Get 
Hey,
it looks like you're new here! If so, you should get your free copy of
the first 3 chapters of my upcoming book (Alejandro Céspedes wrote to me the other day with the following question:
Hi Justin
Just wanted to ask if you’ve designed a way of managing the sales budget of a company. In other words, how to review if the salespeople are meeting the budget or not. Most companies are affected by the end-of-the-month syndrome, and at the same time, salespeople – once they meet that month’s budget – are not interested in selling more. They’d rather stay still and avoid cannibalizing next month’s sales.
Thanks
Alejandro
Here’s my response:
Alejandro
Good to hear from you!
Here are the two steps we take to eliminate these problems:
Eliminate monthly budgets – in favor of a T/cu type measure (Throughput per appointment-slot-consumed).
Eliminate commissions. Pay people what they are worth and make performance compulsory.
Justin
Alejandro’s question was a reminder of just how dysfunctional most sales functions really are. His email set me thinking: why have managers (us) historically designed the sales environment this way. (Presumably, it’s not because we’re daft, or ill-intentioned.) Among the assumptions that underpin the design of the sales function, there must be some that are false … what are they?
Three fallacious assumptions
Here are some assumptions that I suspect will fail to emerge unscathed from an exposure to reality. Feel free to critique my selection, or suggest your own.
Salespeople should be responsible for sales. Really? In how many organizations do salespeople actually have significant control over sales? What percentage of your transactions are the result of your salespeople:
- Originating their own opportunities (as opposed to responding to an inbound enquiry)?
- Prosecuting these opportunities single handed, without assistance from engineering, estimating or management?
If salespeople aren’t responsible for generating the greater majority of sales (all by themselves), wouldn’t it make more sense to hold them responsible for just the activities that they actually do perform?
Of course, in our model, we have salespeople performing only business-development meetings – nothing else. (Marketing originates opportunities, project leaders design solutions, etc). This means that they are accountable for only what they do in these meetings. “Sales” is management’s responsibility. Just like “production” is the responsibility of your production manager – not a lathe operator or a claims processor.
Monthly is a sensible measurement frequency for sales. It’s true that we calculate our profitability monthly. But does it follow that all internal processes should also be measured just once every 30 days. Consider your on-time-delivery performance, for example: should you stop and calculate this just once a month? Of course not. It should be calculated for every delivery.
We calculate profitability monthly because profitability is the consequence of a number of events that occur at different frequencies (and out of synchronization with one another). A more frequent calculation would probably generate less information, not more.
If the responsibility of the salesperson is to maximize the velocity of sales opportunities (and, yes, it should be) – and, if the salesperson’s effort is expended in discrete packets called appointments – why wouldn’t we calculate the progress of each opportunity, relative to each appointment?
As with on-time-delivery performance, you may choose to view the resulting number in the form of a rolling average, but that doesn’t alter the fact that the relevant time-horizon for the activity in question is an appointment slot, not a month.
Commissions drive positive behaviors. I had lunch with a director of a large (publicly listed) technology company in Sydney the other day. After hearing my position on salespeople and commissions, he asked about the negative consequences of eliminating commissions (replacing them with salaries).
I answered his question – as I usually do – with my own question. I asked him if he could first detail the positive behaviors, exhibited by salespeople, that he would be comfortable to attribute to the existing commission plan.
As usual, this question (an innocent one, I’m sure you’ll agree!) was met with a silence you could cut with a knife. He admitted that there were no positive behaviors – only negative ones! And he concluded, of his own volition, that it was probably more appropriate to try and find a justification for the existence of the commission plan than it was to look for a reason to not eliminate it.
As I’ve suggested before, if sales are important for your firm, I suggest that you identify the critical behaviors that contribute to sales, and then make them compulsory (commissions signal to salespeople that these behaviors are optional).
Please comment.
Hi Justin
As I’ve wrote to you before, this seems to be system to work better in Engineer to Order, Make to Order or Project Environments.
What about Make to Stock Environments?
As an example, I currently work with a pipe manufacturer. We sell through distributors. Most sales are repeat sales.
How would you measure effectiveness in this environment? Most sale visits are “maintenance”. We have monthly budgets, but I suspect a Throughput anual budget would be a better measure.
Thanks!
Santiago
We’d approach this kind of environment totally differently.
For starters, if you sell via distributors, we wouldn’t call your field representatives ‘salespeople’ at all, we’d call them channel managers.
We’d make them responsible for (a) winning new distributors and (b) improving distributors’ ability to sell (with initiatives like training, merchandising and – more importantly – performing field trips with their reps, calling on their reps’ clients.)
As for the processing of repeat transactions. There’s rarely a case for field reps to do this. We’d most likely move this to an inside sales team (that makes outbound calls; in addition to handling inbound ones).
Your problem with measurements is obvious. Examine your statement: ‘most visits are maintenance’ … of course, of visits don’t have a concrete objective, it’ll be impossible to measure performance!
If your field reps were to become channel managers, we’d measure their ability to effect meaningful changes in the businesses of their distributors (training delivered, point-of-sale systems installed, customer visits performed, etc).
Management would take responsibility for ensuring that these initiatives do, in fact, drive sell-through.
Obviously, inside sales is easy to measure, in this environment.
Justin
Specifically in what to use instead of monthly budgets salespeople pursue….should you use just a yearly budget and track against it?
Obviously a Throughput yearly target would be probably better.
Santiago
Santiago
First, my argument is that, in an environment where sales are pursued by a team (rather than a lone salesperson) the sales manager should own the budget – not the salesperson.
This is no different from a project environment, where the PM owns the responsibility for the project as a whole, and team members own the responsibility for the various activities to which they have committed.
My next argument is that the measurement frequency should be *greater* (not less than) monthly. We hold salespeople accountable for Throughput / AppointmentSlotConsumed.
This is calculated as follows:
• Throughput: Revenue – TVC, grossed-up to reflect the lifetime value of the transaction stream (in our model, salespeople do not retain ownership of account
• AppointmentSlotConsumed – we typically divide a salesperson’s day into 12 slots. We then allocate a standard slot-count to activity types. For example, a teleconference consumes one slot. A half-day workshop consumes six. This variable is the total number of slots consumed (filled with activities) in the period in question.
We review this number (often a rolling average) weekly in sales meetings.
Justin
The remark that, "commissions signal to salespeople that these behaviors are optional" took me some time to digest when I first started studying your materials. In fact, today, I rarely mention this component until I have established some significant trust with a client. Keep up the good fight, Justin.
-ski