ALL THAT GLITTERS IS NOT GOLD

Forecasting: – Part II

 

In Part I of this article on Forecasting I outlined some of the problems associated with traditional forecasting methodologies.  In this, the final part of the article, I will introduce the underlying concepts of a more effective forecasting process.

 

Forecasting Overview – A Better Way

So, back to the drawing board; there has to be a better way….

 

Founding Principals

Before discussing processes that might form part of a better way, let me cover some principals upon which a better forecasting should be built.

1. Value to Everyone: The sales forecast should be of value to everyone in the chain… Sure the Company needs to know where its sales are coming from & how much, but so does every sales person and sales manager. 
2. Value to Everyone: The forecast review process should be of value to everyone in the chain… Not just a ‘beat-up’ exercise to gain a higher forecast commitment from the sales people.    
3. Sales Increase: The forecasting process should be a quality process to increase both forecast accuracy AND SALES THEMSELVES. 
4. Accountability: No forecasting system or CRM should override the personal judgment of the people closest to the sales; i.e. the sales reps 
5. Worst Case: The forecasting system should be capable of predicting a worst case; i.e. a forecast that can be counted on. 
6. Logical Systems: Any system should not use flawed logic as described previously 

 

System & Process Overview

So with the above in mind, let’s look at:

1. An outline of a forecasting system at the sales rep level
2. A Sales Managers review process
3. Handling of big deals
4. How VP Sales can use the aggregates of a Funnel System as a cross-check of the forecast. 

 

1. 1.      An outline of a Forecasting System at the Sales Level

First, our method depends on that branch of mathematics called discrete arithmetic, which deals with entities that cannot be divided into fractions.  For example, if you are running a trucking fleet and estimate that you only need 60% of a truck for a given load, unfortunately the whole truck still has to make the trip.  Sorry!

Similarly, with sales forecasting of discrete sales opportunities (versus market forecasts), you will win an opportunity in its entirety, or lose it in its entirety, or it goes away.

Building Block 1: Definitions of Probability: The accuracy of sales forecast is based on the individual judgment of each sales opportunity, which definitely requires the prediction and assignment of some probability. For example, specific probabilities for a company’s sales process could be described by:

100%     Sale is done; all relevant paperwork is signed

98%       Everyone who needs to sign off has done so; awaiting signed agreement

90%       Verbal OK and nothing can stop the sale

75%       Verbal  OK, but Internal Issue to be solved *

50%       This is a Qualified Opportunity *

0%          All other Opportunities
(NB: The above is purely a sample and suitable definition criteria for “Initially” and “Hard Qualified” would also be developed)

Building Block 2: Definitions of Customer Pursuit Process Stages (aka Sales Process Steps):  As mentioned earlier, many CRMs allow the definitions of repeatable steps in a sales process, if done well,  can increase sales quite dramatically.

Example of specific Customer Pursuit Stages:

Step 0:                 Suspected Opportunity         

Step 1:                Meeting with Decision Maker(s) Positive

Step 2:                Technical & ROI Feasibility Positive

Step 3:                 Qualified Opportunity  

Step 4:                Proposal being Actively Considered  

Step 5:                All Objections Understood & Handled Positively
                             

Result:                Won 100% Lost, or Abandoned 0%

(NB: The above is purely a sample and another level of detailed Exit Criteria would also be developed)

We suggest harnessing the two key pieces of intelligence;

1. the percentage probability of winning (as seen by the salesperson) (Table 1)
2. the critical step reached in a defined Customer Pursuit Process  (Table 2)

 

Using these two pieces of data for each opportunity, you can calculate different ‘Advisory Views’ of the forecast based on an opportunity being either “in” or “out,” of the forecast.

Example 3.  A typical 3 Advisory View Forecast that we would create might look like:  

Company	Sales Step	Product Line	30 Day K$	Prob %	60 Day K$	Prob %	90 Day K$	Prob %
XYZ Inc	5	A	110	99%
ABC Ltd	4	B			55	90%
GHL & Co	4	A	80	85%			120	50%
DEF Inc.	3	F
URL & Co.	4	A	1,600	90%
1. Optimistic			1,790		55		120
2. Most Likely
3. Worst Case
Optimistic: All Opportunities
Most Likely: Only Opportunites that have reached Step 4 AND >89%
Worst Case:  Only Opportunites that have reached Step 5 AND >98%
4. YOUR Commitment			110		0		0
5. YOUR Most Likely			1,710		55		120

 

For the few transactions above, lines 1, 2 and 3 at the bottom of the table were calculated to include opportunities, or not, based on a combination criteria of Sales Step completed and Prob% (as defined in red).

However, the numbers in Rows 4 & 5 are entered by the sales person, and are arguably the most credible and important pieces of data in the forecast.

In my experience, if managed correctly with true value added Funnel & Forecast Reviews by the manager; not only does forecast accuracy increase, but so do sales!  Which brings us to…

1. 2.      The Sales Managers Review Process

As stated earlier, many sales managers use the Funnel & Forecast Review Process to beat a higher committed forecast out of their sales reps, so that they can, in turn, pass a higher commitment to their boss.  This dangerous practice eventually catches up with the manager, as he or she will consistently miss their forecast commitments which were inflated to be unrealistic in the first place.

So, in line with my 2^nd Principal, let’s look at how the manager can add value.

To start with, why we are even doing this Review, and what are the objectives…

As stated before, every business needs to know w here it is going; and the sales forecast is a key input to knowing how much can be spent on everything from pencils to payroll.

Even more important, the sales people have a franchise to sell the company’s products and services, ie: THEY run a business too and THEY need to know where THEY are going.

Funnel & Forecast Reviews also give a key opportunity to spot areas to increase the sales by using this critical review to:

þ  Understand where each of your sales reps are in the selling cycle for each opportunity (or at least the larger ones)

þ  Find where your sales reps have problems, or opportunities to progress further

þ  Help Strategize to maximize the chances of closing sales (or at least moving them forwards)

þ  Help remove low probability opportunities

þ  Review your sales reps’ time/activity management/prioritization

þ  Assess the short & long term business potential

þ  Look ahead to year end

þ  Help each sales rep come up with a realistic Sales Forecast

þ  Spot your sales reps’ performance issues.

þ  Provide coaching for improvement.

Note that the actual Forecast appears as number 8 on the above list and becomes a by-product of a value-added quality control process; versus the sole objective.

Clearly to do this in an organized manner on a regular basis requires a disciplined process and skill by the manager (as laid out in my eBook, The Science of Sales Management).

1. 3.      Handling of Big Deals

As per the examples used, the effect of very large sales opportunities on a Forecast can be great, or devastating, so clearly these need to be carefully analyzed to see if they are winnable and, if so, how. And, IF NOT, get out early before you waste resources on an unwinnable sale.

I used our own process called Winning the Big Deal! that helps to do this, but now there are some excellent web based systems, such as Occulus, that do an excellent job of analyzing the risk factors, establishing the true probability of sale, and helping to strategize to win the very large sales.

  

1. 4.      Handling of Run Rate Business

Many of our clients have smaller, regular sales from Service Contracts, Supply items etc, and which are credited to Sales People. Thus, there is a requirement to keep track of and forecast these items.

But since many of the individual amounts are very small, we found it was easier to lump them together into line items called Run Rate. Further we could then apply the same discrete logic to these amounts by creating 3 such line items, one for each of Optimist, Most Likely and Worst Case.

 Example 4 below shows how this might integrate into the previous model:

	Company	Sales Step	Product Line	30 Day K$	Prob %	60 Day K$	Prob %	90 Day K$	Prob %
	XYZ Inc	5	A	110	99%
	ABC Ltd	4	B			55	90%
	GHL & Co	4	A	80	85%			120	50%
	DEF Inc.	3	F
	URL & Co.	4	A	1,600	90%
Run Rate	1. Optimistic			1,939		105		120
Run Rate	2. Most Likely			1,740		95		40
Run Rate	3. Worst Case			140		30		30
	Optimistic: All Opportunities
	Most Likely: Only Opportunites that have reached Step 4 AND >89%
	Worst Case:  Only Opportunites that have reached Step 5 AND >98%
	4. YOUR Commitment			140		30		50
	5. YOUR Most Likely			1,740		85		160

 

1. 5.      Turning the above into a Forecast versus Goal

One of PERFORMAX’s key differentiators has always been our total commitment and focus on helping Sales People, Sales Managers and the entire Salesforce make their goals.

So if you take the above template and make the following changes and additions:

1. Changing the “30, 60, 90 Day time buckets” into “30, 60, 90 Day, Rest of Year, Next Year time buckets” and making the Funnel & Forecast Calendar sensitive
2. Adding Year-to-Date Actual Sold
3. Adding Year End $ Goal

it is comparatively easy to compare the Advisory and Sales entered Forecasts to the Year End $ Goal.

From this, it is simple to see:

• Can each individual make their Year End Goal
• If not, what MUST the individual do more of, or better (ie: more Opportunities, or a better job working the ones he or she already has, or both).

 

1. 6.      How VP Sales can use the aggregates from the Funnel System as a X-Check on the Forecast. 

So hopefully we have a good system & review process in place between front line sales and their managers.

As a VP Sales of $100 million sales organization, I found that another way of looking at the aggregated Funnel from all of my sales force gave me some averages that I could use as a sanity check on the aggregated Forecast Items from my sales force.

For instance, I found that from all the $ Items Forecasted by sales to close within 30 days AND that had reached the “Proposed Step” in our defined sales process, we actually closed 55% of these every month. So before going in front of the monthly Management Committee, I used this as a Cross-Check on the aggregated Forecast, and modified my Commitment accordingly.

Corollary: After 3 months of the 55% ratio holding steady, this then caused me to start an initiative to find how to increase this from 55% to 65% etc.

(For details of this, see the brief flash video at http://performax.com/Spencer/PXCase1.html }

Conclusion – The Win/Win

It is obvious that accurate Sales Forecasting is not easy and there are many factors to be considered to do it well.

What I have tried to outline here are methodologies and processes that:

1. Are based on a set of Founding Principals that are fair and give value to everyone involved
2. Yield a Worst Case Scenario upon which Sales People, Sales Managers, Executives & the Company can count on.