I have a few long-term clients who I love dearly but who are painfully difficult to work with!

The problem is that they are creative entrepreneurs, brilliant at starting businesses – and launching new initiatives within existing ones – but challenged when it comes to building sustainable and scalable machines.

Because our expertise is the inverse of theirs you’d think we’d work together fabulously well.  But, more often than not, we don’t!

It’s not that we don’t appreciate the synergy. We do.

It’s not that we don’t both want the same outcomes. We do.

And it’s definitely not a personality thing – over the last 10 years a few of these individuals have become close personal friends of mine.

The issue (I’m starting to realize after reading Predictable Success) is that businesses must undergo a series of metamorphoses as they grow. Now, the thing is that these metamorphoses are tadpole-to-frog changes (material, not superficial).

And these changes require that entrepreneurs and their management teams have an exhaustive understanding of the life-cycle of an organization – as well as a tolerance for the collateral damage that inevitably accompanies each of these transformations.

In our case, at least, this exhaustive understanding has been lacking. Fortunately, however, it’s the subject of this new book.

Les McKeown’s Predictable Success presents a model for the lifecycle of the organization.

The right-hand side of the model represents the rise of the organization and, the left, its decline. At the apex of the arc is a place called Predictable Success. It’s here that the organization is operating at its best. It’s efficient, profitable and scalable.

Les argues that it’s impossible for an organization to get to Predictable Success without first undergoing three critical transitions (Early Struggle, Fun and White-water). And he maintains that, unless management is vigilant, the organization will slip out of Predictable Success and visit Treadmill, The Big Rutt, and Death Rattle on the way to its eventual demise.

Of course, the critical question is, what exactly determines an organization’s journey along this arc?

The answer brings me back to our entrepreneurial clients. Les’s thesis is that the journey is determined by the interplay of two critical factors (in conjunction with the overall environment):

1. Entrepreneurship
2. Systems

Les argues that an organization needs a blend of each – but that the ideal blend is quite different at each of the stages in his model.

And for me, this is the critical take-away.

Obviously, an organization needs both entrepreneurship and systems. But this realization is insufficient. It lures us into imagining that there’s a perfect blend – a kind of golden ratio that management must engineer-into the organization.

But Les paints a picture of a more dynamic reality. Management must fine-tune the blend as it moves from one stage to the next. And, even when the organization is in Predictable Success, management must pay careful indication to the warning signs that indicate the organization is slipping back into White-water or – heaven-forbid – toppling into Treadmill (a scary place, where the seeds of the organization’s eventual destruction germinate without anyone noticing).

How to learn more

If you’d like to learn more about Predictable Success, you can:

1. Purchase Les McKeown’s book
2. Download a free 27-page extract
3. Listen to an interview with Les on the Independent Entrepreneur

Les McKeown interviews yours truly

While it probably should have been me interviewing Les, the tables were turned recently when Les interviewed me for his blog.

It’s a very nice interview so, after you’ve ordered yourself a copy of Predictable Success, you might like to take a listen. If nothing else, you’ll be surprised to learn what exactly I did when I graduated high school!

The interview is here.

If it’s true that sacred cows make the best hamburgers, then we’re in for quite a feast!

I’ve chosen to close Part One of this book with a frontal assault on the juiciest bovine of all: the unassailable belief that salespeople should be paid commissions. And while I’m at it, I’ll take aim at bonuses, targets and other artificial management stimulants.

A litmus test

This discussion is important for two reasons.

First, commissions and their bedfellows will definitely handicap the performance of the reengineered sales environment I’ve gone to great lengths to describe.

Second, this discussion will force us to confront the significant implications of Sales Process Engineering: both locally and organization wide.

If you are brave enough to follow in the footsteps of our quiet revolutionaries it’s critical that you truly appreciate the essence of SPE. It’s not enough to believe that SPE will work; you must also understand – at the most fundamental level – exactly why it will work. (And if you don’t, it almost certainly won’t!)

So, I’m proposing that you use the (emotionally-charged) question of salespeople’s commissions as a kind of litmus test. If, by the end of this chapter, you are comfortable that there is no place for commissions in a reengineered sales environment, it’s safe for you to proceed.

If, however, this conclusion still does not sit comfortably with you, it makes more sense to treat this book as an exercise in creative thinking (and leave your sales function well alone).

When commissions make sense

At its most fundamental level, SPE involves the transitioning of the responsibility for sales from autonomous agents to a centrally-coordinated team.

When sales actually is performed by autonomous agents, it does makes sense to pay these agents on a commission basis (a percentage of the revenue they generate).

So, if we imagine a computer hardware manufacturer that sells desktop and notebook computers to consumers, via big-box retailers; it’s clear that these arms-length retailers should be paid on a commission basis.

And, if we think about this example, we can identify two conditions that accord well with commission-based pay:

1. These retail agents sell from stock – meaning that there is no requirement for them to interact with the hardware manufacturer on a transaction-by-transaction basis (which certainly would not be the case in an engineer-to-order environment)
2. These retail agents are truly autonomous – they march to their own drumbeats (and they own the relationship with the ultimate customer)

But what happens to the case for commission-based pay when these conditions are not in place?

As we discussed in Chapter 2, when we transition from a make-to-stock to an engineer-to-order environment, the case for autonomy becomes weaker. Increasingly, the performance of the organization as a whole becomes more a function of the quality of integration between sales and production.

And, because autonomy and teamwork are polar opposites, as the case for autonomy becomes weaker, we reach a point where we have to make a clean switch from one to the other (there’s simply no such thing as an autonomous team member!).

The wrong question

We now arrive at the critical question. We should not begin this discussion by asking: does commission make sense? Rather, we should ask: should we sell via autonomous agents or via a centrally-coordinated team?

Once we answer this question, our position on commissions becomes obvious.

Commissions: the case against

In order to understand why, let’s briefly revisit the history of manufacturing.

There was a time (before the industrial revolution) when almost all labor was paid on a piece-rate. Piece-rate pay is the manufacturing equivalent of commission. Rather than being paid in units of time, a piece-rate worker is paid in units of output. (A sewer, for example, might receive 20c for each garment processed.)

Today, however, piece-rate pay is almost extinct. (And, I suspect by now, you have a good idea why!)

What happened is that management discovered that, as the complexity of the environment increased, there was a critical threshold beyond which scheduling decisions had to be made centrally.

Of course, beyond this threshold, piece-rate pay had to be eliminated because it drove workers to work as fast as possible and not to subordinate to the schedule. (Remember, because of the combination of dependency and variability you never maximize the output of a system by maximizing the rate-of-work of each system resource.)

Commissions (or any kind of performance pay) are inappropriate in the reengineered sales environments described in this book for exactly the same reason that piece-rate pay is now inappropriate in manufacturing environments.

And this conclusion does not just apply to the sales function in isolation. As we discussed in Chapter 4, in many organizations it is not healthy for sales to be the organizational constraint. So, in these cases, irrespective of the structure of the sales function, the organization as a whole will perform better when sales is not operating at 100% utilization.

I wish this could be my last word on that subject. However, there’s a number of persistent objections to my position that we must first put to bed:

1. Ours is a mixed environment: salespeople are not fully autonomous – meaning that a mix of salary and commission is justified
2. Even if we don’t need the compensation plan to determine salespeople’s rate of work, we still need performance pay to maximize salespeople’s quality of work (in other words, without commissions, what would motivate salespeople to actually sell?)
3. Commissions enable us to mitigate against the uncertain nature of salespeople’s performance and keep costs under control
4. The theory may make sense, but good salespeople will simply not be prepared to work in an environment without commissions

The fallacy of a mixed environment

I’ve heard many executives argue that it’s beneficial for their salespeople to be partly autonomous. But I’ve never heard anyone argue that it’s beneficial for salespeople to be partly team members.

Perhaps it’s because the latter phrasing exposes the folly of this position!

I’ve already stressed that it is impossible for salespeople to be team members and autonomous agents at the same time. However, an astute reader might argue that this is possible in theory (if not in practice).

Your salespeople can be capable team members and operate autonomously if (and only if) the rest of the organization has the capacity to subordinate to individual salespeople.

At first glance, this condition may not appear to be particularly onerous. However, when we consider the enormous variability in salespeople’s output, we recognize that effective subordination would require a huge amount of redundancy in customer service, engineering and production. (Remember, we’re considering true sales here, not repeat transactions.)

The fact that this is commercially unrealistic in most organization tends not to stop management from pursuing a mixed sales environment. And, the consequences are as unpleasant as they are predictable:

1. Management encourages salespeople to operate autonomously
2. Salespeople proceed from the assumption that more sales is always better (the tacit assumption is that the rest of the organization can keep up)
3. On average, the sales team as a whole sells less than the organization has the capacity to produce
4. However, because new accounts are won infrequently (after all, salespeople spend the greater majority of their time processing transactions), the load on the rest of the organization is irregular
5. On the (not infrequent) occasions that customer service, engineering or production does not have the capacity to honor commitments made by salespeople, on-time performance tends to be compromised (although, the commitments that have been made to new accounts are often met, at the expense of existing ones)
6. Periodically, management attempts to improve the financial performance of the organization with additional incentives and special promotions
7. These incentives tend to increase the lumpiness of the deal flow – meaning that, over time, peak sales increase, at the expense of average sales

The bottom-line is that contradictions cannot persist indefinitely. Your salespeople cannot be both autonomous agents and team members. They cannot be responsible only for sales outcomes and simultaneously be expected to attend sales meetings and maintain the organization’s CRM. And customers cannot belong to both salespeople and to your organization.

Commissions and the quality of work

If salespeople don’t have the opportunity to earn commission, then why would they sell?

I wish I had a dollar for every time I’ve been asked this question by an incredulous executive. You would think the onus should be on the defender of performance pay to present an argument.

After all, receptionists answer the phone when it rings, in spite of the fact that they receive no incremental pay. Your financial controller does a good job of paying bills on time, in spite of the fact that they receive no rebate on each check signed. And even senior executives perform important tasks, absent special incentives (I’m assuming that no one is paying you to read this book!).

Why should salespeople differ from almost every other worker on the planet?

The answer to the question four paragraphs above is simple: absent the opportunity to earn a commission, salespeople will still sell because they are salespeople. (Just as receptionists answer the phone because they are receptionists.)

I often wonder if those executives who ask that question are really enquiring into the motivation of their team members or if they are providing an (unsolicited) insight into their own pathology!

In Drive, his excellent best-seller, Daniel Pink presents a powerful case against performance pay. His conclusion – backed-up by many experiments from the social sciences – is that external rewards retard the performance of knowledge workers and have a positive effect only in situations where workers are performing mindless, repetitive tasks.

In other words, if your team members are responsible for activities any more complex than licking stamps, the work itself is their reward.

Interestingly, Pink’s conclusion points to an interesting defense of performance pay in the traditional sales environment. Consider these two points:

1. In most environments the volume of sales appointments has a far greater influence on sales output than the qualitative performance of the salesperson
2. In almost all environments, salespeople generate their own appointments as a result of mindless and repetitive prospecting activities (internet research, cold calling, etc)

With these points in mind, commissions may be defensible in traditional sales environments, not because they motivate salespeople to sell, but because they motivate them to prospect!

Of course, in our case, this argument is moot because we are definitely going to free salespeople of the requirement to generate their own sales meetings.

Commissions as a hedge against non-performance

The obvious problem with the argument that performance pay provides management with a hedge against the costs associated with salespeople’s non-performance is that the same argument could be applied to everyone in the organization.

But, then sales is a special case for a couple of reasons:

1. The performance of salespeople is highly variable
2. It is easy to isolate the contribution that a salesperson makes (this would not be so easy in the case of a line worker)

As we’ll discuss shortly, SPE inverts these two reasons:

1. The output of the sales function ceases to be highly variable
2. While it’s easy to measure the capability of a salesperson, it is difficult (if not impossible) to isolate the contribution that person’s activity make to the organization as a whole

First, however, let’s consider the wider (and more terrifying) implications of performance pay.

Management abdicates

We’ve discussed earlier that you cannot manage an autonomous agent (these two concepts are antagonistic). Performance pay makes this contradiction explicit! In other words, when a significant component of a salesperson’s pay is performance based, management has formally abdicated its responsibility for sales.

In so doing, management has telegraphed to salespeople that selling is optional! It is now up to individual salespeople whether or not they generate sales – and in what quantity.

If a salesperson is capable of selling, the real cost of their non-performance is not their salary, it’s the profits that the organization does not earn when production is sitting idle!

If a salesperson is not capable of selling, the real cost of their non-performance is still not their salary, it’s the sales opportunities that are lost that could have been won if they were attended to by a more capable individual.

Variability diminished

If sales appointments are the primary driver of sales (and it’s rare that they are not), we can significantly reduce the variability of sales by:

1. Fixing the volume of sales appointments (the same number of appointments, week after week)
2. Increasing the volume of appointments (as the appointment volume increases, the variability of the entire sales function reduces)

Of course, our standard model does this by ensuring that salespeople do nothing other than sales appointments and by ensuring that each salesperson performs ten-times the volume of appointments they would perform in a typical sales environment.

Capability

Many of our silent revolutionaries report an increase in salespeople’s capability. There are three contributing factors here:

1. Predictably, when organizations reduce the size of their sales teams, they retain their more capable salespeople
2. When salespeople do nothing other than sell – four appointments a day, five days a week – they get good at it (or they rapidly conclude that sales is not the right career for them)
3. With control over salespeople – and with accurate and current data – sales management finds it easy to institute a process of ongoing improvement

Salespeople’s position on commissions

If there’s one thing I’ve learned in the last 10 years or so, it’s that sales managers are uniformly terrible at predicting their salespeople’s reaction to our standard model.

Almost without exception, sales managers predict outrage from their team members – perhaps even a mass exodus of talent! And the one component of our model sales managers predict will be the most offensive is the elimination of commissions.

In reality, salespeople’s reaction to this proposition tends to be shocking for exactly the opposite reason. It’s shocking how comfortable salespeople are to give up both their autonomy and their variable compensation plan!

The reason salespeople tend to be so compliant is very simple.

Salespeople (contrary to popular opinion) do not live in a parallel universe. They are a part of the same dysfunctional reality that is causing the rest of the organization (including management) so much pain.

Salespeople may have different theories about the source of their particular set of issues – and they may propose different initiatives as a remedy to these issues – but, when presented with the evidence, salespeople recognize (often faster than management) that a significant number of sales problems, production problems and management problems can be tracked back to the same root cause (their autonomous mode of operation).

And make no mistake; salespeople have more than their fair share of complaints:

1. They hate the volume of clerical and customer-service work that prevents them from engaging meaningfully with potential and existing customers
2. They don’t enjoy spending their evenings in hotels entering data in the CRM, generating expense reports and writing proposals
3. The resent the continual conflict over the allocation of commissions (particularly when accounts span multiple territories)
4. They hate having to advise clients that their promises will not be met – and they resent the fact that they have to live with the continuous uncertainty over production performance
5. They don’t enjoy the underlying – and constant – conflict in their relationships with production, customer service engineering, management and even finance

It may be true that salespeople are in love with the notion of the salesperson as a lone crusader, but salespeople are also realists. They quickly recognize that, on balance, the proposed environment will be infinitely more rewarding to work in.

Sure, they sacrifice their autonomy but, so what? They each get a dedicated executive assistant (sales coordinator) who will free them to do nothing but sell.

And sure, they have to transition from commission to a salary but, what of it? Salespeople understand that the dynamics of the environment in which they operate rob them of the financial upside they signed-on for. And, the truth be known, salespeople have never been entirely comfortable with the notion that they are innately lazy: prepared only to do the right thing on the promise of an incremental financial inducement.

The new compensation plan

So, it’s out with commissions and in with a new compensation plan.

But there’s not much to the new plan. The idea is simple: we pay people what they are worth (perhaps a little more).

And that’s it!

In practice, you should pay salespeople enough to ensure that compensation is no longer a regular topic of conversation – and then insist that they perform the activities required for the organization to achieve its objectives.

So here, from management’s perspective, is the fundamental difference between the two compensation plans:

With performance pay, we make optimal performance optional – and then we attempt to exert control through a compensation plan that underlines salespeople’s autonomy with every pay check!

With salaries, we take the discussion of money off the table. Salespeople willingly subordinate to a central schedule. And they perform necessary activities because they are asked to (and, because those activities are congruent with both salespeople’s job descriptions and the reasonable interests of the organization).

This new plan, then, is not even new: it’s exactly the same plan we use to compensate everyone else in the organization!

And when it comes to calculating salespeople’s salaries, there are no surprises here either. As with all employees, there are two considerations:

1. Replacement cost (how much would you have to pay for another person with a comparable set of capabilities?)
2. Asking price (how much will you have to pay the current candidate to ensure that the compensation plan is no longer a regular topic of conversation?)

It should go without saying that it would be foolish to propose that salespeople (or any team members, for that matter) take a cut in pay when you transition to this new model.

Most of our silent revolutionaries shift their salespeople to a salary that is equal to, or slightly greater than, their average total earnings (typically judged over a three-year period).

If you think about it, both parties are getting a terrific deal here.

1. Salespeople are receiving a not-insignificant pay rise. Obviously the potential to earn a figure is worth nowhere as much as the same figure, guaranteed.
2. Management is increasing the volume of effective work performed by each salesperson by ten times. To achieve the same increase in a typical sales environment, management would have to add nine more salespeople for every one they currently employ! In the new model, the cost is limited to an incremental increase in the salesperson’s compensation and the cost of a sales coordinator.

The other artificial management stimulants

This debate about commissions is like Hydra (the many-headed monster). You successfully lop-off one head and another appears.

I fear that, even if I’ve done a reasonable job of convincing you that there’s no place for commissions in the reengineered environment, your very next question might be: but, what about bonuses.

My observation is that bonus plans have a couple of problems:

1. Because the bonus is remote from the positive behaviors that drive the desired outcome, the first installment of a bonus is a pleasant surprise and subsequent installments are viewed as entitlements
2. Bonuses suggest to team members that they are responsible for outcomes when, in fact, managers should own this responsibility – accordingly, they tend to dis-empower managers

It is certainly true that some degree of variability is required where compensation is concerned. However, my position is that standard salaries provide the necessary flexibility. As your team members become more capable, their market value increases, meaning that you are obliged to grant them pay rises when (or ideally before) they request them.

I suggest that there is absolutely nothing wrong with the traditional contract between employers and employees. Employees want to be able to perform rewarding work in a secure environment. If they were really seeking uncertainty and boundless riches they would not have signed-on to be employees in the first place.

The other stimulants (targets and quotas) are problematic for the same reasons as commissions and bonuses. They tend to suggest that team members own outcomes.

In a team environment, the team cannot own the responsibility for anything! There is no collective consciousness – only a group of individuals. It is critical, therefore, that the manager owns the responsibility for the desired outcome and that team members own the responsibility only for the activities assigned to them.

Here, a military example is illuminating. Imagine, rather than allocating discrete responsibilities to each of his units a commander were simply to assemble all his troops and exhort them to take Berlin!

Reinventing management

On the subject of management, it’s important to recognize that the transition to a reengineered sales environment is extremely difficult for sales managers.

As a result of this transition, sales managers find themselves in a position where down is up and up is down. If sales managers were to refer to a list they had compiled before the transition of everything they know for sure about sales, almost every statement on that list will now be false.

Consequently, it is not sufficient to reengineer the general sales environment. You must also rebuild from scratch the sales manager’s method of operation.

* * * *

You now have a sound understanding of the theory that underpins Sales Process Engineering. Part Two of this book will show you how to convert all this theory into practice.

In most discussions of sales, the greater organization doesn’t rate a mention.

This is more than an idle curiosity. The fact that we traditionally consider the sales function in isolation is likely to be an admission of a fundamental flaw in the design of sales – as well as the cause of many of the problems we experience.

This chapter presents a model for the organization as a whole and exposes the critical connections between sales and the other key organizational functions. We’ll start with the goal of the organization and drill-down to discover what the sales function must do – not to be successful in isolation – but to contribute to the success of the organization as a whole.

* * * *

While this book contains many implicit references to the Theory of Constraints (TOC), this chapter formally introduces some of TOC’s key concepts. TOC is a process-engineering methodology, developed by Eliyahu Goldratt and popularized in his 1984 best-seller The Goal. In short, TOC recognizes that the output of any system is determined by the system’s lowest-capacity resource – and that this resource (the constraint) can be used to gather intelligence about, and exercise control over, the system as a whole.

In practice, TOC enables a decision-making approach that contrasts with the traditional (cost-accounting-based) approach – which assumes (erroneously) that the output of a system is the sum of the output of each of the system resources.

The goal

Considering that this book considers just one type of organization (a business), the goal is obvious: to make money (now, and in the future). And, at a glance, the contribution that sales must make to the achievement of this goal also appears obvious: to make sales.

But, not so fast!

Does it automatically follow that, if the sales function generates more sales, then the organization makes more money?

Actually, it doesn’t. There are two (common) cases where the sales function can actually harm the greater organization by generating more sales.

Sales can sell something that production doesn’t have the ability (or capacity) to produce to the customer’s requirements (damaging goodwill as a consequence).

Sales can sell something that causes the organization to make less money than it otherwise would. (For example, limited production resources might be diverted to fill orders that generate a lower yield on those resources.)

We must recognize, then, that the objective of sales cannot be defined in isolation. It must reference at least one other organizational function. (And the same can be said for each of the other functions.)

We should also suspect that, because organizations can differ significantly from one another, it may not be possible to specify the objective with a standard statement that is applicable in every circumstance.

The constraint

As I’ve mentioned, a business consists of a number of functions that must work together to make money (the goal). How much money the business makes is determined, to a large extent, by how well these functions work together.

Let’s consider a very simple business, consisting of just a sales and a production function.

In order to make money, the business as a whole must generate gross profit at a faster rate than it incurs operating expenses. Units of gross profit must be processed by both sales and production before they can be banked. Specifically, sales must win an order and then production must fulfill it.

We will use the (TOC) term Throughput to refer to units of gross profit. Technically, Throughput is equal to the revenue generated by a transaction, minus the totally-variable costs associated with that transaction (raw material costs, sales commissions, shipping, etc).

Because the amount of money that a business makes is a function of the rate at which it processes Throughput, it is important that we understand the capacity of the business. In other words, we need to know how much Throughput the business can process in a given period.

The capacity of the business as a whole is determined by the capacity of its lowest-capacity function (what we’ll call the constraint).

So, if the capacity of each of the functions in our simple business is as marked above, it should be clear that this business can only generate $10,000 (Throughput) a day. Production does have the capacity to produce more but, without sales to fulfill, there’s no point it doing so.

Because (in this scenario) sales determines the profitability of the organization as a whole, we can draw some conclusions about how sales and production should work together:

1. Sales should sell as much as possible (in this scenario, it does make sense for sales to sell as much as possible)
2. Production should produce whatever sales sells (and nothing more)

We can now generalize from these conclusions to arrive at two simple rules – applicable to every business:

1. The constraint should operate at full capacity, at all times
2. Non-constraints, should subordinate to the constraint (in this context, subordinate means keep up with)

It should now be clear that sales should only operate at full capacity (i.e. sell as much as possible) when it is the constraint. In all other scenarios, sales should subordinate to the constraint.

So, if we reverse the capacities of the functions in our simple business (meaning that production is now the constraint), we can conclude that:

1. Sales should sell only what production has the capacity to produce
2. Production should operate at full capacity, at all times

Variability (our dark passenger)

Actually, these two rules will not produce the optimal outcome in reality! And, when we understand the reason why, we’ll also understand why our organization should have a (single) constraint in the first instance.

We must acknowledge that, in reality, the output of any resource is inherently variable. When we talk about a person, a machine or a plant producing an output of x, what we really mean is that the output averages x. If we plot the output of that resource (any resource) on a run-chart, we will discover that its output is quite variable.

This inside (telephone-based) salesperson may average
$5,000 in sales a day, but her range is greater than her mean.

This means that (continuing with our example above) it is impractical for sales to aim to provide production with $T10,000 worth of orders a day, for two reasons:

1. The output of sales will vary dramatically (as is the nature of sales) from day-to-day
2. The capacity of production will also vary but it’s variability will be independent of – and, therefore, out of sync with – that of sales

If sales was to attempt to provide production with $T10,000 worth of orders a day, production will find that it is regularly starved of work – meaning that the actual output of the organization will be less than the capacity of production (the constraint).

The solution to this problem requires that sales maintains a buffer of orders upstream from production, large enough to absorb the sales function’s inherent variability (but no larger).

The existence of the buffer enables the organization to fully exploit its production capacity, as well as to maintain good on-time delivery performance. However, if the buffer is larger than necessary, it will increase delivery lead-time – causing the organization’s product to be less appealing to customers.

With this small (but critical) modification to our simple business, we can now finalize our directives to each function:

1. Sales should maintain the constraint buffer at its optimal size
2. Production should operate at full capacity, at all times

As promised, variability also points us to the reason why an organization should have a (single) constraint.

The inherent variability in the output of every resource means that an attempt to balance the capacities of resources is a fool’s errand. In an environment where all resources have identical average capacities, the day-to-day variation in actual output will result in the emergence of a constraint that wanders, unpredictability, from resource to resource – rendering the organization unmanageable.

It makes more sense for management to determine which function should be the constraint and then build enough protective capacity at non-constraint resources to ensure that the system is stable.

The optimal constraint location

That’s right; you get to choose the location of the constraint within your organization. (Well, you do if – and only if – you can stop the cost accountants from attempting to balance the capacity of all resources!)

To shed some light on this decision, let’s meet one of our silent revolutionaries prior to their transition.

Acme is a traditional (plate and ink) printer. Its owner has stayed current with technology and has, consequently, seen Acme’s production capacity increase geometrically over the last 15 years. The owner’s not-insignificant investment in technology has produced a dramatic improvement in plant efficiency, measured on a per-impression (or, printed-page) basis.

However, Acme’s sales team has failed to keep-up with production. The plant has the capacity to generate around $600,000 a month in Throughput, but the sales team is selling less than a third of that. The owner is rapidly realizing that the efficiencies produced by the new technology are a mirage if the additional capacity is not sold.

Clearly, in Acme’s case, sales is the system constraint, meaning that we can apply our two rules to define objectives for both sales and production. But advising sales to sell as much as possible – and production to keep pace – is not much of a solution when two-thirds of acme’s plant capacity is sitting unused.

It makes more sense to take pause and examine the overall design of the organization. And, in so doing, the very first question we should ask is: which function should be the organizational constraint?

To answer that question, we must start at the beginning: with the goal of the organization.

We know that Acme’s goal is to make money but it’s worth exploring what make money really means. Clearly it means more than generating revenues (you can generate a lot of revenue and still go broke). It must also mean more than making profits (profits are good, but they are only half of the story). That’s right; making money means maximizing the return on owners’ equity (and you can do this by increasing the return, decreasing the equity or some combination of the two).

This better understanding of the goal helps us to recognize that production should probably be Acme’s constraint (not sales). The reason is that production is where almost all of the owner’s equity is invested!

So, in the short run, our two rules may provide Acme with a thumb in the leaking dike, but in the long run, Acme must:

1. Dramatically increase the capacity of the sales function (until sales can consistently sell more than production has the capacity to produce)
2. Reduce the capacity of the plant

Once Acme has remedied this immediate problem – and shifted the constraint to production – then the responsibility of sales will no longer be to sell as much as possible. Sales will be responsible for maintaining a queue of orders up-stream from production – large enough to ensure that production operates at full capacity, day in and day out.

Because Acme is one of our silent revolutionaries, you can probably guess that they chose to dramatically increase the capacity of sales. Today, the presses at Acme run at 100% utilization, 100% of the time. Acme’s salespeople are no longer looking for something – anything! – to print. Instead, they search constantly for ways to increase the yield that Acme earns on its finite plant capacity.

The third function: new product development

Now that we understand the concept of the constraint, we need a more complete model of the organization. To date we’ve envisaged just two functions, sales and production.

In the long-run, however, a business needs (at least) one more function in order to thrive: new-product development (or engineering).

The primary responsibility of new-product development (NPD) is to conceptualize and design the products (or services) that sales sells and that production delivers. (Additionally, NPD will often innovate internally, creating better production or distribution processes.)

It’s critical that we explicitly recognize the existence of – and the importance of – NPD . It’s not just that NPD keeps the organization relevant in the long-run. In most organizations it’s NPD that determines whether or not potential customers are prepared to entertain your salespeople!

Now, obviously all organizations have more functions than those examined here (finance, administration, etc) but, because these are support functions they have no bearing on this discussion. Similarly, I am choosing to ignore senior management because I’m assuming that it’s senior management who’s doing the modeling in the first place!

With our model expanded to three functions, determining the ideal constraint location becomes a little trickier. However, if we consider the three value-chain configurations we discussed in Chapter 2, the optimal constraint location starts to come into focus.

Make to stock

A traditional car company (e.g. Ford or Toyota) is an example of a make-to-stock (MTS) manufacturer. The flow is simple:

1. NPD designs something
2. Production manufacturers it
3. Sales sells it

In most cases, MTS manufacturers sell via arms-length resellers, rather than direct – and for this reason, it makes more sense to refer to our third function as distribution than sales. In practice, this does not make a large difference – particularly when you consider that the manufacturer will still need to maintain some kind of salesforce in order to acquire and develop channel relationships.

As for the question of which function should be the organization’s constraint, this is evident from the phrase make to stock. As discussed previously, the stockpile of inventory exists to buffer production from distribution – meaning that sales must be the constraint.

In most cases the flow between NPD and sales is asynchronous (hence the dotted line above). In other words, NPD designs new products periodically, not once for each item manufactured.

Because services cannot be stockpiled, the term MTS applies purely to manufacturers.

Make to order

Production does not commence for a make-to-order provider until the order is received. Accordingly, there can be no inventory of finished goods.

Increasingly, technology is allowing even traditional manufacturers (think, car companies) to move to a make-to-order (MTO) configuration. Dell is a perfect example of a MTO manufacturer – as is a tax agent or a traditional printer. A MTO provider does not have to design a new product for each client – rather it’s a case of configuring standard options to suit the client’s specifications.

The MTO flow looks like this:

1. NPD designs a product (or service) with a finite number of customizable options
2. Sales sells the product – and helps the client customize it to suit their requirements
3. Production produces it

In most cases, the ideal constraint location for a MTO producer will be production. The responsibility of sales (as per our Acme example) should be to maintain a queue of orders upstream from production. Furthermore, this queue of orders should ideally be composed so as to maximize the yield on production’s limited capacity (bearing in mind that different mixes of work will have varying impact on the profitability of the organization).

An interesting example of an MTO provider is a funeral home. At first glance, it would appear impossible for a funeral home to maintain a queue of orders upstream from production (the mortuary). The reality, however, is that, in recent years, funeral homes have figured-out how to do exactly this! Most homes today have sales teams that sell funeral plans – meaning that, when a person passes, their funeral has already been arranged and paid for.

Engineer to order

Engineer to order (ETO) environments add another level of complexity to MTO.

Rather than configuring a product (or service) to suit a customer’s requirements, an ETO provider designs a custom solution and, in most cases, the design procedure spans the point of sale. In other words, in an ETO environment, the vendor will most likely need to do some preliminary design to win the job and will then have to complete the design after the job is won.

In most ETO environments, engineering should be maintained as the organizational constraint. This is because:

1. Engineering is the source of the firm’s competitive advantage
2. Engineering is, in most cases, harder to scale than sales or production (remembering that components of production can generally be out-sourced)

Examples of ETO providers include engineering and architecture firms, traditional- and web-design companies, and enterprise-software providers.

A new objective for sales

If we adjust our diagram to indicate the optimal constraint location for each value-chain configuration, we now have our final model. In each case, the constraint is the resource downstream from the constraint buffer.

In summary then, what we are proposing is that:

1. In each case, the constrained function (and only the constrained function) operates at 100% utilization.
2. Non-constrained functions subordinate to the constraint

For each resource, to subordinate means something a little different:

1. NPD subordinates (in MTS and MTO environments) by ensuring that product (or service) offerings are consistently appealing to the market (meaning that they are innovative and that they can be competitively priced)
2. Production subordinates to distribution in a MTS environment by ensuring that inventory stockpiles are the optimal size (and composition). Too little inventory will mean stock-outs and too much will cause distribution to liquidate unsold items or, alternatively, will prevent the uptake of newer lines.
3. Sales subordinates in MTO and ETO environments by ensuring that a queue of orders is maintained up-stream from either production or engineering – and by ensuring that the composition of this queue maximizes the yield on the downstream function’s finite capacity

We can now see that it’s only in the case of the MTS environment that the objective of sales should be to sell as much as possible.In the other two environments, sales should be subordinating to either production or engineering.

And, as we mentioned earlier, over time, organizations are tending to transition from MTS to either MTO or ETO. This means that it is increasingly unlikely that your sales function is (or at least should be) the organizational constraint.

If you are not a MTS manufacturer and your sales manager believes that their responsibility is to maximize sales then you should suspect that this is evidence of an organizational design problem. If it does not make sense for sales to be your organizational constraint then sales should have enough protective capacity to enable it to maintain a queue of orders upstream from either production or engineering at all times (come hell or high water).

If sales is resourced properly, your sales manager would never claim that it’s their responsibility to maximize sales. It would be obvious to them that this would cause the order queue to quickly inflate to the point where lead-times would explode and client relationships would be damaged. (If you consider that the sales function exhibits a greater degree of variability than all other functions, it should be clear that you need quite a deal of protective capacity in sales to enable that function to subordinate effectively).

As mentioned, it’s not just the size of the order queue that’s important in MTO and ETO environments: it’s the composition of that queue. Sales should be responsible for selling the mix of work that maximizes the yield on either production’s or engineering’s finite resources.

The optimal mix

Now, the notion of constraints applies at the functional – as well as the organizational – level. In other words, if your organizational constraint is your production function, then the production function will be constrained (at any one point in time) by a single production resource.

In Acme’s case, production is now the organizational constraint. However, if we look inside production, we discover that the plant is designed to ensure that a bank of shiny new 5-color Heidelbergs operates at 100% capacity at all times. The other production resources subordinate to that that bank of printing presses.

If Acme’s sales manager wants to maximize the profitably of Acme (which I can assure you he does), he will plan promotional and sales activities with a view to (in this order):

1. Keeping those printing presses fully loaded with work
2. Prioritizing jobs that maximize the yield on the Heidlebergs’ limited capacity
3. Identifying opportunities to sell any spare capacity in the plant that may not put a load on the presses (e.g. it might be possible to opportunistically sell some spare capacity in the bindery to a print broker)

It should be clear that this tight integration of sales and production will have a profound impact on the profitability of the firm (as indeed it has in Acme’s case).

And the importance of tight integration (as discussed in the previous chapter) is even more critical in an ETO environment, where the line between sales and production is blurred.

For this reason, in MTO and ETO environments, the new approach to the design of the sales function, presented in this book, offers much more than the opportunity to build a more efficient sales function. By allowing the tight integration of sales with other functions, this new model will impact almost every facet of the client engagement.

A word of caution

The model presented in this chapter is intended as a ready-reckoner – not as a substitute for a formal approach to strategy formulation.

As well as the value-chain configuration, you should also consider the source of the organization’s competitive advantage. For example, if movie studios and drug companies compete on the basis of continual and rapid innovation, NPD (or R&D) should always be their organizational constraint (remembering that the constraint is the only function that operates at 100% utilization).

And, as suggested earlier, it’s worth paying attention to how owner’s equity is distributed among functions.

In the case of organizations that consist of a single function (print brokers and travel agencies, for example), the identification of the optimal organizational constraint should be relatively easy!

Okay, perhaps evil is a bit of an exaggeration, but whenever I encounter an environment where time is tracked and billed, I see tremendous inefficiencies and value-destruction.

Let’s consider why.

Imagine you have something to sell – a widget, say. Tell me, for how much should you sell it?

The answer to that question is more obvious than you think. To calculate the optimal sale price you don’t need to know:

1. Raw material cost
2. Labor hours
3. Overhead allocation ratios

You don’t need to know any of that because the answer is: you should sell that widget for as much as you can get!

That’s right, the optimal sale price is not determined by internal factors, it’s determined solely by what the market is prepared to bear. You cannot – let me say it again, CANNOT – calculate the price of a product.

All you can do it estimate it. And you must recognize that, in most situations (certainly in those environments where we’re most likely to see T&M billing) it’s simply impossible to estimate the the price with a high degree of accuracy.

The primary assumption behind time-and-material billing (T&M) is that you can calculate the price of something by simply counting the number of minutes required to produce it.

But you can’t. Effort does not equal value. In many cases, it doesn’t even approximate it!

One of the problems with time is that it’s inherently measurable. Because it can be counted in intervals as small as a minute, we’re lulled into the false impression that we are calculating (as opposed to estimating) value.

The alternative

How then should we estimate value? And how should we track productivity?

If we use time to estimate, it’s important to recognize that we’re using time as a proxy (a yardstick) for value.  Time does not equal value.

My advice, where time is concerned, is not to estimate time in increments any smaller than half a day. In other words, do not ask, how many hours will this job take?, ask how many half days?

Where short-duration tasks are concerned, my preference is to ignore them altogether. Just factor them into the multiplier you are using for half-day slots!

I’d rather, however, that you find some other proxy for value. We’re working with a bookkeeping firm currently. When I challenged them to identify a better proxy for value than time they came up with a great one – transactions (debits and credits). It’s obvious that the volume of transactions processed is a greater determinate of client value than time consumed.

And how do we track productivity? Well, we start by burning timesheets!

You DO NOT make money out of expending effort. You make money out of delivering value. And the connection (in most cases) between these two factors is very tenuous.

Timesheets encourage team members to be busy. This drives multitasking, and the hogging of work that could otherwise be passed-off to lower-paid people. Both destroy value. Furthermore the maintenance of time-tracking systems, consumes enormous resources and the completion of timesheets insults your team members at 10-minute intervals.

You need to recognize that individual jobs (or projects) do not make you money. Your portfolio of work makes you money. Once you realize this, you can focus on managing the portfolio, rather than the jobs.

You don’t make money by keeping your team busy. You make money by delivering jobs. And the two are NOT the same thing. People work best in fits and starts. And team work necessitates relay-racer behavior (person B hovers, waiting for person A to finish his work – and then sprints to hand-off the job to person C).

You need to mobilize your team to get jobs out. Think of the pit crew in a Formula 1 team. Timesheets are not conducive to this environment.

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:

1. Originating their own opportunities (as opposed to responding to an inbound enquiry)?
2. 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.

Today, on Harvard Business Review Online, Peter Bregman argues: why not having a plan can be the best plan of all.

Of course, this is just the latest salvo in a long-running battle between the traditionalists – for whom no plan is ever detailed enough – and the now generation – who see planning as getting in the way of making a fortune or two and still getting home in time for some work-life balance.

Bregman, obviously, sides with the latter camp, citing Mark Zuckerberg (who else?) as his first exhibit in his case for the negative position.

Now, you could argue that such jousting is innocent enough. Few might seriously consider adopting the extreme position promoted by either side.

But the danger, to my mind, is that the debate tends to deflect from serious consideration of the nature of planning: and this consideration can yield some interesting ideas.

False alternative

What we have here is a dilemma. The proposition is that, in order to execute effectively, we must both plan and not plan.

Because contradictions don’t exist in reality, we know, right away, that we are proceeding from a false assumption here somewhere.  The assumption is that plans come in one size only (and I think both sides of this debate like to conjure-up plans of the infinitely-detailed variety!).

If we challenge this assumption, we can posit a new proposition: in order to execute effectively, we must plan to the appropriate level of granularity.

Here’s where things get interesting. How, then, does one determine the level of granularity that is fit for purpose?

Uncertainty and granularity

I propose that there’s an inverse relationship between uncertainty and granularity.

In other words, the greater the degree of uncertainty the less granular the plan.

Take Mark Zuckerberg and his Facebook journey.  It’s false to suggest that he started work without a plan.

In the complete absence of a plan, there’s no work; just undirected action (a random walk).  There must have been a plan – an implicit one, perhaps. At a minimum, there was a goal and some necessary conditions. No doubt the goal was to do something cool – most likely, something with commercial potential. And, at least one of the necessary conditions is obvious, considering Zuckerberg’s special talent. It had to involve software.

In Zuckerberg’s situation, such a plan would have been sufficient, in terms of granularity.

But as Facebook has developed – and uncertainty diminished – Zuckerberg’s plans have undoubtedly become more detailed.

Uncertainty and cycle time

So far, so good.

Let’s add another dimension, now: planning cycle time. In other words, at what frequency should plans be revised?

I propose that uncertainty is the driver here too. And again, we’re dealing with an inverse relationship. Greater uncertainty means a shorter planning cycle time.

So if we imagine the evolution of a business.

On day, one, plans are expansive and devoid of detail:

Find a business opportunity that generates a decent return on sweat equity – with growth potential and minimal risk. Commence by running limited tests of the following ideas …

The planning cycle-time would be measured in weeks. A smart entrepreneur might make a list of 10 ideas, create a landing-page for each (offering a free copy of a commercially available book – with appropriate subject matter), and then run a series of AdWords advertisements to see which generates the greatest number of book requests.

Once the entrepreneur identifies an idea that appears to have legs, the next step might be to write a whitepaper and repeat the campaign with more focused content – perhaps testing to see if it is possible to attract delegates to a webinar.

It’s easy to see that as the uncertainty decreases the planning horizon expands and the granularity of each plan increases.

The plan / don’t plan debate is a silly distraction. If there’s goal-directed action, there’s a plan. The real questions should be: at what level of granularity should I plan? And, at what frequency should the plan be revised?

By the way, if you like this subject, Google Colonel John Boyd and read about his amazing career and the planning tool he made famous (the OODA loop).

Late last night I was in conference with a potential client in South Africa (I’m in Australia, right now).

Towards the end of our conversation, he asked if I thought much market intelligence could be gleaned from customer surveys.

I answered (almost instinctively), data, yes; but, intelligence, no.

When pressured for a more coherent answer, I explained that I had never seen customer survey responses that provide any market intelligence. Never. Never. Never!

My position is that, to qualify as intelligence, survey results must be:

1. Unexpected (if you know the answer already, why ask the question?)
2. Actionable (if data doesn’t cause you to do something differently then where’s the benefit?)

Think about the survey results you’ve seen.  How often have you been surprised?  And how often have you been motivated to take some specific action?

Now, of course, I’m not advocating ignorance. Market intelligence is critical. You shouldn’t try to survive without it. It’s just that surveys are a pretty poor way of generating intelligence.

Here’s the thing …

In your business, you bank behavior, not attitudes.

My advice then, is stop measuring attitudes and, instead, measure behavior. Run controlled experiments. Change offers, change headlines, change opportunity-management workflows (not all at once, of course) and measure the impact of changes on, enquiries, conversions and, ultimately, sales.

Now, those who make their living from surveys will argue that attitude is an antecedent to behavior. I’m sure that in most cases it is. And in some, it definitely isn’t (how many smokers genuinely believe that their’s is an intelligent choice?)

But even if this claim is true, this position contains another assumption: that surveys actually measure attitudes. Do they?

Before you answer that question, consider another: which do you think is the more accurate predictor of a client’s future behavior:

1. Their current attitude
2. Their prior behavior

Tell me if you disagree but, to my mind, it’s a no contest!

And behavior is much sexier than attitude for another reason too: it’s inherently measureable (in a much more objective sense than the surveyor’s 1-5 scale).

If you value market intelligence, can the surveys. Objective management is a philosophy, not a once-a-year event!

Recently I posted a quick-and-dirty guide to process improvement. One particularly difficult question that I skipped over in that post was this one:

When you are mapping your workflow, how do you determine the ideal level of granularity?  In other words, how much detail is too much?

Conventional wisdom is that:

1. Planning and execution are two discrete activities (remember this assumption)
2. The key to good execution is lots and lots of planning (which tends to mean planning at a very granular level)

Conventional wisdom is wrong, however.  And this is evidenced by the many examples of poor execution we encounter on a day-to-day basis.

My argument (and this is classic TOC) is that, above a very low detail threshold, more planning actually means worse execution!

In other words, in most cases, to execute better, you should plan only at a high (non-granular) level.

The relationship between granularity and confidence

Let’s imagine that we are planning a simple workflow – getting to work in the morning.  Here’s a high-level (low-detail) plan:

1. Get out of bed
2. Shower
3. Get dressed
4. Drive to work
5. Log-in to computer

And here’s the low-level (high-detail) one:

1. Upon awakening, check to see if alarm is sounding
2. If so, deactivate alarm
3. If not, check to see if current time is greater than [alarm time minus 10 minutes]
4. If so, cancel alarm and get out of bed
5. If not, go back to sleep
6. And so on …

Imagine that you completed the second (low-level) plan, and then compared it with the first – and answered this question for each plan?

Rate your degree of confidence that reality will play-out as specified in the plan? In other words, how confident are you that each of these activities will be performed in exactly the sequence specified?

My guess is that you will be highly confident where the first plan is concerned – and not-at-all confident in the case of the second.

In fact, it’s probably worse than that. In the case of the second plan, you will likely be certain that reality will not play out as specified by the plan.

The irony is that the second plan creates a perception of accuracy, in spite of the fact that your confidence in the plan is practically zero!

Finding the inflection point (essential and non-commutative)

It’s tempting to assume that there’s a linear relationship between granularity and confidence (that they vary in direct proportion).  And, if that’s the case, there’s no correct answer to the critical how much detail question.

The reality is that the relationship is definitely non-linear: as the granularity of the plan increases incrementally, beyond a critical detail threshold, your confidence in the plan plunges rapidly towards zero.

Here’s why:

1. All the activities in the first plan are essential (you simply can’t skip any)
2. Each activity (relative to its predecessor or successor) is non-commutative – meaning that you can’t swap the sequence without dramatically changing the outcome

However, with a slight increase in granularity, these two conditions cease to apply: not all activities are essential and the outcome can conceivably be delivered with an alternative sequence of activities.

So, my suggestion is that you should plan only to the level of detail where you are confident that all activities are (a) essential and (b) non-commutative (relative to their neighbors).

Semantics are important!

I can almost feel your incredulity at this point! How can a plan at this high level of detail be sufficient for execution?

And your reaction is warranted … because it can’t be!

The high-level plan that I’m recommending is sufficient for planning – but not sufficient for execution.  The thing is that planning must continue after the creation of the plan!

To clear the confusion we need two words for planning:

1. Pre-plan planning (the planning phase, terminating with THE PLAN) – let’s call this planning
2. Post-plan planning (the execution phase) – let’s call this fine-tuning

So, in summary, here’s the solution:

1. Create a plan that contains only the degree of detail that enables you to be highly confident that reality will play-out as prescribed
2. Accept that the level of detail in the plan is insufficient for execution
3. Manage prioritization decisions on a day-to-day basis to ensure that reality tracks to the plan

In the post referenced above (quick-and-dirty approach), I talked about the importance of centralizing scheduling and building a management information system (MIS).

If you re-read that article it should be clear now that both of these initiatives are essential for the management of execution.  It should also be clear that the MIS should be designed to enable management to fine-tune the prioritization of low-level tasks so as to ensure the compliance of the undertaking with the high-level plan.

(Execution management is outside the scope of this posting. To explore the subject further, read my brief overview of Critical Chain Project Management.)

Why your CRM has no hope of delivering the expected ROI and why you should probably keep it anyway.

A Customer Relationship Management (CRM) application seemed like such a great idea, didn’t it?

The rest of the organization had reaped such enormous rewards from automation, and the sales process was certainly in need of productivity improvement.

So why is it that the expected return on the (not insignificant) investment in the CRM following what seemed an exhaustive evaluation and selection process never been realized? Why does it deliver so little value to the organization? Why is it so hard to keep the data in the thing current and accurate? And why do salespeople hate it!

To understand what went wrong, let’s start by considering how we expected to benefit from a CRM in the first place:

1. Improve salespeople’s productivity
2. Ensure salespeople apply best-practice in the pursuit of sales
3. Provide everyone in the organization with a view of the customer and their interactions with the firm (360° view)
4. Provide management with access to (valuable) information

Let’s consider each of these objectives in turn.

1. Improve salespeople’s productivity

It’s hard to argue with this objective. Most business owners recognize that, compared to others in the organization, salespeople operate unproductively. Evidence of that is the fact that an average salesperson performs just two true business-development meetings a week. This is downright scary when you consider that business-development meetings are the primary driver of sales volume.

The promise of CRM, then, is to ensure that salespeople can get their non-sales responsibilities fulfilled faster — leaving them more time to sell.

In practice, this isn’t what happens, for three reasons:

1. It takes salespeople longer to enter data into the CRM than it does to use a traditional calendaring system (think Daytimer or similar)
2. The addition of a CRM is generally accompanied by the requirement for salespeople to do more clerical work than they were previously
3. A salesperson who has grown accustomed to spending most of their time on (relatively enjoyable) customer-service activities is highly unlikely to engage in (less than enjoyable) prospecting activities just because of an incremental increase in their availability of time

2. Ensure best-practice in pursuit of sales

Again, this sounds like a worthy objective. But let’s take pause and consider how, exactly, a piece of software is supposed to cause a salesperson to sell better.

Obviously, a software application won’t:

1. Equip salespeople with (technical) product knowledge
2. Train salespeople in communication principles
3. Cause salespeople to drill and role-play their sales presentations

What a CRM will do is ensure that salespeople:

1. Categorize all sales opportunities according to their location in the workflow
2. Record information about the status of opportunities

Now, if you think about it, neither of these causes salespeople to sell better. Formal categorization may be useful for management (we’ll discuss that soon) but it’s of no use to salespeople. Salespeople are perfectly capable of understanding (and recalling) where a prospect is in their decision-making process, without a complex piece of software.

Unlike accounting data, opportunity status information ages rapidly. A sales opportunity is a fluid (non-linear thing). A salesperson needs to recall the current status of an opportunity (and the opportunity’s history) for a month or so, but after that, the data becomes worthless.

3. Provide everyone in the firm with a 360° view of the customer

So, here’s the thinking:

If all notable customer interactions are recorded in the CRM, then our firm can have just one conversation with the customer — in spite of the fact that multiple parties participate (asynchronously) in this conversation

To test whether this is actually achievable in a typical organization, let’s consider the two pre-conditions for this 360° view:

1. All workflows (sales, delivery, customer service, etc) must be carefully engineered and rigidly adhered to
2. Both your organization and your customers’ organizations must embrace the idea of multiple parties participating in the one conversation — this, of course, is contrary to the idea of a single point of contact

In a typical sales environment, the salesperson essentially owns the customer relationship. Accordingly, the salesperson is involved in sales, delivery and customer service. Of course, the salesperson eschews formal workflows, and even if they didn’t, it’s all but impossible to synchronize multiple parties when the salesperson operates remote from internal resources, and those internal resources have limited capacities.

It should be obvious that the idea of a 360° customer view cannot co-exist with the idea of a single-point of customer contact. And you can guess which of these visions is embraced by most salespeople!

4. Provide management with access to valuable information

There’s no question that, without information, management is impotent.

But CRM systems in traditional sales environments do not and cannot provide management with information. Volumes of inaccurate and outdated data: yes; but information: no!

Consider how data finds its way into the CRM:

Salespeople enter it — generally long after customer interactions have occurred (Friday night, perhaps, in a hotel room, at the end of a busy week).

What’s more, in most environments, salespeople have enormous flexibility to flavor data as they enter it — and, what’s more, salespeople are actually under pressure to employ creative license (for example, if management pressures salespeople to maximize their conversion rates, it’s highly likely that they will report the existence of opportunities later in the engagement process than they otherwise would).

The sad reality is that most sales managers were better-off without the CRM. Before the CRM, sales managers had the opportunity to artfully interrogate salespeople to determine what they were up to. Today, everyone knows that the data in the CRM is two-parts rubbish — but salespeople are off the hook because they’ve followed due procedure!

What were they thinking?

Is it any wonder that a significant percentage of of organizations that have implemented a CRM report that they have failed to meet their ROI target?

So what went wrong? Why have so many smart executives made such a dumb decision?

Our contention, at Ballistix, is that, in prescribing a CRM, these executives were medicating the symptoms and ignoring the underlying disease.

The irony is that the disease — the core problem — was staring these executives in the face all along. Our imaginary executives ruminated on the question:

• How do we improve the performance of our sales process?

Without, first, stopping to ask:

• Is sales actually a process?

Had they considered this more fundamental question, our executives would probably have had to conclude that:

• No. Sales ain’t no process!

The disease … and an appropriate prescription

Elsewhere in the organization, we use the word process to mean more than just a procedure.

Consider a production environment (or a project environment, for that matter). When we use the word process the implication is that we have:

1. Division of labor (specialization)
2. Standardized routings (the path that work-in-progress follows through activities and resources)
3. Centralized scheduling (a central drumbeat that ensures synchronization of all resources)
4. A formal management regime (to compensate for the fact that specialization causes work environments to become more fragile)

If these are the four pre-requisites for process (and it’s our contention that they are), let’s consider how a sales environment scores.

Obviously, a typical sales environment falls at the first gate. And, in the absence of division-of-labor the remaining three pre-requisites become redundant.

We must resolve then that a typical sales environment is not a process. And herein lays the problem (as well as the direction of the solution).

A modern sales environment is essentially a craftshop. And a salesperson is a artisan — a craftsperson who owns not just the entire sales function but, in most cases, the entire customer interface!

If, then, the sales function is a person (not a process) does this person need a CRM? The answer is obvious:

1. They don’t need it!
2. They don’t want it!
3. And if you force it on them it will impact negatively on their productivity and on their relationship with their manager!

Of course, this line of reasoning — as well as liberating us from the requirement to spend gobs of money on a CRM — leads us to consider a more fundamental question:

Should sales remain a craftshop — or should we engineer it so that becomes a process in the true meaning of the word?

Fortunately, history helps us out here. It’s obvious that in the 100-odd years since production (and project) environments have transitioned from craftshops to true processes, productivity has increased by several orders of magnitude (measure it against whatever standard you wish: return on capital, return on labor-hours, etc). What’s more, quality has also improved — also by orders of magnitude.

So, in production environments, we’ve done the impossible we’ve simultaneously increased volume and decreased defects. Who would ever have thought that was possible 100 years ago?

If we want to improve the performance of sales then, here is our recommended approach:

1. Recognize that, today, sales is NOT a process (and admit that process-automation tools – CRM – are of little value in the absence of a process)
2. Conclude that, the key to eliminating the litany of problems that afflict the sales environment is to transform this environment from a craftshop to a true process
3. Recognize that this means:
   1. Division of labor (how about salespeople sell and other people do other stuff?)
   2. Standard routings (every opportunity is prosecuted using the same combination of activities and resource types)
   3. Centralized scheduling (all the activities that are performed in order to both originate and prosecute an opportunity are coordinated from the head-office)
   4. Formal management regime (in this new environment, there’s actually a requirement for management — and the potential for management to control what occurs on a day to day basis — imagine that!)

An engineered sales environment

Now you know what I mean when I talk about an engineered sales environment.

I’m actually suggesting that you engineer your sales environment to look like — and to operate like — a production environment (or more accurately, a project environment).

Why, I can almost hear you asking, would you want to do that?

Let’s leave the technical discussion behind for a second and explore what our clients’ sales environments look like when we’re done with them:

Salespeople sell. The most obvious characteristic of the sales environments we build is that salespeople sell. And that’s all they do. Our client’s salespeople spend all their time in the field performing (exclusively) business-development meetings.

That means that salespeople perform four face-to-face meetings a day, five days a week, week in and week out. It also means that the purpose of all of these meetings is to win a new account or to sell a new service line to an existing account (not to perform customer service or take a repeat order).

Sales coordinators own and manage sales opportunities. To enable salespeople to relinquish responsibility for non-sales activities (prospecting, solution design, proposal generation, calendar management, reporting, customer service, project management, and so on) we first transfer the ownership of all sales opportunities to sales coordinators.

Each salesperson has a sales coordinator and each sales coordinator is essentially an executive assistant. That’s right, in addition to owning sales opportunities, sales coordinators own salespeople’s calendars.

The sales coordinator manages each sales opportunity as if it were a project because … well … it is! Specifically, the sales coordinator breaks each opportunity into a sequence of activities and pushes each activity to the appropriate resource at the appropriate time.

Customer service representatives perform customer service. Salespeople are no longer responsible for managing accounts. If our client’s firm has healthy operations, customer service will improve when salespeople have no involvement with it. (The reality is that salespeople are ill-equipped to deliver good customer service.) So, the end result is that all issues and all repeat transactions are processed by the customer service team. In many cases, customer-service makes outbound calls to stimulate repeat transactions.

The quality of customer relationships improve. The new model impacts positively on customer relationships for four reasons:

1. Customer service personnel can contact existing customers by phone more frequently than salespeople ever could in the field
2. Salespeople also visit existing customers more frequently (of course, the difference is that those visits are designed to sell new service lines — not to service existing ones)
3. Customers’ issues are resolved faster
4. In this structured environment, it’s possible to enforce more rigid procedures — which enables the 360° customer view

Project leaders design solutions and lead projects through delivery. In technical sales environments, perfect hand-offs between sales and delivery are impossible. This results in salespeople becoming entangled in delivery.

Our clients resolve this by ensuring that salespeople partner with project leaders. Project leaders are technical people with an appreciation of the commercial implications of projects —and with decent communication skills.

Project leaders are responsible for the technical component of each sales opportunity (freeing salespeople to focus on the critical commercial component). Project leaders discover clients’ requirements, conceptualize and design solutions and (ultimately) chaperone projects through delivery.

More sales activity: fewer salespeople. So, this engineering thing has endowed the sales environment with quite a cast of characters! It’s intriguing, then, to note that our clients make the transition to this new model, in almost every case, without increasing payroll costs.

The reason for this is that, almost every organization has far too many salespeople! In most cases we will reduce sales teams to 20% of their previous size — but we’ll simultaneously increase the total volume of sales meetings performed by each remaining salesperson by a factor of 10 (remember that a typical salesperson performs just two true business-development meetings a week currently).

The result of 20% of the sales team performing 10-times the volume of business-development meetings is that the total volume of meetings doubles.

The remaining salespeople are redeployed to fill other roles or — if they lack the requisite capabilities — the funds released by downsizing the sales team are more than sufficient to cover the cost of additional sales-support personnel.

No increase in promotional costs. You’ll also be interested to know that, in almost every case, we can double the volume of business development meetings, without additional promotional expenditure. The reason for this is that most salespeople disqualify the greater majority of sales opportunities. Because salespeople are time-poor, they are careful to engage only with high-probability prospects (those with a budget, who are currently in the process of purchasing). This qualification (as it’s caused) is good for conversion rates, but it causes salespeople to believe that they have a chronic shortage of sales opportunities.

But qualification has far worse consequences! Qualification causes salespeople to engage late with potential customers — meaning that every selling situation becomes a bidding situation. This impacts negatively on the size of deals won and the margin earned in those deals.

Our approach to promotion, then, is not to spend more money on ads, but to eliminate qualification. We are happy for conversion rates to drop if it is balanced by:

1. A greater volume of sales
2. An increase in the size of an average sale (a total solution, instead of a commodity)
3. More margin (because our client was bidding against fewer — if any — competitors)

The case for CRM

Obviously, this engineered sales environment differs quite considerably from a typical sales environment.

But the implications for your organization are as exciting as this new model is different:

1. Twice the volume of business-development meetings (exciting, because meeting volume is the primary driver of sales)
2. Improved customer service
3. Elimination of tension between sales and delivery
4. Increased deal flow, volume and margin
5. No increase in operating expenses

Of course the critical question, at this point, is what about CRM?

With this new model, not only is there a case for CRM — but the model cannot operate without it.

However, our attitude towards CRM has undergone a subtle shift.

Previously, we looked to CRM to drive productivity improvements — and those procedural changes that did occur occurred as a consequence of the CRM implementation.

Now, we recognize that a meaningful increase in productivity requires drastic procedural changes — and that the requirement for CRM is a consequence of those changes.

Let’s summarize the four key reasons why you need a CRM in an engineered sales environment:

1. Sales coordinators need a view of the status of all opportunities
2. Opportunities must be prioritized
3. Marketing, sales and customer service must work together
4. Management needs information

1. Sales coordinators need a view of the status of all opportunities

As we’ve discussed the engineered sales environment is essentially a project environment.

The sales coordinator needs a CRM for the same reason that a project manager needs a project-management application.

Because the sales coordinator does not have face-to-fact contact with each prospect they will never have the deep (visceral) understanding of the opportunity that the salesperson does. The CRM provides the sales coordinator with a simplified model of each opportunity. This model is detailed enough only to enable the sales coordinator to synchronize the various resources that are participating in the prosecution of the opportunity.

2. Opportunities must be prioritized

Even though salespeople in traditional environments qualify aggressively, they still end-up with more in-progress opportunities than the have the capacity to manage. (Consider how many times you’ve had a salesperson clamor to perform an initial visit with you, only to discover that the salesperson lacked the capacity to provide you with a proposal within a reasonable time horizon.)

In the engineered environment, salespeople have significantly more capacity — but they still have finite capacity. This means that opportunities must be prioritized to maximize their velocity (minimize opportunity lead time).

When you consider that a salesperson may be working across 80-100 opportunities at any one point in time it’s easy to see why software is required to manage the resulting complexity.

3. Marketing, sales and customer service must work together

In point one (above) we touched on the requirement to synchronize resources within the sales function.

However, in this new environment, other functions must also synchronize with sales:

1. Marketing must ensure that there is a sufficient queue of opportunities to enable sales coordinators to keep salespeople fully utilized
2. Customer service must continue to support existing clients’ ongoing service requirements — failure to do so will obviously interfere with the organization’s ability to sell more services
3. Finance must be able to determine when invoices are required (in many complex sales environments, potential clients will buy services during the opportunity-management process)

As does the sales coordinator, these functions all require opportunity-status information. And this information must be current. It must be accurate. And it must be unambiguous.

4. Management needs information

As suggested previously, management needs information to be able to manage. In the absence of this information, a sales manager is not a manager (a hustler, perhaps, but not a manager!).

As with all other environments within the organization, the sales manager’s information requirements can be broken into three categories:

1. Status information: how many opportunities are at each state of the opportunity-management workflow?
2. Flow information: what is the velocity of opportunities (how fast are they moving)?
3. Resource utilization: what is the load on process resources (is there a bottleneck and where is it)?

The sales manager must be able to view reports that summarize these categories of information and then to drill-down to identify particular opportunities or particular resources that require attention.

What now?

If you have a CRM, then, the news is not all bad.

In and of itself, the technology will provide you with very little value. However, it happens to be a pre-requisite for a very necessary – and very beneficial – sales improvement initiative: engineering your sales environment.

My suggestion is that you do the following:

1. Make CRM usage optional for salespeople (stop trying to achieve the impossible)
2. Plan your engineered sales process (you’re welcome to solicit our assistance with this critical step)
3. Re-configure your CRM to look like it did when you first loaded it (perhaps, [a] export the address book data, [b] do a clean-install of your CRM, [c] import the address book data)
4. Provide CRM access only to sales coordinators and customer-service representatives
5. Keep customizations to an absolute minimum (only add a user-defined field if you are prepared to enforce 100% compliance with its usage)

Just DON’T, whatever you do, buy any more technology!  (If you purchased your CRM in the last 5 years, it is almost certain to be capable of doing everything that you need in order to get your new engineered sales process up and running.)

If you proceed carefully, it’s likely that you will produce the outcomes you were looking for when you initially purchased your CRM. Then you can pat yourself on the back and congratulate yourself on your foresight.

Just be warned, if your CRM vendor gets wind of your success, they’ll be knocking on your door, begging for your permission to showcase your organization as another CRM success story!

Here’s a useful exercise.

Calculate your market size.  But, instead of calculating total revenues or total unit sales, try calculating total face-to-face, business-development meetings (FTFBDM).

Imagine you wish to determine the optimal size for your sales team. The normal approach is to start with one of the standard measures of market size (revenues or unit sales) and reason from there.

Sounds fair enough but, it’s the reason from there bit that causes the trouble. The problem is, that there are a bunch of difficult assumptions required to do this reasoning, including:

1. How many times do accounts change hands each year?
2. How many of these opportunities will we have the opportunity to bid on?
3. How much of a salesperson’s capacity is likely to be consumed by each of these opportunities?

So, here’s how the alternate approach works:

1. Calculate the total number of salespeople operating in your space (the sum of the salespeople you employ, and those employed by your competitors)
2. Estimate the number of face-to-face, business-development meetings performed by an average salesperson in your space*
3. Estimate the share of meetings you can reasonably expect to win in the near term**
4. Divide the product of the first three numbers by your salespeople’s average capacity

The result of this calculation is (in my experience) likely to be a lot more conservative – and much more realistic – than traditional calculations.

Let’s face it, even if your market is $100m in size, if your plans require your sales team to perform 50% of total FTFBDM, you’re certain to fail!

If you are reengineering your sales environment, it pays to be conservative when estimating your requirement for salespeople. You are better off starting with a very small team and focusing on getting that team to 100% utilization rapidly than you are struggling to keep a larger team busy.

* Estimating the number of face-to-face, business development meetings performed by an average salesperson in your space is easier than it sounds. Start by sitting down with your salespeople and analyzing their calendars (not the CRM, the calendars they actually use on a day-to-day basis). Once you have a count, interview people who have operated in your competitors’ sales teams and determine if their sales environments have a structure similar to yours. (If in doubt, assume two true business-development meetings, per salesperson, per week.)

** Be conservative when estimating the share of FTFBDM.  Remember, even if you are a clear market leader, your customers will still talk to your competitors salespeople on occasion!