Editor’s Note: This post was originally published on Seattle 2.0, and imported to GeekWire as part of our acquisition of Seattle 2.0 and its archival content. For more background, see this post.
By Gerry Langeler
Last week I had the joy of three Board meetings in a single day. Fortunately, two were by phone. Anyway, it was interesting to compare and contrast the three CEOs, all of whom had just missed their quarter revenue forecast, in how they dealt with that issue and how each board reacted.
First, let’s get one thing straight. Mature board members know that forecasts are just that – uncertain predictors of the future. And the future is always somewhat cloudy. But clearly the amount of flak one gets for missing the plan is directly proportional to the degree of hope over insight that the Board was provided in the months and weeks leading up to the miss.
Here are the three scenarios:
- CEO #1 sells a product that is an OEM’d (original equipment manufacturer) component of other systems. So, here the issue of forecast accuracy tends to be a) did you get the design win?; b) did the customer complete their design with your product included?; and c) are they shipping yet and if so in what kind of volume?
- CEO #2 also sells a product that is OEM’d, but in addition has some business where that product is sold directly into certain markets and has some regulatory hurdles to jump. So, besides the list above you need to add; d) did it get regulatory approval yet?; and e) has the end-user customer gone through the normal sales steps (budget availability, evaluation, selection, contract negotiation, shipment/installation scheduling)?
- CEO #3 has products that are only sold direct and so the sales process closely follows item “e” above.
First question: Based on the descriptions above, can you guess who got the most flak for missing their numbers? I would think not, although you might make a case that the more OEM business you have the more likely you can see things farther out into the future, and so the larger flak response for missing.
It turns out, CEO #3 got the greatest ire from the Board. This CEO saw a number of large orders slip into Q4. At first, there was an attempt to reset the quarter boundary to “adjust” for this miss. Don’t ever, ever do that! None of us get to redefine time. That ploy was quickly withdrawn before the meeting day, but already the Board was itching to send a few volleys into the air. Next, there were the usual excuses / reasons for the slippage. There were large companies doing the buying. They move slowly sometimes, yada-yada. All valid points, of course. But on closer inspection, it became clear that the probability weighting of the sales funnel at the end of the quarter was essentially ignoring reality. One big order, scheduled to close, was discovered to be down to two vendors as the last week rolled on. That meant regardless of what the champions inside that company were telling our company, it was not yet even at “selection” much less the final steps. It should have been bounced from the forecast for Q3.
CEO #1 got the second-most flak, because as mentioned above he’s an OEM supplier and so the last week of the quarter order phenomena should be more muted. But here, too, there were plenty of signs – including one key customer who has having trouble with passing their acceptance criteria for our firm’s products. They were still on step “b”. They should have been slipped to Q4, before it became Q4.
Finally, CEO # 2 escaped essentially unscathed. Partly, this was because of regular, transparent communications with the Board outside of the board meeting cycle. (see my “Myth of No Surprises Management” blog) We all saw the quarter miss coming, and saw that he saw it coming. But more interesting was a discussion we had during the meeting about the forecast now for Q4. As with all CRM users, he has a number of “forecast” categories, with weightings assigned to each one. There is “shipped” with 100% weighting, as this is not a space where returns are common. Then there is “shippable backlog”. These are all firm purchase orders received, with scheduled delivery dates within the current quarter.
What do you think the probability weighting is on those shippable backlog accounts? Most companies I know would put them at 100%, or at least 90%. This CEO has them at 65%!
Was he suddenly sand-bagging to make sure not to miss Q4? The board pushed him on this issue (I did actually). He replied that he’d done an audit of the last eight or ten quarters, looked at what had been forecast at the start of the quarter, and then what had actually happened, especially in this category. Historically, things in “shippable backlog” actually shipped for recognizable revenue about 72% of the time. So, while 65% was a little low, it wasn’t off by much. That shut us (me) up! This company had discovered over time the degree to which customers seemed to reschedule deliveries, or change their mind before shipment. It’s a powerful piece of information.
How many of you start-up CEOs out there are instrumenting your sales forecasting like this?
You may not yet be, or may just be starting to ship product. So, don’t expect your guesses on the weighting factors to be right, right away. But the sooner you find out how to put proper judgment on both your sales VP’s promises, and your customers’ behavior, the sooner you’ll see some breaks in the clouds, and have much less Board flak to fly through!
