Driver-based
Forecasting and
Performance
Deliver shareholder value and
confidence through evidence-based
forecasting!
Foresite explains how reliable driver-based forecasting and performance
management adds shareholder value and credibility to your business
proposition.
Executive Summary
It’s vital that stakeholders have confidence in your business. When you understand how the compo-nent inputs and drivers can leverage value chain performance across the management structure, you can demonstrate the credibility your stakeholders and investors need.
In today’s value-driven environment, the adoption of leading budgeting and forecasting practices is critical to achieving strong financial control and performance management. The forecasting pro-cess should be part of an overall integrated performance management framework, ultimately driven by value-based measures. More importantly it should foster a value-centred culture that enables managers throughout the organisation to create shareholder value at every value step.
The Driver–based forecasting methodology provides two core planning essentials: 1. Superior budgeting and forecasting capabilities, and…
2. Performance management control
Although much has been published on leading practices in forecasting and performance management, most have been academic or theoretical and relevant only to large organisations that have the budgets to meet the high development and implementation costs. Today, however, applications such as Foresite SPA are available through Cloud applications to instil leading practices swiftly and inexpensively into any organisation without requiring capital expenditure or impacting existing IT infrastructures.
“In today’s value
driven environment,
the adoption of
leading budgeting
and forecasting
practices is critical
to achieving strong
financial control
and performance
management.”
Rolling Forecasts
Traditionally budgets are set annually and updated with periodic forecasts (maybe every quarter). However operations and customers never work in this way, being instead a continuous process. Rolling forecasts promote a culture of value creation and measurement that enables value-oriented metrics to guide decisions and actions that lead to high performance. The projections that they produce are up to the minute, accurate and enable us to identify the gaps between projections and target/budget.
Sales forecasts should not be merely predictions or aspirations, but accurate reflections of the real sales opportunities that the business plans to deliver. They are a dynamic assemblage of existing sales contracts, sales order bank and sales pipeline which are constantly changing in value and timing.
Driver-based rolling forecasts rely on three cornerstones – a forecasting database, a dependable data capture mechanism and a non-subjective projection methodology. A key objective is to provide visibility over the gap between projected sales and the sales target/budget. This identifies the management task ahead and is constantly changing with every new lead, win, churn, attrition and timing change.
1. Forecasting Database – Employing one real-time forecasting database removes many of the traditional forecasting problems associated with accountability, timing and version control. Forecasts are permanently updated and always available on demand for any planning horizon and tailorable for any business purpose e.g. production/capac-ity planning, line loading etc. Multi-dimensional data views, consolidations, translations, analyses and what-if capabilities can instantly provide new perspectives on forecast potential.
2. Data Capture - The best business projections are produced by those who undertake and are responsible for the value step functions along the sales value chain. Frontline and operations managers need access to input, analyse and extract data from one integrated opportunity man-agement system which forms the ideal front-end tool for data capture into the forecasting da-tabase. This avoids the problems and errors associated with manipulating spread-sheets and provides the framework for the integration of personal information and email management as well as document sharing and data exchange to other business applications e.g. ERP. In order to be effective, data capture tools must work with your managers, and not be invasive or prescriptive. They should be intuitive, practical and familiar. Cloud/SaaS applications are a great way to connect people and data across large distances and dispersed organisations. Mobility solutions such as Smartphone access improve performance and further extend the reach that field force have to their opportunity management and critical customer data whilst easing their life/work overlap.
3. Predictive Forecasting Methodologies –Predictive algorithms fall into four broad categories:
• Extrapolation – trending and charting are useful for volume repeat businesses e.g. retail. If applied inappropriately however, it canbe dangerous to assume that trends will continue into the future.
• Binary Method – For every potential sale there are only 2 possible outcomes; either the sale is won or it is lost. Therefore based on the attainment of certain pre-defined milestones the sales lead will be either 100% or 0% included in the forecast. This method is suitable for small samples of lead potentials e.g. major capital projects.
• Roll-up Method – Multiplies the potential prospect value with its probability of success. This method is good for large lead samples, but its main drawback is that probability is subjective; you’ll get as many opinions as people you ask. So who is right?
• Sales Value Chain – This hybrid methodology developed by Foresite SPA combines features from both the Binary and Roll-up methods whilst avoiding the shortcomings of both. It is designed to interface with performance management tools, and therefore more accurately reflects the true operations of the business. It is the first essential for an integrated business forecasting and performance management system and creates the information platform for closing sales gaps.
sales?
prospects?
profit?
“Sales forecasts
should not be
merely predictions
or aspirations, but
accurate reflections
of the real sales
opportunities that
the business plans
to deliver.”
Sales Value Chain
The sales value chain forms the spine of the value creation model. Landmark value steps are the vertebrae from which ultimate conversion rates are set i.e. the % rate at which leads that have experienced this landmark convert into a sale, either at this landmark or at a subsequent one.
As sales leads progress along the value chain, many are lost through performance and competition, but the ultimate conversion rate of each value step dramatically increases i.e. a higher proportion of leads convert at the final product trial step than do at the tender step.
This approach immediately solves a further 5 forecasting issues:
1. Removes all subjectivity associated with using probabilities in the roll-up method. 2. Actual ultimate conversion rates can be measured in the database and applied to
sensitivity checks on forecasts and to provide performance variance analyses.
3. Forecasts can be filtered by conversion rate to remove sales tails and become more binary (according to the risk appetite of the business).
4. Decay rules can be applied to discount delinquent leads according to pre-defined milestone rules. This reduces the impact of leads that are less likely or unlikely to result in a sale, and which can make forecasts over-optimistic.
5. Value steps are the points from which we can measure lead attrition and capture data pertaining to lead attrition causes and competitors. The same can be achieved for sales churn providing invaluable performance data on the 90% of a business’s activity that is usually omitted from the financial or management reporting.
Performance Management
Predictive forecasting is as much about having the performance metrics needed to close the gaps between forecast and planned sales, as it is about having the accurate predictions with which to identify them.
In our value-centred culture the foremost consideration must be the achievement of the current business plan; be it this month or this year’s target/budget. We always need to know exactly where we are in relation to the sales target, the predicted pipeline delivery within the planning horizon and the drivers and limiters that are affecting it.
Sales Gap
The rolling forecast and real-time forecasting database facilitate the accurate assessment of sales bridge and sales gap. Foresite call this their“3 Step Driver-based Methodology”:
Step 1
The FØ Sales Bridge recognises the legacy benefit/deficit brought forward to the current planning horizon in respect to:
• On-going sales/contracts • New business wins • Order bank
• Sales churn impact • Lead attrition impact
These are all ‘known’ within the forecasting database but in normal planning systems are often difficult to extract.
Step 2
Predictive Forecasts apply the Sales Value Chain method (described above) to the sales pipeline converting within the planning horizon. The combination of steps 1 and 2 enables the identification of the Gap between planned and predicted sales.
Step 3
Gap Closure requires analytical visibility of performance and the impact of inputs, drivers, limiters and competitors on the business.
• Pipeline opportunities
• Churn replenishment capability • Process performance analytics
• Relative value of sales inputs and sources • Impact and causes of drivers and limiters • Reasons and impact of competition
G-Index
G-Index is the ultimate business performance metric providing stakeholders with a true
indication of the growth potential ‘in-hand’. Derived from all of the above pipeline and performance data, it is a single-figure metric for the business that can be used to;
• Target business units and sales teams • Benchmark business units
• Understand the relative value of sales inputs • Evaluate business worth
About Foresite SPA
Foresite SPA is the leading driver-based forecasting and performance management SaaS offering the complete management toolkit for anticipating and closing sales performance gaps without imposing prescriptive methodologies or invading management time.
Developed in the tough world of aggressive growth and performance turnaround, Foresite SPA is designed to be robust and reliable across large and diverse organisations where forecasts must not only be accurate, but management must have the tools to ensure that they are delivered.
The benefits of the subscription model are now well-known. Foresite avoids the need for costly and complex BI or CPM systems and so delivers an impressive ROI proposition. This also means that it is adopted quickly and easily, and can be delivering results in a matter of weeks not years.
Brian Hawkes FCMA is a member of 3i’s CFO panel and founder/CEO of Fortek Ltd, a company that works with the boards of high impact investor focussed organisations worldwide, specialising in performance turnaround and rapid growth. Fortek developed Foresite SPA (Sales Performance Applications) as a SaaS in response to its clients’ needs for forecasting certainty and control over the generation of shareholder value. The driver –based forecasting and performance management solution has been adding value and certainty to international groups across Europe, Scandinavia and the United States of America since 2004, and today is the leading SPA provider.
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