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Rational Forecasting The Convergence of Skills, Strategy and Pipeline Management By Tom Snyder

Rational Forecasting

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The Buying Cycle™ Creating Client Value™

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Changes Over Time

Recognition of

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Decision

Evaluation of O

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R e solution

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Rational Forecasting

Rational Forecasting The Convergence of

Skills, Strategy and Pipeline Management

Sales executives typically describe forecasting with one of two statements:

“The only way I come close is by making my own gut-feel alterations to the lies my salespeople tell me.”

“There has to be a better way of generating numbers.”

Accurately forecasting sales numbers is the bane of most sales executives' existence. While everyone accepts that effective management requires accurate information and metrics, few sales executives are satisfied with the sales forecasting tools or processes they employ. Most rely on the perceptions of their salespeople about which business will close, and when. Unfortunately, this approach leaves the manager exposed to the vagaries of subjectivity as each salesperson either hedges or exaggerates. Under these circumstances, sales forecasting is more alchemy than science.

It is the position of this white paper that first, inaccurate forecasts are unnecessary, and second, they do not result simply as a failure of process. Inaccurate sales forecasting is a symptom of a more pernicious problem: failing to incorporate the customer’s point of view in the development and implementation of sales strategy. If the seller and the selling organization craft sales strategies on the basis of buyer behavior, creating a forecasting model of exceptional accuracy is relatively straightforward. In fact, research has proven that the skills and tactics of customer- focused selling are the basis of good forecasting.

This paper will discuss two central research-based conclusions:

• Poor forecasting is only the symptom. The real problem is sales strategy that lacks “customer-centricity” in both focus and execution.

• Effective forecasting tools and processes do not need to be complicated or overly analytical. They are the natural product of good strategic planning.

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Problem Definition vs. Ideal State

In an ideal world, salespeople and their managers would be able to predict future sales results with a high degree of accuracy, at least for the period of one future sales cycle. This should hold true regardless of the length of the sales cycle.

While it may be difficult to predict each individual piece of business (particularly with new opportunities in early sales pipeline stages), forecasting sales numbers in the aggregate should be nearly as reliable as the forecasts most businesses make of “controllable” operations like their manufacturing processes. Sales management should be able to apply the same concepts of variance reduction (such as Six Sigma) to sales forecasts that other managers use to control non-sales processes.

This is more than a matter of just giving comfort to company leaders. Wall Street punishes the smallest negative variance in profit predictions. A half of a percent shortfall in earnings can cause stock prices to plummet. For those companies less concerned with public equity markets, consider the impact that unpredictable revenue figures can have on budgeting, financing and discretionary spending.

The surprising fact is that while even small variances in most areas of a business would be cause for major concern, many business leaders and their sales managers simply accept their inability to accurately forecast revenue numbers. In how many companies does the same conversation occur at the end of each reporting period? How often do sales managers hear something like, “It’s three days until the end of the month/quarter/year and we are nowhere near our budget/forecast/goal/my-promise-to-the-CEO. Do something to find revenue. We just can’t tell the CEO/the Board/Wall Street that we fell that short.” Or, how about the good news? “Wow. We are way over what we thought we’d do for this period. I love these kinds of surprises, I just wish they’d happen more often.”

Huthwaite’s research indicates that these kinds of reactions are indicative of a fixable problem; the inability to execute customer-centric sales strategies.

What Good Forecasting Requires

Good forecasting requires a set of leading indicators that give salespeople and sales managers an easy-to-use tool for predicting the likelihood of revenue from each individual account and opportunity. However, these kinds of metrics are rarely developed and used. Much more

… while even small variances in

most areas of a business would be cause for major concern, many

business leaders … simply accept

their inability to accurately forecast revenue numbers.

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common are seat-of-the-pants predictions by overly optimistic or consistently conservative salespeople, modified according to equally subjective judgments by sales managers.

If such leading indicators are to be identified, the starting point is a proven sales strategy that is executed according to what the customer is doing at any given moment to reach a buying decision. For the sake of this discussion, let’s assume that “sales strategy” refers to the steps salespeople take in either closing a new opportunity or in deciding that the business cannot be won.

It is important to point out that this assumption is a fairly significant one. Many companies allow their sales force to develop new opportunities with little more than an ad hoc this-is-the- way-we-have-always-done-it approach. When done properly, sales strategy, like all other parts of the sales function, is a matter of science, not folklore. While a full discussion of sales strategy is beyond the scope of this paper, one point cannot be overstated: it is impossible to move forecasting beyond pure guess-work unless the sales force has a common set of practices for developing customer-centric sales plans (see Major Account Sales Strategy by Neil Rackham, McGraw Hill, 1989).

What is Sales Strategy—Milestones

It is important to not confuse sales strategy with a simple checklist of activities that the seller associates with moving a client toward a sale. Real sales strategies use an assessment of where the customer is in the process of making a buying decision to adjust and execute each step through the sales pipeline. Too often, sellers operate as though activities such as completing a SWOT analysis or submitting a proposal constitute a sales strategy. While each of these steps is important, and in some cases essential, to making a sale, they represent steps in only one-half of the process. What’s missing is the perspective of the customer.

Real strategy relies on incorporating the customer’s point of view and continually realigning the steps in the sales process accordingly. Why is the customer’s point of view so important? Imagine the parent whose only attention to child rearing was a checklist of activities to be completed as the child reached particular ages, and who was oblivious to how the child reacted or developed. No one would call this good parenting. Yet many sellers look at activities such as completing a SWOT analysis as their only method of planning competitive

When done properly, sales

strategy, like all other parts of the

sales function, is a matter of science,

not folklore

Well formulated and executed sales

strategies incorporate both a seller and a buyer

focus.

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positioning. Isn’t the customer the final arbiter of who wins the business? How does the seller know that their own SWOT analysis coincides with the customer’s view?

Well formulated and executed sales strategies incorporate both a seller and a buyer focus. Good strategies juxtapose insights such as those gained through SWOT with considerations such as customer buying criteria and how the customer ranks the seller against these criteria. By comparing these two points of view, the seller can identify strengths and weaknesses in the sales strategy. These strengths and weaknesses are the basis for adjusting the strategy and tactics of seeking a customer’s business.

This means that sound strategies are dynamic. When done properly, the seller adjusts the plan with every new piece of information obtained. It is the ability to plan and execute such strategies that form the bases for great forecasting. Let’s dissect this idea by looking at the tool most people use in place of a strategic plan; the sales pipeline.

Pipelines Aren’t Strategies

Too often, sales pipelines are constructed with milestones that register activity rather than events. Effective strategies are those that focus on events and on customer commitments not just on checking off which activities a salesperson has completed. It is a mistake to depend on pipeline milestones such as “customer gap analysis defined,” “initial sales meeting completed,” “customer audit performed” or “proposal submitted.” These so-called milestones have little to do with measuring the effectiveness of a sales strategy and even less to do with how to measure the likelihood of closing a sale. Yet it is just these kinds of measures from which forecasts are so often constructed. No general would enter a battle and determine strategy based on things like “guns loaded” or “marching orders issued.” These activities are not inconsequential, but they contain no valuable data as to where the battle plan stands with regard to its objectives.

Great sales strategies, and pipelines that track sales progress, measure events rather than activities. This distinction is critical to producing accurate forecasts. If, for example, I am attending an important client meeting, it is very likely that I need to buy a plane ticket, drive to the airport, park my car, check in to the hotel in the city where the meeting is being held, etc. While each of these activities is critical to my attendance, they have little direct impact on the quality of the meeting.

Reflect, however, on the kinds of milestones that are built into most sales pipelines. Do they reflect the sales equivalent of these kinds of activities? Huthwaite’s research indicates that they often do. Is it any

… effective sales strategies require

planning that identifies the

outcomes of events as the basis for moving toward

a sale.

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wonder that pipeline milestones like “submitted a proposal” or “delivered capabilities presentation” contribute to poor forecasts?

In short, effective sales strategies require planning that identifies the outcomes of events as the basis for moving toward a sale. The primary distinction here is that “events” incorporate the customer’s point of view, while “activities” have a seller-only perspective. Therefore, if strategy is the linking of events to achieve a specific sales outcome, then it is these kinds of events that should constitute the milestones in the pipeline tool we use to forecast.

How Buyer Behavior Drives Strategy

If the pipeline tool has been developed with these ideas in mind, then accurate forecasts are the natural outcome of using the tool. Effective pipeline tools are therefore representations of two aspects of each sale; the events that the seller has conducted or completed arrayed against the buyer’s incremental commitments to make a buying decision. Let’s take a look at how these things work together.

Figure 1: Customer Value Cycle

Understanding

Investigation

Differentiation Minimize Risk

Delivery

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We begin by establishing a set of discrete steps in our sales process that track each opportunity as it moves from “suspect” to “contract.” It matters little whether this cycle is represented as having three stages or thirty. What is necessary is that each stage legitimately represents some significant change in the orientation of the strategic seller. What drives movement through the pipeline are the commitments and actions taken by the buyer as they move closer to making a buying decision.

Huthwaite conducted a twelve-year study of buyer behavior and determined that buyers in complex sales always move through a set of five predictable stages as they move to making or reaffirming a purchasing decision. This cycle is represented in Figure 1. The kinds of commitments that buyers make, and the areas of focus that they adopt, change dramatically as they move from stage to stage.

Buyers in the stage called Recognition of Needs, for example, focus on defining a problem or an opportunity in terms of what a successful outcome or solution will look like. Buyers in Evaluation of Options are focused on differentiating between the various suppliers vying for their business. They form decision criteria and use these criteria as a lens through which to examine the capabilities and offerings of each potential supplier. In Resolution of Concerns, buyers are evaluating the consequences of following through on a tentative decision. After the buying decision is made, buyers in the Implementation phase are looking to measure their actual success against the vision of success created earlier in the decision cycle. Finally, buyers in Changes Over Time do not yet recognize a need for change and are typically comfortable with the status quo.

Developing an effective sales strategy requires the seller to have three skills regarding this buying cycle:

• The ability to recognize where the buyer is in their decision cycle at any particular time

• The ability to execute the specific skills that create value for the customer at each stage

• The ability to move a buyer both forward and backward in their decision cycle

These are the skills required to execute a strategy. Without these, no forecasting tool will ever be accurate. With these skills, the use of a pipeline tool to accurately forecast sales becomes a straightforward exercise.

Rational Forecasting

Knowing the Customer’s Point of View, the Pipeline Becomes a Useful Tool

An example of a sales pipeline tool appears in Figure 2. A note of caution is important. The tool in Figure 2 is a generic example, and may be too general to be of use in any specific business. Note that the stages of the tool describe a different focus for seller activity as the opportunity moves forward. In general, any tool needs to recognize that a seller’s first job is investigation. No winning strategy can be designed without first understanding the customer’s point of view. This means understanding what the buyer is hoping to accomplish with the purchase, where the customer is in the decision cycle, etc. Thus, for example, it is distinctly possible that an opportunity may be in the first stage of a seller’s pipeline, but the buyer is in a late stage (such as Resolution of Concerns) in their buying process. Aligning these two points of view then allows a seller to quickly develop an event-oriented sales strategy which focuses on the pipeline milestones that most need addressing.

Using a pipeline tool to develop accurate forecasts requires that each company (and often each division within a company) determine which milestones uniquely measure progress in their particular market and sales environment. Companies often try to force their entire sales force to use a single tool. However, the way to do this properly is to have one set of pipeline stages

Figure 2: Outcome Focused Pipeline Tool

Opportunity Qualification

Needs Identification

Solution Differentiation

Risk Resolution

Decision/ Confirmation Implementation

Milestone 22Milestone 5

Milestone 21Milestone 15Milestone 9Milestone 4

Milestone 20Milestone 14Milestone 8Milestone 3

Milestone 19Milestone 17Milestone 13Milestone 11Milestone 7Milestone 2

Milestone 18Milestone 16Milestone 12Milestone 10Milestone 6Milestone 1

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common to all parts of the business, but allow the milestones that measure progress within and between stages to vary according to the specific selling environment of each business unit.

With this kind of tool in place, developing metrics that estimate the likelihood of producing revenue at each opportunity stage of the pipeline becomes straightforward.

Forecasting Metrics and How to Construct Them

Once the tool has been constructed incorporating both the seller and the buyer point of view, establishing weighted metrics for each stage is an exercise in feedback and adjustment. This begins with estimates of the total revenue available for each opportunity in the pipeline. The sum of these collective estimates can be called the gross value (GV) of the pipeline. See the simple example in Figure 3. The GV of this pipeline is arbitrarily assigned to be $16 million. Then, by assigning a discounting factor to each stage, we can use these factors to produce an economic value (EV) of the pipeline as well. For example, assigning the value of 20 percent to stage one, 40 percent to stage two, 60 percent to stage three, 80 percent to stage four and 100 percent to stage five gives us a first pass at an EV. Adding up the value of pipeline opportunities in each stage, then multiplying that sum by the discounting factor for each stage produces this estimate (please see Figure 3). The EV is therefore the future revenue that can be expected from the pipeline at any given point in time. In the case of Figure 3, this would produce an EV of $8.2 million. This is one form of a sales forecast that can be useful in several ways.

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First, for any given salesperson, an EV of, say, 1.5 times quota could serve as a leading indicator of a salesperson’s likelihood of achieving quota. Well run sales forces often use a multiplier of between 1.5 and 2.5 times EV as such a leading indicator of a salesperson’s success. Some companies also establish a GV expectation as a longer term leading indicator of success, with these typically running 2.5 to 4 times the salesperson’s quota.

This tool can also drive sales forecasts for particular time periods. Developing an estimate of sales for the current period is simply a matter of calculating the EV for late stage(s) opportunities. Obviously, which stage or stages are included in current period sales forecasts will be determined by the average length of sales cycle, but if the sales force has the skills to execute their strategies, the late stage EV should be a close approximation of current period revenue.

Feedback and Refinement

The discounting factors of 20 percent, 40 percent and so on are just starting points. Developing accurate forecasts requires that these multipliers be revised based on real world data. On a routine basis, managers should evaluate how accurately current period revenue was previously predicted using the EV technique. Using this analysis, the discounting factor for each stage can be refined. Over a relatively short period of time, this process will hone the discounting factors to precise predictors of future business. For example, it may well be that opportunities in stage two have a far greater than 20 percent likelihood of eventually producing revenue. By the same token, it may prove that opportunities in stage three have far less than a 40 percent likelihood of generating revenue. The only way to establish accuracy in these numbers is through the use of feedback and data collection. Ultimately, once these discounting factors reliably predict future revenue, sales managers can focus on these numbers to drive coaching activity, personnel development and new business acquisition.

Summary

Huthwaite’s research has shown that few sales forces have the ability to execute sales strategies based on customer buying behavior. Although many of these companies might disagree, their lack of accurate forecasting is prima facie evidence of this conclusion.

Developing accurate forecasts requires

that these multipliers be revised based on

real world data.

In truth, accurate forecasting is the

natural bedfellow of the ability to execute a customer-driven

strategy.

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Many companies have implemented elaborate CRM systems with high hopes of improving sales forecasts. To some extent, these expectations do materialize. Collecting a wealth of data where no such data existed before will obviously add some science to a previously subjective methodology. But, these improvements only mask the underlying problem. In truth, accurate forecasting is the natural bedfellow of the ability to execute a customer-driven strategy. And, a customer-driven sales strategy is the key to a short, effective and high percentage sales cycle. With the skills to incorporate the customer’s point of view into sales strategy, accurate forecasts are the natural by-product of a good sales pipeline tool.

Example A: Typical Pipeline = Forecasting Inaccuracy.

Example B: Customer/Seller Pipeline = Forecasting Accuracy.

The Difference: Strategically Skilled Sellers.

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Opportunity Qualification

Needs Identification

Solution Differentiation

Risk Resolution

Contract Confirmation

1. Players involved in decision process identified

2. Initial contact with FOR achieved

3. Buying steps in decision process identified

8. FOD contacted

9. FOP confirmed

10. Where buyer is in decision process identified

11. Decision Criteria identified

4. Nature and level of severity of buyer concern identified

5. Organizational competency to address concerns verified

6. Personal and organizational credibility achieved

7. Revenue potential meets profiled standards

12. Explicit Need/s confirmed

13. Capacity to deliver a solution perceived by buyer achieved

14. Cost justification presented

15. Availability of estimated budget confirmed

16. Resource availability confirmed

17. FOP contacted

18. Events calendar agreed to

19. Decision Criteria addressed

19. Buyer’s understanding of link between final solution and Explicit Needs is confirmed

20. Major solution vulnerabilities identified and resolved

21. Major competitive advantages maximized

22. Revenue from ‘best first win’ identified

23. Long-term revenue potential estimated

24. Resource allocation agreed to

25. Implementation risks identified and addressed

26. Advocates identified and leveraged

27. Blockers identified and minimized

28. Compelling and believable message for final solution identified and delivered

29. Key players have taken ownership for solution

30. Scoping meeting with internal resources conducted

31. First signed contract received

32. Implementation plan agreed to

Stage 1 Stage 2 Stage 3 Stage 4 Stage 5

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Average vs. Excellent Sales Forecasts

Average Excellent Inaccurate sales numbers even in current period

Forecast viewed by sales as a necessary nuisance

Forecasts focus on sales activities

Forecasts adjusted by manager’s “gut feeling”

Weighting factors are arbitrarily chosen

Accurate numbers across several future periods

Forecast is a part of a tool that drives sales strategy

Forecasts focus on customer events

Forecasts are reliable and empirically verified

Weighting factors are empirically refined

Typical Pipeline = Forcasting Inaccuracy

Suspect Cool Warm Hot Contract Delivery

Establish Potential

Acct. Opp.

Present Audit

Results

Hold First

Meeting

Conduct Audit

Send Initial Letter

Present Initial

Proposal

Forward Product Info

Identify Target Vertical

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