Monday 5 October 2015

How much is my sales pipeline really worth?

Sales pipeline analysis is about realism and objectivity – why do so many managers fool themselves into false expectations and get cross when this is pointed out to them.

What possible benefits are there in using rose-tinted glasses for such an important activity – or is it about selective use of the vari-focals to make clear what they want to make clear?  Why avoid something that might be bad news and deprive yourself of the opportunity to improve the situation and achieve great things as a result?

So you may have gathered that I see this frequently and find it very frustrating.  Have you the following - but my situation is special, I am a better sales person, my proposition is more compelling…that may well be but exactly how much of difference does that make: 20% or 100%?  Guess what I think!  If experience breaks the norm then you can build it in – but let’s start with the feasible and most likely.  It is another of those unwritten rules that sales people performance regresses to the mean just like fund manager performance – see Daniel Kahnemann.

Why do I have any credibility at all in talking about this?  When I took over Analysys Consulting in 1998, I took over many fantastic projects but one of them was the disciplined pipeline management and sales forecasting process.  It became fundamental to us as we rode the dotcom wave, helped steer the company into new areas of growth, judge recruitment and prepare it for sale. 

Strangely, it was one of the most difficult areas when we came to merge with our sister company – as a bunch of analysts we “knew” that we had calculated the right answer and just couldn’t understand why the rest of world seemed to find irrational reasons not to use it and continue to use the “gut feel” method that rarely seemed to work.  We went along with it for a while until it became clear it was fiction and injecting falsely high hopes into the planning process.  Not surprisingly , one side continued to grow and we struggled to work out how to grow the other one when it was difficult at any point to really get a grip on the likely sales outturn.  No benefit whatsoever in fooling anyone as to the real prospects – defensiveness and fear of failure can lead people to look at things in ways they think support their own views but then others suffer as a result.

This links back to one of my previous blogs on how entrepreneurs react when they are attempting to attract and then spend investors’ money.  The responsibility to use the rational and realistic sales forecast is then even stronger – using false expectations because they tell a better story leads directly to value destruction.

At Analysys, courtesy of Drs Cleevely and Gray, we simply had a method that took pipeline judgements away from the instinct and political agenda of those involved in the sales cycle – we found it relatively straightforward to work out from the past what proportion of what kind of leads turn into work and what the right value at each part of the pipeline needed to be to hit monthly revenue numbers.  Turns out that this is not hugely different across different companies and across different sectors.  I use it as my default position when getting involved in new companies but nearly always encounter huge resistance – but we have done it this way here, our product is different, we have a better way of closing business, better client relationships etc.  And then sales forecasts slip, there is rarely enough in the pipeline to protect against a loss of some “banker” proposal.  This is despite some very clear parameters included as guidance in CRM systems – the parameters that are so often over-ridden and which also tend to be increasingly over-optimistic as sale closure appears to be getting closer.

One of the key features of the Analysys method was never to rate a bid as higher than 55% likely to convert until the work actually started and you had a clear view that an invoice would be accepted.  Why so pessimistic?  Well, projects can get cancelled for many reasons, they can be renegotiated and most importantly timings slip – the chance of a sold piece of business starting at a certain time is just as temperamental as winning the business in the first place. 

I originally thought that this was a feature of professional services businesses but have since learnt it is just as relevant for product-based businesses too.  I have recently been a bit more flexible in using this framework – I have allowed a 90% category for business that has been contractually confirmed (including start date) even if the first invoice has not been issued or accepted. 

Can anyone re-buff the assertion that the average likelihood of sales in a pipeline is typically 15% to 20% when you look at historic win-rates?  Then why do so many pipelines have an average probability weighting of 30% to 50% - mathematically hard if the highest rating is 55%! 

This is yet another example of where being totally honest and frank with yourself can lead to fantastic results – and where using false assumptions (even unwittingly) can lead to serious problems.

Addendum – Commonly missed questions in the sales process

·      Who will actually make the final decision?
·      Have you met the person who will make the final decision?
·      Has the budget been identified for the purchase?
·      Who is advocating your solution inside the customer organisation?
·      If they were to buy your product, when will they actually pay for it?
·      Are you the preferred and/or only supplier in the process?

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