Turning Opinions into a Forecast

As you may have surmised by now, opinions permeate most sales organizations. Their importance is magnified when people are asked to predict the future. This barbaric ritual is euphemistically referred to as forecasting.

If a salesperson is under the gun—in other words, if he or she is busy and hasn't made much progress with the pipeline—then forecasting is likely to mean spending a few minutes massaging dates, amounts, and percentages from the previous month's report, most likely late in the afternoon on the day the report is due. The poorer a person's year-to-date position against quota, the greater the temptation to inflate the forecast. In such cases, the report should carry a disclaimer patterned after the one on side-view mirrors: "Warning! Objects in forecast may be further away and smaller than they appear."

Salespeople quickly learn that monthly review meetings with their managers go much better when they have lots of accounts listed in their pipelines. Because there is no standard way to position offerings, it is up to each salesperson to list the accounts he or she feels are viable. First they persuade themselves of that viability, and then they persuade their managers. By the time they get to this second round of persuasion, they may be quite eloquent in arguing for an opportunity's viability. In fact, if these salespeople could sell to buyers and customers as well as they do to their managers, they would be 200 percent of quota every year!

Sales managers are required to give their opinions of their salespeople's opinions. They are measured in the short term by the aggregate of the pipelines of the salespeople reporting to them. Inevitably, their opinions are influenced by what they want to believe. They want to believe that the opportunities in the pipeline are winnable, and that all the salespeople will make their numbers.

The job of sales manager is a very difficult one, and most are subjected to a great deal of pressure to deliver revenue objectives. Salespeople's lives are better if they can either (1) show a strong pipeline or (2) defend a weak pipeline. First-level managers have exactly the same challenge when doing a pipeline review with their managers. For this reason, first-line managers want to believe the yarns being spun by their salespeople.

There's another reason not to stir the pot. If the sales manager is able to poke holes in a rep's funnel for several months in a row, his or her "reward" is to put the salesperson on a performance improvement plan, which in many cases must be overseen by the HR department. Writing and monitoring this plan requires a huge commitment of time and serves as a distraction from the task of achieving branch or district quotas. It is also an unpleasant task to finally realize that a potential hiring error was made.

Ultimately, moreover, if the salesperson is unable to achieve the established objectives, he or she will be terminated. Now the manager is faced with the task of recruiting, hiring, and training a new salesperson. Does all of this influence how hard a manager drills down into a given rep's pipeline? We think so. All things considered, it is far easier for managers to believe their salesperson's overoptimistic assessment of the opportunities that are out there, soon to be closed.

The barbaric ritual continues all the way up the chain—from district, to region, to the vice president (VP) of Sales. Each level puts its happy spin on the figures and then passes them along. The accuracy of the forecast usually improves over this long journey; the major reason it does so, though, is that the statistical base behind the forecast is getting larger, and this generally leads to a more reliable final result. This forecasting activity happens either weekly (weakly?) or monthly, and culminates with the forecast from the senior sales executive that arrives on the desk of the CFO, who must project earnings for the quarter.

Virtually all companies have become skilled at controlling their expenses, so the largest variable in projecting profitability is top-line revenue. But CFOs have learned from experience not to take revenue projections from Sales at face value. In fact, not believing the projected total for a moment, CFOs tend to multiply the gross forecast by a heuristic factor—always less than 1, often written on a scrap of paper and then stuck in their top right-hand drawer—to take some of the sunshine out of the forecast. After making this adjustment, they tell the CEO what the results for the quarter will be, so that he or she can set earnings expectations for analysts and investors.

So, as we've seen, senior executives have good reason to doubt the accuracy of their forecast. On the occasions where it is accurate, that may be due to offsetting errors. For example, the ABC Company (95 percent probability) did not close, but the DEF Company placed a huge order for add-on business that was never factored into the forecast. The most important revenue number at so many companies turns out to be little more than a piling up of opinions, many of them extracted from people under pressure to protect their jobs. Unless and until organizations take responsibility for forecasting out of the reps' hands, this key number will continue to be unreliable.

In reality, monthly forecasts tend to be most useful as potential wake-up calls, alerting salespeople that their pipelines are thin and warning them that they've got to ramp up their business-development activities. When the revenue forecast starts looking overoptimistic and it appears that there could be a shortfall late in a quarter, the pressure (internal and external) intensifies. Salespeople are encouraged to close business, often by offering "Hail Mary" discounts. Even if the current quarter is salvaged, though, this too often becomes a vicious cycle, with the pipeline being flushed at every quarter end, and then having to be filled from scratch.

One of the most difficult aspects of forecasting is projecting when opportunities will close. If a salesperson forecasts the Acme Company to close in September, then in October, and then in November, and it finally closes in December, the forecasting accuracy is 25 percent, even though they got the business.

Too often, close dates have nothing to do with the buyer's agenda, but correspond to seller's agendas. Under the best of circumstances, closing before buyers are ready requires significant discounting. In the worst case, pressuring buyers prematurely can cause the seller's organization to either (1) lose the sale or (2) compromise pricing. In the latter case, if the order doesn't close, the seller can anticipate either having to honor the discount at a later time or having to talk their way around it.

Organizations spend a significant amount of time forecasting. Much time and effort are expended to create the forecast, and—in months where there is a shortfall—more time and energy may be expended defending the bad numbers and explaining how they were generated in the first place. (These resources should, of course, be devoted to selling, rather than finger pointing.) And in many cases, after the last dust settles, things return to normal, dates are shifted back, and the process is repeated. The quality of the pipeline remains fairly consistent, still reflecting the (optimistic, undisciplined) opinion of each salesperson.

Many libraries offer amnesty programs to their borrowers, whereby fines on overdue books are forgiven. The books come back, their borrowers are reinstated, and everyone starts with a clean slate. Sales organizations would benefit from the equivalent. They would benefit from getting rid of all the dead wood contained in the pipeline and starting from scratch, without unduly penalizing those who come clean.

One of the most extreme examples of dead wood in a funnel emerged during a workshop we taught for a company in Cleveland. We asked what was the longest sales cycle that the company ever encountered. Without hesitation, the VP of Sales said, "Seven years." Knowing that their average sale was about $50K, this seemed to be impossible, so we asked a number of follow-up questions. As it turned out, the company had, indeed, competed for a particular account for 7 years. During that period, they actually wrote four separate proposals.

The business initially was awarded to one of their competitors by a decision maker who was comfortable doing business with their major competitor. After 7 years, that decision maker left to join another company. At that point, in response to a fifth proposal, the buyer switched vendors.

Amazingly enough, during the entire 84 months, this "opportunity" appeared in the pipeline. We've already suggested the reasons for this: Salespeople take comfort in having a long list of buyers as they set out to convince their manager that things are going to be great. Removing a dead opportunity would create more problems than it would solve. A new prospect would have to be found to replace it. Embarrassing questions would have to be answered. Better to sell your manager on being unrealistically optimistic.