Salespeople behave predictably irrational...

when they keep opportunities in their pipeline even if there is little chance that they will ever win them or, even worse, they will never end up as a deal because the customer has no intention to buy in the first place. The observation made by CSO Insights in their SPO Report 2008 about the mediocre forecast accuracy is a flagrant proof of this behavior. According to this report, even around 21% of deals forecast(!), so well down in the pipe, end up with no customer decision. I believe this percentage has not varied much over the time CSO Insights are doing their yearly survey. Until now, I had the opinion that keeping unrealistic opportunities in the pipeline and even putting them into forecast was related to the fact that salespeople are generally of an optimistic nature.

In Dan Ariely's book “Predictably Irrational” (yes thats where I got the idea for the title of this post), I have found insight in basic human behavior (the way we are wired) that might help salespeople and sales managers to fight the urge of keeping unrealistic opportunities in their pipelines. If you agree that keeping doors open is a valid metaphor for wanting to keep as many opportunities as possible in the funnel, you might be interested in the chapter in “Predictably Irrational” entitled:

Keeping Doors Open

Therein, Ariely describes a series of experiments done with MIT students with the help of a simple computer game. The students were shown three differently colored doors on a computer screen. They could enter any door with a mouse click. After having entered the virtual room they then could accumulate earnings as each subsequent click staying in the room added a small sum of money to their earnings. The total amount of accumulated earnings was visible real time. Though, not all rooms offered the same potential of earnings, thus inviting students trying to increase earnings by looking behind different doors. In the first set up of the game , the only limitation was the amount of clicks available. Clicks had to be used wisely as each time a room was switched, the necessary click for the change would not give additional earnings. Only with subsequent clicks applied in the newly (re)entered room, additional money could be earned. Students, earning the highest amount of money from the experiment, sampled all three rooms and then, based on the knowledge from sampling, spent most clicks in the room showing the largest potential for winning.

Where is the relevance for salespeople?

Take the three doors as three opportunities and the limited number of clicks as the one limit you always have, your time. The experiment actually confirms selling best practice; to qualify and then to focus on the opportunity with the highest potential. The set up is though not sufficiently reflecting the harsh reality of selling. Not attending a door for a while, did not have any penalty for the students. That is like acting in a market with no competition. So the second set up added a threat for a door to close permanently if it was not addressed after a certain amount of clicks (time). This set up comes closer to the real sales environment considering competition. There the threat of a door permanently closing is equivalent to he concern, that unattended opportunities might be won by the competition.

Modified behavior when there is a threat for permanent loss of an opportunity

Students faced with the additional constraint of having a door permanently closed on them, started racing frantically between the doors so none would permanently close. They left their previously rational behavior of sampling and then staying in the room they had found offering the highest profit potential. Students working in the set up of this additional constraint in average earned about 15% less money than those in the initial set up. Even when students were told in advance which door hat the highest earnings potential they did not change their behavior of racing around. Apparently our brains are wired in a way that the fear of permanent loss is so strong that we keep reacting to it even if we rationally know that it hampers our ability to maximize financial returns

Do we therefore have to accept cluttered pipelines?

No. Look at star sales people. They are known as ruthless qualifiers, meaning that they work with fewer opportunities in the funnel and still make more money than the average performers. My recommendation for salespeople is that overcoming the fear of permanent loss is a prerequisite for being able to to become a star performer.

As a manager, you might get inspired by the story of Xiang Yut, the Chinese commander fighting against the Qin dynasty in 210 BC. After having crossed the Yangtze river, he had the ships burned that carried the troops over; thus cutting of the escape route. He also violated an other golden rule of military commanders, keeping the morale of the troops by feeding them well. He instead had the cooking pots destroyed. Having done this, Xiang was not exactly popular with his troops as they had no other choice but fighting their way to victory if they did not want to perish. However the measures proved to be effective for the outcome of the war. Yut's troops won 9 consecutive battles thereby destroying the main troops of the Qin dynasty.

You might not want to be so radical. Instead of just commanding your salespeople to take the clutter out of their pipelines, you might want to coach them and sort out the opportunities with them. Be prepared that this might already be enough to make you momentarily not too popular, For being able to command or coach your people on this, you have to be brave and overcome not only your fear of maybe being momentarily less popular but also your own fear of permanent loss. Overcoming these fears will give you and your people the focus needed to increase your chances for winning.

Enforcing the adoption of sales methodologies can help you with this task. From studies, we know that increased win rates is the primary benefit sales managers who have managed getting good adoption of sales methodologies can report

You now should have a better chance to get adoption, because you know that overcoming the fear of permanent loss is a strong barrier to rational behavior. Overcoming this fear yourself and helping your people do the same will help you to obtain better results.

These Questions Had to Come Up

We are living in era of benchmarking and best practices. It is thus no surprise to me that after having given you an example how to derive a rudimentary forecast from the leaking sales funnel, questions like the following have arisen.

You might ask yourself how many stages a sales funnel should have? In the picture of the entry prior to giving the example, I used six stages. For the example later, I used only four stages. The short answer is: It depends? I have seen customers using four stages and others using six and more. I will devote a future entry to dwell further on the question.

As I have also very much insisted that the funnel stages should be defined by customer evidence of their buying cycle, you might wonder if your sales process defined by high level sales activities is no longer best practice. If activities to be carried out by your sales people to execute your sales process, are the only criteria, I tend to say yes. Experience shows that such sales process definitions have a higher tendency for biased forecasts. I do however not suggest that you have to throw out everything and start from scratch. What I strongly recommend is to add buying cycle oriented milestones to fix the rules for transitioning from one stage to the next. Your derived forecast will become more reasoned this way.

With sales processes defined solely by high level activities to be carried out by the sales person you might also be confronted with an adoption problem. How often have I heard that the sales process defined by management does not fit the particular and specific context the sales person has to operate in? I take these opinions as a symptom of a failed change management initiative for implementing a sales process into a sales organization.

Jim Kasper in his book Creating the #1 Sales Force suggests a series of questions to help to overcome such objections. It should be no surprise to you that the series of questions starts from a customer’s point of view. Actually the very first question he asks to people who think their sales context is widely different from anybody else’s is. “You do have customers don’t’ you?”, followed by: “Those customers start out as prospects don’t they?” What these questions do are demonstrating that there is probably more commonality between sales processes, when you take the customer’s view point instead of your internal procedure and product focus. Using the milestones in the buying cycle as the primary criteria to segment a sales funnel helps thus also in the adoption of a sales process.

In my experience this also helps with the next question: Does a sales organization have to have one single sales process to be followed by everybody in the organization? You might guess the answer by now. If you serve customers with quite different buying behaviors (e.g. buying trough an RFI/RFQ process versus buying on a spot type market) you might have more than one process. I will get into more details on this when I will discuss the question about the needed number of sales stages as those two topics are related.

Observant readers might have noticed that in the example I started to talk about forecasting orders instead of sales. I got a bit ahead of myself. I will have to explain to you in a future entry to this Blog that some of my clients have made the experience that focusing on order booking helps reducing forecast error. It actually raises the interesting question for what number you, as the sales executive should be held accountable for.

Do not Deprive Yourself of Valuable Insight

Companies usually describe their sales process, if they even have one, by a sequence of sales stages describing key activities that are to be carried out by the sales person in the respective phase. I am not going to repeat my opinion on the pitfalls such a concept - focusing on the activities from the sales person’s perspective- can have in understanding where opportunities really are in the sales cycle. I think I have said it loud and clear in last Monday’s entry (September 4, 2006).

It is another odd thing I want to draw your attention to today. Quite often you can find in those sales process descriptions a sales stage called “closed lost”. The typical rule on how this is to be used is that all lost opportunities have to be put to that stage. Does this not leave the impression, that opportunities are only lost in the close phase? Where do you put the opportunities that you are losing in earlier stages of the process? Or do you really believe this never happens to you; loosing an opportunity before the close phase?

Chances are that when constructing the sales process no distinction was made between a sales stage and the status of an opportunity. The status of the opportunity though is exactly the additional data element I talked about two days ago, If the right rules are applied on how to use the opportunity status, this data become the basis for calibrating the conversion rates at each stage transition of your leaking sales funnel. The status is also an important element for “win/loss” reviews. I will come back to this topic in a future entry. I will show you then how these reviews can be used for calibrating sales methodologies. If used right, the opportunity status also allows you to benchmark how you stand with carrying opportunities in the forecast that will end up with no decision by the customer. Actually, you will be able to detect this rate for each sales stage. Be prepared the opportunity status is an element to discover a maybe painful truth. But it is worth the pain, as it can help you detect the waste of the most precious resource: time of your sales people.

What are the values you should foresee for the status of an opportunity? In my experience, the following list of values has proven sufficient to gain a wealth of additional insight on how your organization handles opportunities and the detection of potential room for improvement:

“Active”, “abandoned by us”, “abandoned by customer”, “lost to competition”, “won”.

The rules how to use these values could not be simpler. If one of the described events arrive you just change the status accordingly, but you do not change the funnel stage, the opportunity is currently in.

You then can run statistics to find out in what stage what status appears in what frequency. These statistics will allow you to detect potential flaws in the execution of your sales process. Here are a few examples of what those statistics might tell you: If you find very few opportunities with status “abandoned by us” you might want to look into how your people qualify opportunities. Qualification done correctly, should actually lead to this opportunity status quite often with opportunities in early stages. Finding the status “abandoned by us” only with opportunities in the last stage, might also hint at a not rigorous enough qualification process. Should you find the status “lost to competition” frequently with opportunities in early sales stages, check if your people detect opportunities considerably later than your competitors.

There is however an important prerequisite that these statistics lead to meaningful results. Your people must tell you the truth of what really happened. It is my experience that if your people can trust you, they will be more honest. I guess it is nothing new to you that the way you manage your people is an important factor for establishing trust. If you turn each anomaly you detect in the opportunity status statistics into an inquisition why on earth your people could let this happen, do not expect that you will be given a very accurate picture. Chances are that understanding these observations from your statistics as an opportunity for a coaching event and turn it into a learning experience for your people, so they can be do better next time, you will also get a fairer picture of what happened. The uncomfortable truth is that change management needed for introducing the rules on how to use opportunity statuses might start with you as their manager.

Who could say it better I no uncertain terms than Jeffrey Gitomer. He ran a story in one of his recent eZines entitled “Manager, put yourself to the test before you test your people.”

For many of the issues discussed so far in this Blog, change management is the essential incredient to improve the situation. In future entries, I will give you my opinion, why it is especally hard to introduce change to sales organizations.