If you read one of my earlier blogs about the Buying Cycle, you’ll understand that I view there is a part of selling that is in the hands of the Buyer, and that’s a hard thing to forecast and predict - especially in a receding economy where buyers can go ducking for cover. However it is still a necessity for all businesses to attempt to put some science into the Sales forecast and make it as predictable as possible.
I believe there is a necessity to separate a Sales forecast into two dimensions - a view of the progression of the opportunity, and a view of the likelihood of closing it in the current forecast period (be it quarter, month, week, or whatever heartbeat your organization ticks to).
So first Opportunity Progression. Every Sales Opportunity progresses through a set of stages, and each organization should be able to set a clear set of criteria for how an opportunity gets categorized for entry/exit from a particular stage. Let’s call these the gates for each opportunity stage.
We always start by identifying an opportunity. This is when the lead first arrives from Marketing, a prospect is found through cold calling, or we receive a referral. There is some awareness of the nature of the opportunity, an individual(s) identified within the customer organization to drive forward with, maybe some concept of a customer project, competition, and a general level of interest. Effectively we determine at this stage that it is something worth spending some Sales effort on.
Now we need to qualify the opportunity. Run it through an intensive investigation, meet the customer to understand the requirements and ability to buy, fully understand what you’re up against in terms of competition, figure out if it’s of value to your organization and how to prioritize effort spent on it, determine the appropriate channel and partner combination, evaluate if you can win and if it’s worth winning. Unfortunately I don’t think enough startups are rigorous in this stage in terms of weeding out the things that are just not worth spending effort on today, or worth spending effort on at all.
There’s a lot of selling effort that goes on after qualifying an opportunity, and depending on your market, products, organizational need, etc. you may want to insert some stages and gates into your selling process to track and manage your Sales team and produce a forecast. However the next major opportunity milestone is a formal technical and commercial proposal submission to the customer. There may be trial proposals before this, but what I’m referring to is the proposal that the customer will use to decide if you’re in or you’re out.
After this comes the Win, and I view a need to separate the technical win from the commercial win. In both cases, all competition is eliminated - either technically or commercially (and a competitor may pass the technical hurdle but not the commercial one). Far too often these decisions by the customer are separated, and occur with different sets of people and at very different places in time. Separating them also serves to make an organization think through the steps, process, people, and so on necessary to successfully pass through each gate - and the two are fundamentally different from many perspectives.
The final stage for any opportunity is contracts and purchasing. For transactional sales with an existing customer, this stage may be very short and trivial. However for a first sale to a major account, this stage could go on for months (in which case it again may be important for your organization to set another set of more granular gates within this stage to progress through).
So this is the Science part. Every organization should establish a set of opportunity stages and a clear set of gate criteria for each stage. And most Finance teams will want some sort of mathematical calculation done on a forecast, so set percentages against each stage and use them to produce a factored forecast utilizing opportunity deal value (e.g., 25% of a qualified opportunity valued at $10,000 results in $2,500 added to your factored forecast). You will want to re-visit and tune your percentages over time. But don’t rely solely on a factored forecast because you will get it wrong more often than not.
Now to the Art part - how you manage all of this as a Sales Manager or VP Sales, and build your view of what closes in the next forecast period. I like to group opportunities in a set of buckets, and believe that the natural number to manage is 3 or 4. If your closing period is a quarter, then the number of buckets may very well reduce over the course of the quarter (potentially to 2 in the last days/weeks of the quarter).
The first bucket is what your team is Committed to closing. Get them to sign up in blood for closing a specific set of opportunities in the next period. This is where there is no barrier to how close a Sales Manager needs to be with the Salesperson or the customer. With larger deals they should have met with the customer to ascertain the deal can be closed. This bucket is the base on which your forecast is built. If a majority of this bucket comes from one deal, then the organization as a whole better carefully factor that one deal into the forecast for the period, particularly if it has a high close percentage attached to it. One curve in the wrong direction and the forecast goes out the window.
The second bucket is for Upside opportunities. These ones have a good chance to close in the period, but there are obstacles still in the way - and timing may still be uncertain. If the Upside bucket doesn’t shrink as the period progresses or opportunities are “stage-stalled” in the bucket, then you have a problem and better be very careful about how much of this bucket is counting into the number being forecast for closure.
I think it is arbitrary whether there are two more buckets or not. My view is that there are probably a set of opportunities being worked on that have some chance of closing in the period (or not). You definitely want to track these somehow because if your Committed and Upside buckets start to shrink early in the period, you need to be able to draw on these opportunities to attempt to shore up your pipeline. And as a Sales Manager you may want to have a fourth bucket for the first part of the period where you put the opportunities that your team thinks are in play, but that you really don’t believe have a chance to close in the period.
The Sales forecast is a real-time thing, and a Sales team needs to live it every day. CRM systems help to manage them and enforce good practices, though spreadsheets can do the job in smaller organizations if the VP Sales, an administrator or a Sales operations person is prepared to assemble and edit the results produced by the team.
My last piece of wisdom is that it is very important that a VP Sales looks at a forecast from at least 2 or 3 different views, and cross-compares the results. I came up with my own methodologies over time and constantly looked for correlation between views. But there was always a good piece of intuition inserted in there as well. Reliable Sales forecasts will never be produced mathematically, so it is always important to keep the Finance team at arm’s length - it is a necessity that they produce their own forecast view, and that the executive team takes everything into account in figuring out this quarter’s number.
So in the end it is an Art and a Science, and thus probably only as good as the set of collective experience that goes into it.