How to Improve Sales Forecasting (
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Sales forecasting has changed with the popularity of sales force automation and with CRM moving to a software-as-a-service delivery model. Here, Knowledge Center contributor Joe Ruck explores the art of sales forecasting, including how sales forecasts are often erroneously based on the opinions of individual sales reps, who rarely know without a doubt whether a particular deal will close in the designated time frame.
Fans of the Fox television series "House," a medical drama
starring cynical but effective Dr. Gregory House, will recognize his
catchphrase, "Everybody lies." Like other good one-liners, it rings
true beyond its original context. One area where it has particular resonance
for me is in sales forecasting.
Sales forecasting is serious business. Financial markets expect public
companies to deliver a smooth revenue ramp. A missed sales forecast carries
dire consequences. Wall Street will punish "your miss" by hammering
your company's stock. Of course, enterprises need to get their sales forecasts
right for their own reasons. If done well, a sales forecast helps assure that
there is sufficient capacity to process orders and ship products on time. Get
that wrong and you're saddled with either expensive inventory or lost sales.
Extrapolation versus forecasting
Forecasting remains more of an art than a science. Even in large companies,
sales forecasts are often based on the opinions of individual sales reps.
Therein lies a problem. Only rarely do reps know without a doubt whether a
particular deal will close in the designated time frame. There is a great deal
of unpredictability that accompanies the purchase of consumer goods, and it's
worse in sales to businesses. Most business-to-business transactions involve
multiple influential decision makers and a decision process in which group
dynamics play an important part. Under those circumstances, a sales rep's
capacity to predict an outcome is often not much better than relying on the law
of averages.
A good substitute for individual deal forecasting is extrapolation.
Something like, "Last quarter, I had $1 million worth of opportunities and
$500,000 came in. This quarter, I have $1.2 million worth of opportunities so,
hmm, let's say $600,000 will be the forecast."
Hopefully, if you have 100 sales reps, the statistics all come out in the
wash. But the sad fact is, statistics are only as good as the data on which
they are based. Follow them blindly and the result will be no better than a
simple guess.
Sales managers: Get involved
Companies are under tremendous pressure to meet their sales targets. This
pressure gets transmitted directly to the sales force in the shape of both the
carrot of huge commissions and the stick of dismissal. The thinking is that
this approach will lead to better forecasts. However, this is not the case. In
particular, the threat of termination, coupled with the inherent uncertainty of
forecasting, turns what should be a tightly controlled and transparent business
process into an opaque game of hide-and-seek.
The problem is that if sales reps were to forecast anything less than say,
70 percent of their quota, they would put themselves at risk of being
terminated. On the other hand, if reps forecast numbers over 130 percent, they
risk having their territory reduced. So, it should be no huge surprise that all
reps feel the need to forecast in a tight range, along the lines of 80 to 110
percent of quota. Everybody lies.
Over-allocating quota is common practice
Experienced sales vice presidents understand this and attempt to compensate
by over-allocating quota. This way, at each level in the sales management
chain, you can still commit to 100 percenteven with your reps committing an
average of 95 percent all the way up to the executive suite. Most of the time,
this method makes the numbers balance out.
In this scenario, it is the sales manager's job to peer through all the fog
and try to build a picture of which deals are really likely to happen and which
are not. This will be done via a process of cross-examination: "Do you
know the name of the decision maker?" "When was the last time you
visited the customer?" "Show me the most recent e-mail reply from the
prospect." "Can you set up a meeting for me to meet with the
customer?" The cycle repeats itself, since the same logic forces the sales
manager into delivering a forecast bounded to 80 to 110 percent of quota to his
or her immediate superior, and so forth, all the way to the top.
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