If it were easy to predict the future, we would all be at the racetrack. But that is exactly what sales forecasting is – predicting the future. Just like gamblers use data, history, insights, and analytics to improve their accuracy at predicting outcomes, so do sales and revops leaders.
Sales forecasting combines human judgment, analytics, and predictive elements. Unfortunately, forecast errors are all too common due to insufficient or low quality data, incomplete consideration of variables, or incorrect inputs. According to Gartner’s State of Sales Operations Survey, less than 50% of sales leaders have high confidence in forecast accuracy, and very few companies achieve the gold standard of accuracy within 10%. This has to improve.
Depending on your revenue organization’s go-to-market motion, and whether you are focused on high-velocity or large enterprise deals, different forecasting approaches will likely be adopted. For high-velocity motions, where deals move quickly through the sales cycle, key factors such as pipeline creation within the quarter, closed won linearity, deal velocity and count, conversion rate, and deal size play a crucial role in generating forecasts. On the other hand, businesses targeting large enterprise deals with longer sales cycles should consider factors like day one pipeline coverage, bottoms-up deal roadmaps, and in-depth deal inspection. Regardless of the approach however, incorporating manager judgment, historical analysis and comparison, and predictive scoring – if available – is essential.
The often overlooked importance of capacity-based forecasting
One area that is chronically overlooked and under-appreciated during weekly forecasting is sales hiring and capacity. It is often treated as an afterthought or a brief “how is your hiring going?” or “are your ramping reps doing ok?” before quickly moving on. But hiring and capacity easily drives the same potential for risk as deal pipeline and win rates. If I were to tell you that discussing pipeline in your weekly forecast review isn’t necessary, you would call me crazy and banish me from revops! But as you can see from the example below, hiring and sales capacity is just as impactful.
In this example, I modeled a 40 person MidMarket team entering Q3, with an $800,000 annual quota and a four month ramp. For the day one pipeline target, the coverage ratio assumption is 2.2. If we entered the quarter with a $200,000, or 14%, gap in day one pipeline target, we’d have all hands on deck identifying any and all actions we can take to close the gap. An effort would be organized to determine the source of the shortfall to avoid the same in the future. This would be considered and treated as a significant risk to the achievement of the quarterly budget.
This time, using the same 40 person MidMarket team as above, I modeled an ~18%, or six sales representative, attrition rate for the first half of the year leading up to Q3 – low according to recent industry trends. This includes terminations and internal promotions to new teams or non-quota carrying roles. The plan assumes that their backfills were in seat 60 days after the date of attrition and called for a number of new hires in the first half of the year. Unfortunately, as is all too common with recruiting cycles, a handful of hires were in seat late resulting in the same 14% gap to the day one sales coverage target above.
The importance of sales capacity management is not exclusive to larger sales orgs. Imagine you have a manager with a team of eight sales reps and they lose one fully ramped and productive rep. Their sales capacity would go down by 12.5%; Lose two and it declines by 25% literally overnight. What if 12.5% or 25% of your pipeline for the quarter disappeared overnight? Would you be concerned?
Sales orgs that dismiss these risks by expecting current reps to make up the difference set quotas too low and overhired. Would you dismiss pipeline gaps by expecting a 10% or more increase in win rates? It’s very difficult to claw your way out of a sales capacity hole, so even if the current reps can provide short-term coverage, the increased risk to your plan remains.
Mitigating sales capacity risk
So what can you do to minimize sales capacity risks?
- Incorporate Attrition into your Planning: Not planning for attrition destroys a plan. During annual planning, don’t just create a hiring plan, create a net hiring plan that works in assumptions for attrition. Remember attrition also includes internal team transfers and promotions to non-quota carrying roles. Attrition often follows a pattern. Use previous years’ data to gain insights to inform your assumptions for the upcoming fiscal year.
- Drive Accountability to the Hiring Plan: The finalized plan should include assumptions around hiring, attrition, net hires, sales capacity, ramp, and achievement factors by segments and managers (team). Include sales leaders and managers in the planning process to gain alignment, drive accountability, and foster collaboration.
- Manage Attrition you Control: Internal promotions or transfers between teams without structure can wreck a plan. Define and communicate rules of engagement around internal promotions. We need to stop robbing Peter (lower segments) to pay Paul (higher segments). For example, say everyone agrees promotions can only take place on the first day of a quarter. Each segment can then make an estimate of how many open roles will be filled internally and you can easily get ahead of attrition by hiring and ramping in time to replace the lost productive sales capacity.
- Hire Ahead of Attrition: Get alignment from leadership and finance on net hires by adding incremental headcount to the hiring plan based on assumed attrition. For example, say you anticipate attrition of one sales rep at the start of Q3. You would add a head prior to that based on assumed hire and ramp time. If the attrition doesn’t materialize, then you can use that hire to fill another planned headcount later in the quarter. The additional expense of hiring a few months early is not materially meaningful and that rep will ramp and start contributing faster than plan which can offset the earlier expense.
- Treat Recruiting as a Partner: Include recruiting in the planning process to ensure they are staffed and prepared to fill your heads, including backfills for attrition. Partner with them to build and track recruiting pipeline and velocity, create hiring profiles, screen candidates, and improve overall efficiency.
- Update Actuals Weekly: Regularly update actuals for sales hiring, rep movements, promotions, and attrition along with sales capacity and rep attainment to understand performance and gaps against plan.
- Forecast Weekly: Drive visibility and action by working with sales leadership and recruiting on the timing of future hiring, attrition, and rep movements to forecast sales capacity for the remainder of the year and uncover plan risk. If reps are getting into seat late, if attrition is higher than planned, or if ramps were underestimated, raise those as areas of risk along with any actions you can take or any asks from the team.
- Optimize Planning: Use the historical info tracked and captured above to better inform future planning and re-planning. Update your assumptions around quotas, ramps, attrition, attainment, and hiring velocity to close the gap on planning vs real world execution.
Predicting the future is hard, but you can drive more accuracy and predictability by incorporating a capacity-based forecast into your weekly forecasting cadences. The entire purpose of forecasting is to assess and change the future by identifying risk and driving action. And the earlier, the better, right?