Categories: Sales and Distribution
When times are tough -- and even when they aren't -- predicting future sales is a real challenge for all software companies, large and small. Everyone tries to create sales forecasts, usually in homemade spreadsheets. And they rarely work.
What's the alternative? How can your software company predict -- with some degree of accuracy -- which (and how many) deals are going to close next month, next quarter, next year?
We turned to our go-to guy for all things related to software sales, Steve Kraner.
Based in Herndon, Va., Kraner is not a "natural" salesman; he describes himself as an engineer who crossed over to the dark side. He holds a Bachelors in Engineering from West Point and an MBA from Loyola College. He built successful high-tech divisions at two major U.S. corporations -- Siecor and Digital Equipment Corp. -- and he's trained thousands of tech companies worldwide.
Boy, did we get an earful. Let's just say that Kraner gets even more animated than usual when he talks about the customary methods of forecasting.
Tip #1: Without a selling system in place, forecasts are futile.
"You need to have in place a selling system at an organizational level," Kraner says.
"If you don't, then forecasting means sales managers interview with the VP to create a forecast, and the managers understand they're being asked to create an instrument of their own demise.
"How? The VP asks his people to put in their numbers for the next year. Reps look at this and say, 'I'll put in whatever is needed to get this done, just to get the boss off my back.' If it doesn't work -- if the sales numbers don't materialize -- the VP says, 'Well, they were their numbers.'
"Managing in absence of system means the manager can add no value; it's pure pressure.
"During World War II, a group of Army officers, lead by the economist Kenneth Arrow, was assigned the task of forecasting the weather a month in advance. Concluding that their numbers were no better than those picked out of a hat, they asked to be relieved and reassigned.
"The reply they received said, 'The Commanding General is well aware that the forecasts are no good. However, he needs them for planning purposes.'
"Now, let’s translate that to software sales. 'The forecast is no good, but we need it to run the company.'"
Tip #2: Once you have the system, train everyone how to use it.
"You want to train your people in the use of the system, and show them how to use the system itself to produce an accurate forecast," says Kraner.
"A state-of-the-art system will have a customer verification point; we call ours an Ultimate Contract. This isn't a forecast produced under pressure. You get a CRM system, and if they can fill in all the blanks from the Ultimate Contract, then it's believable when they say, 'We're at 80 percent.'"
What does an Ultimate Contract look like? Kraner gave us two real-life samples from his own business, plus a template for creating your own; SoftwareCEO subscribers can download them here.
Tip #3: No one can forecast without customer verification.
"You want to reduce this exercise to the minimum number of signals, and send that information to the customer," Kraner says.
That communication to the customer might go something like this, says Kraner:
- Mr. Customer, did I get this right?
- Here’s the problem we're trying to solve.
- Here's the impact of the problem.
- Here are the financial ramifications of the problem.
- Here are the various constituencies within your organization who care about this problem.
- Here's your vision of a solution and how we would fix it.
- You are willing and able to spend the money required to implement that solution.
- And, here are all the steps you and I together have defined to get to an ultimate decision -- a Yes or a No.
"When you write that all up, and you send it to the customer, now you've got something you can verify and put into a sales system," Kraner says.
Tip #4: Forget about probabilities; go with verifiable evidence.
It's a common sales forecast spreadsheet gambit: The rep lists his or her prospects, then, under the manager's gun, ranks those according to the probability of closing the deal.
"Probabilities are always subjective and therefore kind of pointless," Kraner says. "If you use the Ultimate Contract, it's binary: You're either going to win or lose.
"Managers are asking for hard facts and math, and they’re asking reps to give them that by taking a wild-assed guess. Their thinking runs like this: 'If Jane is successful and selling, she's going to sandbag on her forecast, and if Tom is failing, he's going to overestimate.' You've got to take all the subjectivity out of it."
Tip #5: Sales reps still provide forecast data, but now it's verifiable.
"The rep is required to send the Ultimate Contract to the customer," says Kraner. "Reps will lie to their manger. They're less likely to lie in writing, but still do. Sales reps will not, however, send a complete lie to their customer and ask them to endorse it.
"Managers use the Ultimate Contract as a coaching tool: It's attached to forecast. It is an X-ray of an opportunity. It's a reflection of the strength or weakness of the actual deal. You will be able to look at the deal and know what the rep needs to do, specifically, to fix it.
"For example, maybe a customer says their business problem is not compelling enough to justify this level of financial commitment. The customer said, 'We need a new CRM system because I don't like the graphical user interface on the current one; I think it's kind of ugly.'
"That's very different from the customer who says, 'We need a new CRM system because the old one doesn't allow me to generate the reports I need, and the last manager was fired because he couldn't generate the reports; it's the primary reason I am here.' One customer doesn't have much pain, and the other one will act to save his job.
"Another example: A customer is hesitating about price. Well, the Ultimate Contract shows you that there's an obvious problem that needs to be fixed. This rep is clearly talking to the wrong person. The rep is typically is talking to 'Seymour' -- so named because they always want to see more. The Seymours are low-level people who have to go ask Daddy for an allowance.
"With the Ultimate Contract, that shows up: 'I don't have the money, and I can't get the money.' OK, there's the cancer, and I as sales manager can fix the cancer. That deal doesn't make it on to the forecast. It may be I've missed a key element, like executive sponsorship, so it gets bumped down."