Types of deals: yes, no, good and bad

October 09, 2018

A common mistake I see business owners (or freelancers) making is that they accept whatever work comes through the door. This approach to sales is often rooted in fear and desperation. The idea is that you never know when the next sale might happen, so you say yes to everything or anything. The trouble with this approach is that not every deal is a good deal and in fact, some deals may be harmful to the business.

It is much better to evaluate each potential project carefully and then determine if the pursuit is worthwhile. To help hone this skill, I use a simple box, classifying deals as yes or no and good or bad. This leaves us 4 clear-cut designations.

Using this box, it is fairly clear that a Good Yes or a Good No are most preferable. A Bad No causes little harm (if any) and should be the default when there is any doubt. A Bad Yes is a worst-case scenario which should be avoided whenever possible. How then, do we predict the future so that we avoid the Bad Yeses and maximize the Good Yeses and Good Nos?

Understanding the past is a part of learning and getting better for tomorrow. Applying this same tool, we can easily determine where to place previous deals or projects. This is only half the battle. Looking back can help us identify specifics where things went wrong but we need something more general as a guide in order to help us with future decisions. This will be slightly different for everyone, but some common factors apply to us all. Below are five rules I use to look at deals to determine if they are right for me.

Rule #1: If there is any doubt, say no (or seek clarification).

The basic premise here is that a Good No or a Bad No is better than a Bad Yes. This rule simply hedges the bet in my direction. Worst case scenario I pass on the job and I lose out on what would have been a really good deal. Best case scenario, I pass the work to someone else. In this scenario I strengthen two relationships (the potential client and whomever I referred the work to) and the project might even boomerang back to me (I’ve been hired to do the work I originally passed on, but via a 3rd party re-seller).

There is of course a time and a place to explore things further. If you have doubt, seek clarity. This might require further meetings, calls, or research. Perhaps you just need some time to think and gain perspective. However, I only explore this for so long. Sometimes doubt is simply a thing that lingers and cannot be squashed no matter the time or resources thrown at it.

In the end, if there is doubt, politely decline and do your best to offer suggestions for next steps.

Rule #2: Fully understand the scope or pass on the work.

This rule is an extension of rule #1. If I don’t fully understand the scope, I have violated Rule #1 and I therefore must punt. There is more to consider here as well. If I don’t understand the scope I can’t determine if the work is in my wheelhouse or if it will be profitable.

Something well worth mentioning here, timeline and quality are key parts of the scope (the project management triangle). Far too often people think of scope as simply the workload or amount of effort. They often gloss over the desired quality and the desired timeline. You must fully understand all aspects of the scope.

I highly recommend documenting the scope using a method like the MoSCoW technique and be sure to include specifics regarding all parts of the scope. If you cannot or are unwilling to do this groundwork for a project you should gracefully pass on the deal and offer the client another path forward.

Rule #3: Only take work which is (reasonably) within your wheelhouse.

I am all for learning new skills and techniques. If I can have someone help finance my research and development via a project, all the better. The trouble is when we go too far outside our wheelhouse and try to capture revenue in return. It is very hard to properly determine the scope of a project that is too far outside your wheelhouse and that violates Rule #2. Similarly, there is doubt about if you will be able to achieve the desired outcomes, which violates Rule #1.

It can be tempting to accept a paying project which will teach you a lot, or help you break into a new industry. However, it is best to avoid this situation. You will more than likely end up disappointing the client, not being profitable and ruining a relationship. If a project is too far outside one’s wheelhouse it is best to admit that is the case, recommend someone if you confidently can, and then move on.

Rule #4: Only take work you are sure will be profitable.

Here again we build on Rules #1-3. Even if you are confident, fully understand the scope and are sure that the work is in your wheelhouse, you can still have an issue with profitability. This varies a bit from business to business depending on your pricing policy and business practices. The choices here are a different discussion (although I always encourage project-based over per hour and highly recommend a value-based pricing policy) but this can be put aside. When you step back and think in the most macro and longest terms possible, profitability is fairly universal.

Suppose you bill in a way that allows you capture payment for 50% of the project when it is 50% complete. At this point the deal falls apart because you failed to properly scope the project or because it was outside your wheelhouse. One could argue you were profitable on the partially completed project. I would argue that you have spoiled the relationship, and this has an incalculable negative impact on all future business. It is hard to know who knows who or how your actions today might impact future business in a way that lowers a potential profitability.

Here is where rules #1-3 are so crucial and how rule #4 brings those so sharply into focus. Profitability is far more than “did I make the money on this project what I wanted?”. We need to look at it from a much more macro level. Profitability is measured in dollars but also things like goodwill and opportunity cost. If you can’t fully satisfy a client and ensure long-term, highly macro profitability, the dollars and cents mean nothing.

View the project through every lens of profitability. If you cannot see profitability from every angle it is best to find a better fit for the project.

Rule #5: Be excited about the project or don’t be involved.

It is hard to underestimate the power of passion and the disruptive force of unhappiness. Even when all the stars align and Rules #1-4 have been satisfied, you can find yourself smack in the middle of a Bad Yes. Sometimes you take a deal that you are not that interested in and it all falls apart.

I have one binary question as my safety net: “Am I excited about this project?”. If I can’t confidently say yes, I simply have to pass.

The trouble here is that it can be awkward and hard to deliver the message. The best advice I can offer here is to tell the client you don’t think you are a perfect fit and help them find someone that is. If you have satisfied Rules #1-4 it should be fairly easy to find someone else who is all too happy to take on the project. Even if you can’t think of a great referral you can hand the client your documented scope and tell them that it should help shorten the discussion with the next person they talk to. This is a small gesture but is better than a cold flat no.

Final thoughts

Sizing up a deal and deciding if it is a good fit might be the hardest part of business. Understanding how devastating a Bad Yes can be and that anything else is far better is key. One more thing to consider is opportunity cost. Remember that the next deal to come along might be much than anything you have in front of you today. Even when all things are perfect, a Good Yes today might not be as good as a Good Yes next week or next month. Since we can’t predict the future, how can we solve this riddle?

The best answer I have is to always leave room in your schedule. It is best practice to run, at most, at 80% of capacity. Indeed, you likely want to operate at 50% of capacity and be profitable there. Although this can be a struggle and is a somewhat a different discussion, it is a key concept to keep in mind. If you can be highly profitable and keep your production at 50-80% of capacity, you are leaving plenty of room for those really amazing “next month” deals.

Here is where this comes full circle and is a self-fulfilling prophecy. Good Nos allow room and lead to the profitability that supports it. The more you secure Good Yeses and avoid Bad Yeses the more profitable you become and the more room you have in your schedule to allow for the next opportunity. This is an example of the Flywheel Effect. The opposite also happens. Bad Yeses clog the system and prevent you from being able to take on those really Good Yeses.