Getting Faked Out By Our Pipelines
Many businesses track their sales Pipeline as a leading indicator of future sales/revenue. The Pipeline represents the accumulated value of their outstanding proposals. Companies also track their Adjusted Pipeline, which multiplies each proposal by the sales person’s “guestimate” of it’s likeliness to close.
What we’re hearing from companies is that they are struggling now to achieve the results that their Pipelines and Adjusted Pipelines are predicting. What seems to be happening two main causes.
Pipeline / Adjusted Pipeline Defined
First, let’s get clear on how the Pipeline and Adjusted Pipeline works. If a sales person has 2 outstanding proposals, one for $20K and one for $10K, the total value of the sales person’s Pipeline is $30K ($20K + $10K). But, if the $20K proposal is only 10% likely to close (representing $2K in Adjusted Pipeline – $20K x 10%), and the $10K proposal is only 50% likely to close (representing $5K in Adjusted Pipeline – $10K x 50%), the total Adjusted Pipeline is only $7K ($2K + $5K). For more information on Pipelines, see the following article in Wikipedia: http://en.wikipedia.org/wiki/Sales_tunnel.
Fewer Proposals Are Closing
The first problem to address is that fewer proposals are closing now. Sales people are notorious optimists, and 2 or 3 years ago, their optimism seemed to be warranted. Proposals converted to orders with a fair amount of regularity. Now, in the “new economy”, their proposals are not converting as often, and sales people need to adjust their predictions accordingly.
Proposals Are Taking Longer to Close
The second issue with Pipeline accuracy has to do with the speed that proposals close. Sales cycle times have increased in the last year, as companies fight harder to hold onto their cash and force their employees to prove that expenditures are critical. Proposals that once closed in 30 to 60 days are taking 90-120 days or even longer. So – the Pipeline value may be accurate, but the timing of the proposals closing may be overly optimistic.
Adopt Clearer Rules About %’s
Sales teams need to adopt more rigid and clear rules about how to estimate the likelihood of a proposal closing in the calculation of the Adjusted Pipeline. One company we work with has only 4 possible percentages that their sales people are allowed to use. This keeps things simple, and the company has developed clear definitions of what each percentage means. Some sample definitions follow, but you will need to develop definitions that work in your industry:
- 25% – there is competition and/or they don’t have the project budgeted
- 50% – there is competition but we’ve emerged as the lead choice
- 75% – there is no competition but we haven’t gotten approval yet
- 90% – there is no competition and we’ve been given verbal approval
Estimate Close Dates More Realistically
Companies also need to ask sales people to estimate the expected close date of each proposal, and sales people need education around how long things are taking to close now compared with two years ago. As a learning exercise, gather your sales team, and take their Pipeline reports from April of this year, and see how accurate their projections were with the benefit of hindsight. Sales people need to realize that even if their prospect is telling them a “firm” decision date, their prospect probably has underestimated the difficulty of getting management’s approval to spend the money.
Companies need to study their Pipeline conversion rates, and set realistic close dates not based on what the sales person or the prospect is saying, but on the speed that proposals are actually closing. In this way, companies can better estimate how much Pipeline they need in order to be “ok”.
Two years ago, a company that needed a Pipeline of $1M might now need $2M or even more. We need to convince our sales teams not to get comfortable with Pipeline values that were acceptable in the past, and to keep working hard to find more opportunities. Having a $1M Adjusted Pipeline when you can’t get anything to close doesn’t do a company any good.
If you are struggling with your Pipeline tracking or accuracy, let us help you develop tools to show your sales team what they need to achieve to keep the company healthy in this new economy.