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 ?