Quantcast
Subscribe now
Get The Machine sampler (first 4 chapters) free the instant you subscribe! You'll also receive each of my posts, fresh in your inbox. 
(You'll get The Machine sampler in your inbox the instant you subscribe!)
THE SMALL PRINT: We know you're taking a risk when you entrust us with your email address, so we commit: (a) to NEVER spam you; (b) to NEVER sell or rent your data to anyone; (c) to ALWAYS make it easy for you to unsubscribe; (d) to ONLY send you stuff you reasonably expect to receive; (e) to contact you LESS frequently than you would reasonably expect.

The emergence of cargo cults on some Pacific Islands after World War II is an amusing and oft-repeated story.

The relatively primitive lifestyles of these islanders were interrupted by Japanese aircraft dropping large supplies of clothing, medicine, canned food and tents to support the Japanese war effort.

Some of these supplies were shared with islanders, in exchange for their assistance.

After the war, when planes and their valuable cargos disappeared, some islanders took to imitating the rituals they’d observed the Japanese performing. They carved headphones from wood and wore them while sitting in fabricated control towers.  And they waved landing signals while standing on abandoned runways.

I’ve noticed the emergence of a similar cargo cult in organisations in recent years — particularly those organisations that sell major products and services.

Sales departments have observed a rapid evolution in the performance of their organisations’ operations departments. They’ve seen outputs increase by orders of magnitude. And they’ve seen quality and on-time performance improve by similar degrees.

Of course, sales departments have also observed that these performance improvements have been accompanied by an increase in the usage of mathematics in operations — and, particularly, an increase in the role of statistics.

Sales departments have taken to imitating these rituals — in the hope that they will have a similar effect on the performance of their departments. Increasingly, we’re seeing mathematical models, sophisticated databases and business intelligence tools being applied in the pursuit of greater (or more consistent) sales results.

What sales departments fail to recognise, however, is that operations uses such tools to measure (and predict) the behaviour of processes that are inherently measureable. Sales processes, for the most part, are not.

Let’s consider the practice of sales forecasting: a perfect example of this management hocus-pocus.

In most major-account sales environments, salespeople are expected to regularly enter data into their firms’ CRM’s, reporting on the status of sales opportunities and the activities performed in pursuit of these opportunities. This data is then manipulated by management and used to estimate month-by-month revenue numbers. These revenue numbers are then provided to operations so that they can be used to determine production quotas and raw-material requirements; as well as to update cashflow models.

At first glance this practice sounds sensible enough. However, we don’t have to dig far beneath the surface to realise that the mathematics is not quite as elegant as it appears!

The first thing that we should recognise is that, in most organisations, major sales are landed quite infrequently. This is due, in part, to the fact that salespeople dedicate only a small amount of their time to business-development (selling) activities. Most of their time is consumed by customer-service and clerical tasks, and fulfilment-related activities. (Believe it or not, a typical salesperson performs just two business-development appointments a week.)

Aside from infrequent major sales, another symptom of salespeople’s limited business-development activity is a shortage of smaller sales. (Salespeople’s limited capacity and their performance-based pay cause them to focus on larger transactions.)

Because salespeople dedicate only a small amount of their capacity to selling, it follows that the organisation has only a small number of opportunities under management at any one point in time. Management must scrutinise this small dataset and somehow predict the month-by-month emergence of major (and infrequent) orders.

In most organisations, management should recognise the impossibility of this undertaking and resolve that it has as much chance of predicting sales revenue in three months time as it does the weather!

But management is not so easily deterred. It is true that there are only a small number of opportunities under management. However, management has been insisting that salespeople enter an increasing volume of data relating to each opportunity into the CRM. The assumption is that more data means more accurate predictions.

Let’s consider the nature and source of this data and the conditions under which it is collected.

Aside from minimal amounts of objective data, salespeople are expected to enter numerous best-guesses relating to everything from customer predispositions to competitor intentions. Even much of the data that appears to be objective at first glance reveals itself as otherwise under close scrutiny. For example, even though the opportunity-management process is divided into a series of milestones, the achievement of few of these milestones is actually signalled by unambiguous customer behaviour.

What’s even scarier is that few organisations have an objective definition of sales opportunity. It’s a common phenomenon for major opportunities to appear in the CRM just days before they are won when, in reality, opportunities of this size would have required months’ worth of work.

The prevailing assumption in sales departments seems to be that if we take a large number of subjective data and multiply them together, the process of multiplication will somehow furnish us with an objective result.

But it gets worse. The inaccuracy of the data in the CRM is not just limited by salespeople’s personal biases. In most cases the problem is compounded by the fact that salespeople enter data into the CRM weekly (as opposed to daily) and by the fact that management provides opportunities and incentives (of various kinds) to salespeople to game the system by flavouring the data that they enter.

Now the lunacy of this pointless and time-consuming exercise does not escape operations. In most organisations, finance and production have concluded that their best-guesses are more accurate than the numbers delivered by the sales department’s elaborate models. If these forecasts are put to use, it’s more likely that they will be used as ammunition in the ongoing rivalry between operations and sales!

If the sales department wishes to remedy this problem, there are two obvious courses of action. It can either accept that forecasts in which operations cannot have the necessary degree of confidence are of less value than no forecasts at all — and stop producing them. Or it can figure out how to reengineer the sales department so that its output becomes predictable.

At a minimum, the latter course of action would require that salespeople spend the majority of their time selling — and that they pursue a sensible mix of major and minor sales. It would require an objective definition of sales opportunity, and milestones that are achieved only when potential customers exhibit unambiguous behaviours (customer opinions are worthless). And it would require that the responsibility for scheduling salespeople’s activities and compiling reports be removed from salespeople.

Of course, if management were to examine operations carefully, it would discover that operation’s mathematical models and scientific methods begin with the careful collection of objective data. Operations people know that garbage in equals garbage out.

Even though some Pacific Island cargo cults persist to this day, Islanders’ rituals are as unproductive now as they were in the nineteen-fifties.

It’s time that sales departments recognise that the root cause of inaccurate sales forecasts has nothing at all to do with inferior mathematical models and insufficient technology.

Tagged with →  

Home Forums Sales forecasts: hocus-pocus with a dollar sign!

This topic contains 3 replies, has 1 voice, and was last updated by  Justin Roff-Marsh 6 years, 4 months ago.

Viewing 3 posts - 1 through 3 (of 3 total)
  • Author
    Posts
  • #2347 Reply

    Chris

    Good post. If the figures aren't hit there's a sense of failure. Careful who you share the numbers with in the team – they are for motivating for success. Think about which numbers the teams should focus on. Need goals for the road map but sometimes everyone needs to get out of their own way and get on with it

    #2348 Reply

    Pekka Töytäri

    I find the subject and your article really interesting. I have been working the forecasting related issues for about 20 years now, 8 of them as a consultant and 2 as a doctoral researcher on value based selling and sales management. I think you point to the objectivity of the data used in the process. I believe that is the key to any success. production related forecasting (or any process we ourselves control) is obviously much easier than forecasting the outcome of a process where decisions are made rather independently of us. with relatively large numbers and intentional effort to remove the bias of subjective evaluations the results are probably relatively good. with fewer and larger deals it takes profound understanding of the customer's decision making process, corporate and individual preferences, benefts and sacrifices to understand the likely outcome of any deal. unfortunately, my experience is that the art and science of "sales opportunity management" is not that well established process in most corporations.
    Best
    Pekka Töytäri
    sales management consultant and doctoral student at Aalto University

    #2349 Reply

    Thank you Pekka

    This is very nice feedback. Are you comfortable with the 'scenario-based approach' proposed in the next article?:
    http://www.salesprocessengineering.net/2008/11/11

Viewing 3 posts - 1 through 3 (of 3 total)
Reply To: Sales forecasts: hocus-pocus with a dollar sign!
Your information:




mautic is open source marketing automation