When you open your eyes, your bedroom appears roughly as it did the night before. Your bed is below the open window, and your dresser is still adjacent to the door.

However, a second look reveals that the curtains that normally hang above your windows are missing. As is the painting that normally hangs, slightly crooked, on the wall facing your bed.

What’s more, you notice some strange additions to your bedroom furnishings. A plaster bust now dominates your dresser. And an empty hat rack leans precariously against your bed head.

As you rise and navigate your way around your bedroom, you discover that your memory provides the accurate version of reality. In spite of the information tendered by your eyes, your curtains still hang above your open window, and your painting still adorns the wall adjacent to your bed. Your sense of touch confirms that there is no plaster bust on your dresser, and that the hat rack is also a mirage.

You only have to spend a day in a typical marketing or sales department to discover that this scenario is analogous to the environment in which management operates.

Various reports and performance indicators (both formal and informal) provide glimpses of reality. However, this feedback falls short of delivering the accurate and complete viewthat managers need in order to be truly effective.

When hobbled with an incomplete and unreliable view of reality, managers’ activities are, at best, inefficient and risk-adverse. At worst, managers unknowingly engage in activities that are harmful to the organisation as a whole.

Hence the need for an objective management structure!

Reality

By definition, reality must be the starting point for an objective management structure.

Without the ability to accurately perceive reality, measurement and, accordingly, management is impossible.

Of course, the concept of measurement presupposes something to measure.

This means that the ability to perceive reality is not enough. We need also to determine upon what aspect of reality we should focus.

It is perhaps self-evident that our focus must be determined by our goal. After all, a measurement out of context with a goal is just a number (data, not information).

If your goal were to drive from Sydney to Darwin, your current location, speed and direction of travel are information; the weather in Perth is data.

For this reason, the most critical step in designing an objective management structure is defining your goal.

I’ve had many managers assure me that this is also self-evident:

Marketing managers tell me that it’s their goal to generate sales opportunities.

Sales managers advise me that their goal is to generate sales.

In each instance, managers forget that the processes they manage are part of a larger system. As a result, they fail to recognise that their goal must be subordinated to the goal of the system.

One system, one goal!

For simplicity, let’s define a system as a set of interdependent processes.

A fine example of a system — one with which we’re all familiar — is an internal combustion engine (pictured below).

As you no doubt know from your experience with this particular system, the goal of the internal combustion engine is to generate torque (rotational force).

As depicted above, this system consists of four processes:

1. INTAKE (a mixture of fuel and air is drawn into the cylinder).
2. COMPRESSION (this mixture is compressed by the rising piston).
3. COMBUSTION (the fuel/air mix is ignited by the sparkplug).
4. EXHAUST (the resulting exhaust gasses are expelled from the cylinder).

Now, consider this question for me:

If you were the sparkplug in this system, what would be your goal?

1. Would it simply be to generate sparks (as many as possible)?
2. Or would it be to generate (a set quota of, say) 10 sparks a second?

Of course, neither answer is correct.

Your goal could only be expressed in terms that recognise the relationship between your activities and the goal of the system.

Accordingly, your goal would be something like the following:

To produce a spark at the top of each compression stroke.*

* Technically, the sparkplug produces a spark fractionally before the top of the compression stroke.

If your goal must be subordinated to the goal of the system, it’s essential for us to identify your organisation’s goal.

Why does this organisation exist?

Whenever I ask this question of a seminar audience, I get a range of answers:

1. Some managers claim that their organisations exist to manufacture widgets.
2. Others explain that their organisational goal is produce happy customers.
3. Others try and cover all bases with statements that reference the organisation¡¯s relationship with all stakeholders (shareholders, staff, the community, the goldfish in the corporate pond etc.)

In each instance, managers are confusing the goal of their organisations with necessary conditions.

The goal of any commercial organisation is, by definition, to make money.* Necessary conditions are the conditions that must be present to enable this goal to be achieved.

* Goldratt (whose work has had a significant impact on the thinking behind this article) explains that the goal of a business is to make money, now and in the future. I would argue (as, in fact, does he) that the latter part of this statement is redundant (we’re all accustomed to recognising the value of future revenues). To learn more of Goldratt’s work, begin by reading The Goal.

While the idea that the goal of a commercial organisation is to make money may initially cause managers some discomfort (believe me, it does), it also provides the clarity we need to start to piece together our objective management structure.

Unravelling organisational complexity

As our internal combustion example illustrated, all goals at a process level must reflect the contribution that the process makes to the goal of the system as a whole.

Unfortunately, organisations tend not to be as simple as our little engine.

In fact, one of the greatest challenges faced by managers is the requirement to understand the interaction between multiple organisational processes.

As has been explained in recent editions of AdVerb, this challenge has been greatly simplified by Goldratt’s Theory of Constraints (TOC).

In short, TOC recognises that the output of any system is determined by the system’s constraint (or bottleneck). It also points out that:

1. Every system has a constraint (if it didn’t, output would be infinite).
2. At any one point in time, every system has only one constraint.
3. A stable system is one where the constraint remains in one location.
4. Because the constraint is the sole determinate of system output, every management decision should reference the constraint.
5. The investment of resources in any non-constrained process or activity will produce absolutely no return (contrary to the assumptions that underpin cost accounting).

An understanding of TOC enables a manager to ignore organisational complexity when making decisions, and simply consider the impact that the options under consideration will have on the system’s constraint.

Now, because the goal of the organisation is to make money, when we’re discussing system output, what we’re really talking about is money. And when we’re discussing the system’s constraint, our consideration is the flow of money at the constraint.

TOC practitioners use a simple formula to express this concept:

Flow of Money = Throughput / Available Constraint Units

Throughput (T) refers to revenue minus totally variable costs (true gross profit).

Available Constraint Units (ACU) refers to the number of units of constraint that are available over the period of consideration. (If the constraint is a machine, the Constraint Unit is likely to be time-based. If the constraint is a salesperson, the Constraint Unit will be an appointment slot.)

As we’ve established, the goal of every process within our organisational system should reference the organisational goal: maximising the flow of money at the system’s constraint (or T/ACU).

Let’s pause now, for a practical example.

A two-process organisational system

Consider the simple organisation pictured below.

If we assume that the constraint in the organisation above is in the production process, what is the goal of the sales process?

Is it to produce as many sales as possible?

Obviously not!

The sales process should produce enough sales to ensure that the production process operates at peak capacity, all the time. To produce more sales than this would waste resources (and annoy the marketplace).

But, that’s only the half of it.

If the production process is constrained, the sales process should also produce the kind of sales that are going to deliver the greatest return on the Constraint Units consumed.

Here’s the solution:

System Goal: maximise T/ACU (measured at point of sale).

Production Process Goal: maximise T/CU (measured at point of sale).

Sales Process Goal: maintain a production buffer of optimal size (x days’ worth of unstarted work in progress). Maximise the value of the production buffer (T/CU).

To translate this into plain English:

The goal of our simple organisation is to maximise the yield (Throughput) it gets on its Available Constraint Units. (Because the output of a system is determined by the system’s constraint, this is equivalent to saying that the goal of the organisation is to make money.)

The goal of the production process is to maximise the yield it earns on every Constraint Unit it consumes.

The goal of the sales process is to:

• Maintain a buffer (or inventory) of unstarted work in progress (or orders) of an optimal size. If this production buffer is too small, there is a risk that the production process may sit idle from time to time. If it is too large, this indicates that the sales process is wasting resources that would be better deployed at the constraint.
• Maximise the value of the production buffer. The value of the buffer is the total Throughput that the buffer represents, divided by the number of Constraint Units that will be consumed to realise this Throughput. The inference here is that not all Throughput dollars are equal in this scenario. The sales process must focus on winning the sales that produce the greatest yield on the scarce Constraint Units.

The sales process dissected

We have now accumulated all the theory we need to apply our focus to the sales process.

I’m going to assume for simplicity’s sake (and because it is often the reality) that your system constraint is your sales process. In other words, I’m assuming that your production process can handle all the sales that your sales process produces (at least for the duration of this discussion).

Because we’re now shifting our focus from the system (which is a collection of processes), to one particular process within that system, we’re now going to have to think at a more granular level.

Our interest now shifts from determining which process is constrained to determining the exact location of the constraint within the constrained process.

Let’s consider a simple sales process (designed around Relationship-centric guidelines), containing three personnel:

The basic responsibilities of each person are:

1. Marketing Coordinator. Producing sales opportunities.
2. Sales Coordinator. Managing the salesperson’s diary.
3. Salesperson. Negotiating transactions.

Before we even attempt to manage this process, we need to determine exactly where the constraint is.

Now, the nice thing about operating at this level of granularity is that you get to choose! At this level, it’s quite easy for you to shift resources around to ensure that the constraint is exactly where you want it to be (and to ensure that it stays there).

If you consider that, in any process, by definition, it is only the constraint that operates at 100% capacity, ask yourself, who in the process above would you least like to be idle?

It’s obvious, isn’t it?

You would like your salesperson to be operating at 100% capacity, all the time. This is because your sales process will generate a greater flow of Throughput when your salesperson is fully utilised than it will when either your sales or marketing coordinator is flat-out (and your salesperson has idle time).

If you want to ensure that your salesperson is the constraint (and stays that way), you simply over-resource the marketing coordinator and the sales coordinator. In practical terms, this means ensuring that they never have to operate at full capacity (at least where their critical tasks are concerned).

As we did in our previous example, we’re going to take one more precaution to ensure that the constraint stays put.

We’re going to build an inventory (or buffer) of unallocated sales opportunities to ensure that the salesperson never has to sit idle.

The resulting process is pictured below:

Now, let’s apply the same logic to this sales process that we applied a moment ago to our simple organisational system.

We should first remind ourselves that the sales process pictured above is part of a larger system ¡ª the business as a whole.

We already know that the goal of that system is to make money.

We also know that the money that the system makes is determined by the organisational constraint, which happens to be the salesperson.

The salesperson’s Constraint Unit is an appointment slot.

 Accordingly, the goal of the system as a whole is to maximise T/ACU (or Throughput / Available Appointment Slot).

Now, if we shift our focus to the sales process, it is obvious that the goal of the sales process must be the same as the goal of the system. (The sales process is the constrained process.)

Let’s look now at each of the personnel operating within the sales process.

The salesperson’s goal should be to maximise his Throughput per appointment slot consumed (or Throughput / Appointment). It’s worth noting that the salesperson’s goal is not simply to maximise Throughput, nor is it to maximise his conversion rate. Each of these goals is likely to result in behaviour that is sub-optimal in the context of the system as a whole.

The sales coordinator’s goal is to keep the salesperson fully utilised. In other words, it is her responsibility to ensure that every available appointment slot is filled. (An empty appointment slot represents an opportunity cost equivalent to the average Throughput / Appointment).

As you’ve no doubt guessed, the marketing coordinator is responsible for both the size and the quality of the opportunity buffer. The buffer should be maintained at its optimal size (measured in days¡¯ worth of appointments). It should also be composed of opportunities that are likely to yield the highest Throughput / Appointment.

Now that we have established an objective (and systemically congruent) goal for each person in our sales process, performance indicators are pretty much self evident:

Function	Goal	Performance Indicator
Sales Process	Maximise yield on Salesperson	Throughput / Available Appointment Slot
Salesperson	Maximise yield on Appointments	Throughput / Appointment
Sales Coordinator	Ensure salesperson is fully utilised	% of Optimal Utilisation (Optimal Utilisation is 100%)
Marketing Coordinator	Maintain opportunity buffer at optimal size. Maximise value of opportunity buffer	% of Optimal Days. {Throughput / Appointment Slots x Probability}*

* means sum of. Throughput, Appointment Slots and Probability are all estimates. Probability refers to the probability of your converting that opportunity.

Management just got easier

Well there it is: an objective sales process management structure!

Each person’s goal (and the accompanying performance indicator) is congruent with the goal of the system as a whole ¡ª and, accordingly, is reality based.

Each performance indicator is quantitative, rather than qualitative, meaning that no subjective interpretation of results is required.

Each person has only one or two performance indicators (one is optimal), meaning that there is no confusion as to what she should be doing, and how she will be judged.

Each person is likely to have a clear understanding of the contribution she makes to the success (or otherwise) of the system as a whole. As well as being good for morale, this discourages the development of political factions.

Creating a productive environment

As I’m sure you’ve already realised, an objective management structure will make an enormous contribution to organisational productivity.

However, there are three more initiatives we recommend you implement in order to create a truly productive environment.

1. Use run charts. It’s one thing to allocate a performance indicator to a team member. It’s another to find a way to use this information to positively influence her behaviour. If you remind yourself that a performance indicator is just feedback from the system, the solution is obvious: plot it on a graph. Better still, have each team member plot her performance indicator on a run chart. An example of a run chart follows. This was generated within Excel, however, traditional plotting paper does as good a (and some would argue, better) job.
2. Eliminate budgets and bonuses. Managers traditionally have attempted to motivate their teams with a cocktail of artificial stimulants. Budgets, bonuses, performance reviews, quotas and management exhortations are tactics invented by management to cope with the lack of an objective management structure. You’ll find that, if you simply pay your team members what they’re worth — and have each discuss his or her run chart at a weekly management meeting ¡ª your requirement for these artificial stimulants will rapidly dissipate.
3. Replace the word maximum with optimum. In this discussion I have taken a shortcut (for the sake of simplicity) and allowed myself to use the word maximum on a couple of occasions. I’ve referred to maximising the yield on the constraint and to maximising the value of the opportunity buffer.

My preference is, in both cases that you replace the word maximise with optimise.

We’ve already discovered that every process (and system) is constrained. What this means is that, if you scale a process, you will eventually reach a point of diminishing returns.

In the case of maximising the yield on the constraint, you may find the constraint moves (which is generally undesirable), or that your ability to grow your business is constrained (it takes time to recruit and train new staff).

In the case of maximising the value of your opportunity buffer, you’re likely to find that, past a certain point, increased promotional costs are likely to overwhelm any increase in opportunity value.

Now, in both instances, it will take some experimentation to determine those optimas. However, in the short term, I suggest you aim only for incremental improvements in these (and similar) situations. From a systemic perspective, it is far healthier to aim first for stability, and second for incremental improvement, than it is to set stretch goals. (The latter approach is guaranteed to wreak havoc elsewhere in the system.)

My thanks to James Powell (Viago), who provided technical assistance for this article. Viago assists organisations to apply TOC to production processes. www.viago.com.au

Over lunch, a CEO recently admitted to me that his financial controller was using his organisation’s profits to build quite a substantial commercial property portfolio.

When I asked if this was best use of his organisation’s free cashflow, he smiled, "How did I know you’d ask that question?

"The fact is," he continued, "the availability of capital is not currently a constraint on our growth."

"It might not be a constraint on your organic growth," I argued, "but I still think that money could be better invested in new client acquisition."

We spent the rest of that lunch scribbling on napkins. Together, we discovered that a dollar invested in promotional expenditure was actually providing this CEO’s organisation with a better-than 900% return on investment!

By the time coffee was served, we’d agreed that his organisation’s sales process could provide a much more favourable return on capital than even the bluest of blue-chip commercial property investments.

In our experience, this holds true for most organisations. Unfortunately, most are reluctant to invest in their sales processes because (unlike other business processes) it’s impossible to calculate a return on investment.

Science versus art

If you’re a follower of our Relationship-centric Marketing methodology, you’ll know that a sales process has inputs and outputs — just like any other business process.

You’ll know that a sales process (as the word process implies) consists of a sequence of simple, interrelated steps — just like any other business process.

And you’ll know, at least in theory, that each step in a sales process can be measured, managed and optimised — just like any other business process.

This article explains the science (and more importantly, the mathematics) behind sales process management. It will show you how to take control of your sales process and use it to fast-track the growth of your organisation.

If you didn’t pay much attention to mathematics at school, you may find this article tough-going at times. But please be sure to persevere.

I’m sure you’ll discover that your sales process is harbouring significant growth potential!

Management by numbers

If you think about it, the word management presupposes measurement. The fact is, if you can’t measure it, you simply can’t manage it.

So, to manage a sales process (or any process for that matter), we need to know what to measure. Generally speaking, we will measure inputs, outputs and time. Specifically, we’ll measure:

• Throughput (output/time)
• Productivity (output/inputs)

We’ll measure these key performance indicators (KPIs) for the process as a whole, and then we’ll break the sales process into its key components (sub-processes) and devise a set of KPIs for each component.

It’s worth remembering that your sales process is actually a component of a much larger system: your entire business. In the context of your business as a whole, revenue is a measure of throughput, and gross profit is a measure of productivity. The problem with these indicators is that they are trailing indicators: that is, they tell you more about what you have done in the past than they do about what you should do in the future.

Because your sales process is the first step in your entire organisational process, the information you collect from monitoring these performance indicators can be used to enable real-time process optimisation.

As we dissect and analyse the sales process, we’ll make references to a fictitious company we’ll call Correlex. Correlex is an engineering firm that consults to property developers. Correlex’s clients all pay a retainer of $450 a month to access its consulting services. References to Correlex will appear in indented sections, with a green sidebar, just like this one.

Measuring the process as a whole

The objective of your sales process is obviously to generate sales.

This process must be designed and managed to ensure that it delivers a sufficient volume of sales in exchange for a commercially realistic investment.

For simplicity’s sake, we’ll assume that the objective of our sales process is to acquire new clients. But don’t worry, we will be sure to take follow-on sales (and even referrals) into account.

Accordingly, the two global indicators in which we’re most interested are:

• Client acquisition rate (new clients per month).
• Client acquisition cost (cost per new client).

When we’re measuring client acquisition cost, we’re dividing the amount we invested in the acquisition of relationships by the number of clients acquired as a result of that expenditure.

When we calculate this figure, we only take into account the variable costs associated with the promotional campaign that acquired each particular client relationship. With a promotional campaign, variable costs are typically media costs. We do not factor in the fixed costs associated with that promotional campaign (the cost of creating the campaign). Nor do we include the fixed costs associated with the rest of the sales process (e.g. the cost of managing the relationship with the potential client).

We ignore fixed costs because these are the cost of operating your sales process, rather than process inputs.

Our client acquisition cost is most useful for monitoring the performance of our relationship acquisition campaigns. It’s important to remember that, unless you have a very short sales cycle, client acquisition cost tends to be longer-term performance indicator. (The term sales cycle refers to the average time span between the acquisition of a relationship and the consummation of a sale.) We’ll uncover a short-term indicator when we examine the relationship acquisition step of the sales process.

When the CEO of Correlex reviews his organisation’s sales process, he discovers that, averaged over the last 12 months, Correlex acquired two new clients each month.

To determine his average client acquisition cost, he divides his total variable promotional costs by the number of clients he acquired over this period.

In the last 12 months, Correlex had advertised in the Financial Review, and in a number of specialist publications. It had also run 4 direct mail campaigns. Accordingly, its variable promotional costs consisted of the cost of media for the advertising campaigns, and the cost of mail processing for the direct mail campaigns.

In total, Correlex invested $9,600 in order to acquire 24 new clients: an average client acquisition cost of $400.

$9,600 / 24 = $400

Optimisation

It’s obviously important to know how many sales your organisation is making. It’s also nice to know how much each sale is costing you in promotional expenditure.

But, in isolation, this information is not particularly useful.

What you need to be able to do, is compare your actual performance with your optimal performance.

A common mistake in process management is to establish absolutes as targets. For example, it would be tempting to assume that the objective of your sales process is to generate as many sales as possible, for the lowest possible promotional expenditure.

The reality is that sales and promotional expenditure are interrelated. (You can’t have one without the other.) A singular focus on either maximising sales or minimising promotional costs is likely to sub-optimise the performance of your sales process. The key is to determine the optimal relationship between promotional expenditure and sales.

Accordingly, you now need to determine the optimal figures for each of your global KPIs.

Client acquisition rate is easy. Obviously, your optimal figure is determined by the capacity of your production and distribution processes. (There’s little point generating sales that can’t possibly be fulfilled.)

However, your client acquisition cost requires a little more thought.

As the graph below illustrates, as your promotional expenditure increases, the number of clients you acquire should also increase. However, with the increased promotional expenditure, the profitability of each client relationship suffers.

In theory, your optimal client acquisition cost is the point where these two lines intersect.

In practice, it will take some experimentation (and careful measurement) to calculate your optimal acquisition cost.

The starting point for this calculation is the determination of the lifetime value of a client. (Your optimal client acquisition cost will be a percentage of this figure.)

It is difficult to overemphasise the importance of performing this calculation. Without an understanding of the dollar value of a client, it is simply impossible to effectively manage your sales process.

In our experience, because most organisations have no way to value a client relationship, most grossly underestimate the amount that they are prepared to invest in client acquisition.

This under-investment in client acquisition seriously retards the growth of many organisations.

The publishing industry is one industry that does understand the concept of lifetime value. Typically publishers of magazines and other periodicals are prepared to invest at least 100% of the first year’s subscription revenue in order to acquire a new subscriber!

Valuing a client relationship

In financial terms, a client relationship is simply an annuity income stream.

It follows that you can value a client relationship, just as you can value any other kind of annuity (income-producing investment).

You value an annuity using a net present value calculation. (Net present value is the sum of a series of future payments, discounted for the cost of capital.)

To calculate the lifetime value of a client, determine the gross profit you earn in an average year from an average client, then multiply this by the figure in the annuity table below that corresponds to the number of years you retain this average client.

This table shows how much a series of $1 payments, to be paid at the end of each year for a specified number of years into the future, is currently worth, with interest at different rates, compounded annually. In other words, the table shows what you should be willing to pay, today, in order to receive a certain series of future payments of $1 each.

As you already know, Correlex sells a consulting service for $450 a month.

To calculate the lifetime value of an average client, it must multiply the gross profit in a transaction by the number of times Correlex transacts with an average client over the lifetime of the client relationship.

On average, Correlex retains a client for three years. Its gross profit is 70% (or $315).

It chooses to account for cost of capital at its overdraft rate, 9%.

Correlex calculates the net present value of a client relationship by first calculating its annual gross profit, and then multiplying this figure by the appropriate multiplier from the table above:

Average annual gross profit: $450 x 12 x 70% = $3,780

Net present value: $3,780 x $2.53 = $9,563

The CEO of Correlex is surprised to see just how valuable a client relationship is.

Prior to performing this calculation, he was considering reducing his promotional expenditure ($400 per client seemed like a lot — especially for an engineering firm).

Now, however, he suspects that he has been underspending on client acquisition!

Accordingly, he decides to set his optimal client acquisition cost at a (conservative) $900. He also resolves to watch his KPIs carefully and review this figure in six months’ time.

As explained, your optimal client acquisition cost will be a percentage of the lifetime value of a client. The actual percentage will depend on the fixed costs associated with your sales process (and your sales volume). It will almost certainly be more than 10%. It may even be as high as 50%.

(While the idea of investing 50% of the lifetime value of a client in client acquisition may seem ludicrous, it’s important to remember that, once an organisation has passed its break-even point, it’s effectively enjoying a 100% return on this promotional expenditure. Try earning that in the bank!)

Before he can finalise his global performance indicators, the CEO of Correlex must determine his optimal client acquisition rate. A quick call to his operations manager confirms that Correlex is capable handling four new clients a month.

These indicators provide Correlex’s CEO with an overview of the relationship between his sales process’s inputs and outputs.

His suspicion that he is underspending on promotion is supported by the fact that Correlex is growing at 50% of its optimal rate.

Because your global KPIs are longer-term indicators, they do not enable you to manage your sales process on a day-to-day basis.

To do this, we need to divide your sales process into its key components, and then devise a set of performance indicators for each.

You’ll remember that a sales process consists of three components:

• Relationship acquisition
• Relationship management
• Opportunity management

Let’s start with the final component of the sales process and work backwards.

Opportunity management

The objective of your opportunity management process is to convert sales opportunities into sales (remember, we’re assuming that a sale is a new client). This process will generally involve salespeople, operating either in the field, or from a call centre (or both).

A sales opportunity is typically an expression of interest in a specific product or service, generated as a result of your opportunity management process. (Sales opportunities are often called leads.)

As with your sales process as a whole, we are primarily interested in the throughput and the productivity of your opportunity management process.

Accordingly, we will begin by measuring:

• Client acquisition rate (clients per month)
• Opportunity conversion rate (sales/opportunities x 100)

Of course, the throughput of the opportunity management process (client acquisition rate) will be identical to the throughput of your sales process as a whole.

Your conversion rate is the percentage of sales opportunities that convert into sales.

The CEO of Correlex already knows his client acquisition rate.

What he doesn’t know, is how many sales opportunities his consultants require in order to make each sale.

A survey of his consultants’ sales figures indicates that, on average, his consultants convert one in every 2.9 sales opportunities into sales. (Accordingly, his conversion rate is 35%.)

But these sales figures also reveal an interesting phenomenon. Correlex’s CEO observes that conversion rates vary considerably from consultant to consultant. He also notices that there seems to be an inverse relationship between acquisition rate and conversion rate for individual consultants.

In other words, the consultants who acquire the most new clients tend not to have the highest conversion rates, and visa versa.

He wonders why …

Optimising conversion rates

Contrary to popular belief, the primary influencer of conversion rate is not the skill of salespeople.

Rather, it is the design of the opportunity management process.

In our experience, opportunity management processes are best designed with a view to minimising the time between the emergence of a sales opportunity and closure of that opportunity (a sales opportunity is closed when it is won, lost or abandoned).

Increasing the throughput of a sales process may result in lower conversion rates, but this is not necessarily a bad thing!

Sales managers typically manage their salespeople as if a conversion rate of 100% is achievable.

In reality, 100% is rarely an optimal conversion rate. The reason is that, as conversion rates go up, throughput goes down.

Ask yourself, which would you prefer: a salesperson who conducts 5 appointments a day, with a 40% conversion rate; or a salesperson who conducts 3 (highly qualified) appointments a week, with a 95% conversion rate? (Hint: salesperson A generates 10 sales a week, where salesperson B generates less than 3.)

You can take the following steps to increase the throughput of your sales process:

• Break the opportunity management process into a number of logical steps.
• Ensure all sales opportunities follow the same process.
• At each step in the opportunity management process, be sure to up-sell to the next step.
• Actively manage open opportunities.

You can manage individual (open) opportunities with a simple tabular report, like the one below. Normally, a sales team will work through this report in its weekly sales meeting. The key indicators to watch are the number of open opportunities and average days open. (If you sell a number of products with different price points, you may prefer to monitor the dollar value of opportunities).

Most CRM systems produce such a report; alternatively, you can create your own in Excel.

You can also use the weighted value and target close data from this report to produce sales forecasts.

Correlex’s CEO reviews his consultants’ differing opportunity management processes. He identifies the consultant with the most efficient process and resolves to benchmark this process and make it the organisational standard.

This new benchmark calls for a conversion rate of 25% and an average days open of 45 days.

From these figures, he calculates that, at any one point in time, his organisation should have one and a half months’ worth of open opportunities:

Optimal monthly sales: 4

Opportunities required to make 10 sales: 4 / 25% = 16

Average days open: 45 (5 months)

Optimal open opportunities: 16 x 5 = 24

Relationship management

The objective of your relationship management process is to generate a steady stream of sales opportunities from your relationships under management.

We do this by creating an automated communication program. This is a sequence of ongoing communications, where each communication is designed to add value to these relationships.

A typical communication program will consist of a monthly e-mail newsletter and bimonthly seminars or workshops.

We tend to take an indirect (longer-term) approach to the generation of sales opportunities. Our experience is that, if you can design the relationship management process to position your organisation as the leader in its particular field, sales opportunities will be forthcoming.

Events and other activities can be used to stimulate the flow of activities, but on many occasions, these activities will simply time-shift the emergence of opportunities — rather than creating opportunities you wouldn’t otherwise have received.

You need to balance your need for sales opportunities against the requirement to add value to the relationships under your custodianship. There is a danger that, if you design your communications specifically to maximise the flow of sales opportunities, you may compromise the integrity of these relationships.

As with our other processes, we are primarily interested in monitoring throughput and productivity. Accordingly, our KPIs are as follows:

• Opportunities per month.
• Opportunity realisation rate (monthly opportunities/relationships).

Opportunity realisation rate advises you of the correlation between the number of relationships you have under management (the size of your database) and the number of sales opportunities these relationships produce each month.

Correlex has 1,500 contacts on its database. Because all of these contacts are recipients of Correlex’s monthly e-mail newsletter, it referrs to them as subscribers.

On average, Correlex receives 12 sales opportunities a month from its subscriber database.

These 12 opportunities represent an opportunity realisation rate of 0.8%:

12 / 1,500 x 100 = 0.8%

In order to increase the flow of sales opportunities to the 16 per month required, Correlex’s CEO realises he must acquire an additional 500 subscribers:

16 / 0.8% = 2,000

Relationship acquisition

The objective of your relationship acquisition process is to acquire a steady stream of relationships with potential clients and centres of influence.

The input into this process is the investment in your relationship-acquisition campaigns (remember, we’re only tracking variable costs). The output is obviously the relationships (or subscribers) you add to your database.

The precise management of this process is critical for two reasons:

• The flow of inbound opportunities is the key determinate of the throughput of the process as a whole.
• In the absence of an objective performance measure, there is a high probability that you will either under- or over-spend on promotion.

Our performance indicators for this process are:

• Relationship acquisition rate (relationships per month).
• Relationship acquisition cost (cost per relationship).

Relationship acquisition cost is calculated by dividing the variable cost of promotional campaigns by the number of new relationships acquired by those campaigns.

As with our global KPIs, these indicators don’t mean much until we can compare actual and optimal figures.

Optimising your relationship acquisition process

The calculation of your optimal relationship acquisition rate is easy. This figure is determined by:

• Your target database size.
• Your availability of promotional funds.
• The capacity of your relationship acquisition process.

The calculation of your optimal relationship acquisition cost requires a little more thought.

The amount that you are prepared to spend in order to acquire a new relationship must obviously relate to the value of such a relationship.

But how can you value one more name on your database?

The solution is to value relationships using exactly the same methodology we used to value clients.

Your database of subscribers provides you with a flow of sales opportunities.

You can value a sales opportunity by discounting your optimal client acquisition cost for your conversion rate. (In other words, if your conversion rate is 10%, a sales opportunity is worth 10% of your optimal client acquisition cost.)

Accordingly, to value one new subscriber, all you have to do is calculate the odds of that subscriber becoming a client over the life of their relationship with you.

While you can easily calculate the life of a client relationship, it’s a little harder to calculate the life of a subscriber. In our experience, it’s rare for subscribers to unsubscribe from our automated communications program.

For this reason, we arbitrarily choose to value subscribers over the same lifespan as clients. Accordingly, if the life of an average client is three years, we value subscribers over this same period.

The CEO of Correlex is prepared to invest $900 to acquire a new client.

Because his optimal conversion rate is 25%, a sales opportunity is worth $225.

$900 x 25% = $225

He knows that his automated communication program provides him with an opportunity realisation rate of 0.8% per month. Or, to put it another way, for each subscriber on his database, he will receive 0.8% of a new sales opportunity each month.

Because he arbitrarily decides to value subscribers over a three-year period (36 months), Correlex’s CEO can calculate that there is a 28.8% likelihood of a new subscriber turning into a client over this period.

0.8% x 36 = 28.8%

If 28.8% of subscribers become clients, it follows that a new subscriber is worth $64.80:

$225 x 28.8% = $64.80

Therefore, this $64.80 is Correlex’s optimal relationship acquisition cost.

Correlex’s CEO decides to set his optimal relationships acquisition rate at 85 per month. This will allow him to easily hit his target of 2,000 subscribers within 12 months. (Even accounting for a particularly conservative unsubscribe rate of 42 a month.)

Specifically, is your organisation converting the optimal percentage of sales opportunities into sales?

My bet is that you’ll find this question hard to answer … for two possible reasons:

1. You don’t know what your optimal conversion rate is.
2. You can’t bring yourself to be happy with a conversion rate any less than 100% — which makes the concept of an optima superfluous!

This article explores the opportunity management process — that all-important process responsible for converting sales opportunities into sales.

It explains why a conversion rate approaching 100% is undesirable. Why a salesperson and an opportunity management process are not one and the same. And why pep talks and sales quotas are counter-productive.

Is yours really an opportunity management problem?

Most managers blame their salespeople for a lack of sales.

That’s like blaming a light bulb for darkness during an electricity failure.

In all likelihood, there’s nothing wrong with your salespeople’s ability to sell.The problem is more likely to be a lack of sales opportunities.

It’s important to recognise that salespeople are not good at generating sales opportunities. They can do it, but it’s an inefficient use of their time. (It’s also technically possible to use a light bulb to generate electricity, but there are more efficient means!)

For this reason, we divide sales processes into three key components as pictured below (each component is a sub-process).

The first two components of this sales process (relationship acquisition and relationship management) generate sales opportunities; the third (opportunity management) converts those sales opportunities into sales.

Before we consider your opportunity management process, we must ensure that it’s your current process constraint. If your salespeople are currently conducting less than three or four appointments a day — and if you don’t have a rising backlog of sales opportunities — then your opportunity management process is not the constraint.

Accordingly, you need to focus your process improvement efforts elsewhere.

Specifically, you need to work on the upstream components of your sales process to increase the flow of sales opportunities.

(Our article on Relationship-centric Marketing explains how to build the process components you need to generate a predictable and scalable source of sales opportunities.)

Where are the sales?

Once you have a scalable source of sales opportunities, your sales will go up, right?

Yes and no!

As you increase the opportunity flow, your sales will initially rise. However, as the opportunity flow continues to increase, you will reach a point where your sales volume levels out (and your conversion rate begins to drop).

Once you reach this point of diminishing returns, you’ll know that your process constraint has shifted. Yesterday, your process output was constrained by a lack of sales opportunities. Today, it is constrained by a lack of resources in your opportunity management process.

It’s now time to focus our attention on your opportunity management process.

Multitasking: productivity’s public enemy #2

If your opportunity management process is under-resourced, the solution is to employ more salespeople, right?

Not necessarily!

I’d recommend you first perform a time and motion study on your existing salespeople.

When you do, calculate the percentage of your salespeople’s time that is devoted to each of the following activity categories:

• Clerical and secretarial duties. (Data entry, literature fulfilment, report preparation, appointment scheduling, routine follow-up calls etc.)
• Account management. (Routine ‘customer service’ visits and order collection.)
• Proposal generation. (Preparing quotations and generating proposals.)
• Prospecting. (Generating sales opportunities.)
• Fulfilment logistics. (Liaison between clients and the production department and expediting client orders through production.)
• Negotiating sales. (Negotiating sales with near-term sales opportunities.)

My guess is that your end result will look something like the following.

This pie chart would illustrate that your salespeople are devoting only a small percentage (10%) of their time to negotiating sales.

We would argue that this activity is the highest-leverage use of their time.

The other 90% of their time is devoted to activities that could (and should) be delegated to other less-skilled and lower-paid individuals (or to organisational systems).

An additional problem here is that, instead of focusing on one activity, salespeople are sharing their time between six activities, each of which requires a different skill set and different resources.

This is multitasking at its worst!

Goldratt (the developer of the Theory of Constraints) claims that cost accounting is productivity’s public enemy number one. Well, if he’s right, and we believe he is, multitasking has got to be public enemy number two.

Our experience is that the productivity of individuals decreases geometrically as they take on each additional task.

Our estimate is that this decrease in productivity is equal to the square root of the number of disparate activities. In other words, conducting six activities concurrently will take two-and-a-half times longer than performing these same activities sequentially!

As a result, when you divest your salespeople of low-leverage activities, the productivity of your opportunity management process increases dramatically.

Almost certainly, you will discover that you will not need to employ more salespeople for quite some time.

Of course, the pressing question is, who should be responsible for what?

Sales: a process, not a black art

To me, the suggestion that a salesperson should sell, does not seem like a radical one. I’m sure if I suggested to a manufacturer that his lathe operator should operate a lathe, he’d be quite comfortable with that idea!

The reason why managers have historically expected salespeople to be responsible for the entire sales process is that sales has never really been a process, in the true sense of the word.

Traditionally, the sales function has been the least scientific, least measurable, least predictable and least manageable corporate function.

As a result, responsibility for the entire function has been handed to these strange, unpredictable, (and sometimes, dare I day it, unsavoury) individuals we call salespeople.

Salespeople, understandably, have been happy to perpetuate the perception of sales as a black art. Their ownership of the entire sales function puts them in a position of enormous power. (Many sales people regard their client list as an asset that can be auctioned off to the highest bidder!)

That, however, is ancient history (or at least it should be). Today, we know that sales is a process. As a result, there’s no reason why we shouldn’t break that process into its core activities, and match each activity with an appropriate resource — just as we would in the case of a manufacturing process.

We’ve started by looking at your salespeople because they are your scarcest (most expensive) process resource.

To maximise your return on your salespeople’s time (of course, time is a salesperson’s unit of capacity) your salespeople should ideally do nothing other than that conduct appointments with near-term sales opportunities (individuals who have indicated a propensity to purchase).

We recommend that you separate the account-acquisition and the account-management functions. This is because account acquisition is a higher-leverage use of a salesperson’s time.

If possible, your most skilled salespeople should be responsible for account acquisition.

If you must have the same salesperson performing both account-acquisition and account-management appointments, to minimise multitasking, we suggest you split these appointments between different days of the week. (For example, you might schedule account-management appointments on Monday, Wednesday and Friday; and account-acquisition appointments on Tuesday and Thursday).

It should be possible for your salespeople to conduct between three and five sales appointments a day. (Contrast this with your salespeople’s current activity levels.)

Account management

We see considerable amounts of salespeople’s valuable time squandered in the name of account management.

Most account-management activities are either unnecessary or ineffective.

A classic example is the scenario where a salesperson spends his time conducting what the Americans call doughnut runs. A doughnut run is where a salesperson spends all day visiting existing clients with no apparent motive other than the delivery of doughnuts!

Your account-management activities should be planned in line with the only two sensible objectives of this function:

• Extending service utilisation (increasing share-of-customer).
• Procuring repeat orders.

Obviously, extending service utilisation is the highest-leverage activity. The procurement of repeat orders should be handled by customer service personnel (preferably telephone-based).

Where possible, your relationship with clients should be structured in such as way as to facilitate both the procurement of repeat orders and the extension of service utilisation.

To facilitate the procurement of repeat orders, you might agree to provide products on an automatic replenishment basis. Alternatively, you might provide clients with an attractive incentive to sign a service contract.

To extend service utilisation, it is desirable to have your salespeople provide a consultative service to your clients. This service should be designed to assist your clients with the attainment of best practice — as defined by methodology that underpins your basis for communication. (See our article entitled The importance of getting religion.)

If the objective of your salespeople’s account-management activities is to extend service utilisation, it’s essential that any performance metrics (and incentives) reflect this objective.

We frequently hear managers complain that their salespeople are happy to live on the commissions generated by their existing client bases.

Well … can you blame them? The question that must be asked here is: why are salespeople paid commissions on repeat sales from existing clients, when the procurement of repeat sales is a low-leverage activity?

Our suggestion would be to pay commissions for:

• The acquisition of a new client.
• The extension of an existing client’s utilisation of your service.

In each case, incentives can be calculated based upon the projected net present value of the new annuity income stream.

Sales support

Obviously, your salespeople need some organisational support if they are to conduct between three and five appointments a day.

We typically divide responsibility for this support between two roles. (In smaller organisations, these roles may be assigned to the one person.)

Marketing coordinator

The marketing coordinator is responsible for managing the sales process as a whole (just as your production manager manages your manufacturing or fulfilment process).

They typically provide salespeople with support in the following areas:

• All data entry (including the completion of contact reports).
• Campaign management.
• Literature fulfilment.
• Appointment scheduling.
• Preparation of proposals.
• All routine follow-up calls.
• Report generation.

Production coordinator

The production coordinator provides an interface between your clients, your sales team and your production manager.

They have access to both your client database and your production system. They are responsible for negotiating the scheduling of jobs with your production manager — eliminating the common (and counter-productive) situation where each salesperson attempts to hustle his or her own jobs through the production system!

The production coordinator provides salespeople with the following support:

• Generation of quotations.
• All production-related client liaison.
• Receipt of repeat orders (in low-volume environments)
• Feedback on clients’ order status (where necessary).

The single point of contact myth

Whenever we suggest sharing salespeople’s low-leverage activities between marketing and production coordinators, we hear the same objection. ‘But, wouldn’t our clients rather have a single point of contact?’

The answer, at least in practice, is no, they wouldn’t!

Our experience is that clients appreciate being able to have direct access to individuals who can provide the service or the information they require on the spot. (Unless your salespeople are grossly under-utilised, they are never capable of providing this degree of accessibility.)

The fact is, clients will favour a highly efficient (low friction) interface with your organisation — even if that interface involves dealing with two or more individuals.

Process design

Before you can divest your salespeople of these low-leverage activities, you must ensure that your opportunity management process is, in fact, a process — as opposed to an unplanned sequence of ad hoc client contacts.

It will take some experimentation to design the optimal process. However, any process is better than no process at all.

The diagram below pictures the Ballistix opportunity management process.

Aside from enabling the divestment of low-leverage activities, a structured opportunity management process provides the following significant benefits:

• Increase opportunity flow (compress time between expression of interest and sale).
• Eliminate dropped opportunities.
• Enable forecasting (monthly sales projections).
• Continual improvement (identify and elevate constraints).
• Provide potential clients with a structured decision-making process.

Managing the opportunity management process

As indicated above, a structured opportunity management process enables management (continual improvement).

We suggest you manage your opportunity management process using what we call an open opportunity report, similar to the one pictured below.

An open opportunity is an opportunity under management, as opposed to an opportunity that has been won, lost, abandoned or suspended.

The most important information on this report is the total weighted opportunities and average days open.

Total weighted opportunities refers to the total dollar value of open opportunities, discounted for the probability of winning each sale. This probability weighting is determined by location of each opportunity in your process. You can calculate this weighting by examining your historical data.

Average days open enables you to monitor the rate at which opportunities are moving through your process.

On this report, source refers to the source of the opportunity, not the source of the relationship. It is likely that most opportunities will be generated by your relationship management activities (e-mail newsletters and events) or by utilisation extension campaigns directed to existing clients.

Process optimisation

As with all processes, you should manage your opportunity management process for consistent output — and not for month-to-month stretch targets.

Contrary to popular belief, sales quotas, pep talks and internal sales promotions are counter-productive in the long term.

These activities simply time-shift the emergence of sales — producing an unnecessarily lumpy sales curve.

Of course, a lumpy sales curve reduces the efficiency of your other organisational processes and makes it harder for your suppliers to forecast your inventory requirements.

These activities can also be damaging to client relationships. They result in channel loading and depressed conversion rates, as salespeople attempt to fast-track the closure of opportunities.

Your optimal sales volume will be determined by either your production (or fulfilment) capacity or by the capacity of your opportunity management process, which ever is the lesser.

Optimal conversion rate

By now you should have realised why 100% is unlikely to be your optimal conversion rate.

It’s far easier to increase process output (sales) by focusing on improving volume, than it is by attempting to increase conversion rates.

Ironically, almost every sales improvement initiative we come across focuses on improving conversion rates.

These initiatives include:

• Sales training (your salespeople don’t need sales training, they need sales opportunities).
• Software (your salespeople don’t need sales force automation software — they’re salespeople, not clerks — data entry should be someone else’s job).
• Motivational seminars and team-building workshops (if your salespeople have a productivity problem, multitasking’s the most likely culprit, not poor motivation).

If you show me an organisation with a conversion rate approaching 100%, I’ll show you a sales process with a volume problem!

Managing change

By now, you’re probably wondering what your salespeople will think of this process-oriented approach. How will you be able to convince them to relinquish control of the opportunity management process?

The short answer is, don’t try!

It’s far easier to drive change by giving than it is by taking. If you initially focus on increasing the flow of sales opportunities to your opportunity management process, your salespeople will reach a point where they’re crying out for assistance.

Once they realise that they’re grossly under-resourced they’ll be happy to divest some of their low-leverage activities — in exchange for a calendar full of appointments.

When your salespeople are each conducting three to five appointments a day, five days a week, they will have reached their optimal earning capacity.

The benefits for you are obvious. As well as a significant increase in process output (sales), you have decreased your dependence on individual salespeople. You now have a sales process that can be precisely managed — and rapidly scaled.

[Presented at: TOCICO Conference, Miami 2004]

Introduction

The traditional sales process is hard to manage and all but impossible to scale.

This paper introduces a radical new approach to sales process design, resourcing and management.

The result of this approach is a process where:

1. Salespeople consistently perform five appointments a day, five days a week.
2. Appointments are programmed into salespeople’s diaries in descending order of probable contribution.
3. A buffer of sales opportunities is generated and maintained, without requiring any involvement of salespeople.
4. Budgets, targets, bonuses and commissions are eliminated and all activities are synchronised (in real-time) with the goal* of the organisation.

The problem with the sales process

Most sales processes are not processes in any useful sense of the word.

In a production context, the word process conjures up images of a production line — a series of tightly-coordinated activities that deftly converts raw materials into finished goods.

A typical sales process hardly fits this description.

A typical sales process consists of a number of individuals, each of whom is responsible for the entire sales function (and for a number of non-sales activities). Rather than following any formal procedure, these individuals engage in a broad range of ad hoc activities — using intuition to make resource allocation decisions.

A typical sales process is not dissimilar to a manufacturing process prior to the industrial revolution:

1. All tasks are performed by skilled technicians.
2. There is minimal automation.
3. Each technician operates in parallel with others — rather than in series. Accordingly, each worker is responsible for his own end-to-end process.
4. There is enormous variation in output.
5. Because there are no economies of scale, the system is difficult to scale.
6. Technicians receive performance pay, meaning that they are inclined to behave like sub-contractors
7. There are no disincentives for technicians to set up their own competitive businesses.

(Technically, it makes sense to apply the word ‘process’ only to the latter configuration in the diagram above.)

Fortunately, if we are looking to increase the productivity of the sales process, modern manufacturing provides us with clear guidance.

Applying TOC to the sales process

TOC’s five focusing steps* advise us to begin by identifying the constraint.

Because the salesperson is the traditional sales process’s only resource, it’s obvious that the salesperson is the capacity constrained resource (CCR).

To determine how to exploit the CCR, we’ll perform a simple time and motion study.

A review of a typical salesperson’s time and activities is likely to reveal the following breakdown of activities:

As illustrated, a typical salesperson conducts just two business-development appointments a week.

The balance of his time is allocated to:

1. Project management: managing the delivery of prior sales
2. Customer service: receiving and processing repeat transactions
3. Opportunity management and clerical tasks: activity programming, diary management, data entry and literature fulfilment
4. Social activities: appointments with no formal business objective, as well as a range of overtly non-commercial activities (often involving sport)
5. Prospecting: identifying sales opportunities

The following table ranks these activities by time allocated (descending order) and by the contribution each activity makes to Throughput*.

Where the contribution to Throughput is concerned, project management, customer service and social activities are marketed as not applicable. This is because it simply does not make sense to treat these activities as part of the sales process*.

While the exclusion of social activities from the sales process is contentious, we do so for two reasons:

1. We consistently find that we can get a better return on scarce resources from commercial activities than we can from social activities.
2. Even if social relationships are an antecedent of commercial relationships (which is debatable**), such relationships should be regarded by management as a contingent liability.

Of the three remaining activities, business-development appointments obviously make the greatest contribution to Throughput.

These appointments are a higher-probability activity than prospecting. While opportunity management and clerical tasks are necessary, they do not make a direct contribution to Throughput.

Because the conduct of business-development appointments is the salesperson’s most productive activity, we will establish the appointment slot as our unit of constraint. In our experience, a salesperson’s maximum sustainable capacity is likely to be five appointments a day.*

For this reason, the pie chart on the preceding page, displays time allocated to activities in terms of appointment slots consumed.

It should now be obvious that:

1. Our sales process will be at its most productive when we have maximised Throughput per appointment slot available (T/ASA).
2. The measure of the contribution of our salesperson to the process as a whole will be Throughput per appointment slot consumed (T/ASC).

Accordingly, our focus should now be on:

1. Ensuring that our salesperson is fully utilised (all his available appointment slots are consumed).
2. Programming activities into our salesperson’s diary so as to maximise T/ASC.

A word on programming

In our experience, neither salespeople nor management are ever likely to have considered a formal approach to the programming of sales activities.

Consequently, salespeople’s time tends to be programmed by salespeople themselves — with intuition as the prevailing method.

Unfortunately, as is illustrated by the popularity of casinos, the human brain does not excel at performing estimates where probability is involved. The result is that low-probability activities are likely to be given priority over higher-probability activities. (Salespeople over-estimate the value of the unknown.)

This has a deleterious effect on both process throughput and conversion rates.*

The sales coordinator

In order to maximise both the utilisation and the productivity of the CCR (the salesperson), we focus the salesperson exclusively on business-development appointments and add an upstream resource called a sales coordinator.

The sales coordinator is responsible for ensuring that the salesperson is fully utilised at all times (five business-development appointments a day, five days a week).

Consequently, the sales coordinator takes total control of the salesperson’s diary (just as a personal assistant would take control of an executive’s diary).

In order to maximise the salesperson’s productivity (T/ASC) the sales coordinator allocates appointments in the descending order of their probable contribution. Because the sales coordinator’s intuition is no more capable of estimating this contribution than the salesperson’s, these critical programming decisions are made using a formula provided by management.

Feeding the constraint

As suggested previously, we are only interested in the salesperson performing business-development appointments.

These are appointments with a commercial agenda that has been approved in advance by the potential client.

At some stage, the sales coordinator is likely to find it difficult to schedule appointments that comply with this precondition.

This is because, prior to agreeing to such an appointment, the potential client (prospect) must acknowledge a requirement for the product or service that the salesperson is representing.

While, for most organisations, there is no shortage of prospects, there is a shortage of prospects with a current acknowledged need (this is what we call a sales opportunity).

At this point, we are in danger of the constraint shifting from the salesperson to the sales coordinator.

In order to prevent this from happening, we must:

1. Identify the source of — and a method to generate — sales opportunities.
2. Build a buffer of these opportunities (an opportunity buffer) upstream from the sales coordinator.

The source of sales opportunities: four theories

We find that most organisations have designed their sales process based upon one of four theories concerning the (primary) source of sales opportunities:

1. That sales opportunities are a raw material (and, therefore, abundant)
2. That salespeople create sales opportunities (as a result of their prospecting activities)
3. That promotional campaigns generate sales opportunities
4. That existing clients are the source of sales opportunities (either directly, or via referrals)

While there is a set of circumstances in which each of these theories is appropriate, few organisations find themselves complying with those circumstances.

The result, for most organisations, is a chronic shortage of sales opportunities. This persistent scarcity of sales opportunities, in turn, encourages organisations to design their sales processes to maximise conversion rates, at the expense of process volume.

The theory that sales opportunities are a raw material is appropriate only for those organisations with a production — rather than a sales process — constraint.

The theory that salespeople are the primary source of sales opportunities is applicable only in situations where salespeople can prospect and sell concurrently (e.g. door-to-door sales). In other situations, prospecting is such a resource-intensive activity that it consumes the greater majority of a salesperson’s available time.

The theory that promotional campaigns are the primary source of sales opportunities is applicable only to organisations that change their products regularly (entertainment promoters, infomercial marketers, property developers etc). This is because promotional campaigns that directly generate sales opportunities tend to suffer from rapidly-diminishing returns.

The theory that existing clients are the primary source of sales opportunities is appropriate only for organisations with an enormous, under-exploited client base (telecoms, utilities etc). For other organisations, this theory results in a sales process that is a self-contained (self-limiting) system.

Relationships as a source of sales opportunities

Curiously, for most organisations, it is true that clients are the primary source of sales opportunities. That said, if the objective is to increase process output at anything other than an incremental rate, it doesn’t make sense to look to existing clients to drive this growth.

Our solution is to recognise relationships as the primary source of sales opportunities.

Our interest, then, is not just in customer relationships, but in relationships with the organisation’s marketplace as a whole, where this marketplace consists of:

1. Customers
2. Potential customers
3. Centers of influence

We have observed that, in most instances, there is a predictable, linear correlation (suggesting cause and effect) between the number of relationships an organisation has under management and the volume of inbound, unsolicited sales opportunities.

This phenomenon is dependent upon:

1. A base of relationships that is large enough to be representative of the marketplace
2. Some kind of periodic and relevant communication with these relationships

Of course, this observation supports marketers’ concept of brand equity. However the marketing community’s pseudo-scientific treatment of this concept renders it all but useless.

Considering the significance of this observation, a more systematic approach is appropriate.

Accordingly, if relationships under management are a scalable source of sales opportunities, it makes sense to:

1. Build a database that is as representative as possible of the wider marketplace.
2. Communicate periodically with individuals on this database, with communications designed to stimulate the emergence of sales opportunities.

The Relationship-centric Sales Process

This approach results in the following sales process.

In summary, this process functions as follows.*

1. Promotional dollars are invested in the acquisition of relationships — rather than in the direct acquisition of sales opportunities. Relationships are acquired by giving away packaged information (generally a book, white paper, or similar), in exchange for contact information. Because of the relative size of most organisations’ marketplaces, and the attractiveness of the offer, these campaigns are less prone to diminishing returns.
2. Respondents are added to a database, subscribed to a periodical and invited to regular events. (Events are, by far, the most effective method for the stimulation of inbound sales opportunities.)
3. Inbound sales opportunities are managed by the sales coordinator — where opportunity management consists simply of programming opportunities into the salesperson’s diary, in line with an appropriate strategy. (A strategy is the sequence of steps used to convert sales opportunities into sales.)

The promotional coordinator

Now that we understand the nature of the activities required to generate sales opportunities, we can complete the resourcing of our sales process.

Upstream from the opportunity buffer we add a resource we call a promotional coordinator.

The promotional coordinator is responsible for maintaining the opportunity buffer at its optimal size.

In order to achieve this requirement, the promotional coordinator manages a portfolio of relationship-acquisition and -management campaigns.

We now can be confident that the salesperson is both fully and productively utilised — and, consequently, that he will remain the capacity constrained resource.

Managing the sales process

Conceptually, there is little difference between the management of a production process and the management of the sales process pictured on the previous page.

What differences there are, stem from the uncertainty associated with Throughput and intangible nature of both relationships and opportunities.

Throughput

Obviously, where a sales process is concerned, we are dealing with probable, rather than actual Throughput.

Accordingly, Throughput must be discounted for probability (or risk).

We must also acknowledge that the whole-of-life value of one sales transaction may be greater than the value of the initial transaction.

For this reason, Opportunity Throughput (TO) is equal to the risk-adjusted, net present value of the sales opportunity.

Probability

Traditionally, probability is estimated (subjectively) by salespeople. If the opportunity management process consists of one or more standardised strategies this is no longer necessary. All we have to do is select process milestones (stages) and determine the historical probability for opportunities at each stage.

The table below shows a typical set of stages with associated probabilities.

Buffer size

The opportunity buffer consists of all sales opportunities — where these opportunities are at various stages of the opportunity management process.

You could visualise the opportunity buffer as an inventory of pending appointments. If, however, multiple appointments are required to close each appointment, you would have to remember that each appointment is likely to be connected to one or more others.

We can estimate the minimum number of opportunities that are required to keep the salesperson fully utilised by multiplying his daily capacity by the average opportunity cycle time, and then dividing the result by the average number of appointments consumed by each opportunity (some opportunities will never progress to first appointment, while others will consume multiple appointments).

Because Murphy will strike from time to time, this buffer needs to contain protective capacity. Experimentation has lead us to the conclusion that protective capacity should be an additional 50% of the minimum capacity.

The following example relates to the five-stage opportunity management process referenced previously. (It should provide some indication of the volume of concurrent opportunities that can be processed by a single salesperson.)

Programming appointments

You’ll recall that we wish to replace intuition with a more objective method for programming appointments.

We can do this by:

1. Estimating the contribution that each sales opportunity will make if it is allocated to an appointment slot.
2. Indexing the opportunity buffer, based upon this probable contribution.

We start by revisiting our stages and adding the following:

Appointments pending: This is an estimate of the number of additional appointments that will be required to win the opportunity (this number cannot be less than one).

Maximum days: Because opportunities atrophy over time, this figure determines the point at which we will apply an additional discount. (These numbers are cumulative.)

We estimate the relative value of each opportunity using the following formula:

Overdue days is calculated by subtracting the max days value that is associated with the current stage from actual days (the number of days the opportunity has been open thus far.) The result must be a whole number*.

The following table is an example of three opportunities indexed using this method.

Assuming the same geographic region, the sales coordinator will program these opportunities into the salesperson’s diary in the order dictated by the index.

Performance indicators

We discussed earlier that the performance indicator for the sales process as a whole is Throughput per appointment slot available (T/ASA).

If we reflect on the contribution each team member must make to maximise T/ASA, it is easy to derive an objective and a performance indicator for each.

Each of these performance indicators should then be plotted on a run chart — providing each team member with a real-time, objective view of the contribution his activities are making to the goal of the system as a whole.*

This objective approach allows us to dispense with targets, budgets, bonuses and commissions, performance reviews and management exhortations.

The sales process is now easy to manage and, consequently, easy to scale.

The result

The application of TOC to the sales process results in radical changes to process design, resourcing and management:

1. Responsibility for all tasks other than the conduct of appointments is institutionalised.
2. Non-constrained resources are applied to the acquisition and management of relationships and, accordingly, to the generation of sales opportunities.
3. The opportunity-management process is standardised — and optimised, so as to maximise the return on the unit of constraint (appointment slots).
4. Sales process cycle-time is reduced — often resulting in an increase in conversion rates.
5. Salespeople require only product knowledge and communication skills (consequently, they are easier to recruit and retain).
6. Commissions and bonuses cease to be necessary and the staffing mix shifts in favour of (lower-paid) sales support staff.
7. Significant increases in Throughput can be expected for similar Operating Expenses and Investment.

Problem is, it’s simply the wrong question to ask. And I’ll show you why…

Let’s assume that the objective of your advertising is to generate sales. If this is the case (and I truly hope it is) it seems logical that your promotional expenditure should precede sales – and not the other way around. (Surely you don’t make sales just so you can afford to advertise?)

Your advertising expenditure should determine your sales volume. This means that your advertising budget should be calculated by multiplying the number of sales you plan to make in a given period by the amount you need to invest in advertising to generate each sale (your ‘acquisition cost’). So, if you decide you want to double sales, you simply double your promotional spend.

Most organisations use sales volume to determine advertising expenditure because they simply cannot detect a relationship between advertising spend and sales!

If you can’t measure the relationship between advertising expenditure and sales, it’s either because you don’t have a system in place to make such measurement possible, or because your advertising simply doesn’t work.

Either way, building a system to measure the effectiveness of your advertising should be your number one priority.

Your first step is to calculate the amount you are prepared to invest in advertising and promotion to acquire a sale (your ‘allowable acquisition cost’). When determining this figure, be sure to consider the lifetime- rather than the transactional-value of a typical client.

Once you know what you can afford to spend to acquire a sale (or a new client), your next step is to measure what you are currently spending.

To do this you need to record a ‘source’ for every sales inquiry your business receives. It’s best to determine the source of an inquiry at the very first point of contact. Make it compulsory for your reception staff to ask inbound callers what prompted their calls – and add a compulsory source field to any forms on your Website.

If you know the source of every sale, it’s now a matter of dividing the number of sales you receive from each promotional campaign in any given period by the cost of that campaign. This will give you your acquisition cost – itemised by promotional campaign. If your average (actual) acquisition cost is lower than your allowable acquisition cost, you should reinvest the balance into additional promotion. If it’s higher, you need either to find a more cost-effective promotional campaign, or to increase the price of your product.

Once you understand the relationship between promotional expenditure and sales – provided you have promotional campaigns capable of generating sales at or below your allowable acquisition cost – you really can ‘dial-up’ next year’s sales figures.

1. Sixty percent of her time is spent prospecting (looking for someone to sell to).
2. Thirty percent of her time is spent face-to-face with qualified prospects (actually selling).
3. And 10% of her time is spent servicing existing accounts (looking after people to whom she has already sold).

Now, ask yourself a question: is your salesperson investing her time in the most effective manner? To answer that question, let’s examine each of the activities in which she engages, starting with ‘servicing existing accounts’. In my experience, using salespeople to perform customer service duties is a little like trying to kill a butterfly with a hammer: you waste resources, and make a hell of a mess in the process! The fact is, the best salespeople tend not to be great at customer service – and visa versa. Better to give your customer service duties to a full-time, telephone-based customer service person who’ll do the job properly, for around half the salary. Your salesperson can now divide the time she saves between prospecting (now approximately 70% of her available time) and selling (now 30%). Let’s take a look now at prospecting – is this activity really an effective use of your salesperson’s time? If you’re paying your salesperson $70,000 a year, and this person has 20 timeslots a week that she could theoretically fill with appointments, 14 of these slots are currently being spent looking for people to sell to in the remaining six! Or, to put it another way, each appointment is costing you (in salary alone) $243, instead of the $73 you’d be paying per appointment if all of the available slots were filled. Is this so bad?

The answer’s no … and yes!

No, it’s not unrealistic to invest $243 to set an appointment for a $70,000 a year salesperson. But this calculation doesn’t take ‘opportunity cost’ into account. In other words, what’s it costing in lost sales revenue to have your salesperson perform only six out of a possible 20 appointments? Let’s assume that a typical customer is worth $10,000 to you (lifetime value) – and that your salesperson successfully ‘closes’ one sale for each six appointments. Right now, your salesperson is performing six appointments a week – which equates to one sale, worth $10,000 (or $1,670 revenue per appointment). If you can find another way to invest that available $243 per appointment, such that each of your salesperson’s 20 available timeslots is filled, your salesperson will now be performing an additional 14 appointments – lifting revenues to $33,400 a week. (That should just about cover your customer service person’s salary!) Therefore, the ‘opportunity cost’ of having your salesperson do her own prospecting is a massive $23,400 a week!

But that’s not the half of it!

If your salesperson is no longer setting her own appointments, who is? And what’s the likely impact on her closing ratio? Let’s assume that you were to use advertising to generate inquiries – you’ll find examples of lead-generation advertisements in this (and previous) editions of AdVerb. And let’s assume that you give your new customer service person the job of setting appointments for your salesperson. Our experience is that responses to a lead-generation advertisement placed in a metropolitan newspaper are likely to cost you somewhere in the region of $30 each. If your customer service person appoints one in five, each appointment will cost you $150. So will your salesperson’s closing rate suffer if her appointments are set for her? In our experience, no. The fact is, salespeople’s closing rates typically more than double when appointments are set with respondents to a lead-generation campaign. And there’s a simple reason why: those prospects who set appointments after responding to an advertisement – and then reading an information pack (usually the offer in a lead-generation advertisement) – are significantly better qualified than those appointed by a salesperson using traditional prospecting methods. If we assume that your salesperson’s closing rate increases by only 50%, she is now making five sales a week, worth a total of $50,000. So let’s take a look at what we’ve achieved with our little hypothetical ‘re-engineering’ exercise. Well, we’ve increased your costs. A good telephone-based customer service person will cost around $35,000 a year. And your lead-generation campaign will cost you $150 per appointment. (Accordingly, your costs have risen by around $3,700 a week.) But we’ve also increased your revenues – from $10,000 a week, to $50,000 a week. There are 40,000 good reasons to grab a notebook and a calculator – and spend a week spying on your salesperson (with her permission, of course)!

The Sales Process Engineering method recognises this assumption as erroneous.

In most all sales processes, opportunity flow (volume) is the primary driver, not conversion.

It’s quite easy to see why.

Imagine a typical salesperson who processes about 10 opportunities a month and assume that this salesperson wins 50% of those opportunities. Now, consider how much potential there is for this person to increase sales by improving conversion.

Perhaps, with significant effort, this person could increase conversion rates by a percentage point or two. Let’s be generous
and assume 10 points. Now, this person is generating 6 sales a month.

Now, consider the potential to increase sales by improving opportunity flow. If this person divests of low-yielding activities
and dedicates their time to business-development appointments they will easily process 10 times the volume of sales opportunities each month (yep, that’s 100).

Let’s assume conversion rates drop by half (to 25%). Obviously, this person is now generating 25 sales a month.

So, opportunity flow should have primacy over conversion. Or, to express the relationship in TOC terms, opportunity flow is the goal and conversion a necessary condition.

But the relationship between conversion and sales is even more complex than this.

The reality is that small increase in conversion is likely to actually come at the expense of a *huge* decrease in opportunity
flow.

The traditional approach to conversion improvement is for the salesperson to assume responsibility for more and more activities. The salesperson schedules and conducts every appointment; prepares every document; designs the solution; walks the client’s job through production; supervises implementation; and even manages the account on an ongoing basis.

Obviously, as the salesperson assumes responsibility for an increasing activity load, more and more of their capacity becomes unavailable for business-development activities.

It’s not just that the activities themselves consume the salesperson’s capacity, the fact that the salesperson has to
synchronise numerous disparate tasks across multiple opportunities adds a significant overhead (one of the evils of multitasking).

So the relationship between conversion and opportunity flow is non-linear. An incremental increase in conversion will result in a geometric decrease in opportunity flow.

All the more reason to shift your focus from maximising conversion to maximising opportunity flow.

If we were to classify the potential causes of low sales into three categories:

1. Market and offer mismatch (wrong market, wrong offer or both)
2. Lack of appropriate channels for customer to hear about us (promotional channels) or to buy our products (sales channels)
3. Sales management (managing the sales pipeline)

Which do you think tend to be the major cause of lack of sales?

Answer

Well, I’d say (1) has the greatest influence. Even with limited visibility and a poorly managed sales process, clients will find a way to buy from you if your offer (product) is good enough.

However, poor performance in (3) tends to mask problems in (1) and (2). In other words, management often assumes that poor sales are automatically the consequence of a sales capability problem and investigates no further.

You may be interested to know that we address these problems in the reverse order (3,2,1). The reason is that good sales management (particularly in the environments we engineer) generates both management information and the demand for sales opportunities.

We free up massive capacity in salespeople’s diaries and then make a commitment to fill this capacity come hell or high water. The resulting ‘pull’ forces the organisation to address the other issues.

Chris was agitated because he had just realised that, last week, across his sales team, 20 appointment slots had gone unfilled, due either to cancellations or a failure to schedule appointments.

He had calculated that these empty slots had cost him (conservatively) $16,000.

Chris now wants to do “whatever it takes” to ensure that these (occasional)holes are plugged.

I’ve got to say that it’s so gratifying to hear an executive complain about lost Throughput. (Most are way too busy obsessing about ways to shave operating expenses.)

Tell me, were your salespeople fully loaded with business- development appointments last week? If they performed 20 or less each, have you calculated the opportunity cost of their under-utilisation?

I suspect the opportunity cost dwarfs whatever operating expenses you might need to incur to shift the constraint firmly to your sales team.

(Disclaimer: obviously, this comment doesn’t apply if you are deliberately maintaining production or NPD as your system constraint.)

Ramsay is the gruff, Scottish, Michelin-star-winning, celebrity chef. His show tracks his attempts to knock poor-performing restaurants into shape with his unique mix of screamed expletives, gentle reasoning and some sound business principles.

The other night he asked a restaurateur to explain why, on the one hand, she was promoting a cheap burger on her blackboard, while on the other, her menu items were ridiculously overpriced.

She explained that, because she was loosing money, her accountant and banker had encouraged her to raise prices — which she did. The problem is that this reduced cashflow. So, to generate cash to pay wages, she had to offer discounted blackboard items!

Predictably, Ramsay instructed her to phone her accountant and advise him that he is an a*******. But what was more interesting was the solution he proposed.

Ramsay instructed her to re-price her menu, serve smaller meals and focus on selling three courses to diners, rather than one.

But here’s the good bit. Because the restaurant’s weeknights were quiet, he told her to switch her focus from selling food to selling tables. His solution was to sell each table for 10 pounds — a fixed menu — and then sell each table multiple times in the one night.

While Ramsay has probably never heard of TOC, he’s smart enough to know that tables are typically a restaurant’s constraint — and, consequently, that the key to maximising the profitability of a restaurant is to maximise Throughput per table.

If you’ve seen the show, you’ll know that Ramsay often fails to rescue the restaurants he takes on. In the case of this show, when he returned a few weeks after his initial stay, the restaurant was doing well — particularly weeknights. From memory, on the particularly weeknight that Ramsay visited the restaurant was so busy that it had turned it’s tables three times each! And the restaurateur reported that she was, at last, making money.