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

[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.

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.

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.