Sales Forecasting is a myth !

Who in their right mind ever thought up sales forecasting?

Can't you just see the manufacturing staff of every company sitting around waiting each month anxious to read the sales forecast to determine what to build? Talk about a way to go out of business!

Manufacturing (this takes into account hardware, software, consulting services and anything else that is sold) does not build to forecasts!

That’s right, manufacturing does not build to forecasts, companies build to statistical history. This is true for anything sold. If you sell ice cream, you buy month's supply of ice cream based on what you sold over the last 3,6 or 12 months. If you increased your sales by 20 quarts of chocolate every month for the past 12 months, guess how many additional quarts you are going to order…20! If you placed an ad and the sales increased 20% every single time it ran, guess what? You would increase your next order by 20%. This is not rocket science; production is based on history not forecasts.

The 'build bases history' is the same regardless of what is produced; cars, washers and dryers, baseball caps, PC's airplanes, locomotives, widgets…you name it. Someone in management has a statistical chart that shows growth (or decline) and builds accordingly.

So from where does this magical sales forecasting idea come? The roots are based in the history of sales managers being the good guys and in their need to avoid tough questions. How many sales managers say the same thing every month - "It's not me asking for this forecast, it’s the factory, the owner, the VP of manufacturing." You name anyone that is not them, anyone 'above', and that's who needs it. Rubbish!

CEO's need to know one thing and one thing only about sales: Do you have enough in the pipeline to meet your quota? Sales Managers need to concentrate on one thing and one thing only – the pipeline. Either your staff has a good pipeline or they don't.

CEO's know, statistically, that Sales is going to produce £X of sales per month based on the following: within the sales force the top 20% sell at 200 -300% of quota, the next 60% sell at 90 -120% of quota and the bottom 20% at less than 90% of quota (20/60/20). Guess where everyone spends their time? That's right, getting the top 20% to sell more. What a waste of time! Those people are doing their jobs and other than making sure that there is nothing holding them back, like the sales prevention teams which every company employs, they should be left alone.

The bottom 20% should be given a specific action plan and then let go if the results are not quickly forthcoming. The sales manager needs to be focused on the middle. Following is an example of how this attention can produce results.

Given a total sales staff of 10 each with a quota of 100 with a 20/60/20 split on performance consider Table A. The most important three numbers are: Sales Staff, total sales (£1,150) and the sales £ per staff, in this case £115.

Table A

Now consider Table B, reflecting a sales manager who is spending time where needed. Result? The top 20% are left alone, the middle 60% have raised their quota achievement from 100% to 150%, and the bottom 20% are let go.

Notice that sales goes up, head count goes down and sales per person moves up from £115 to £163, and the cost of sales goes down.

Table B

What does this have to do with forecasting you ask? Everything! If you improve the close ratio in the middle of the pack, your rewards will be immense.

What have we gotten in the open? Sales Forecasting is not about forecasting, sales forecasting is about monitoring activity. Let's start calling Sales Forecasting what it is: Sales Activity Monitoring (SAM).
Understand this: no one at corporate gives any credence to sales forecasts - other than holding your feet to the fire when your forecast is off. And your feet are held to the fire every month! If you still believe forecasting is needed so that corporate offices can produce the correct products mix,. stop reading and keep doing what you always do - because you are going to keep getting what you have always gotten: considerably less than desired and possible.

So how does SAM improve Sales? Simply. Regardless of what one sells, no one can predict when an order will come in. The secret to SAM and raising closing ratios is tracking real opportunities. If you sell cars, you can't tell when someone steps on your lot if he will buy. Selling life insurance - who knows. Selling refrigerators - right. Multi million dollar complex systems? Same thing. No matter what you sell, you actually do not know until the order is placed what is a 100% certain sale.

SAM Basics

Let's use the selling of cars to illustrate SAM's significance. To stay in business, let's say my car dealership needs to sell 10 cars per day. Based on past history, I know that the closing ratio of people looking to buy is 5 to 1 (5:1 or 20%). For every five people who step on the lot, one will buy. Now I have the basics. To sell 10 cars a day, with a close ratio of 5:1, I need 50 people on my lot every day. I don't care how, I don't care who and I don't care when, because I know if I get 50 people to step on my lot per day I will sell 10 cars. And how, you ask, do I know? Statistical average.

Beginning to see the picture?

Now here's the rub with forecasting! Still assuming we need 10 deals; let's say I only have twenty people visiting my lot, see a problem already. Do the math. With a closing ratio of 5:1 we get four sales…Remember, we need to have 10 per day. What sales managers do with the above scenario is fudge the close ratio, making the close ratio whatever number is needed to make 'their numbers. In this case, the close ration goes to 2:1 or 50% and lo and behold, we forecast 10 sales. The only problem is that the close ratio in reality is still 5:1, we sell five cars and our forecast is off again.
There are two problems here: a) There is no way in the short tem to increase the close ratio from 5:1 TO 2:1 and b) There is not enough activity to make the actual close ratio work.

I propose that sales manager be sales managers - not coaches, not closers, not presenters – simply Sales 'Activity' Managers (SAMs). Forget sales forecasting and start evaluating activity! Activity is the only thing with which a sales manager ever need be concerned. A sales manager should make sure that all steps for every opportunity (and the steps are different for every company, but they are same within a company) are completed or in process. Only then can one evaluate an activity and determine whether the opportunity is real. Tracking real opportunities are is SAM is all about.
Step back for one second to get the relationship picture between sales activity and sales. Though not the same, they are joined at the hip. Ever see someone get a home run by not getting to the plate? No 'at bats' means 'no hits'. Just as no one gets a home run every time, no one closes every opportunity. But, if you get to bat enough times, and you perform all the basics correctly, you will get hits. Likewise, if provided enough real opportunities and perform all the steps correctly, you will get sales.

Forecasting Fallacy

Table C represents 10 sales people (A-J) over 10 selling cycles (1-10). Each row represents the sales by each sales person with their coinciding total on the right. Each column represents the sales by each salesman for the total selling cycle with total at the bottom.

Let's now assume we need five deals a month and, because of history, we know our close ratio is 2 to 1. Let us further assume that quarters represent opportunities – heads we close; tails we lose. Here are the actual results of 10 tosses using 10 quarters (100 total tosses) with the black dot representing heads.

Table C

First of all, notice that the total number of heads is 50! This number will always be close to 50% of the number of tosses…always. So, based on statistics, we know that our 'close ratio' is 2:1.

Depending on your goals, there are three ways to manage the sales process. The first one is to manage to your quota as a sales manager. The second is to manage to the sales staff quota. The third is to motivate everyone to meet their individual potential.

Managing to Your Quota

In the above Table C your quota has been met. The problem with Table C is that you, as sales manager, are playing the numbers - not considering the closing ratio for your sales staff but the closing ratio for you. You are concerned with quantity rather than quality of activity. The problem with this approach is that you are driven by quantity. You know that the law of closing works in your behalf. Therefore you to drive your sales force to make more calls and you get more business. This model is typically used in call centers (bull pens) and has a high turnover in sales force. This model does not ultimately produce a stable and motivated sales staff.

Did I mention that heads turned up 50% of the time? Amazing what statistical averages tell us. Remember, there is no way to predict on any throw which cells will be heads and which will be tails. This means that there is no way to know for certain which call will result in a sales. Listen and listen well. Sales managers using Table C don't need to know this. Again, they don't need to know…all they need to know is that they need to have 50 heads (sales) over 100 throws (opportunities) and if they throw at least 100 times, they will get pretty darn close to 50. This is true for sales activities, if you have enough qualified prospects in the pipeline (in this case 100), and if your close ratio is 2:1, your team will close 50.

This is where sales managers get into problems. Let's say I only have eight columns representing sales staff. My close ratio hasn't changed (still 2 to 1) and I still need 50 deals. Alas, I only have 80 opportunities on the table…Guess what? I am not going to make my numbers. So what do sales managers do? They all fudge a bit and change the 2-1 close ratio to 1.6 to 1. Like magic, they are am back to my 50 deals that close. The only problem is: the ratio is 2-1 and not 1.6 to 1. The 'forecast' is off…again.
An old question is appropriate here: How many legs does a horse have if you call a tail a leg? The answer is four. Calling a tail a leg doesn't make it a leg. The same is true for ratio. Arbitrarily changing a close ratio does not make it so.

Manage to Sales Staff Quota

The second way to monitor the sales forces is to monitor each individual's activity to insure that each sales person meets their quota. The chart will look like this to manage the sales process:

Table D

Here we find we have managed to everyone's quota, but we have kept a number of our staff from fulfilling their personal goals. The above example gets each person to raise activity until the close ratio makes his/her quota. Not a good idea. Too limiting in terms of sales for you, for them and for the company. When you don't motivate people to meet their potential, the good ones leave. This environment is found where there are salary caps, usually where the company doesn't want sales people to make more money than the owner. What companies miss is that the more the salesman makes, the more the company makes.

The third and best way to manage Sales Activity is, in fact, to balance a person's time with three basic disciplines: Prospecting, Developing and Closing opportunities.

Everyday we see the results of not spending time on each of these. When we don't prospect but rather spend all the time Closing we see a sine wave of activity. Sales, no sales, sales, no sales, sales, no sales, etc. By the same token if we see lots of prospecting or closing, we see no sales.

While there are no set percentages; a good rule of thumb regarding time is to spend 20% prospecting, 60% developing and 20% closing each and every week. In real terms this is 8 hours per week prospecting, 24 hours per week developing and 8 hours per week closing. Is this engraved in concrete? Of course not. There may be times when 40 hours are spent closing. However, if time is not spent on these three disciplines every sales chart will look like a sine wave.

Manage to Sales Staff Potential

Here we see a sales manager doing his job, managing opportunities foreach sales person, maintaining and monitoring the closing ratio for each sales person, making sure that all the steps are completed and, most importantly, increasing commissions on increased sales.

Table E

The importance of this chart to our SAM is that just as one cannot predict which cell will be heads or tails; neither can one predict when/if an order is going to arrive. The bigger the dollar item, the longer the window to get the order. Yet traditional sales forecasting remains constant. We bet all of our marbles that sales person X is going to close BIG BUCKS with the Widget National Company in the second quarter. Nothing more than wishful thinking.

All the many years I have served in sales I have been required to produce a sales forecast. Each month I sit down and tried to guess when a deal would close. The bottom line is that they were always guesses. Many times the paperwork was in Purchasing, then waited for months for proper signatures, each month promising my sales manager that the PO would arrive any day. The PO eventually arrived; but as to when? That was truly a guess.

Why is any Sales Manager worrying about a 100% deal whose timing is off? Sales Managers should spend time making sure the opportunity is moving along, while encouraging the prospecting and development of good quality opportunities.

How to Improve SAM

Sales Managers need to start helping their sales staff move suspects into prospects and prospects into opportunities. Your job as a sales manager is to help and track quality opportunities. I am not saying, "Forget closing". I am asking you to change the focus to sales activity. You know the steps to closing an opportunity in your business. Ask the tough questions and keep track of the answers. Depending on your business sales cycle, decide how often to talk to each of your sales staff. Don't give yourself any excuses about reports, meetings, or other deadlines. Your job is to keep your staff's sales eyes glued on their SAM.

Starting a SAM, the first time means believing everything. Opportunities, percentages, closing date…Everything. The first SAM report looks great, and everyone is happy because the SAM looks like the sales forecast. You ask questions about each opportunity to clarify in your own mind that the proper steps have been taken and the next steps are appropriate. And the key? You as a sales manager believe everything!

The next day, week or month when you review the SAM a decidedly different perspective. "HMMMM. I still see (you comment to the staff) you have XYZ on the activity list. The action items on the 'to do' list haven't been done - you haven't talked to the decision maker, you don't have the presentation scheduled, and the budget hasn't been approved. This is coming off the activity list…NEXT!" Whoa! The smiles have now disappeared. Guess how long before your SAM looks empty. Not very long. But the good news is, that will change.

Conclusion

Your SAM is the way to make sure that your sales staff have their pipelines filled with suspects, prospects and opportunities. Are you going to close every opportunity? No. Are you going to close your fair share of the real deals? Absolutely. But only you can know the difference between a forecast and an activity.

Fiddling and fudging or analyzing and action? Which will it be? Your success depends on three things you, them and SAM!

Warren Avery is President of Promethean Data Solutions publisher of the IT Weekly Newsletter, is a 35 year sales veteran in computer systems, retail, advertising and executive recruiting.

www.PrometheanDataSolutions.com