By Jim Tholen, Managing Partner

Revenue and Billings forecasting is a lifeblood of modern technology companies. Getting it wrong can have disastrous impacts on cash flow, resource allocation, and of course can yield very uncomfortable conversations with your board and shareholders.

Getting it right, of course, yields the opposite — all positives for driving your business forward.

We are adamant believers in NOT doing probability weighted forecasts, especially for B2B businesses with reasonably high transaction values (i.e. average deal size > $100,000).

The reason is simple. To give a bit of a silly example, let’s say you have 10 deals each worth $100,000 with a probability each of 50%. So that is a gross pipeline of $1 million and a weighted pipeline of $500,000. So in a weighted pipeline world, that might yield a forecast of $500,000. While this may look great at first glance, it does not ensure closing the deals. You can have lots of 50% deals and still have no revenue!

Instead, at BroadSoft, we implemented a simple but (for us) effective forecasting methodology.

Every registered deal was tagged as either “Committed”, “Best Case”, or “Pipeline”. While there were probability guidelines underlying each category, these categories meant the following:

• Committed — high probability the deal would close in the quarter (or month depending on the cadence of your forecasting);

• Best Case — possible to get done in the quarter — needs work but possible to pull in;

• Pipeline — we are working it, but early in the process.

For us the power of this model is that deal outcomes are binary — that is they either get down (100%) or not (0%). We found it much easier to manage our forecasting and guidance knowing our track record on “Committed” deals (and to a much lesser degree “Best Case”).

And yes, we were data hounds. We looked at trends within and across quarters on our “Committed” and “Best Case” close rates and those trends helped inform our forecasting.

But in the end we never ‘weighted’ a deal. You never heard one of us say “I have that deal in at x%”. It was either in the forecast or not. It was “Committed” (or not).

We have been evolving this forecast methodology to several of our clients, and believe it can be effective — perhaps even more so for early stage companies and companies in the early adopter market stage. Especially in these cases, each deal is important, often unique, and complex. Weighted forecasts can really send poor signals for early stage companies (is it meaningful to have an $X million weighted pipeline? To us, much more powerfully, it is far superior to have focus around a set of deals and a discipline around “Committed”, “Best Case” and “Pipeline”.