As the economy slows, it’s likely that your firm’s order flow will slow too.

But, does it really need to?

For you to answer this question in the affirmative, two conditions need to be in place:

1. Your share-of-market needs to be considerable
2. Your sales function needs to be operating at (or close to) optimal efficiency

So, think about it. Do these conditions hold true for your organization?

I suspect not. It’s likely that your marketshare is much less than 50%. And it’s highly unlikely that your sales function is operating at anywhere near optimal efficiency.

To validate my second claim, have your sales manager examine your salespeople’s calendars and determine the number of true business-development appointments performed by your salespeople last week (it should be 15-20 each).

If these conditions do not hold for your organization, the implication is exciting. In theory, at least, it will be possible for you to maintain your order flow in these tough times, provided that:

1. You can improve the performance of your sales function to the point where you can secure enough new accounts to compensate for any contraction in sales
2. You can do this without increasing your marketshare to unrealistic levels

An action plan (five simple steps)

With this encouraging thought in mind, let’s consider an action plan for coping with these tough economic times.

Step one is to estimate how many appointments (in aggregate) you believe it is possible to generate for your sales team each week.

Remember, that the number of appointments you can generate is primarily a function of the appeal of your market proposition. A client of ours in Kentucky just eliminated a problem with appointment-setting by writing to clients offering them $500’s worth of free merchandise. This offer was commercially viable because the value of new accounts was high and because the firm had under-utilized fulfilment capacity. This appealing proposition caused the number of prospects who accepted appointments when offered to increase from less than 1:20 to more than 1:3!

Step two is to determine the optimal size of your sales team. This is simply the number of appointments you can generate each week, divided by 20 (each salesperson’s future capacity).

Step three is to figure out how to remove all activities from salespeople, other than field-based, face-to-face, business-development appointments.

So, activities that must be re-routed elsewhere include opportunity generation (promotions), appointment setting and calendar management, solution-design and proposal generation, customer service and all fulfilment-related tasks.

Step four is to reconfigure your resourcing model. It’s likely that you will discover that you need far fewer salespeople (even considering your increased appointment numbers) and more sales-support personnel.

Our approach to resourcing is to provide each salesperson with a dedicated sales coordinator (who manages opportunities and plans his or her calendar) and then route all other activities to a promotions person, customer-service personnel and technical experts who provide salespeople with field support.

In most cases it is possible to accomplish this reconfiguration with a negligible (if any) increase in operating expenses.

Step five is to eliminate bonuses and commissions.

If you’ve been waiting for the right time to eliminate this caustic practice, a down economy is such an opportunity.

While performance pay makes sense in environments where salespeople are truly autonomous, these environments are few and far between.

As organizations transition to make-to-order (or engineer-to-order environments), the requirement for tight integration between sales and fulfilment becomes critical.

Tight integration necessitates team work, and performance pay for individuals destroys the integrity of teams.

Furthermore, performance pay:

1. Signals that optimal performance is optional
2. Causes your sales function to become more costly as it operates more efficiently

The bottom line

Typically, when we implement these five steps in organizations, we increase each salesperson’s activity level by 10 times. However, in most cases, we also reduce the size of the sales team.

A typical net result would be twice the volume of true business-development appointments, with minimal change in operating expenses.

If your current marketshare provides you with room for growth, this is a strategy worth considering in these slower times.

We recently published a document detailing three common scenarios: the application of SPE to different sized firms and it’s implications for sales activity and operating expenses.  If you don’t currently have a copy of this document, send me an e-mail (justin.roffmarsh@ballistix.com) with "Scenarios" in the subject line.

The case for performance pay

Let’s envisage a situation where performance pay definitely makes sense. The situation that springsto mind immediately is outsourcing — or more generally — the use of contractors. If you have outsourced a task to a contractor, it makes sense to compensate that contractor on a per-piece (or results) basis. Because you are outsourcing, you have no control over the contractor’s production process (you can consider only inputsand outputs) and, as a consequence, it doesn’t make sense for you to gamble on something over which you have no control. Most organisations understand this explicitly.  This is why most contractors (including service providers) are under pressure to quote on a fixed-price — rather than a time-and-materials — basis. Now, if you consider the structure of a typical sales process (as discussed in the preceding article), you’ll realise that the relationship between the salesperson and the organisation is more similar to a contractor-clientthan it is to an employer-employee relationship:

1. Salespeople are responsible for the end-to-end sales process.
2. Management has limited (if any) access to objective process data.
3. Salespeople perceive that they own customer relationships (and in many cases they do!)

In this environment, it certainly does make sense to pay salespeople as you would a contractor. But, as you well know, we maintain that this isnot an ideal environment. What we now have to consider is how the radically different environment we advocate impacts on the case for performance pay.

The ideal environment

In summary, the essential differences between a typical sales process, and the process we advocate are as follows:

1.  Salespeople are responsible only for the conduct of (sales) appointments.
2. All other tasks (including the sequencing of salespeople’s appointments) are allocated to a sales support function.
3. Sales process management decisions are subordinated to the organisation’s constraint.

If you consider the first two points above, it’s obvious that we are no longer outsourcing the sales process, in its totality, to the salesperson. In fact, we have simplified the role of the salesperson to the point where he performs only one task (appointments*).  As well as increasing (massively) the productivity of the salesperson, the elimination of multitasking provides management with the ability to micro-manage the salesperson. The thing is, if a salesperson performs one simple task, over and over, management now has access to a statistically relevant quantity of objective data. This data-stream is the critical feedback loop that enables a process of continual improvement. Now that the salesperson can be measured and managed intelligently, the case for performance pay is no stronger for the salesperson than it is for any (and every) other employee. Which, of course, raises a very interesting question: wouldn’t it make sense to provide every employee with performance-based compensation? Our consideration of point three (above) exposes the first of two fatal flaws in this common argument.

Fatal flaw one: the optimum is rarely the maximum

If you consider most performance-based compensation programs, their operation is simple.  Employees’ pay is linked (directly or indirectly) to their productivity. Accordingly, the harder an employee works, the more he earns. This approach assumes that incremental increases in employee productivity are necessarily good for the organisation. Sadly, this assumption is dead wrong.  The fact is, in any process, incremental productivity improvements in only one resource will impact on that process’s output.  (This critical resource is the process constraint.) Productivity improvements elsewhere will have either no positive impact, or even a negative impact, on process output.  (I’m referring now to non-constrained resources.) Consider a simple organisational process consisting of the following sequence of activities (each performed by a separate resource):

1. Promotion (the generation of sales opportunities).
2. Sales (the conversion of sales opportunities to orders).
3. Fulfilment (the fulfilment of these orders).

If you were managing this fictitious organisation, would you be likely to exhort the people responsible for these resources to produce at their maximum possible rates? I hope not! Presumably you’d recognise that there is no benefit in Promotion producing sales opportunities that Sales can’t process.  And, similarly, there’s no benefit in Sales generating orders that Fulfilment can’t fulfil. To provide each of these individuals with a financial incentive to produce at maximum (individual) capacity will waste resources, unnecessarily inflate expenses, generate chaos and damage customer service. It’s for this reason that the third attribute of an ideal environment (above) is that sales process management decisions are subordinated to the organisation’s constraint. What this means is that the output of the various resources within our process should be synchronised with the maximum sustainable capacity of the process constraint. Performance pay is likely to have the exact opposite effect.

Linking global rewards to global objectives

Now, if you think about it, the flawed assumption that incremental increases in employee productivity are necessarily good for the organisation does not have to ring the death knoll for performance pay. It’s possible to envisage a compensation program that links local rewards to global optima. For example, you could:

1. Only reward team members at the process constraint for incremental increases in output.
2. Compensate team members at non-constrained resources for maintaining optimal (rather than maximal) output.

Now, this (smarter) approach to performance pay overcomes the sub-optimisation* problem.  It does, however, introduce two questionable assumptions of its own — and it fails to address the second fatal flaw in the argument for performance pay! Let’s consider the two assumptions first. The first is that the process constraint will stay in the one location.  If it moves (and from time to time it will), it will be necessary to reconfigure your compensation program.  You will inevitably find yourself having to explain to team members at the prior constraint that they must now satisfy themselves with a lower rate of pay (this is particularly challenging when the team members involved are salespeople!). The second assumption is that it is beneficial for team members at the constraint to strive for maximum output.  The reality is that what you want is not maximum output but maximum sustainable output.  While it sounds like a heroic endeavour, the pursuit of ’stretch goals’ increases volatility and decreases average output.* It’s time now to unveil performance pay’s mostinsidious flaw: the assumption that pay drives performance.

Fatal flaw two: pay does not drive performance

At first glance, the assumption that people will work harder in the pursuit of a greater income looks innocent enough. After all, a donkey will chase a carrot, won’t he? Well he will, until he’s replete!  From that point on, the donkey has no interest in the carrot whatsoever. In our experience, team members’ desire for additional money subsides rapidly once they are earning what they believe to be a fair market rate (assuming, of course, that their basic needs are met by that level of income). Furthermore, team members value the security of a fixed income more than they value the possibility of a higher (variable) income. But — and I’m asked this question often — don’t we want our employees to be entrepreneurial? The answer is ’no’.  We don’t.  As suggested previously, we will destroy our organisations if we turn them into a loose cooperative of contractors — all taking risks in the pursuit of a profit (this is, after all, the definition of ’entrepreneur’). We want our organisations to be tightly synchronised, highly efficient and totally predictable.  The donkey-and-carrot method of compensation is totally at odds with this objective.

Market rate plus some

Now I’m not suggesting that the elimination of commissions should result in a drop in your team members’ average rates of pay. In fact, I would expect the opposite to occur in many cases. But I am prepared to suggest that, along with performance pay, we should eliminate the notion that performance and pay should be directly linked. A better method to apply to the calculation of salary is to estimate the replacement cost of an employee. This replacement cost should consist of the market rate for a person of comparable capability, plus a premium for the inevitable switching cost you would incur if you were to lose that team member. You’ll find that this method provides a simpler and more rational basis for setting and renegotiating salaries.  Obviously this method will result in an indirect link between productivity and salary (more productive employees will have a higher replacement cost). You’ll also find that the offer of a good fixed salary (in place of the promise of untold riches) will result in a greater number of better quality respondents to your employment advertisements; particularly when you are recruiting salespeople!

A caveat

It’s important to highlight that the elimination of performance pay is contingent upon the successful reengineering of the sales process. If your sales process (or any other process) is intelligently designed and objectively managed, the retirement of performance pay is likely to be a logical and painless eventuality. An attempt to reengineer a traditional sales process that begins with the  heavy-handed suspension of performance pay is likely to have unpleasant consequences.

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)!

1. Operations: whose job it is to maintain a frictionless client interface
2. New product development: whose job it is to maintain a steady stream of innovations and maintain the desirability of the service

Accordingly, we tend to take account management away from salespeople and give it to an internal (phone-based) customer service team. This provides two benefits:

1. We can increase, significantly, the frequency of customer contact (for the same payroll cost).
2. Because the customer service team members are sitting at a computer, they are in the position to discuss work-in-process and process additional transactions for clients on the spot. (In other words, they can provide some value.)

Now, there’s a third (indirect) benefit: we can allocate the time saved in salespeople’s schedules to business-development appointments. But there’s an interesting twist here. In focusing on business development, salespeople do actually end up making a contribution to client retention — a far more meaningful contribution than they make with their traditional account management activities. By selling existing clients additional services, salespeople increase the value of the relationship to both parties and, as a consequence, increase the client’s switching cost. So, it transpires that salespeople *can* make a contribution to client retention — not by doing the job of operations — but by doing their own job, and selling existing clients more and more services.

1. The volume of ‘how is my job going’ calls is dramatically reduced
2. Customers’ call the assigned account manager directly with questions
3. In almost all cases, customers’ questions get answered on the spot (or by return of e-mail)
4. Salespeople have more time to spend face-to-face with customers (and potential customers)
5. Customers actually feel that the organisation is more – not less – accessible!

Now, that’s customer service.

The case for autonomy

Imagine that you are an executive at Hewlett Packard. You have two divisions, one manufactures inexpensive computers for domestic customers (moms and dads). The other division engineers custom solutions for enterprise customers. Think about how you distribute your inexpensive computers. Do you have salespeople knocking on doors in the suburbs? Of course not, you distribute them via Harvey Norman (think, Circuit City if you’ve never heard of Harvey Norman). Now, Harvey Norman is an autonomous agent. They bring enormous value to the table for you: massive stores (and car parks), a captive audience, logistical capability and so on. Let’s call this value ‘infrastructure’. However, when we engage with Harvey Norman — an autonomous agent — we must sacrifice some of the benefits we’d enjoy if we managed sales internally. We can’t walk the floor at Harvey Norman and issue directives to sales clerks. It’s also unlikely that we can collect data at the most granular level like we can within our own organisation. So, there’s a trade off. And with less information and less control it’s inevitable that we will not be able to integrate (synchronise) production as tightly with our sales agent as we would if we owned the entire channel. And, as I hope you’ve already guessed, we compensate for this imperfect integration by maintaining inventory. In other words, we build domestic computers to replenish stock, as opposed to building to fulfil direct customer orders (like Dell does). As is always the case, poorer integration equals larger inventories. In this case (domestic computers) we’re quite comfortable with this trade-off. Ultimate sales are made by an autonomous agent — and we pay this agent on a piece-rate (performance pay) — and we’re better off, in-spite of the need to carry inventories.

The case for team membership (integration)

Let’s consider our other division. This division sells custom technology solutions to enterprise customers. These solutions — by virtue of their being custom — are engineered to order. You can see the problem already, can’t you? If these solutions are engineered to order, they cannot possibly be sold from inventory. If we can’t build inventories of stock to buffer imperfect integration between production and sales, then we’d better strive for perfect integration. Even though perfection is unachievable, it still shouldn’t be hard to see that there’s simply no comparison between the degree of integration we can achieve if we own the entire distribution channel as opposed to what’s possible when sales are handled by autonomous agents. In fact, it may well be that tight integration between sales and operations is the most effective way for you to gain advantage over your competitors. (If you operate in a pure engineer-to-order environment, please go back and read that sentence again!) So, in this case, it doesn’t make sense for sales to be outsourced to Harvey Norman or to any other variation on the ‘autonomous agent’ theme. In this division (enterprise solutions), sales and production must both march to the beat of the one drum. However, when we take sales ‘in-house’ we must recognise that we sacrifice the infrastructure that a Harvey Norman brings to the table. And, obviously, considering our market, we’re not particularly uncomfortable with this trade-off.

Give and take

In summary, then, when we distribute through autonomous agents we give up control but gain infrastructure. When we own the entire channel we give up infrastructure in favour of greater control.

Equivocation

I can almost hear you thinking, a typical salesperson is hardly comparable with a retail giant like Harvey Norman. And I’m glad you’re thinking that: it’s exactly my point! When we (management) equivocate between engaging salespeople as autonomous agents and team members, we end up with the worst of both worlds: limited control and negligible infrastructure. So, my position is not that salesperson autonomy is necessarily wrong. It’s that equivocation between autonomy and team membership is. You need to consider your organisation, and its market, and determine which approach to salesperson engagement is the more appropriate. After all, you can’t eat your cake and have it too.

Clarification

In many organisations it’s quite okay to have a mix of the two approaches within the one channel. For example, while it doesn’t make sense for the final link in Hewlett Packard’s distribution chain to be fully integrated, it’s likely that HP has a team of salespeople who call on Harvey Norman stores (channel managers). These channel managers should absolutely not be autonomous agents. Even though Harvey Norman is a good example, an autonomous sales agent can make sense even if they don’t bring quite the same scale to the table. For example, if we have a manufacturer client, we will often turn capital-city salespeople into true team members (as per our Sales Process Engineering model) and encourage our client to engage autonomous agents in regional areas — who may well be individuals who sell a range of non-competitive lines.

When you add the requirement for technical expertise into the normal (massively-multitasked) sales environment you inevitably find that salespeople are hard to find and difficult to train. Furthermore, the consequences of salespeople defecting to a competitor are severe.

Our approach to the deployment of technical salespeople is typically to pull them back from the front-line and have them provide technical support to front-line salespeople (we’ll either call them ‘technical experts’ or ‘project managers’).

We like front-line salespeople (the ones performing 5 appointments a day, five days a week) to be generalists, not technical specialists. In other words their knowledge should be broad (across a range of products or service lines), not deep.

Once these salespeople have proposed a high-level solution, they can then introduce the technical experts to take a brief and design a solution. (See my recent post explaining why salespeople should not take briefs: http://finance.groups.yahoo.com/group/ballistix/message/79).

This approach tends to suit both technical salespeople and their employers.

Technical salespeople would, in most cases, rather focus on solution design and project leadership.

And their employers benefit because this role produces a greater yield on technical salespeople’s skills, allows the payment of a higher salary and minimises the risk of defection.