Category Archives: Marketing and sales execution

Sears: Bankruptcy through Management by Magazine

Sears, the company that gave the world Kenmore appliances, Craftsman tools, Sears houses, and catalog retailing “limped into bankruptcy” on October 15, according to The Wall Street Journal (Sears, Once Retail Colossus, Enters Painful New Era).  As one who grew up near two Sears anchor stores, this is astonishing. Never mind that for years, “the handwriting was on the wall.” It wasn’t always that way. Sears was the first major retail chain to build parking lots for cars and to offer store hours on Sundays. Talk about innovation!

The bankruptcy will affect nearly 70,000 Sears employees, and threatens the financial security of 100,000 Sears pensioners. “Employees are our greatest asset!” – until they’re not. In 1925, when Sears opened its first store in Chicago, the “limped into bankruptcy” part of their story was unimaginable. I wonder how Amazon’s epitaph will read, and when.

Over the next year, there will be copious Sears-related analysis. Stern-faced investment analysts will appear on TV. Wizened B-School faculty will lecture classes about the company’s missteps. And armchair quarterbacks like me will proffer reasons for the company’s demise, and post them online.

“In the end, Sears just didn’t . . .”  Almost any crucial corporate outcome or result you’d care to include at the end of that sentence will ring true. Management flew an already-troubled company into the ground in every sense of the word.  “It’s an American tragedy and it need not have happened, said Arthur Martinez, Sears CEO from 1995 to 2000. Amen.

As I read about the various Hail Mary’s Sears tried to save itself, I detected a strong aroma of Management by Magazine in the C-Suite. I saw how Sears executives flung themselves onto the life-ring of The Next Great Management Fix, and along the way, how they strangled the company beyond hope of resuscitation.  “Sears said in court papers if faces ‘catastrophic consequences’ if it can’t repair its unraveling supply chain. Some 200 vendors have stopped shipping goods to its stores in the past two weeks, and it faces potential liens if it can’t pay logistics companies owed millions of dollars over the coming weeks,” according to The Wall Street Journal.

Sears CEO Eddie Lampert resigned his position on October 15th. Here’s what he tried along the way. Below each, I’ve included counterpoints that by now, I’m sure Lampert wishes he read:

1. Cut costs, increase profits!

Analysis: the right strategy, done the wrong way.

“[CEO] Eddie [Lampert] inherited a difficult situation, but he made the operating performance worse,” said Steven Dennis, a former Sears executive who left the company in 2003. “He cut costs in places that hurt the company and didn’t reinvest in the stores.” Mr. Lampert’s strategy included cutting advertising spending. Predictably, goods wouldn’t sell, former executives told The Wall Street Journal. He also limited merchandise purchases to the point where stores routinely had empty shelves and outdated products.

Counterpoint: A Better Way to Cut Costs.

 

2. Create transformational change!

Analysis: the right strategy, done the wrong way.

“We chose transformational rather than traditional change,” Lampert said. “Some efforts gained traction while others did not, and there were external factors that have severely hurt the company.”

Counterpoint: Transformational and Incremental Change: A False Dichotomy?

 

3. Diversify, or die!

Analysis: the wrong strategy.

“Industry executives say Sears planted the seeds of its demise nearly 40 years ago when it diversified from socks into stocks with the 1981 purchases of the Dean Witter Reynolds brokerage firm and real estate firm Coldwell Banker,” according to The Wall Street Journal. “That was their first mistake,” said Allen Questrom, a retired retail executive who ran JC Penney. “They took their eye off the ball.”

Counterpoint: To Diversify or Not to Diversify

 

4.  Fail fast!  “Mr. Lampert would green-light a project, then quickly shut it down if returns didn’t materialize. That applied to investments other executives saw as necessary, such as store upgrades: Some stores had holes in the floors, broken fixtures and burnt-out lights.”

Analysis: the wrong strategy.

Counter-point: Why Fail Fast, Fail Often May Be the Stupidest Business Mantra of All Time. 

 

Lampert ran Sears via teleconference from his home in Florida. He visited the company’s Illinois headquarters “once or twice a year” according to former Sears executives. For those who believe senior executives lead by demonstrating their commitment to the company, it’s hard to miss Lampert’s message: “we’re toast.”

Marketing for Business Growth, Forty Years on

The temperature in Washington, DC is steamy hot, and my dogs don’t bother lifting their heads when the UPS truck rolls up. Not even a tepid growl leaves their throats. That would take energy.

Every August, DC’s torrid pace abates, providing me an opportunity to reset. I dive into books and other reading I’ve arranged in wobbly stacks about my office. Some materials have been patiently awaiting my attention for months, if not longer. The slower tempo enables me to see things differently. I become a tad less skeptical, and more open-minded – though my family would strenuously disagree.

Lately, I’ve had an epiphany about change. I’m finally convinced that things are changing faster than ever. I’ve heard this proclamation for years, but I’ve persistently dismissed the idea. Faster-than-ever change seems like dogma, shouted by software providers and consultants who hawk their products and services for change management. All can be had for a fair price, of course. The subject line tells me so. Tiresome as the summer heat.

But today, by golly, I get it! In 2018 , inventors launched 3-D metal printing, artificial embryos, Babel-fish earbuds, and genetic fortune telling. And it’s only August! One hundred years ago in 1918, we got the grocery bag. Yawn. The same year also brought the superheterodyne receiver, the torque wrench, crystal oscillator, and hydraulic brake. Impressive, for sure, but when it comes to rapidest change ever, 2018 rocks. Don’t tell me otherwise.

With this passage, futurist Ray Kurzweil cemented my transformation:

“The Law of Accelerating Returns is the acceleration of technology, and the evolutionary growth of the products of an evolutionary process. And this really goes back to the roots of biological evolution.

Evolution works through indirection. You create something and then work through that to create the next stage. And for that reason, the next stage is more powerful, and happens more quickly. And that has been accelerating ever since the dawn of evolution on this planet.”

Ray, you had me at The Law . . .

Expectedly, my conversion elevated the urgency of existing concerns: Have marketers kept pace with the rate of change in technology, science, society, the environment, education, and health? Do our product and process innovations matter to customers? Are our sales methods congruent with how buyers buy? What has permanently changed in marketing and sales? (Or, expressing it in marketing parlance, what’s dead?) These questions traverse the boundary of humanity’s perennial quandary: are we relevant? Heavy introspection for a biz-dev blog, but curious minds want to know.

I have a confession. All this change-is-happening-faster-than-ever stuff causes me to hyperventilate. To calm myself, I must know the durable, steadfast, unchanging, rock-solid principles that marketing professionals latch onto. My picks: 1) trust between buyers and sellers is a crucial element for transactions 2) deceit notwithstanding, they share a common goal: the equitable exchange of value, and 3) there is a positive correlation between satisfying customer needs and revenue generation.

In biz-dev, what else has endured, and what has changed? My query led me to an illuminating time capsule. A seminal book that I read exactly forty years ago – in 1978:  Marketing for Business Growth, by Theodore Levitt (Levitt died in 2006, and his book was first published in 1969 under the title, The Marketing Mode).

Levitt, a Harvard professor, and editor of the Harvard Business Review argued that the greatest threat to companies comes not from outside forces, but from within the organization. The culprit?  Management complacency and ossified thinking. Levitt posited that the railroad industry declined because its executives saw their business as railroads – not transportation – myopia that stifled the industry’s innovation. Levitt wrote that in the early 1900’s, railroads could have integrated nascent trucking, aviation, and maritime services into their business operations. But they defined their product narrowly, and, well . . . the rest is history. We have a sickly railroad industry, and the one that thrives is called logistics.

As a 20-year-old undergraduate in 1978, I read Marketing for Business Growth, and it shaped my thinking. Back in ’78, I highlighted passages that provoked or inspired me – and there were a lot of them. So it was a blast to revisit what I culled from my first reading, and to compare it to today.

It was a man’s world. What struck me immediately was Levitt’s exclusive use of masculine pronouns. And the abstraction, “marketing man,” appears throughout. Admittedly, less tedious than he/she, or he or she. And more grammatically acceptable than they, but we’ve come a long way toward diversity and inclusion. And we have a long way to go.

The index. Marketing for Business Growth does not include entries for topics that are ubiquitous today:

Analytics

Big Data

CRM

Customer Experience

Data science

Data theft

Diversity

Fraud

Long-tail

Loyalty

Metrics

Megatrends

Micro-segmentation

Performance indicators

Privacy

Social Media

Viral marketing

But the index contained some curiosities. For example, Power lists these sub-entries:

  • Corporate
  • Of executives
  • In management styles
  • Of producers
  • Staying

. . . And nothing about consumer power, except oddly, just this:

Powerlessness of consumers

I flipped to that page:

“The consumer is an amateur; the producer is an expert. In the commercial arena, the individual consumer is an impotent midget. He is certainly not king. The producer is a powerful giant. It is an uneven matter. In this setting, the purifying power of competition helps the consumer very little – especially in the short run, when his money is spent and gone, gone from weak hands into strong hands.”

To say it was a different time seems an understatement. Stultifying for employees. Frustrating for consumers. And I’m guessing, not really a cake walk for managers, as well. There was no “work life balance.” No “virtual offices.” No maternity leave. No paternity leave, either. People smoked at their desks. And business lunch did not involve a “vegetarian option.” Oh. I forgot . . . side salad, but hold the bacon bits. Back then, was anyone truly happy?

“Information, discipline, planning, structure, and order – these are inescapable organizational requisites. The larger the organization, the more they are required,” Levitt wrote. But he countered this point with one remarkably prescient: “But the more they are required, the more their restrictive consequences must be offset by more emancipating styles at the apex.”

Moving through the index, I found Cost, which has only two entries:

  • Of advertising
  • Of computerized education

And Data gets equally spare treatment:

  • Information differentiated from
  • Proper use of

Wow. For data, that’s it? Kurzweil is bang-on right: things have changed faster than ever.

It would be easy to dismiss Marketing for Business Growth as a quaint anachronism. An artifact of a slower time. A tome overcome by events. But that would be a mistake.

Much of what Levitt wrote continues to ring true:

  • “Marketing operates decisively and inescapably in two quite different worlds – on the one hand, in the world of today’s products and today’s competitive environment, and on the other, in the uncertain world of tomorrow. It is in a powerful position to recommend and influence the company’s products and operating posture for tomorrow because a properly run marketing organization will look ahead with more perceptive detail and concreteness than other operating departments.”
  • “The most palpable fact of [marketing’s] existence is that it cannot easily control the events or conditions that produce efficiency. The major events or conditions of its operations are the actions of its competitors and the behavior of its customers. More than any other corporate functions, marketing constantly faces energetic adversaries against which it must struggle for success. Success is defined as customer patronage. What makes success especially hard to attain is the fact that the consumer seems constantly to change the conditions under which he will deal with one rather than another supplier.”
  • There is “extreme danger of high-level executives developing a trained incapacity for independent thought and analysis and, as a consequence, a trained capacity to make only routine bureaucratic choices. What passes for thinking is generally little more than rambling committee discussions of the ins and outs of issues carefully predigested, documented, resolved, and set forth by the staff. There is seldom a quiet moment of independent contemplation, rarely a staff document that is thoroughly studied and weighed by its recipient, rarely a decision of any consequence made on the basis of deductive reasoning at the upper level.”
  • “As machines get more complex, as equipment and business processes get more interdependent, and as competition for the customer’s favor gets more intense, the seller cannot depend simply on good engineering, aggressive selling, and low prices for his due. He must find new ways to serve those he seeks to convert to his custom . . . Modern marketing consists of orienting a company toward trying to find out what at any given time the customer will define betterness to mean. This requires the entire company to be more effectively organized and oriented toward fulfilling the customer-getting requirements implied by that definition.”
  • “A product is not just what the engineers say, but also what is implied by its design, its packaging, its channels of distribution, its price, and the quality and activities of its salesmen. A product is therefore a transaction between the seller and the buyer – a synthesis of what the seller intends and the buyer perceives.”

Looking back, it’s apparent that even the best ideas are as good as a company’s resolve to fulfill them. That’s a scarce resource.  In 1969, Levitt wrote that the greatest threat to an organization are the people who run them (though Levitt would have written men). Fast forward to August 2018, when Lawrence Burns wrote in a Wall Street Journal article, Late to the Driverless Revolution,

“But the deeper reason the auto companies were late to the revolution is that they mistakenly believed that their business was manufacturing and selling cars. They failed to see that their success had always been based on something more fundamental: helping people to get from one place to another. . . Auto executives initially dismissed self-driving cars in part because they didn’t understand the full potential of digital technology. But it was also because they were primarily focused on delivering attractive vehicles to dealer showrooms rather than on providing compelling transportation experiences to customers. Detroit was held captive by a century-old business model.”

The more things change, the more they stay the same.

Ethical Selling: American Express Offers a Teachable Moment

“Every ethics question a business person could face comes down to a question you face on your very first sale: what are you willing to do for a buck?”, Philip Broughton wrote in his book, Mastering the Art of the Sale.

The question needs to be asked at every company. From the mom-and-pop Custom Cupcakes by Diane, to this week’s ethical letdown, financial behemoth American Express. The Wall Street Journal reported ongoing sales chicanery at the company, and traced its roots back to 2004 (American Express Gave Small Business Customers One Rate, Then Secretly Raised It), July 31, 2018).

Perhaps it began even earlier. AmEx reaped the benefits through 2018 – around the time Wells Fargo was accused of the same distortion. When it was publicly called out, an AmEx manager got nervous, and “told salespeople they would need his approval before offering prospective clients a margin of less than 0.70 of a percentage point, according to an email reviewed by the Journal. Current and former employees said the price changes were common knowledge within the forex business . . . Amex’s foreign-exchange international payments department routinely increased conversion rates without notifying customers in a bid to boost revenue and employee commissions,”  Journal reporter AnnaMaria Andriotis wrote in the article.

AmEx spokeswoman Marina Norville, responded, saying, “We constantly reinforce the importance of acting in the best interest of our customers.”

Current and former AmEx employees voiced a different take. They “describe an environment focused on bringing in as many new clients as possible and squeezing revenue out of them before they depart. Employees were told that the average forex [foreign exchange] customer did business with AmEx for around three years. ‘Who cares if they come or go? Let’s make money while we have them,’ one current employee said, referring to the attitude within the division,” according to the Journal.

Well, Amex, which is it? – because it’s not both.

The article describes AmEx’s tactics: “The salespeople didn’t inform customers that the margin, a markup that AmEx tacks on to the base currency exchange rate, was subject to increase without notice,” current and former employees were quoted as saying in the article. “Some time later, salespeople would increase the margin without informing the customers . . . Managers directed salespeople to keep the details of the payment arrangements hazy when speaking with potential customers and to avoid putting pricing terms in emails,” according to current and former employees.

This reveal got me wondering: how does this American Express division recruit salespeople? How do their online solicitations represent their selling culture and expectations?

This June, 2018 post for FXIP Manager popped up first in my search:

“FX International Payments (FXIP) is a cross-border payments solution developed to meet the foreign currency payment needs of small to mid-size corporate and financial institution clients. www.americanexpress.com/fxip.

The FXIP Manager reports to the Director FXIP Americas and is responsible for managing a portfolio of existing corporate clients. He/she will develop and maintain relationships, drive expansion sales of new product solutions, and make outbound calls to encourage transaction activity. The incumbent is responsible for achieving client revenue targets and overseeing the effective management across the end-to-end client life cycle, including, early engagement, loyalty and retention. He or She will work closely with colleagues in sales, marketing and operations to deliver superior service to our clients. This role includes a broad range of responsibilities, including: business development, relationship management, portfolio analysis, and requires interaction with both internal and external partners. This position will own and drive work streams and strategic initiatives to increase overall portfolio performance.

The candidate will have demonstrated success in proactively driving organic growth, client retention, revenue obtainment and related metrics in a foreign exchange environment focused on profitable expansion in a time-sensitive, well defined compliance and risk conscious environment.

Following this description, AmEx lists desired qualifications – eleven of them. Usual stuff: demonstrated experience in . . . strong knowledge . . . high proficiency . . .

Then, this one, halfway down the list:

“Must understand the individual and group responsibilities impact to department profit and revenue targets,”

And this,

“Demonstrated strong negotiation and influencing skills in order to handle objections [to] convert and activate prospects.”

Except for “deliver superior service to our clients” in the job description, this is a Revenue Focused job with a capital R, and a capital F, not unlike most sales positions. But this posting hints at the AmEx sales culture:

Drive organic growth . . . profitable expansion . . . revenue obtainment [sic] . . . Impact to department profit and revenue targets . . . Strong negotiation . . . influencing . . . handle objections . . . convert and activate . . .

Make no mistake: this is a high-pressure selling environment. If you like serving customers and relish a pat on the back for doing so, AmEx might not be the place for you. Unless, of course, you’re making goal.

What are you willing to do for a buck? And, what aren’t you willing to do? Two straightforward questions with complex answers that might vary, depending on a company’s momentary situation. Or, the sale rep’s.

This case offers a teachable moment for sales managers and salespeople to engage in conversations, and to answer further questions:

  1. Which conflicts of interest exist between AmEx and its customers? Do the same conflicts occur in our sales engagements?
  2. How might the conflicts be mitigated?
  3. Is intentional omission of facts during the sales process equivalent to lying?
  4. In the AmEx scenario, who is responsible for misleading customers? Management? Salespeople?
  5. Is it justifiable for salespeople to execute management requests, even if they perceive those requests are morally or ethically wrong?
  6. How would you resolve a conflict of interest if it happened with one of your customers?
  7. How should companies balance achieving revenue targets, and preserving the best interests of customers?

“This ought to be a moment when people stop and remember how dangerous the system is when you don’t have the proper protections in place . . . This is a wake-up call. It should remind all of us and firms that culture and compensation make a difference . . . How you reward people, how you motivate people and what values you hold people to matter,” former US Treasury Secretary Jack Lew said. He was talking about Wells Fargo.

No company is immune to the corrosive impact of dishonest and unethical sales practices. If you’re not already discussing the issues, the time to start is now.

Revenue: MiMedx Shows How to Fake It Till You Make It

Suppose your company pioneered a product able to improve the health of millions of people. Suppose that over the past five years, you reported at least 50% year-to-year revenue growth. To cap it off, suppose Fortune recognized your company as the fifth-fastest growing public company in the US. How might your company’s revenue prospects appear to investors, and what would be the impact on its stock?

If you were prone to making understatements, you’d say the share price would increase. And that’s exactly what happened for MiMedx , a company that makes human skin grafts for surgical use, and whose market value once reached $2 billion. Then, in June, 2018, a load of financial poop went airborne, and traveled into the company’s twirling fan.

That’s when “the company said an internal investigation had shown that its reported financial results going back to 2012 were no longer reliable and would have to be restated,” according to a Wall Street Journal article, Highflying Medical Firm Falls to Earth, Its Sales Questioned (July 24, 2018). As of this writing (July 27), the market cap for MiMedx was under of $464 million. MiMedx’s president, Parker “Pete” Petit has resigned, and an interim executive now runs the company. His specialty: “restructuring troubled businesses.” I’m reminded of Icarus, yet again. Those ancient Greeks – they sure understood human foibles. Somehow, they did it without the benefit of social media, AI, predictive analytics, and all. Amazing.

Stories about companies that tanked after achieving soaring revenue seem commonplace. Often, it’s the result of scrappy competitors who saw an opportunity, and seized a cash cow that a company was contentedly milking. Sometimes, it’s the result of self-satisfied, complacent management, who paid little heed to oncoming trains that demolished their business strategy. “We’re going to get flattened? . . . I thought you said ‘fattened!’”

MiMedx suffered from none of these mistakes, and that’s part of the tragedy. “No one has suggested that MiMedx’s products are faulty,” the Journal says. According to a company statement, “[MiMedx] is operating its business as usual as it continues to grow, invest in its product pipeline, and focus on serving healthcare providers and their patients.”

“Business as usual.” A sound bite that analysts, customers, and prospective employees sometimes like to hear. But it turns out that there was a bit of revenue hanky-panky going on.

Well, a lot of hanky-panky – if the allegations are true. “A Wall Street Journal review of company emails, court documents and internal complaints, plus interviews with current and former employees paint a picture of a company seeking to grow at almost any cost.” Where have I heard this before? Sounds so familiar . . . Bells Cargo? . . . Fells Wargo? Help me out . . .

In the Wall Street Journal article, employees describe a potpourri of revenue inflation tactics. I can’t call them innovative – some have been around for decades – but what makes MiMedx especially disturbing is what happened to employees who blew the whistle. Among the techniques former employees described in The Wall Street Journal article:

  1. Channel stuffing. “MiMedx sometimes shipped more skin grafts than had been ordered, and booked them as sales . . . MiMedx sales records show the company recorded a shipment of 135 oversized skin grafts to a Las Vegas plastic surgeon’s office, which former employees said is way beyond the 10 or so smaller pieces in a typical physician order. The shipment was recorded at 8:00 pm on September 29, 2016, just before the end of a quarter. No one in the surgeon’s office had ordered the goods, according to a former employee of the office.””
  2. Browbeating the sales force. “What else can u ship by end of month?” read one message to a rep, which continued, “Need all u can put in today up to $100k if possible.”
  3. Booking consignment inventory shipments as sales. “Several former employees said that at times, near the end of a quarter, the company would book as sales some of the goods sent to hospitals on consignment but not yet used.”
  4. Mislabeling products for medical uses that receive higher reimbursement from insurance companies.
  5. Providing advisory services to physicians on how to maximize reimbursement for the company’s products.

Customers have the unfortunate habit of directing their ire about bad selling behavior toward salespeople. I understand. The front-line rep is a conspicuous target. Most customers never meet the Sales VP who hatched an incentive plan that encourages revenue production over anything else. They don’t hobnob with the VP of Human Resources who carries out heavy-handed sales management policies, especially the punitive firing part. If they did, they’d learn about the high-pressure manipulation under which salespeople work, and how that penetrates their customer conversations. They would understand that the objectionable behaviors salespeople display are almost always result from what management encourages, and ultimately, what employers pay salespeople to do.

But many salespeople are principled and resist adopting practices that compromise their morals and ethics. Or, violate the law.  But for some, pushback comes at a cost.  With MiMedx and Wells Fargo, management concocted penalties to ensure employees kept quiet, which allowed their devious machinery to continue operating. Both companies eventually poisoned themselves. Time will tell whether the dosage was lethal.

It would be easy to attribute the transgressions at MiMedx to good old fashioned greed, and leave it at that. Why attempt to fix what you can’t change?

But MiMedx illustrates a preventable problem. Four root causes:

  1. Flawed proxies. In the case of MiMedX, the flawed proxy was revenue growth, which investors often confuse as a sign that other things they covet are present: talented management making smart decisions, fast-growing industry or market, killer business strategy, great products, rapid customer adoption, loyal repeat customers. MiMedX demonstrates that revenue is a weak proxy because a growing company can be infected with problems, and revenue is easy to spoof.
  2. Misplaced and outsized financial rewards. As with Wells Fargo, when executive compensation plans put heavy emphasis on stock price increases, nobody needs to guess how managers will direct their energies.
  3. Ethics absent from corporate culture. Tom Tierney, a former MiMedx Regional Sales Director, described the company’s culture as “a mind-boggling level of sales and accounting irregularities,” which he characterized as a “win at all cost” company culture.
  4. Lack of safety for employees when reporting fraud and abuse. “MiMedx provided employees with a way to report issues that troubled them. Eight ex-employees said they were fired after they spoke up,” according to The Wall Street Journal.

There are plenty of sound reasons to pursue rapid revenue or market share growth. For companies that are first to market with an innovation, rapid revenue growth enables them to establish platform or production standards for an industry. It helps them build economies of scale, which raises barriers to entry. It gives them bragging rights as the market leader. All of these have positive strategic consequences. With MiMedx, the quest for rapid revenue growth appears to have backfired because its primary purpose became apparent: to line the pockets of the company’s owners.

I blame analysts and investors. We have better, deeper metrics than revenue growth to assess the future vitality of a company. It’s time to start trusting those numbers, because as we’ve learned by now, revenue is wicked-easy to fake.

For Sales Forecasting, Quality Is the New Accuracy

“The sales team forecasts $100 million in revenue for the quarter.”

Many companies motivate employees with incentives for matching sales results to predictions. Some punish them for being wrong. Some do both. A constant lament:  “Why, oh why, can’t I get an accurate sales forecast?” .

“Businesses often use forecasts to project what they are going to sell. This allows them to prepare themselves for the future sales in terms of raw material, labor, and other requirements they might have. When done right, this allows a business to keep the customer happy while keeping the costs in check,” according to Arkieva, a company that specializes in supply chain management. Seems reasonable.

Insisting on forecast accuracy is the easy part. Measuring accuracy is a different matter.

One popular metric is MAPE, or Mean Absolute Percentage ErrorAccording to the table below, APE, or Absolute Percentage Error, looks relatively tight at 4% after five periods. But at 26%, MAPE suggests a different story. Based on MAPE, it’s hard to describe this example as representative of stellar forecasting.

(source: arkieva.com)

The table also reveals a subtle risk in measuring forecast accuracy. Notice that periods 1 and 2 have the same actual-forecast variance (10), but sandbagging in Period 1 produces a lower APE (10%) than overstating in Period 2 (11.1%). If you’re rated on forecast accuracy, there’s a clear message: ‘tis better to be under than over. That’s warped. You can hear the rancor in customer service call center: “Half my conversations are with customers asking why it’s taking so long to get items the sales rep said were in stock.”

I hate the notion of accurate sales forecasting. It’s naïve and wrongheaded. It’s contrived failure, a la Lucy from Peanuts: “Hey Charlie Brown! You kick the football while I hold it!” Year after year, CXO’s and sales managers unwaveringly insist on forecast accuracy, as they hold knives to the necks of functionaries tasked with ensuring it. Einstein would be pleased to know that his definition of insanity continues to thrive.

If I said, “a pretty good forecast is good enough,” people would malign my squishy tolerance. “Oh, you must eat vegan granola and wear Birkenstocks to sales calls.” Au contraire! My acceptance of sales forecast inexactitude comes from a passion for pragmatism – a reaction fueled by both anger and love. Author Edward Abbey wrote, “a writer without passion is like a body without a soul.” I make no apology for my astringent pronouncements.

Forecast accuracy simply doesn’t align with customer fickleness, cold feet, biases, budget revisions, caveats, strategic flip-flops, tactical changes, reprioritization, intervening events, committees, sub-committees, ad hoc project teams, internal bickering, competing interests, leadership attrition, new hires, new agendas and directives, politics (both national and intra-company), informal decision hierarchies, second-guessing, scuttled venture funding, maxed-out lines of credit, indecision, trigger events, buyouts, divestitures, mergers, competitive Hail Mary’s, and external forces. All, ingrained in corporate decision making. And I haven’t yet introduced buyer ignorance, stupidity, and confusion. “Sales forecast accuracy!” Whoever coined this oxymoron should be taken to the woodshed.

In forecasting, there’s more alchemy than reason. “The manufacturing people divide it by two after I give it to them, so I multiplied it by three before I gave it to them! Then they divided by four, so I multiplied by five. The credibility gap became ridiculous. Nobody uses my forecast anymore. They make their own!” writes  Dave Garwood , an internationally recognized expert in supply chain management. If you’re on the forecast accuracy horse, it’s dead. Get off!”

Happy to dismount, sir, because I ran out of liniment a long time ago. Following decades of complaining and handwringing ad nauseum over forecast accuracy, after countless hours in sales meetings dedicated to telling reps that forecast inaccuracy is tantamount to failure, it’s time to take a step back to ask a different question. Instead of asking for forecast accuracy, ask for forecast quality.

Pause for a moment, close your eyes, and take five powerful Ujjayi breaths. Think about what you gain when quality, rather than accuracy, becomes the goal. Namely, the liberty to think probabilistically instead of deterministically. The freedom to be wrong, and the opportunity to learn. That’s far from Easy Street. Forecast quality demands keen situational awareness, iterative learning, and continuous improvement. Compared to the don’t-be-wrong-or-you’ll-get-your-tail-kicked ethos surrounding sales forecast accuracy, that’s a valuable upgrade for sales organizations.

Forecast quality concentrates on reducing outcome volatility – not eliminating it. Forecast quality accepts the inevitability of variances. The goal is to tighten the deviation between predicted and actual.

I understand why managers insist on accuracy. Who wants to deal with variances, and all their overhead, including staffing buffers, contingent resources, safety stock, and Plans B, C, and D? CXO’s find life is easier when not bogged down with what-if scenarios. Considering worst-case, most-likely, and best-cases for revenue, unit demand, material purchases, plant capacity, transportation logistics, and labor is tough. Yet, we soldier on. As one former boss liked to tell me, “that’s why we pay you the big bucks.”

Eight attributes of quality sales forecasts:

  1. Intelligent. Quality forecasts result from careful situational analysis and interpretation. They are supported by clean data and appropriate statistics, and not strictly on instinct or intuition.
  2. Account for intrinsic uncertainty and complexity. Resolute as a sales team might be on making goal, revenue achievement is not deterministic. Quality forecasts involve ranges like worst case, most likely, and best case.
  3. Include relevant variables and dependencies, and exclude those that are not. Quality forecasts identify which elements predict an outcome – and the relationships between them – so that probabilities can be assigned.
  4. Future-oriented. Future events can’t be predicted or modeled from historical data alone. Quality forecasts embed emerging or nascent forces into the model.
  5. Collaborative. Inputs reflect multiple points of view, including forces that the company doesn’t control (e.g. economic, competitive, technological, social).
  6. Documented. Quality forecasts clearly explain the methodology, inputs, and interpretation of results.
  7. Transparent. Quality forecasts allow other departments to learn and understand how they are developed.
  8. Iterative. Quality forecasts are continuously improved, and must be adjusted as conditions change.

Tips for achieving high forecast quality:

  1. Use forecast variance as a planning tool. Garwood advises that forecasts “should not be punitive as their primary purpose. When forecasts fall outside an acceptable tolerance, root cause analysis must be performed.”
  2. Involve the company – not just Sales. A quality forecast must include inputs from product engineering, marketing, and supply chain operations.
  3. Meet regularly to discuss forecast quality and accountability. “The #1 cause of forecasting problems is lack of accountability,” Garwood says. “A company might meet its overall revenue target, while a particular region or channel might be significantly under- or over-forecast. No region wants to be called out as ‘worst’ in forecast quality.”
  4. Pursue buy-in. Garwood suggests to “start by describing the forecast accuracy problem and how it impacts the manager, not by saying ‘here’s why this change is good for you.’ With forecast accuracy myopia, everyone spends too much time apologizing for not hitting ‘the number’ bang on. Who wouldn’t want to fix that?”

Above all, recognize the difference between good forecast quality and poor quality. That’s more nuanced than forecast accuracy. According to Garwood, “a good quality forecast means the business operates profitably within the planning variance that management has established. If the variance creates significant strategic or tactical risks, either 1) the forecast is poor quality, 2) the business lacks adequate risk capacity or 3) both.”