What purpose does sales forecasting serve any way ?


As part of my ongoing statistics education ( data science of you want to make it sound really important)  , I had the opportunity to analyze historic sales forecast vs actual sales of a company recently to find out optimization models . Since managing sales is something I have done and continue to do – it was all the more fascinating for me to understand what the data was “supposedly” pointing out . 

And then an old buddy called me out of the blue and while talking shop – he mentioned that despite extra focus on accurate forecasting , the new CEO of his company was constantly frustrated with his sales leaders . A month before quarter close he accused them of sandbagging the forecast – and he got the numbers he liked as a result . Two days after quarter closed , the results didn’t look anywhere close to forecast and he yelled at sales management for bad forecasting . We both found it funny and sad as he was recounting this story – it’s all too common a scenario .
Let’s get tools issue out of the way . Although they won’t admit it publicly – companies that build sales management and planning tools also mostly do sales forecasting on a series of spreadsheets . Some put a fancy UI on top for C levels to see the results . Essentially – very few companies have figured out a tool to enable end to end sales forecast management  . Tools are all great – just that tools are not the problem this business function is low in effectiveness. Tools can help somewhat with efficiency – but not effectiveness .

Why do people bother with forecasting to begin with ? I will tell you my view – others might have their own opinions. The ideal reason for me is making prioritizations on resource allocation, followed by predictability . 

I like my sales reps to be “selfish” resource hoggers who do everything they can to win the deal (ethically etc of course). I want my sales managers on the other hand to provide the company view and prioritize which deals get what resources . This provides healthy tension in the system and gives me enough information to make executive decisions ( hiring , changing structures , discounting principles etc). 

Predictability is only a second aspect for me – but it is a close second . For good or bad – investors need predictability every quarter whether it is public or private capital markets the company operates in . And this causes a lot of “tail wags the dog” scenarios in sales forecasting . 

Pipeline management is a perfect casualty . Qualified pipeline is what we as sales leaders think drives sales . That is possibly true too – but what the sales system tells you as qualified might not be real in most cases . Which brings us to this thing called “coverage”. Conventional wisdom in my indistry is that to close $1 in sales , you need somewhere between $2.5 to $4 in “qualified” pipeline . We even.        pay some teams directly for drumming up demand to make sure our reps have such coverage . Plus the reps bring in their own opportunities . 

More often than not – reps won’t have the coverage their upline managers expect . There starts the exercise of low quality opportunities getting created to make the numbers up . Some times it is done with best of intentions – overly optimistic reps just think they have a real opportunity and their managers either share their optimism or just are too lazy to test for qualification till they get too many questions . End result is that a wrong pipeline number is set and published that is 3X the expected sales number from the CFO . And when sales doesn’t come close to that – or when sales exceeds the “call” by a lot , no one knows why. Should anyone really be surprised ?

Let’s look at the evil effect on resource allocation too before we wrap this up for today. Two thirds of way into a quarter , experienced managers will know whether they have a prayer of hitting quota for their team. This usually starts the process of parading top execs from the company in front of top execs at customer . The CEO of a vendor who goes before the CEO of a customer at end of quarter very rarely has the ability to say no to unreasonable asks . So they end up “buying” business at high cost of sales . Some Sales reps and sales managers who have a lot of experience know how this game plays out and occasionally do set up things this way for the top executives . You can’t blame them – your poor forecasting process and the metrics you use to compensate sales people are now working against the best interests of your company . 

Bottom line – before sales managers over invest in sales forecasting , they need to think through the holistic picture of what they want to achieve as end result . Situation differs for all of us and hence I don’t think there is a prescriptive one size fits all solution . I definitely will be rethinking this all over from scratch over the holidays . 

Is my cup of green tea frappucino half full or half empty ? 

  

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5 thoughts on “What purpose does sales forecasting serve any way ?

  1. Pingback: Sales forecasting and effectiveness - slotting in the role of the CFO - diginomica

  2. I also think there is a cultural factor to add to this- how German sales reps qualify and forecast is very different to American or South-East Asian sales reps. This adds to the complexity of forecasting and requires a skillful judgement from the sales directors if an opportunity is a real one or just, best case, a warm lead.

  3. I share you view but the issue is not the analytics, but the instruments gathering the data – people. When someone says the deal is 25%, 50% or 75% likely, it is barely more than a guess. You’d have to go back and apply accuracy ratings to each sales persons ability to correctly predict their own success. My bet is most would either be terrible or almost random. People in general are not very good at telling their own fortunes.

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