Sales, Zombies, and Revenue Risk. Oh My!

April 23, 2015

Andrew Rudin, Managing PrincipalContrary Domino ®, Inc.

703.371.1242arudin (at) contrarydomino (dot) com

100%

“. . . There are known knowns; there are things we know we know. We also know there are known unknowns; that is to say, we know there are some things we do not know. But there are also unknown unknowns—the ones we don’t know we don’t know.”

—Donald Rumsfeld

“Mr. Ackerman, if you want a guarantee, buy a toaster.”--From the movie, The Rookie, 1990

What we will cover:1. Illustrate a simple risk example2. Describe risk in a sales context3. Outline a six-step process for identifying revenue risks4. Describe actionable ways to manage risk5. Q & A

At the end of this program, you can expect to have:• a process exposing key revenue risks • an understanding of the major revenue risks that many companies face• a framework for managing those risks

http://www.slideshare.net/JohnGolden5/minimizing-risk-in-your-2015-sales-process/1

Managing

How confident are you that you will achieve your annual quota or revenue goal this year?

a) Very confidentb) Confidentc) Not sured) Not confident

Polling question:

Simple risk problem: A colleague who has never traveled to your city is making plans to visit.

She asks you, “about how long does it take to get from your city center to the departure gate at the closest international airport?”

Worst case Best case

Personal car 3:00 (180 mins) 0:45

Taxi/Uber 2:30 (150 mins) 0:30

Rail/Bus 1:51 (111 mins) 1:10 (70 mins)

Worst case Average Best case

Personal car 3:00 (180 mins) 1:52.5 ≈ (113 mins) 0:45

Taxi/Uber 2:30 (150 mins) 0:90 0:30

Rail/Bus 1:51 (111 mins) 1:30.5 ≈ (91 mins) 1:10 (70 mins)

“The Flaw

Of

Averages”

Most Likely

1:00 (60 mins)

0:50

1:31 (91 mins)

• Mode of transportation selected• Hour of the day • Accident, collision, or other mishap• Weather conditions (winter vs. summer)• Day of the week• Inaugurations, major festivals, etc.• Roadwork, other construction, maintenance• Mechanical failures• Queue at security

So, how long WILL it take to get from Downtown DC to IAD?

Worst case Best case

3:00 (180 mins) 0:30

What factors into this range?

Worst case Most likely Best case Fastest! Least volatile

Most volatile

Personal car 3:00 (180 mins) 1:00 (60 mins) 0:45

Taxi/uber 2:30 (150 mins) 0:50 0:30

Rail/Bus 1:51 (111 mins) 1:31 (91 mins) 1:10 (70 mins)

X

X

X

Common artifacts of revenue uncertainty

Delta = Taper = Risk Risk-free sales funnel

What is the primary reason prospects leave your sales funnel?

a) Poor fit for our product/service solutionb) Not enough money and/or unmotivatedc) Lost to competitor, or did not decided) Prospect’s priorities changede) Unanticipated event or unknown reason

Polling question:

Key: acknowledge that specific things are uncertain.

That’s our number! Go take that hill!Hey – [stuff] happens!

versus

Put uncertainty to work for your company!

“If you’re prepared for flying irradiated zombies that can swim, then you’re prepared for anything.”

6 steps:

1. Start with a deterministic statement.2. Identify areas of concern3. Prioritize those areas of concern4. For each priority, take a view on a related process5. Determine “worst case,” “most likely,” and “best case”6. For every minimum value, explain why it’s not possible to achieve a result that is

lower, and for every maximum value, explain why it’s not possible to achieve a result that’s higher.

1. Start with a deterministic statement.

“Our [name of goal] for [period of time] is [quantity].”“Our revenue goal for FY 2016 is $35 million.”

Putting uncertainty to work for your company

1. Start with a deterministic statement.

2. Identify areas of concern3. Prioritize those areas of concern4. For each priority, take a view on a related process5. Determine “worst case,” “most likely,” and “best case”6. For every minimum value, explain why it’s not possible to achieve a result that

is lower, and for every maximum value, explain why it’s not possible to achieve a result that’s higher.

Which of the following has the MOST SIGNIFICANT IMPACT on your revenue results:

a) Number of qualified leads received by salesb) Number of sales engagements that enter the proposal stage c) Average value per sales transactiond) Length of buying cycle or sales cyclee) Not sure or None of these

Polling question:

“Our revenue goal is $35 million.”

• We might not get enough leads.• Our product might not be available when customers require it.• We might not be able to sell at our list price.• The sales team might not be able to engage with prospects.• Our average proposal value might be too low.• The exchange rate for our exports might not be favorable.• Too few opportunities might reach proposal stage.• Our brand might take a bad hit if an employee does something

stupid on social media.

Identify areas of concernWhining

“Lame excuses”

“Not a team player.”

Putting uncertainty to work for your company

1. Start with a deterministic statement.2. Identify areas of concern

3. Prioritize those areas of concern4. For each priority, take a view on a related process5. Determine “worst case,” “most likely,” and “best case”6. For every minimum value, explain why it’s not possible to achieve a result that

is lower, and for every maximum value, explain why it’s not possible to achieve a result that’s higher.

Prioritize those areas of concern

Area of concern: Priority

We might not get enough leads. 1

The sales team might not be able to engage with prospects. 2

Too few opportunities might reach proposal stage. 3

Our average proposal value might be too low. 4

Putting uncertainty to work for your company

1. Start with a deterministic statement.2. Identify areas of concern3. Prioritize those areas of concern

4. For each priority, take a view on a related process5. Determine “worst case,” “most likely,” and “best case”6. For every minimum value, explain why it’s not possible to achieve a result that is lower, and for

every maximum value, explain why it’s not possible to achieve a result that’s higher.

For each priority, take a view on a related process

Concern Related process: Priority

We might not get enough leads. # qualified leads received from marketing 1

The sales team might not be able to engage with prospects.

# face-to-face appointments held 2

Too few opportunities might reach proposal stage.

# of proposals generated 3

Our average proposal value might be too low.

Average total $ value per proposal 4

Putting uncertainty to work for your company

1. Start with a deterministic statement.2. Identify areas of concern3. Prioritize those areas of concern4. For each priority, take a view on a related process

5. Determine worst case, most likely, and best case6. For every minimum value, explain why it’s not possible to achieve a result that is lower, and

for every maximum value, explain why it’s not possible to achieve a result that’s higher.

(annual basis /Sales force n = 40)

Worst case Most likely Best case

# qualified leads received from marketing

3,600 4,000 6,000

# face-to-face appointments held

1,920 4,800 5,760

# of proposals generated 960 1,920 2,400

Average total value per proposal

$ 35 K $ 45 K $ 100 K

2016 Revenue goal = $35 millionWorst case Most likely Best case

Revenue $18 million $32 million $40 million

Prioritized related process

Putting uncertainty to work for your company

1. Start with a deterministic statement.2. Identify areas of concern3. Prioritize those areas of concern4. For each priority, take a view on a related process5. Determine “worst case,” “most likely,” and “best case”

6. For every minimum value, explain why it’s not possible to achieve a result that is lower, and for every maximum value, explain why it’s not possible to achieve a result that’s higher.

Impossible to go lower/higher because:

Worst case Most likely Best case

Revenue $18 million

This is historical run-rate revenue generated by installed accounts and reseller activity. Maximum churn rate factored

$32 million

5% above last year’s revenue attainment. Industry CAGR is 7%.

$40 million

New plant / delivery capacity would have to be built. 2-year lead time.

2016 Revenue goal = $35 million

Delta: Worst to Best = $22 m.

(annual basis) Worst case Best case

# qualified leads received from marketing

3,600Social platform average unattended lead generation

6,000Not funded for new marketing outreach in FY 16

# face-to-face appointments held

1,920Average # of appointments by bottom 50% of sales team

5,760Assumes two appointments per day by all sales reps

# of proposals generated 960Average # of proposals by bottom 50% of sales team

2,400Assumes capacity workload by pre-sales engineering

Average total value per proposal

$ 35 KAssumes next-generation product release will be delayed

$ 100 KAssumes maximum seven months before competitor releases next-generation product

Impossible to go lower/higher because:

Calculation of different probability scenarios

Input variable 1, 2, 3 . . .

Expected Revenue

Output 1

Output 2, etc.

Unit Production

This provides a powerful, powerful planning tool:

Risk appetite / capacity

Dimension Key questionLikelihood How likely is it that the risk will occur?

Impact If it occurs, what will be the magnitude of the result?

Volatility What is the range of the possibilities?

Preventable / controllable Can the risks be eliminated or reduced?

Recurrence Can the risk recur, and if so, with what frequency?

Correlation (+ or -) Does the change in one condition cause a corresponding change in another?

Questions to ask about risk:

“Heat Map”

Impact

Low High

Likelihood

High

Low

Manage

Monitor

It depends

It depends

Risk management strategies / tactics:

• Accept – prospects might not buy!

• Eliminate – accept only Cash-on-Delivery

• Reduce – volatility, customer churn, ethical risks, fraud

• Share – outsourcing / channel sales

• Transfer – outsourcing / channel sales / full-commission sales

• Add or increase – introduce new product, initiate campaign, government or major account focus

Planning Pitfalls:• Anchoring – “Our number is based on the estimate we got in

2013.”

• Bias and wishful thinking – “I really, really want this result.”

• Not enough information – “We didn’t consider the possibility of regulatory impact.”

• Wrong information – “Some of our forecast optimism is based on the fact that all of our reps have high Klout scores.”

• Using only historical information – “We just take the previous year’s results and multiply by 1.25.”

Final thoughts:

1. The concerns and considerations you have about risk must be sound, or the numbers don’t matter.

2. The numbers you use must be right, or the results you get don’t matter.

3. The results must be right, or the alternatives you consider don’t matter.

Andrew Rudin, Managing PrincipalContrary Domino ®, Inc.

703.371.1242arudin (at) contrarydomino (dot) com

Thank you for being here, and for your time.