Sales Forecasts: Hocus-Pocus with a Dollar Sign

Sales processes, for the most part, are inherently unmeasureable

Published: Wednesday, January 12, 2011 - 05:00

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

The relatively simple 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 cargoes 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 behavior in organizations in recent years, particularly those that sell major products and services.

Sales departments have observed a rapid evolution in the performance of their organizations’ 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 mathematics, particularly statistics, in operations.

Sales departments have taken to imitating these “rituals” in the hope 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 recognize, however, is that an operations department uses such tools to measure and predict the behavior of processes that are inherently measurable. 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’ customer relationship management (CRMs) system, reporting on the status of sales opportunities and the activities performed in pursuit of these opportunities. These data are then manipulated by management and used to estimate month-by-month revenue numbers. These revenue numbers are then given to operations so that it can be used to determine production quotas and raw-material requirements as well as to update cash-flow models.

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

The first thing we should recognize is that, in most organizations, 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 (i.e., selling) activities. Most of their time is consumed by customer-service and clerical tasks, and fulfillment-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 organization has only a small number of opportunities under management at any one point in time. Management must scrutinize this small data set and somehow predict the month-by-month emergence of major (and infrequent) orders.

In most organizations, management should recognize 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 has been insisting that salespeople enter an increasing volume of data relating to each opportunity into the CRM. The assumption is that more data mean more accurate predictions.

Let’s consider the nature and source of these data and the conditions under which they are collected.

Aside from entering 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 seem to be objective at first glance appear 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 signaled by unambiguous customer behavior.

What’s even scarier is that few organizations 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 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 for salespeople to game the system by flavoring the data that they enter.

Now the lunacy of this pointless and time-consuming exercise does not escape operations. In most organizations, 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 behaviors (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 operations’ mathematical models and scientific methods begin with the careful collection of objective data. Operations people know that garbage in equals garbage out.

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

About The Author

Justin Roff-Marsh

For 15 years, Justin Roff-Marsh’s deep thinking and writing on the subject of sales process engineering has blazed a trail for others to follow. Roff-Marsh is the founder and president of Ballistix, a management consultancy with operations in the United States and Australia. He’s also an expert in the theory of constraints, the process-engineering methodology that underpins Ballistix’s contrarian approach to the sales process. Roff-Marsh is a prolific blogger, speaker, and the author of Reengineering the Sales Process (Ballistix, 2005).