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Episode 38: Forecasting - When It's Right & When It's Wrong

by Hannah Rose | Oct 27, 2022 10:00:00 AM

People are scared right now. It’s reporting season on Wall Street, so everyone is coming in. Doug was talking with a Bank of America analyst the other day and they’re moving now. People are predicting a recession next year. Doug isn’t saying there’s not going to be a recession, but there’s no question that’s where we’re heading. People are playing tight because they think something is coming. As of right now we’re not really in a recession, but numbers are still going up because everyone’s talking about it and we’ve convinced ourselves that we’re in a recession.

Perspective matters.

But recessions and where we’re headed is not on the agenda for today, though it’s important to keep up with what’s happening in the world. Today is all about forecasting and the common mistakes that are made.




Additional Resources:

Show Notes:

It’s been mentioned that forecasting isn’t the answer, so why is forecasting not the answer? Why do people think it is the answer?

Every time Doug has asked about forecasting, forecasting isn’t the issue. He’s not saying that you don’t need forecasting, but you should not be thinking about forecasting. The only time forecasting is going to be really helpful is when you have it in place before you need it, so if you want to figure out what you do to manage it, you need to do certain things prior. If you want forecasting to be valuable then it’ll provide insight over longer terms. 

Forecasting is an optimizing item. The core aspects of our business are in really good shape. If forecasting is your problem, then you are in really good shape. 

Someone came looking for our help and they had three salespeople and the average sale was $200k - $250k and they made 6-10 sales a year. Their frustration was they didn’t feel like they had good forecasting. Doug’s response was that they didn’t. You can’t have good forecasting. We live in a world where our forecasting is only within a range for how good it can be. 

Doug’s favorite example of this is if he took a thousand gallon container and put it into the Atlantic Ocean, pulled water up and there were no jellyfish, it would not be a safe assumption to say there are no jellyfish in the Atlantic. 

If we think about forecasting as jobs to be done, what are we hiring forecasting for? What are you actually using it for? Where is it beneficial? 

When you’re always trying to build predictability into your environment, forecasting is a form of predictability. There’s two levels of forecasting

1. Forecasting for resources

2. Forecasting for managing the business

The problem that people have in the approach they take to forecasting is they’re looking for precision. What forecasting does is provides range in even the best circumstances. If your numbers are small, then your variance is going to be wide and the difficulty is that until you get to a certain level of critical mass, your variance can be so wide that forecasting for resource management doesn’t make sense. 

Doug, in this case, would run scenario planning. He would be looking and saying “okay, well what happens if we're here? What happens if we’re at this place, this place, or this place?” You have to consider when you’re talking about forecasting and you’re thinking about it over a period of time. Doug doesn’t think in terms of months, he thinks in terms of quarters and trailing 90 days. When he looks at inflection points that’s oftentimes at the point a company grows. Before you hit that next plateau, you actually go through barriers. If you begin to think about it from a resource standpoint, what are we doing here? It’s not so much forecasting as it is scenario planning. 

Why do we want predictability? We want predictability because we want to allocate our limited resources better. In sales, our limited resources are our people, time and effort. 

In HubSpot, there’s a forecasting pre-built automation that is great if you want to do the typical approach to forecasting. It takes a lot of friction out of the process. The problem is, Doug hates the traditional approach.

When do people complain about forecasting? When they aren’t closing the amount of business they want to close. The legitimate reason to look at forecasting is because you’re struggling to keep up. In reality most companies have a sales problem or a new business problem or a revenue problem, not a forecasting problem.

The reality is, your forecast tells you that you’re going to miss where you need to be. Most people say there’s something wrong because they can’t be 50% below where they need to be. So then you end up putting more pressure. All of a sudden, putting the pressure on turns into sales urgency which ends up causing more chaos. Rather you should place bets to say whether you’re going to close a deal or not. 

Where are you going to spend your time? For example, say you have a $300K opportunity and you have a 10% chance of winning it and you have a $50K opportunity with a 45% chance of winning it. You’d probably spend more time on the $50K opportunity, but the $300K is worth more. It really depends on the situation to which one you spend more time on. 

When it comes to your pipeline, how do you feel about the probability being explicitly tied to the deal stage? 

Doug doesn’t like it. Stage based probability is abject. Right now, Doug can point to two opportunities easily in our pre-sales pipeline that have a higher probability of winning than an opportunity that is in our last stage. 

One of the things that we do that’s fundamentally different, that we’ve also talked about in an earlier episode, is that we look at our forecasting through accuracy. We close the loop. Whether you win a deal that you didn’t expect to or lose a deal you expected to win, we talk about those things. The problem with stage based forecasting is that there’s no involvement in forecasting.

If you get into psychological research, one of the things that is happening in behavioral science right now is that so much historical research is based on averages. When you start studying aspects about the brain and what we think is normal behavior/abnormal behavior, it’s all based on an average. This means we take the wrong play at the wrong time. In the wrong situation with the wrong person. The biggest value of forecasting is predictability - how are you allocating your energy and your effort? You should be thinking in odds. What is the confidence level? How can we learn to spend more time on the better things and less on the worst things?

What we ask people to do is keep it pretty simple. This is something even Doug does. We have a forecast confidence property from 1 to 5 - hopeful, possible, probability, likely, and definite. Hopeful is 5%, possible is 30%, probable is 50%, likely is 67% and definite is 95%. 

The difficulty in the game of probabilities is you can come out and in the end it’s zero or one. You get the money or you don’t.

Jess’s Takeaways: 

  • You have to start forecasting before you need your forecast.
  • The forecast provides the range.
  • Closing the loops is a step that frequently gets missed and is the key when you’re looking and briefing/debriefing your forecast.

Next Steps: