Enterprise Sales Effectiveness (ESE)

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1 Your resource on sales practices Enterprise Sales Effectiveness (ESE) December Enterprise Sales Effectiveness (ESE) 2014 No. 4 December 2014 > Inside this issue sales channel strategy 1 Building a sales strategy for growth ( part 1 of 2) leading design practices 5 Writing a good sales compensation plan sales team policies 7 Our clients often inquire how to better manage their draw policy for their sales people. Copyright 2014, Hay Group. All rights reserved in all formats. This publication is designed to provide accurate and authoritative information with regard to the subject matter covered. If legal, tax, or accounting advice is required, the services of a person in such area of expertise should be sought. sales channel strategy Building a sales strategy for growth (part 1 of 2) With the economy s improvement in 2014, growth (finally) became a hot topic again in the sales world. Three simple, but key analytical building blocks have helped companies align their sales team to take advantage of the better environment: 1. What parts of the marketplace should we focus on? 2. How big should our sales team be? 3. How will we get the sales team to buy in to this approach? Approaches to answer the first two questions will be presented here; as well as a preview to the third question. Question 1: What part of the marketplace should we focus on? In any specific market channel, sales leadership must balance the cost of fielding the sales force with providing the most relevant value proposition to customers. This has implications for salesperson capacity and geography because many companies will need to build a better, more consultative relationship with clients which changes the equation. Sales forces have to be more strategic about the customers with whom they spend time. One recent client experience is a good example of this. Traditionally, there had been no such thing as a bad customer any sale was a good sale. As the years went by, the cost pressure of this approach became untenable. It just was not profitable to serve a client who might purchase a very small amount once per year; the cost of delivery was too great. So, it was necessary to first segment the clients to determine who were the most desirable customers. We find that organizations are increasingly successful in this segmentation by assessing channels not just by volume, but by type of sale.in this case, sales leadership created a heat map to identify where to focus the sales force.

2 2 Enterprise Sales Effectiveness (ESE) December 2014 Client segmentation heat map High revenue Level 1 client Level 2 client Level 3 client (Best) Client count Low High Mid revenue Low revenue The Y axis is easy. This is simply a volume measure, like revenue or sales. The X axis is trickier. This needs to represent the quality or strategic importance of the customer. In many cases, this can be based on an evaluation of any of the following: Margin Mix Fit with the company s strategic objectives Strategic location or channel Quality of the relationship This company was able to identify those clients where it had been spending time and resources (indicated by brown) towards the middle of the matrix and also the preferred clients in the upper right hand corner. They could then refocus the sales force on these important accounts. Revenue risk? It should be noted that the intent is not to identify what revenue is undesirable all revenue is good if it is serviced at the right resource level. In this case, much of the company s revenue came from small, less strategic clients with whom it is harder to justify the cost of being serviced by a field sales person. For those clients, these might be better served by an improved on-line interface, with occasional visits from field sales. The important lesson is not to forgo revenue but to strategically choose how you want to invest resources against opportunities. This also means pressure testing the results against high volume but not strategically important vendors as well as ensuring appropriate geographic coverage.

3 Enterprise Sales Effectiveness (ESE) December Assessing geographic coverage Question 2: How big should our sales team be? The above channel analysis identifies the potential in the channel, and the strategic method for creating value for that potential. The next question is the size of the sales force. Increasingly, sales leadership is struggling with this question. Having deeper, more consultative relationships with customers is fine, but it puts pressure on resources because building relationships take time, and does not necessarily yield results quarterly. Understanding the nature of the sales job is essential. It is important to evaluate the job to understand what knowledge is required, the level of challenge as well as the nature of the results to which the field sales job is held accountable. This includes: Value proposition to the segmented customer How the sales person impacts that value proposition Behaviors consistent with top performers A simple way for estimating the appropriate size of the sales force is to look at performance and consider growth rates. In the example below, we have arrayed sales team members individual performance from lowest to highest, and identified the 75th percentile of individual volume as the appropriate level of performance.

4 4 Enterprise Sales Effectiveness (ESE) December 2014 Sales performance levels Dividing the 75th percentile level of performance into the forecasted volume gives you a first cut at A) appropriate headcount and B) appropriate sales goals. What s next? Question 3 Getting buy-in from the sales team The next challenge will be communication and training against the implications of these analyses. It is not a one-off communication; rather a significant and deliberate focus on leadership and on-going communication. Part 2 of this series will expand upon supporting specific audiences with specific messages: Who The company Sales managers Reps who stay Reps who leave Customers Important points What is the strategy, the plan? What are they saying to the team? How are they going to engage and move beyond reorganization? What leadership styles must they master? What is their role? What will they be doing differently? What does it mean to move to new roles? What will they say? How will they be treated with respect? What is the plan? How will my business benefit?

5 Enterprise Sales Effectiveness (ESE) December leading design practices Once a plan format is in place, it also doesn t change much from year to year. Document authors figure that once everyone learns where to look for the information they re most interested in, then it would cause disruption to change the way the document is presented. We advocate making improvement to the plan document any way. If there s even a small change made to sales compensation arrangements, take advantage of the change to introduce a more powerful document. The simple trick is to write the incentive plan document from the point of view of the true audience the sales team and (to some extent) the business. Highlight the most important items to them first. Writing a good sales compensation plan We ve read a lot of sales compensation plans over the years. It remains interesting to us that there really is no common format or approach companies use to document the workings of their plans. In the worst cases, it s difficult to simply figure out how incentives are supposed to work which means compensation dollars might be wasted, losing a lot of their motivational power for the sales team. Often, incentive plan documents seem to present information in the wrong order. Sometimes this is because the plan is written from the administrators point of view. The result is that a lot of detail appears in the first pages that few on the sales team really care about topics like eligibility for incentives; legal conditions; or what happens in unusual circumstances. If we were to bring together several of the best features we have seen in plan documents over time, here s what it might look like: Start with what s new, in order to draw attention to those items. Also list what s staying the same to emphasize continuity and lower the natural level of concern. Describe in simple terms what the strategic objectives are behind the incentive plan. For example, if the company wants to encourage growth, noting that will help the sales team understand why the incentive plan is constructed to reward growth instead of (say) renewal business. Create a graphic snapshot that summarizes the main plan elements in one place, but isn t overloaded with detail.

6 6 Enterprise Sales Effectiveness (ESE) December 2014 Better sales incentive plan document design: Incorporating good practices Typical plan document outline Purpose of this document Incentive plan eligibility Terminations Other administrative information Plan element 1 Description Example Rules, conditions, processes Plan element 2 (as above) Plan element 3 (as above) Deadlines Appendix Improved plan document outline Highlights: What s new/what s the same Strategic purpose of the plan/changes Incentive plan snapshot How to win Other administrative information Plan element 1 Description Example Plan element 2 (as above) Plan element 3 (as above) Plan administration detail Appendix Add a section on how you will win. Use this to reinforce the behaviors you want the sales team to pursue, and show how incentives are generated by doing it. (Without this section, the sales team will likely draw their own conclusions as to how to make money). Present a section on each key performance metric in the plan, along with a simple illustrative calculation. After that, the detail can be listed. Organize calculation-oriented detail according to the sections above, similar to footnotes. Then finish with the legalese section in the back, or even as an appendix. Now, the document will emphasize the messages that drive effectiveness, and the sales team will get it much more quickly.

7 Enterprise Sales Effectiveness (ESE) December sales team policies The amount of pay at risk and the nature of the sale largely determine if a draw is appropriate for a given sales role. Usually the draw is a function of performance, however a targeted level is frequently 1/3 to 1/2 of a competitive base salary level. We recommend giving the historically better performing sales reps a higher percentage of draw for fixed cash as well as setting a minimum performance threshold to participate in the draw. To address deficit situations, organizations will often lower the draw until the deficit is resolved and may initiate a performance management process. For new hires, many firms will establish a ramp-up period where the draw is non-recoverable. Our clients often inquire how to better manage their draw policy for their sales people The purpose of draws is to assist with cash flow for the sales reps in a sense, an advance on commissions earned. There are two types of draws: Non-recoverable draw the salesperson does not owe the company the shortfall if their performance (and thereby commissions) falls short of the draw amount. Recoverable draw the salesperson must pay back to the company their future earnings to cover the draw.

8 8 Enterprise Sales Effectiveness (ESE) December 2014 For more information: Hay Group is a global management consulting firm that works with leaders to transform strategy into reality. We develop talent, organize people to be more effective and motivate them to perform at their best. Our focus is on making change happen and helping people and organizations realize their potential. We have over 2800 employees working in 87 offices in 49 countries. Our clients are from the private, public and not-for-profit sectors, across every major industry. For more information please contact your local office through Marc Wallace marc.wallace@haygroup.com Tom Hill tom.hill@haygroup.com Michael Vaccaro michael.vaccaro@haygroup.com Amanda Wethington amanda.wethington@haygroup.com