How to guarantee a missed forecast

missed_targetThe sales managers I speak with tell me there is only ONE thing worse than not making your revenue target and that’s to forecast that you were going to make your number and then miss it. I am sure most that are reading this will agree. The problem with forecasting however is that most companies look at sales forecast in the macro and use the law of large numbers. The law of large numbers as defined by Wikipedia is a theorem in probability that describes the long-term stability of the mean of a random variable.  Therefore, when we look at a sales pipeline through the law of large numbers we can see why percentages are applied to forecasting.

 
If a VP of Sales commits $10,000,000 of revenue but historically only realizes 50% of that commit, then he weights his forecast accordingly to $5,000,000. Some companies get even more granular in that they apply a percentage to a deal when it is in a certain stage in the sales cycle. 

 
Discovery Stage                       15%     x          $1,000,000      =          $150,000
Qualification Stage                 35%     x          $1,000,000      =          $350,000
Demonstration Stage             45%     x          $1,000,000      =          $450,000
Proof of Concept Stage         70%     x          $1,000,000      =          $700,000
Negotiation Stage                    85%     x          $1,000,000      =          $850,000
Close Stage                            100%   x          $1,000,000      =          $1,000,000
Total Pipeline Value                                                                          $3,500,000

 
If you are using either one of these methods to forecast, then I have some very bad news. When you live by percentages you will die by percentages because no one wins a piece of a deal.

 
To forecast by the law of large numbers means that you are surrendering any insight into why you are going to win or lose a deal. After all, a forecast is merely the sum of every deal predicted to close. Every one of those deals has its own story and should be committed to close based upon the manager’s understanding of that story – not a coin flip. To take that concept even further, forecasting by stage in the sales cycle takes no account of the competitive nature of an opportunity. If you are in the negotiation stage of a deal and have 85% probability of close, wouldn’t your competitor also be in the same stage? You both are not going to get the deal, much less 85% of it.

 
At The Complex Sale, Inc., we recommend having qualitative deal review based upon objective criteria to forecast an opportunity. To view a recorded webinar on these 11 questions – please follow this link: https://www1.gotomeeting.com/register/794796552

Will it close on time?
 Do we know when they can no longer go without a solution?
 Do we know the decision-making process?
 Do we know the approval process?

Will we win?
 Have we linked our solution to solving enterprise-level pain?
 Do the decision-makers acknowledge our differentiation?
 Do we have enough votes of the decision-makers to win?

Will it close for the amount forecasted?
 Have we quantified the value based upon their criteria – not our ROI?
 Do we understand the political risk associated with this decision?

Have we prepared for the political nature of the decision making process?
 Are we anticipating counter-attacks of the competition?
 Are we aligned with powerful people to break a deadlock?
 Have we outlined the steps needed to get the deal signed?

Your confidence in winning should be based upon objective questions like these. The more you can answer “yes,” the more confident you feel that you can win and vice versa.

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5 Responses

  1. The law of large numbers “MAY” work for VP’s and SVP’s of Sales. But it will NEVER work for the individual rep. It’s binary, you win or lose, 0 or 1! These 11 questions are powerful and can be used by the rep on their own, in a peer review between rep and rep, and, with the rep and their manager. Great stuff Scott!

  2. Get your sales manager involved the first time you sense the deal may slip. Be prepared to discuss the things you know that could have an impact on the close date, be prepared to discuss your “blind Spots” people or issues that could affect the date. Ask the sales manager what they would do if this were their opportunity, ask them how comfortable they would feel if it was on their forecast? Is it time to change your tactics? Could you focus more on this opportunity since it is time critical? Do you have enough coaches in the opportunity? Answering these questions and getting your manager involved early will help you increase your forecast accuracy.

  3. I lead a small executive sales team who focus on large deals ($20M+). We implemented the TAS methodology this spring and are just getting into a regular cadence with it. It does help us address the specific deal questions (is there an opportunity, can we compete, can we win, do we want to win) from both a client and our perspective. Older deals that we now put through this lens are now less attractive vs. the resource investment and/or there is no compelling event for the client to do business with us. Could not agree more that individual deal details, not the averages and risk-adjusted sales pipeline stages, are the critical success factors to achieve any forecast and annual goal.

  4. I completely agree with your thoughts here Scott! I have typically worked for sales organizations that suggest keeping a certain amount of pipeline based off of the stage in the sales cycle. And as you know that will unfortunately lead to a lot of sales people continually working bad deals…just to make sure they are hitting a KPI.

    I had an interesting conversation with a VP of Sales the other week where we were discussing his forecasting and coaching process. He told me that he typically requires his reps to maintain a pipeline that is 3x their annual quota. The next question I asked him was, “What is the win rate for you sales organization?” That is a question he did not know the answer to. Without knowing the win rate for his team, the 3x quota requirement is an arbitrary number that was pulled out of a hat. At that point he was not sure if the quota requirements would lead to him hitting his annual revenue targets…or not.

    Before rolling out these metrics and KPI’s it is essential for sales leaders to make sure that they understand why the benchmark exists and how it will help the individual rep reach their goals. If achieving the benchmarks doesn’t help the reps hit their goals then it serves no value for the sales organization.

  5. Excellent post Scott,

    I’ve spoken with 120+ attendees at my sales enablement workshops and a dozen sales VPs and managers over the past month. In discussing their sales performance challenges, forecasting accuracy is consistently at the top of the list. As we explore the issues, your points are spot on. Almost all are using the law of large numbers, (percentages) and mapping broad stages of a sales cycle to a probability which in turn suggests a portion of the potential revenue to be closed. To make matters worse, there is often little thought given to how the stages and milestones should map to advancing a deal and a generic status that comes out of the box with their CRM implementation is often relied upon. Further, those who lack or have a loose sales process are left with sales people who don’t have any guidance on what constitutes deal progress. Managers are left in the dark and forecast accuracy suffers.

    In today’s market, it is absolutely critical for sales VPs and managers to have better insight into their pipeline. They need to a achieve a level of granularity that provides insight on a deal by deal basis and that provides clear leading indicators that identify where an opportunity really stands. Managers should leverage the “qualitative deal review” questions as milestones (leading indicators) within the sales process to understand the story within a deal. By applying that knowledge more accurate forecasts can be generated. The inability to align this qualitative insight with the quantitative sales performance data leaves a manager combing through text from activity updates in the CRM and only getting fragments of what’s really been achieved. Management is left with their “thumb in the air” and apply gut instincts to determine their forecast.

    One way to spotlight where deals are is through use of a sales playbook embedded within the CRM system. Pipeline visibility can be significantly magnified as the activities/milestones that a sales person executes through the sales cycle can be captured and directly correlated with sales performance data from the CRM. Results are better insight, predictability and more accurate forecasts.

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