The eWEEK Knowledge Center recently published an article by contributor Joe Ruck on sales forecasting. While I agree with his diagnosis that forecasting is rife with challenges, I disagree with his prescription. Mr. Ruck’s article treats forecasting as a means to answer the question “What will top-line revenue be?”
Instead, the true value of forecasting lies in creating an actionable revenue forecast that provides the entire organization with detailed information to drive execution. You may even call this comprehensive process that goes beyond sales forecasting “revenue performance management.”
It is estimated that companies miss the equivalent of 10 percent of total annual sales in lost opportunity revenue that could have been captured as a result of better insight on sales activities and target markets. Here’s an example: Company XYZ has a top-level forecast that predicts a price decay for a particular product line in the Asia Pacific region. The executives feel fortunate to have seen this shift coming and lower prices to match the forecasted competition. The business swallows the lost revenue, but survives because it doesn’t completely lose the market.
Suppose, in reality, that the price decay only existed for a specific product in Korea, rather than for the full product line in the entire region. The company lost a great deal of revenue by slashing their prices across the board. How can you prevent this from happening to you?
If it’s broken, fix it
As Mr. Ruck described in his article, customer relationship management (CRM) systems are inadequate for creating a detailed, bottoms-up, forward-looking plan. CRM is great at providing a top-line gut check on revenue for new opportunities, but is grossly insufficient for:
1. Forecasting run-rate business
2. Product or account-based forecasting
3. Showing detailed changes on unit and price forecast
Instead, companies sometimes turn to statistical modeling or top-down predictions to fill the void. Using algorithms to churn out predictions has its uses, but no previous time period serves as an accurate model for the unpredictability of today’s markets. On the other hand, predicting revenue with educated guesses or by multiplying probability and overall pipeline is goal-setting, not actionable revenue forecasting. For example, what does a plant produce based on 3X pipeline coverage of revenue?
3 Steps to Better Revenue Forecasting
3 steps to better revenue forecasting
Bottoms-up forecasting incorporates “feet on the street” intelligence from the people who are closest to the customers and therefore most in tune with market changes: sales reps, channel partners and product marketing. Compiling data from all of these sources provides the most detailed and timely insight on changing market conditions and their specific causes, and gives companies the visibility they need to make strategic adjustments.
Instead of trying to make a square peg fit in a round hole by adapting tools such as CRM and spreadsheets, consider dedicated software that enables a real-time, multi-perspective forecasting process. The appropriate tools can help you accomplish the following three steps to revenue performance management success.
Step No. 1: Capture and consolidate
It’s not easy to get sales folks to submit their forecasts; they would rather sell (as they ought to be doing). To base your revenue forecast on the input from the people closest to your customers’ changing needs, you need to make it easy to capture your forecast continuously.
You need to make forecasting an everyday activity and allow flexibility for mobile, Excel and Web-based access. You need to enable contributors to enter forecasts at any level (for example, by product, account or region), not just by opportunity. You also need to provide reps with information to help them forecast (for example, a backlog for a particular customer).
Step No. 2: Align resources
As much as they might believe it, sales reps are not the only employees who contribute to achieving the revenue plan. A true bottoms-up revenue forecast incorporates forecasts from channels and product marketing and can thus guide company-wide alignment by exposing discrepancies between different groups’ predictions. For example, aligning perspectives might reveal that the sales team is forecasting revenue from a new product before marketing expects that product to be available.
Step No. 3: Manage performance
Finally, the forecast should be used as a barometer to measure and improve revenue performance. Real-time, continuous bottoms-up revenue forecasting gives companies the visibility to see what changes in the forecast matter most and why they occurred. Armed with this information, executives can hold the organization accountable to the forecast-and make strategic adjustments based on the changes that will have the greatest impact on the business.
Let’s hit the rewind button and imagine that our Company XYZ was following the above best practices. The sales reps on the front line in Korea get the first whiff that the price decay is coming. Each can quickly adjust his forecast while real-time roll-up allows executives to see this trend building. The regional manager is alerted and offers Korean customers a slightly lower price for higher volume orders-offsetting the future price decay and making up revenue with volume.
It doesn’t end there. Because the sales forecast is part of the overall revenue forecast process, fulfillment is notified of an impending increase in volume and updates its production plan. Simultaneously, finance readies for the price change and margin impact. Smart revenue performance management allows the company to make up the revenue and prevent the loss that would have occurred by slashing prices across all of Asia-Pacific.
It’s tempting to chalk up losses as inevitable consequences of the recession, but it’s not all doom and gloom out there. There’s opportunity, but you need to be able to see it and act on it before it disappears. Make forecasting about revenue performance rather than a single number for sales and you’ll be well on your way.
Southard Jones is Vice President of Products at Right90. Southard is responsible for guiding Right90’s product direction and strategy. He has over 12 years of product management and development experience including roles as an engineer, consultant and product line manager. Prior to Right90, Southard was a product line manager at Siebel Systems, where he managed marketing and development efforts for Siebel Analytics, Balanced Scorecard and Performance Management. He also has worked on product development and supply chain consulting engagements with PRTM, Raytheon and other companies.
Southard earned an MBA from the Kellogg Graduate School of Management, an MEM from McCormick School of Engineering and a B.S. in Mechanical Engineering from Cornell University. He can be reached at [email protected].