How accurate is the weather forecast? A study by Minitab suggests that, in general, same-day forecasts are quite good, five-day forecasts are usually pretty reliable, and 10-day forecasts stretch the limits of predictability too far.
How about sales forecast accuracy? It’s tempting to say that lost opportunities are harder to see coming than a thunderstorm. CSO Insights’ 2018 Sales Operations Optimization Study reports that over the past several years, “actual deals won have been less than half of those forecast to be won.”
As noted in the CSO Insights white paper, “How to Get a Grip on Forecast Accuracy,” “When forecasts deviate widely from actuals, it raises questions about the CSO’s ability to manage the business. When actuals are lower than forecast, inventory carrying and capacity costs escalate. If actual demand exceeds forecasts, revenue opportunities may be missed, and customer failures may occur.”
Seven barriers to accurate forecasting
Sales forecasting challenges can be formidable, and they can persist even as sales organizations grow and evolve in other ways. The new study identifies seven barriers to accurate forecasting.
Forty-seven percent of study participants said the biggest barrier is that “salespeople are too subjective about close possibilities.” It is, of course, entirely natural for salespeople to be optimistic, or even hopeful. But “subjectivity” may stem from another cause: fear. The operations study observes that, “Most salespeople do not have enough quality opportunities in their pipeline/funnel. They continue to drag poor quality (i.e., unqualified) opportunities along and include them in their forecasts to avoid being hounded by their managers for not having sufficient volume.”
On the sales manager side of the equation, though, there may be a reluctance to question these less-than-solid opportunities too closely. The second-ranked barrier to accurate forecasting is “managers failing to truly investigate the commits their salespeople are offering.” Sales managers, like salespeople, may dread reporting bad news to higher-ups.
In third place: “Reporting looks backward; we do not have enough predictive information,” closely followed by, “Information we have is not accurate enough.” Barriers five, six and seven were, respectively, “Limitations in the technology we use to manage forecasts,” “Not enough historical data to compare against,” and “We have no formal sales methodology.”
The road to forecasting success begins with a rigorous approach. The Sales Operations Optimization Study divides forecasting approaches into three categories: “Subjective and casual,” “consistent reviews” and “formal and structured.”
As the chart shows, a formal and structured forecasting approach correlates with higher win rates. A pessimist might point out that those organizations with a formal process in place – including measurement and tracking – still lost 37.5 percent of the opportunities they had forecast would close. Most companies, though, would consider it a job well done to climb from an accuracy rate of roughly half (49.9 percent) to a rate of roughly two-thirds (62.5 percent).
Is 100 percent forecast accuracy possible? Theoretically, yes. But let’s ask a better question: Is 100 percent forecast accuracy desirable? According the sales operations study, “The effort to sell to forecast can encourage behaviors that are not helpful or are simply wasteful. [These] include only pursuing opportunities we are absolutely sure of winning, being overly selective and ignoring large and/or emerging market segments.” It’s self-defeating to “win the forecast” at the expense of winning more business.
Three sales forecasting best practices
Broadly, there are three sales forecasting best practices that combine to produce optimal results:
- Increased involvement of sales leadership. While much of a “forecast improvement initiative” will be spearheaded by sales operations, buy-in and support from leadership is essential. If a barrier such as “no formal sales methodology” is identified, leadership must take the necessary steps to remove that barrier.
- More structure and consistency in process – and less subjectivity. One aspect of this is sales managers investigating their salespeople’s commits more thoroughly. “Gut feel” has always played a role, and probably always will, but it leads to sales forecasting mistakes. Reliance on a strong sales process produces superior results.
- Development of models and measurements powered by analytics. Sales operations has multiple responsibilities here, from defining the sales process to providing seller performance metrics.
As with weather forecasts, no one gets sales forecasting right 100 percent of the time. In addition to an organization’s own inefficiencies, sudden shifts among markets, customers or competitors can all impact close rates. But over time, doing the right things leads to the desired results.
For more information, download the 2018 Sales Operations Optimization Study by CSO Insights, the research division of Miller Heiman Group.
Want better sales forecasting accuracy? Get a demo of Scout by Miller Heiman Group, our new sales analytics platform that scores the health of active opportunities using the Strategic Selling methodology, flags deals that need manager attention and predicts which deals are most likely to close.