Reducing the Break-even Time for New Salespeople. Overcoming a major barrier to growth

Transcription

1 Reducing the Break-even Time for New Salespeople Overcoming a major barrier to growth

2 What s your biggest barrier to growth? The sales team is a significant engine of organic growth for most companies. Unless you already have a dominant market share, or operate in a commodity business where price is the only issue, increasing the size of your sales team would have a major impact on your growth rate. The problem is that the cost of a new salesperson starts to affect your P&L as soon as you hire them, but, for B2B products with a relatively long sales cycle, they may not start generating significant revenue until at least a year later. As a result, you can only invest in a limited number of new salespeople each year without damaging current profitability. For many companies, this is a major barrier to growth. For many companies, the time it takes for new salespeople to generate revenue is their biggest barrier to growth At Imparta, we have been researching this issue in depth, because we see overcoming this barrier as vital for us to maintain the growth we have achieved over the past decade. It is also a critical issue for many of our clients, especially at a time when sales headcounts and budgets are under pressure. Even companies with no growth need to replace salespeople lost through attrition (often 10-15%) and deliberate churning of the bottom 10% of performers. Our research shows that if you can reduce the time it takes a new salesperson to start generating revenue from 12 months to nine, you begin to unlock the organisation s ability to grow fast. If you can reduce the ramp-up time to six months, each new person has a good chance of breaking even or even making a profit within the first year, and the barrier to growth goes away almost entirely. This White Paper sets out our analysis in more detail, and outlines a number of approaches that Imparta has identified to create a dramatic reduction in the time for new salespeople to generate revenue. How much does a new salesperson cost? Hiring a salesperson is a very expensive process. If you use a recruiting agency, fees are typically around 20% of first year salary, plus internal resource is needed for the recruiting process itself. If three senior people spend an hour each interviewing five candidates for each successful one, the opportunity cost (along with the cost of psychometrics, administration and so on) can easily reach 2k per hire. At that point the costs start to accelerate. A solid induction process can cost another 5k, and if the salesperson has been given a guaranteed commission scheme for, say, the first three months, that also needs to be factored in. Not every hire succeeds in their new role, of course. A company is doing well if 75% of new salespeople are found to be the right stuff and make it through 1

3 the first six months. The cost of the 25% that do not needs to be spread across the new hires to give an accurate picture. For a typical salesperson on a 70k salary, the first-year cost can be as high as 170k The recurring costs of a new salesperson include their salary and other taxes (such as National Insurance in the UK), but you also need to include travel expenses and the cost of the manager s time in coaching and performance management. For a salesperson on an illustrative 70k salary, as the following table shows, the first-year cost before commission can be as high as 170k nearly two and a half times the headline figure. The total first year cost in your business will vary, of course from, say, 40k for telesales to over 300k for a senior salesperson in a high value business. Please see the Next Steps section of this White Paper for a tool that will calculate this figure in more detail for your organisation. Cost 000 One-off costs Recruiter say 20% (if appropriate) 14 Internal cost of recruiting 2 Internal cost of induction 5 Guaranteed commission (where given) 15 Share of costs of failed hires 30 Total one-off costs 66 Recurring costs per year Salary, approx. 70 National Insurance 10 Travel & accommodation expenses 16 Manager time (coaching etc.) 8 Total recurring costs 104 Total first year costs 170 2

4 The impact of this cost on your profit and loss statement (P&L) will of course depend on the point in the financial year when they are hired, but without question the cost is a larger number than most people realise. If you are hiring enough salespeople to make a real difference to your revenue, their costs will also make a real difference to your profits. How long does it take a salesperson to generate revenue? If you hire a typical new salesperson at the beginning of your financial year, the analysis above shows that they will cost you approx. 170k in that year. Clearly, if it takes them a year to start generating revenue, you will incur a loss of 170k in year 1, which means you cannot afford to hire many of them without seriously damaging your P&L. But does it really take a year for a new salesperson to start generating revenue? The average time for any given business depends on many factors to do with the business itself, including: The precise role you are hiring into (e.g. pure new business vs. hunting within existing accounts); The length of the sales cycle in your business (a single call, or an 18-month long pursuit?); The complexity and economics of your market (is it growing or shrinking? Are you differentiated or commoditised?); The stage at which you engage your field salesforce. These factors help to determine the average time it would take someone in a given role and industry to start generating revenue. Your actual salespeople will then be distributed around that average by more individual factors, including their knowledge, motivation, skill and connections, the quality of their induction into the company, the accounts and leads they are given, the commitment and skill of their manager, and so on. For a B2B business with a field sales force and typical sales cycle of six to nine months, our research has identified four main types of sales hire, as follows: The Sprinter (first revenue less than six months). Sprinters often get a head start in their new role, either because a number of their own contacts are relevant to the new company and ready to buy, or because they are given productive accounts to develop and do so successfully. They are generally not held back by factors like a poor induction process, lack of confidence, etc. The Middle Runner (first revenue in nine months). These salespeople often exhibit similar characteristics to the Sprinters. However, they may have been held back somewhat by a background and contact base that was not as relevant as had been thought (e.g. new to the product or service area), or by not being given access to new opportunities and client contact early enough. 3

5 The Distance Runner (first revenue in 12 months or later). Most new starters fall into this category. It is typically the result of having to learn new customers and new products at the same time, and is common where salespeople are expected to generate their own leads. The Non-Runner (no significant revenue before employment is terminated). These are the hiring mistakes though they may well have performed well in other environments. We have found that good selection and assessment processes can reduce these dramatically. It is interesting to note that in statistical terms, this is not a normal distribution, i.e. there are many more Distance Runners than there are Sprinters. We have found that Sprinters are not only fast revenue generators; they are also more likely to exceed their targets year after year. This is partly because the same factors that led them to early success remain relevant, and partly because they are made more confident by that success. The exact length of time before revenue is generated will vary depending on the length of the sales cycle in your business, but the general categories will still remain valid. What is the impact of different times to generate revenue? The revenue required for a new salesperson to break-even depends on their cost, and on the average gross margin of the business. The higher the gross margin, and the lower the salesperson s cost, the more time you can afford before they start to perform. However, it is helpful to note that for many companies, the break-even revenue for a new salesperson is around 40-50% of a typical full-year sales quota. (It is lower in subsequent years.) The following graph shows in broad terms how quickly Sprinters, Medium Runners and Distance Runners reach that break-even point, i.e. the point at which they have a neutral impact on the profits of the business. 4

6 Cumulative Revenue as % Full Year Quota Although this analysis will vary based on the precise characteristics of your business and on the point in the financial year when someone joins, it allows us to draw some important conclusions: A Distance Runner, even one that you hire at the beginning of your financial year, will cost you a great deal to begin with. In our example above, they will generate a loss of close to 170k in that first year. Even if they are profitable thereafter, this means that your ability to grow the business by growing the sales team is severely limited if you also want to preserve profits. In marked contrast, a Medium Runner joining your team at the beginning of your financial year will have a minimal impact on your P&L in year one, and hopefully a positive one in year two and beyond. This means that you can add many more salespeople, as long as most of them join at the beginning of the financial year, and you don t make too many hiring mistakes. If you are able to hire (or create) Sprinters, they will actually generate a profit in their first year. This means that you can add as many as you like at almost any part of the year, even if there are some bad hires. So your ability to grow your business through the engine of the salesforce is dramatically affected by your ability to hire or create Sprinters. Your ability to grow your business is dramatically affected by your ability to create Sprinters The next logical question is: Are there things we can do to hire or create more Sprinters? And the answer is emphatically Yes. 5

7 How can you speed up revenue generation? To understand how management actions can affect the ramp up of new salespeople, we researched a wide range of new starters, and the revenue they generated in their first year. The main factors that we identified as affecting sales ramp-up are shown in the following diagram, along with the levers that managers can pull to affect them. % Successful Hires Size/quality of candidate pool Rigour of assessment process Judgement of people doing the assessment Early warning system for poor hires X % of Year Up to Speed Relevance of background Quality of induction process Injecting new hire into receptive client situations early on Quality/quantity of coaching X Average Deal Size Attractiveness of the new hire s target market (sector; geography; buyer type etc.) Use of formal planning methodology Availability of sales support and coaching X Number of Leads Relevance of new hire s contact base Number of undersold opportunities available Quality of overall lead generation and referrals New hire s skill/will in networking X Conversion Rate Level of competitive advantage Use of formal pitching process Use of deal clinics Locus of control = Revenue Generation in Year One The rest of this White Paper examines these management levers in more detail. As with all such approaches, you will already be doing some of the things that follow, and many will be obvious in retrospect. The value lies in taking a systematic approach to the issue. 6

8 Increase the quality of hires It goes without saying that the better your sales hires, the more likely they are to break even quickly. It has taken Imparta many years to get the formula right, and our key findings are: Improve the size/quality of the pool of candidates. Even if you use recruiting firms, you need to analyse your successful hires to understand which types of people sell best in your business, what they do well, and where to look for them. By preference, target people with a strong contact base selling a similar type of product or service (sales cycle; level of customisation; decisionmaking process) to the same buyers as you. Be careful of hiring only from direct competitors, though, in case they are prevented from talking to their best connections during that all-important first year. And beware the simplistic approach: just because someone has sold something called the same thing, doesn t mean it s the same sales process or buyer. For example, training can mean a single off-the-shelf product sold to an individual, or a complex academy sold to a large decision-making group that includes L&D and Sales leaders. Our hit-rate on salespeople has improved to almost 100% since adopting this process Improve the rigor of your assessment process. Do you use competencybased interviews already? Great. But salespeople are notoriously good at, well selling themselves. So you need to assess what they can actually do with your product, rather than what they say they can do. A robust assessment process may sound expensive, but in reality it saves huge amounts of time and money. Our process includes: CV screen against specific criteria; Initial telephone interview to test further against those criteria; Diagnostic simulation to assess sales skill; Mastery test to assess sales knowledge; Psychometric and motivation assessment, which also identifies areas to question/probe during the interview; Only then do we bring people in for a face-to-face meeting, where we conduct a: Competency-based interview; Sales role-play (face-to-face) to test real-life selling skills against our competency model; Other tests as appropriate (e.g. mini case study to test commercial acumen). Our hit-rate on hiring good salespeople has improved to almost 100% since adopting this process. Indeed, if I could go back to when I started the company and change one thing, it would be to implement this selection process from day one. 7

9 Choose the people doing the assessment very carefully. We have found that the best hiring decisions are made by a team of two people working together: an excellent sales coach, and an excellent salesperson. They bring different viewpoints to the selection challenge, and together will interpret the competency-based assessments more accurately than one person alone. Create an early-warning system for poor hires. Even with a best practice hiring process, a few Non-Runners will slip through. Not only do they cost a great deal in their own right, but they also use up a space on the team that could be used by someone far more productive. You need to spot them and take action (in everyone s best interests) as soon as possible. Don t just work on the basis of actual revenue generated, though, or you could end up removing a Distance Runner who could eventually be a strong performer. Your early-warning system should focus on the actions that lead up to revenue. Look out for people who have not built trust, formed relationships, identified opportunities, displayed the right competencies, or built the early stages of a pipeline. Don t be fooled by a single huge opportunity on which all rests; a good salesperson will develop many threads in the first six months. A best-practice induction process can shave months off the ramp-up of a new salesperson. Speed up the ramp-up Once someone has accepted an offer to join, the first few weeks are absolutely critical to how quickly they begin to create and drive opportunities. Clearly, the more relevant their background, the less they have to learn, but there are also a number of concrete steps you can take to speed up the ramp-up. Use rapid and laser-like on-boarding. A best-practice induction process can shave months off the ramp-up of a new salesperson. Take a close look at your own process and ask: Do we transfer knowledge about the company s products, services and operating procedures as soon as possible? People won t remember everything, but it s essential to get them to a basic level of understanding as soon as possible. Use your best salespeople to help create the training. Do we have a shadowing process? Do we help to build the all-important internal network from day one? Previous Imparta research has shown that the best salespeople know how to get things done inside their own organisations (and incidentally, that the best managers spend a great deal of their time getting things to happen for their teams). Introduce new hires to contacts in as many functions as possible, from credit control to technical support and service. 8

10 Do we train new hires in our sales methodology as quickly as possible? Training new hires together helps to build cohorts for mutual support, and focused development (e.g. through a Sales Academy) will embed best practice from the outset. Do we create a sense of teamship and belonging? Helping new salespeople to feel as though they really belong especially if they are not office-based is a key driver of motivation levels, and in turn performance. Inject the new hire into receptive client situations early on. Our research showed that Sprinters often benefited from being introduced into the heart of a customer situation either an existing client or receptive contacts very early in their tenure. This helps to build confidence and gives people a test-bed for their techniques. It is also much easier for a good salesperson to leapfrog from one contact to another, than it is for them to penetrate the hard shell of a cold target. So introduce new salespeople to a few customers or even just warm connections as soon as you can, and sooner than you might think sensible. I m not suggesting you should take them along to meet the CEO at your biggest client, but there will be receptive situations where it makes good sense to get their feet wet. Provide intense coaching. By now most people are aware that focused, functional sales coaching is a primary tool for building capability and performance. It is all the more important in the early days, when accompanied sales calls, joint planning sessions and careful, constructive feedback can help to achieve quick wins and build confidence. Assigning a buddy and a company mentor can also provide additional support. Increase the number of leads The new hires most likely to score early will have a relevant set of contacts that they can work through to identify opportunities. However, there are other things you can do to increase the number of leads they generate in the first year: Look for undersold opportunities. If your sales team are genuinely busy talking to customers and writing proposals, the chances are, there are opportunities that would benefit from increased sales attention. They may be sitting down at the lower reaches of your pipeline, at say 10-30% probability, or they may be dormant customers (or near misses ) that have not been spoken to for a while. Transferring these undersold opportunities to a new starter may cause an emotional reaction in the current account owner, but you need to persuade them that they will do better by focusing their efforts on winning the deals they have. Compensate them if you must, but allow an eager new mind to give these undersold opportunities enough attention to generate significant revenue. 9

11 Look for accounts in the comfort zone. Take an especially close look at accounts that have been a customer of just one part of your business for a long time. Can you use the new salespeople to cross-sell to them? At the very least, use the new hires as a fresh pair of eyes. Work on the quality of your overall lead and referral generation. It goes without saying that stronger lead generation at the company level will translate directly into more Sprinters. Some important questions include: Is a single person tasked with lead generation, or has it fallen down the gap between Marketing and Sales? Is there an active referral request scheme? Have you optimised your Google Adwords and SEO? Are your sales segmentation and target lists up to date? Are you using events for new hires to interact with potential Centres of Receptivity and establish relationships? Improve the new hire s skill and will in networking. Good networking is a learned skill, and early training in this area can pay off. Equally, many otherwise good salespeople are actually quite uncomfortable networking (whether that is informally or within a customer context), and it is the manager s role to ensure that their motivation (or will ) for this task is kept high. Increase average deal size Once an opportunity has been identified, the break-even on a new salesperson can be accelerated by maximising the size of the potential deal. Target new salespeople at your most attractive markets. It sounds obvious, but target new hires at your most attractive vertical markets, geographies and buyer types (unless you have already saturated those markets). The more significant the needs of the market, and the better the fit with what you offer, the larger and quicker the deals will be. If you are investing in growth, don t use new salespeople to fix your problem sectors. Use them to push home an advantage. Use a formal planning methodology. A good opportunity or account management methodology will help people to uncover opportunities in a more systematic way. Many good salespeople can succeed while flying by the seat of their pants. Almost all great salespeople supplement their gut feel with a structured approach to uncover needs and increase deal size. Provide adequate sales support. We ve already mentioned the importance of coaching, and coaching from peers and managers can of course help to drive up average deal sizes (and later, to increase win rates). Equally important is the availability of sales support technical sales staff, bid managers, and so on. These resources broaden your contact base with the potential customer, and make up for gaps in the new salesperson s knowledge. Make sure that you balance the hiring of new salespeople with enough resources to support them in the field. 10

12 Improve the conversion rate The final step in our equation for year one revenue is the conversion rate of the deals that your new hires work on. As with deal size, targeting attractive sectors (where you have competitive advantage) will help to improve your win rate. But you can also: Use a formal pitching process. It takes time to understand how customers view your company s products and services vs. those of your competitors. A good pitching process takes the guesswork out by formalising the process of understanding and responding to your customers decision criteria. It has a measurable impact on win rate in general (for one Imparta client it increased the win rate by a factor of three), but especially so for new hires. Use deal clinics to win deals and build teamwork. In our experience, group sessions facilitated by an expert coach improve conversion rate while also building skills and confidence across the team. The facilitator brings specific skills such as value mapping and stakeholder analysis, while the team brings their own personal insights to the process. Read up on the locus of control. An earlier Imparta research project examined the factors that drive sales performance beyond a core set of sales skills. Of these, the most significant was found to be the salesperson s locus of control. Broadly speaking, people with an external locus of control believe that things happen to them, whereas those with an internal locus of control believe that they influence the outcomes themselves. In selling, an external locus of control can lead to failure as the salesperson doesn t seek out ways to overcome barriers to the sale. Keep an eye out for language that suggests your new hire is taking a defeatist approach, and use coaching to get them to see what they can control. Why Imparta? Imparta is ranked among the top three global sales training companies by US based consultancy ES Research Group, and has been named among the Top 20 global Sales Training Companies for the last three years running by TrainingIndustry.com Our long-term clients include some of the world s leading organisations, including GE, O2, Lloyds TSB, HP, Intel and the WPP Group. We cover sales, marketing and service, and are able to provide the glue that aligns those teams (e.g. sales-enabled product training) as well as in depth expertise in each field. We have a dedicated Client Impact team that can help you roll out a single workshop, or a sophisticated Sales, Marketing or Service Academy covering reinforcement, application, coaching, measurement and accreditation. 11

13 Our expertise in experiential learning design ensures very strong learning impact (we are a pioneer in the world of simulations and remain a Microsoft Gold Certified Development Partner). Imparta has 140 trainers and associate trainers around the world and the capability to deliver large-scale, global roll-outs in local languages. Next steps As we have seen, there are many actions you can take to turn your Distance Runners into Sprinters and unlock growth in the business. You don t have to take every action here, by any means, but the importance of the issue warrants a systematic approach. We have prepared a free Excel tool that helps you to calculate the true cost of a new sales hire for a given team in your business, the impact of different times taken to reach productivity, and a checklist and action planner to help you speed up their ramp-up. You can download this free tool from the same place you got this white paper - We would very much like to hear about your experiences in this area, so please feel free to drop us an to introduce yourself. Naturally, we would also be delighted to work with you to help reduce the average ramp-up time for your new sales hires and to measure and track their first-year profitability as a KPI if that is something you would value. 12