timeline matches your and your stakeholders’ expectations. One way to manage this is to implement a “claw back” provision in the compensation plan in the event the contract revenue flow does not begin.
  4. Contingencies: Those familiar with managing revenue recognition are very familiar with the various contingencies that can be embedded in a deal. They can range from non-standard service level agreements (SLAs), certain performance criteria, and non-standard termination clauses and payment terms. As a general rule, it is best to secure payment upon contract signature and follow a standard MSA document that aligns with your business practices. One other item to pay attention to Proof of Concept (POC) agreements. POCs may be sold and you may receive cash for them, but be careful about calling them a booking as they are generally non-recurring revenues until they are converted from the POC stage to the commercial stage.

The bottom line is that bookings, like any metric, are meaningless unless you have some discipline built around them. Putting together a bookings policy that builds this discipline will help align the interest of your sales teams with your company’s objectives, and will not leave you having to explain how bad bookings resulted in the latest revenue shortfall.