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Financial metrics (and in particular Revenue) are the lifeblood of any company. If ample revenue is not coming in the door to squeeze out some profit, then the door will eventually slam shut. And if the revenue coming in is sufficient to keep it open but insufficient to meet the company’s expectations, then that very same door becomes an exit for the company’s senior executives.
For that reason, executives cannot wait until revenue is actually in the door before they begin to watch it—they want it on the war room wall as soon as it appears on the horizon. It has therefore become incumbent on sales management to report anticipated revenue from in-process sales opportunities. They do so in an assortment of hypothetical financial statements known collectively as forecasts. Forecasts allow executives to gaze in the future, predict how much revenue will be coming in the door, and manage their stakeholders’ expectations appropriately. This keeps the doors open, but only as an entrance.
Without question, management’s favorite mechanism for real-time forecasting is the sales pipeline. Like Revenue, the sales pipeline really needs no introduction—every war room wall has some pipeline numbers on it. Appropriately, our study contained a good portion of metrics that were used to report the size, shape, and complexion of a sales pipeline. They included measures like these:
As we began to receive these metrics from our surveyed companies, we dutifully created a space on our wall for “Sales Pipeline” metrics. This category, we thought, was going to be the easiest of them all—if a metric had the term pipeline or sales cycle in it, then just throw it in the “Sales Pipeline” bucket. And conveniently, almost every company had already designated a category of pipeline metrics on its own, so it was a simple task for us to shuffle them to our sales pipeline space. But as we stared at these metrics over time, the pipeline numbers came to befuddle us.
Initially, we had the sales pipeline metrics in the “totally unmanageable” category that later became Business Results. This made sense because most all of the metrics in this category were quantified in dollars—Dollars in the Sales Pipeline, Dollars in Each Stage of the Sales Cycle, and so on. Of course, these dollars would eventually turn into Revenue, and we had already established that Revenue could not be managed. So sales pipeline metrics must be Business Results. Not manageable.
But once we created Sales Objectives as our third level of “influenceable” metrics, our eyes kept darting back and forth between those and our “Sales Pipeline” metrics like Percentage of Deals Won or Percentage of Deals Advancing. It would seem that a sales manager should be able to influence these metrics by coaching and developing her reps into more skilled sellers. In fact, if the sales manager could not influence metrics such as Percentage of Deals Won, then you’d have to fundamentally question the value of even having sales managers. Managers had better be able to influence the sales pipeline, or else their sales forces are in trouble.
Our suspicion that the “Sales Pipeline” category was too diverse kept nagging us, but objects at rest tend to stay at rest. Without any better way to characterize them, the Sales Pipeline metrics remained right where they were on our wall, as unmanageable Business Results.
They remained there until we had the epiphany that we discussed earlier: the metric itself is not as important as what it is intended to measure. We had fallen into the trap of letting the label on the metric define it for us. We needed to examine the nature of the metric to discover where it belonged on the wall. Finally, we had a new question that would help overcome the inertia of the Sales Pipeline metrics. So we began to interrogate the pipeline numbers with our new question: what are you really intending to measure?
It became quickly apparent that sales pipeline metrics have two distinct uses. The first intended use is to measure the health of the company looking into the future. These are metrics such as Total Pipeline Revenue or Weighted Value of the Pipeline, and they are typically reported at the corporate level. By assigning dollar amounts and probabilities to various milestones in its sales force’s aggregated opportunities, management can build a credible sales forecast for its overall organization. And this is the primary objective of these pipeline metrics on the war room walls—to create a probability-weighted financial statement that foretells good or bad future Business Results.
The second use of sales pipeline metrics is to measure the effectiveness of salespeople at moving opportunities through their sales cycles. These are measurements like Percentage of Deals Advancing or Percentage of Deals Won, and they are typically reported at the individual level. They are not intended to create financial statements like their corporate-level peers but rather are used by sales management as diagnostic and objective-setting tools to improve salesperson productivity. By identifying where a seller’s deals are getting stuck in the sales cycle, a manager can provide guidance or support to help the salesperson move further down the path to success.
We therefore began to pull metrics out of the Sales Pipeline bucket and put them into one of two places (see image above). Any metric that looked as though it was intended to measure the future health of the company remained at the Business Result level, but it was reallocated to the bucket of Financial measures where numbers like Revenue already lived. Whether it is booked Revenue or forecasted Revenue, the metrics both answer the same basic question: Is this company healthy?
Any metric that was intended to measure the effectiveness of a seller at shepherding deals through his pipeline was moved to the Sales Objective level. Sales managers could then influence these measures through Sales Activities like coaching and training. We then breathed a sigh of relief, knowing that our management framework now allowed for sales managers to sway things like Percentage of Deals Won. But most important, our model now more closely resembled the reality that we knew.
So our breakthrough with the sales pipeline metrics was to separate the “forecasting” measures from the “salesperson effectiveness” measures. The forecasting metrics went into the Financial bucket within Business Results, and the effectiveness metrics went into a to-be-determined bucket within Sales Objectives. Our nagging concerns about the pipeline metrics had disappeared, but so had our “Sales Pipeline” category. We now had only three buckets within Business Results—Financial, Satisfaction, and Market Share. Life was much simpler.
This post originally appeared on the Work.com Blog and is an excerpt from Cracking the Sales Management Code: The Secrets to Measuring and Managing Sales Performance.
