With the uncertainty of CoVid-19 looming over your market and your customers’ markets, are you finding your already taxed forecasting processes are reaching their breaking point or leaving you with more questions than answers?
Whether it’s a financial crisis, natural disaster, or a viral pandemic, re-setting the fact base and quickly determining the implications for a key external event on your business will require a combination of time-tested best practices for forecasting, as well as specific measures unique to today’s environment.
Assess your organizations’ current state and map your future state with SBI’s Revenue Growth Maturity Model.
First, is your forecasting process getting the basics right?
This isn’t the time to embark on a months-long re-engineering project for your forecasting process. However, if you have gaps in your forecasting process, you can and should utilize the energy and focus of the current business climate to re-set around basic forecasting principles:
- Use a defined set of forecast categories, consistently
- Use a set of objective criteria that dictates what group the deal should be in
- The entire organization (not just sales) uses the criteria to qualify and categorize each deal
- Sales stage is separated from the forecast category. The first only tells you how far through the cycle a contract is, not how likely the company is to win that deal.
A Defined Set of Forecast Categories
Now, more than ever, a consistent voice must emerge regarding the implications to your forecast. If each sales team in your organization is utilizing a home-grown terminology for discussing and communicating a sales forecast (e.g., committed vs. upside or forecasted vs. plan B vs. plan C), the ability to trace the impact the same singular event across your entire business will be impossible. Ensuring deal-based forecasting inputs are sourced directly from your CRM platform (as opposed to offline spreadsheets or templates) will typically accelerate this.
Objective Criteria for Each Deal Category
If your sales teams are utilizing the same forecast categories, but there isn’t a consistent definition or criteria for what each group means, then you are only partway there. For a roll-up of your sales teams’ forecasts across to mean anything, objective criteria consistent with your sales process and reinforced in regular coaching by your sales managers is essential. Far from an academic categorization exercise for forecasting, a consistent POV for what constitutes a quality opportunity worthy of forecasting will only be consistently utilized in practice when regularly reinforced by sales managers in their standard coaching and cadence interactions.
The Entire Organization (Not Just Sales) Uses the Same Criteria to Qualify and Categorize Each Deal
Given that a sales forecast informs quite a few decisions in an organization, organizations outside of sales will sometimes apply their own terminology to the forecast given their use case. Finance, supply chain, and delivery/fulfillment can often fall prey to this. In the interest of ensuring a consistent voice when communicating the sales forecast, ensure ALL of your organization is using the same criteria to avoid adding unnecessary confusion. If this is a problem in your organization, utilize this event as a catalyst to drive consistency and coalesce around a single POV on the forecast.
Sales Stage Is Separated From the Forecast Category
It is a common practice (but NOT a best practice) to force a pre-determined win probability to opportunities based on the sales stage. For example, late-stage deals are automatically forecasted or attributed to a high win probability. This is commonly done as a streamlining effort to reduce data entry requirements from sales reps. However, examining the impact of CoVid-19 on your forecast illustrates the fallacy of this approach. Take, for example, the case where several of your critical late-stage opportunities are now at risk due to uncertainty from CoVid-19. A process that automatically forecasts late-stage opportunities provides no mechanism for reflecting this reality. Precisely because the sales stage and forecast category are two independent attributes, your CRM platform should allow the sales state and forecast category to be independently maintained. If your organization currently forces forecast categories based on the sales stage, as with the other basic forecasting principles, use the CoVid-19 phenomenon as a catalyst for fixing and maturing your forecasting process.
For a more in-depth discussion of these forecasting principles, particularly from the POV of PE professionals evaluating portfolio companies, see Your Portfolio Companies’ Forecasts Are Unbelievable, But Maybe Not In A Good Way.
Don’t “Judgement Stack” Your Forecast: Another Aspect of Your Forecasting Process You Should Examine
“Judgement,” as defined in a forecasting process, can take several forms, but is essentially an input into the forecast process from a source other than the sales rep via their individual opportunity in the pipeline. For larger organizations with multiple layers that ‘roll-up’ the forecast to the top, judgement can be applied at several points along the way. The two most common manifestations are:
- Using management “judgement” to override the forecast POV of the sales rep for a given sales opportunity. E.g., the experienced sales leader is more pessimistic than the enthusiastic sales rep and pulls a deal out of the forecast
- Providing forecast for future quarters beyond the average sales cycle length. A rolling 4 quarter forecasting process for a business with a 3-month sales cycle cannot rely exclusively on a deal-based, bottoms up forecast. Typically, other factors such as run-rates with puts and takes of known outliers are used.
How is this relevant to CoVid-19? When dealing with singular events that impart extraordinary scrutiny and focus on the forecast, avoid ‘judgment’ stacking of the same risk at multiple layers in your organization as the forecast is rolled up.
A common scenario: A first-line manager “judges down” next quarters forecast due to uncertainty around CoVid-19. The sales VP she reports to rolls up next quarters’ forecast, weighs the uncertainty of the business climate, and hedges the forecast again before submitting to WW. The same risk has been accounted for twice already and possibly will be again at the corporate level. Ask yourself this question regarding your own organization:
- Would you even know if and where it occurs?
- What damage is caused by double-counting the same risks in your forecast for other events?
The solution to this is to ensure there is absolute clarity where and how judgement is employed in your forecasting process, and address Macro forces impacting a forecast where its impact can be readily managed, articulated, and communicated.
What does this mean in practice?
- Reps should continue to communicate their most likely outcome for opportunities. To the extent that CoVid 19 has already impacted an in-flight opportunity in some way, sales reps should accurately reflect the impact across one or more of these three significant variables:
- Deal Signing: the probability or risk of a deal signing
- Deal Size: the most likely size of the deal if it closes
- Deal Timing: the most likely close date for the deal
When one or more of these risks are combined, it hampers your ability to discern the impact of certain risk factors. There is a material difference between risk to timing for when a deal will close vs. risk the deal will close at all. Still, in many organizations, a rep will signal a lower win probability without adjusting the close date for the opportunity. In their mind, they are merely taking a deal out of the forecast. The net impact on the forecast to the current period may be the same, but the implications for the coming quarters is quite different.
- Reps should continue to forecast their opportunities based on specific insights for individual prospects. Sales reps should NOT apply a blanket hedge for uncertainty across all their deals. In other words, don’t provide an opening for the ‘fog of war’ excuse. You still need to reinforce accountability in the forecast process. The basics of opportunity management, proper deal qualification, and regular coaching from your sales leaders matters now more than ever. E.g., a borderline business case for a proposal, lack of relationship with key decision-makers, or poor intelligence around buying criteria are risk factors for a deal with or without CoVid19. Ensure these aspects continue to be examined and worked between your sales managers and their teams.
- Account for judgement based on macro forces in one place vs. embedding it in multiple levels of your organization.
- Non-Deal-Based Judgement: Consider having your sales organization forecast as they usually would, but specifically call-out where and how CoVid-19 has impacted the estimates. As the forecast is rolled-up through the organizations, discussions over where and how much that impact should be can be conducted transparently rather than layering judgement several times over as the forecast is rolled up.
- Deal-Based Judgement: Ensure any management judgement for an individual opportunity is attributed to that individual opportunity. Do NOT allow a blanket hedge for the current quarter’s deal-based sales forecast, or you will be unable to answer this inevitable question for each deal that slips the quarter: “X deal just slipped the quarter due. The customer says they need some more time to assess the CoVid 19 situation. What does that do to our forecast this quarter?” If your sales leadership has applied a topside hedge to their forecast, it is no longer clear if any one transaction is in the sales forecast.
While there will undoubtedly be an initial surge in inspection and scrutiny of the forecast, CoVid-19’s impact on the business environment is still evolving at an unprecedented pace for each industry and country. Therefore, do not treat this as a one-time event, but rather a continually evolving phenomenon. Investing the time now to bolster gaps in your organization’s forecasting processes will reduce the confusion and noise along the way.