Sales forecasting and effectiveness - slotting in the role of the CFO

Den Howlett Profile picture for user gonzodaddy November 22, 2015
Summary:
The CFO can make a significant difference to the way sales execution strategies are established. There is little in the way of literature to help.

Success winner woman
My good buddy Vijay Vijayasankar has written an interesting and thoughtful op-ed piece on his experience as a B2B sales leader, the problems he sees in the ability of tools to help and the frustrations he sees when attempting to develop and meet targets. It's a familiar story that has special relevance to the technology industry. In this story, I want to make the case for rethinking sales forecasting and offering some thoughts around effectiveness, a key area of Vijay's focus and how the office of the CFO can help.

First up, Vijay shares the commonly held belief that:

Conventional wisdom in my indistry is that to close $1 in sales , you need somewhere between $2.5 to $4 in “qualified” pipeline. We even pay some teams directly for drumming up demand to make sure our reps have such coverage. Plus the reps bring in their own opportunities.

Right there you have the first problem with the way sales pipeline is perceived. The way it is stated, the assumption is that the win/loss rate is somehow fixed. Put another way, when I speak with CXOs in tech companies, they talk about the win rate as somewhere in the 25-35% range, hopefully settling out somewhere around the 30% mark. That fits nicely with Vijay's pipeline number and is, again, a commonly held 'standard.'

There is another factor that may not be so well known. I remember about 12 years ago speaking with a super smart CMO who said something that's stayed with me:

The problem with sales isn't the A grade students. You know they're going to do what it takes to make their numbers and very often exceed. The problem comes with the 70% of D-grade students you either have to coach to up to C and B grade or throw under the bus. It's a relentless task.

See the possible correlations emerging here?

Vijay imagines that sales effectiveness is the result of resource effectiveness and in his scenario that's a fair assumption to make. You already know you'll toss something like 65-75% resources away. It gets worse in Vijay's scenario.

The CEO of a vendor who goes before the CEO of a customer at end of quarter very rarely has the ability to say no to unreasonable asks. So they end up “buying” business at high cost of sales.

Wrong. And this is fundamental. It isn't cost of sale that's been impacted, it's the margin outcome that's been blown. The moment you give something away, discount or what not to secure a deal, you've given away a degree of margin that is reflected in the cost of execution for those things for which you won't get compensated. You might think that it also means a higher cost of sale but that's an illusion because much of the cost of getting any deal is tied up in fixed costs such as salaries, benefits and employee on costs. Companies attempt to compensate (sic) for this by offering a good chunk of final compensation by way of bonus. That, in reality, is the only direct input to a sale you can realistically measure because it varies with the deal. In Vijay's scenario, the actual cost of securing the deal has not changed. Sales folk are compensated on deal value, not what's in the deal.

What to do? I prefer to look at it another way. Imagine that the margins in technology sales were 50% instead of the 80-95% we commonly see. Many of those companies we see today at little better than break even would be under water very quickly. What difference would that make to the way companies view pipeline building and sales execution strategies? I reckon it would invoke a radical rethink about the fundamental assumptions underpinning how pipeline is assembled.

I am for example surprised that so little seems to be made of the value a savvy CFO can bring to the table. This from Harvest CFO in 2013:

Along with deriving more accurate sales and revenue forecast, a well-disciplined sales forecasting process focuses the sales team on activities that will generate sales in a more predictable manner. The act of measuring and delineating sales drivers should result in increased revenue and sales process efficiencies.  Also, the sales metrics are now in the hands of the CFO, who, in partnership with the sales director, can accelerate the behaviors that drive those sales revenues.

In that article, the author cites numerous sources of information that can help achieve better measures, better intelligence and, you guessed it, better outcomes.

However, there are factors in technology sales that are much harder to quantify but easily recognized. I remember Zach Nelson, CEO NetSuite coaching me on sales at a time when I thought I knew nothing about the topic. His advice was unequivocal:

Passion drives 80% of sales. If you have passion for what you're selling then the other 20% can be taught.

I totally got it. Along with passion comes belief. If you believe in what you're doing then that shines through. It's something I see many times among the best sales people. It's not that they necessarily have the strongest grip on what they are selling but that they have the most fervor for the solution and its perceived value. More to the point, they instinctively know how to marshall resources to achieve the outcome they are seeking. So again, what to do?

Why not build a team of rockstar sales people? I think it's possible but like building any talented group of folk who execute, it's much like cat herding. The very best don't do things the way you expect. They don't follow the rules in the same way as others. Sometimes they don't follow the rules at all and I get why. The rules are made for the 70% D-graders, not the A-grade students. They are demanding, wanting to be as certain as possible that the deal in front of them is one they can close. Even so, we can use sales tools as a way of learning and encouraging both the best and those that need coaching. Here, Vijay's allusion to statistical analysis is a good starting point.

In the end, I sense we are at a point where the notion of relationship selling is more important today than it ever was in the past. Technology has not always delivered what it promised and the ability of the top sales people to punch through the inevitable objections around value has to be considered a value that needs capturing. All of that plays directly to the way in which the A-graders work. They develop the right kinds of relationship with the right kind of people to close out the right kind of deal that works for everyone - mostly. Rather than worrying about whether the forecast is of any value, I believe we should be examining what went into winning deals, understanding the factors that got a deal past the winning post, looking at the correlations and patterns that consistently lead to solid deal flow and then applying those lessons to the sales execution against a much more precise set of pipeline prospects.

Equally important is getting out of deals early where the likelihood of winning is low to nil. Too many times I see people chasing deals where it's clear to almost everyone else that it won't happen. They sit in pipeline until someone comes along and ruthlessly prunes. And the process starts all over again.

Simply stuffing the pipeline in the hope of turning 30% of that pipeline into deals is incredibly wasteful. The sales leaders who figure this out will be the ones who build world class, predictable sales growth. The office of the CFO can and should be an integral part of that set of processes. They have the skills to pick apart the numbers needed to inform sales strategies that focus on the bottom line - not the top line alone. It should not be down to sales leaders alone to figure this out for themselves. They are too invested in the solution to be as objective as is necessary when discovering success factors.

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