INSIDE presents Building an Effective Sales Organization ... · Pros & Cons of Changing Incentives...

I N S I D E

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WEBCAST SERIES HANDBOOKJULY 29, 2010AUG. 5, 2010

AUG. 12, 2010

Presentation Agenda

Speaker Biographies

Presentation Handouts

Select Articles by the Speakers

Questions? Call us at 1-888-742-5060.

Building an Effective Sales Organization for the RecoveryHow to Position Your Sales Force for Economic Realities

presents

Speakers:

J. Michael Marks Managing Partner, Indian River Consulting Group

Steve Deist Partner, Indian River Consulting Group

Mike Emerson Partner, Indian River Consulting Group

Moderator:

Thomas P. Gale President & Publisher, Modern Distribution Management

Webcast Series Details

Part I: July 29, 2010Part II: Aug. 5, 2010Part III: Aug. 12, 2010

Each session in this Webcast series will last 90 minutes.

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MODERN DISTRIBUTION MANAGEMENT / BUILD AN EFFECTIVE SALES ORGANIZATION / 2010

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Agenda for each 90-minute session:

Contact Information

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MODERN DISTRIBUTION MANAGEMENTFounded in 1967 by J. Van Ness Philip

PublisherThomas P. [email protected]

EditorLindsay [email protected]

1. Introduction to Topic and Speakers (5 mins.)2. Program (60 mins.)3. Q&A (25 mins.)

Part I: Understanding Territory Coverage EconomicsTopics covered:

Why the Model is BrokenRole & Evolution of Field SalesWho is Responsible for Revenue Growth?Territory Design EconomicsDetermining What Your Customers WantTeam SellingGeneralists to SpecialistsSegmented Sales StructuresAction Plan

Part II: Designing Incentives for RecoveryTopics covered:

Pros & Cons of Changing IncentivesThe Art & Science of CompensationSelf-Regulated ProgramsManagement-Regulated ProgramsSalaries, Commission, Bonus & LeverageWhat’s Really at Risk?Territory-Driven OptionsTarget Compensation OptionsTarget CommissionAction Plan

Building an Effective Sales Organization for the Recovery

Copyright © 2010 by Gale Media, Inc. All rights reserved. Modern Distribution Management® and mdm® are registered trademarks of Gale Media, Inc. Material may not be reproduced in whole or in part in any form whatsoever without permission from the publisher. To request permission to copy, republish, or quote material, please call 303-443-5060.

ISSN 0544-6538

Agenda for each 90-minute session:

Part III: Tools of Effective Sales ManagementTopics covered:

Pros & Cons of Making a ChangeMapping Strategy to ActionSales Effectiveness Process PrinciplesWhat Do Best Reps Do Differently?Account TargetingCall BudgetingPipeline ManagementSales Manager’s Best FriendScorecard IllustrationSEP Foundation: Monthly ReviewsWhy do CRM Projects Fail?Action Plan

TakeawaysAt the end of each session, a self-evaluation tool will be provided to participants so that they can apply the lessons from the Webcasts to their own organizations. These will provide a foundation for conversation within your organization and, for those attending the live event, prepare you to ask questions the following week. You can fi nd these tools at the end of each of the three sections of slides in this Webcast handbook.



Mike Marks

Mike Marks co-founded the Indian River Consulting Group in April 1987. Mike began his consulting practice after working in distribution management for more than 20 years. He has written extensively, and is frequently quoted on industry issues. Contact him at [email protected].

Steve Deist

Steve Deist has over 20 years of experience in the wholesale distribution and supply chain arenas. Steve is co-author of the NAW sales management bible The Five Fundamentals for the Wholesale Distribution Sales Manager. He is a highly rated speaker, an instructor at the University of Industrial Dis-tribution and a distribution company board director. Contact him at [email protected].

Mike Emerson

Mike Emerson began his career at IRCG in 1997. He is responsible for managing the fi rm’s compensation practice and also runs many of its chan-nel and research projects. Contact him at [email protected].

Your Instructors

Indian River Consulting Group

www.ircg.com

321.956.8617


Slides

Three Part Series:Three-Part Series: Building an Effective Sales

O i ti f th ROrganization for the RecoverySummer 2010

Mike Marks, Mike Emerson, and Steve DeistDiscussion Leaders

Indian River Consulting GroupIndian River Consulting Groupwww.ircg.com

Tom Gale, President and PublisherModeratorModerator

Modern Distribution Managementwww.mdm.com

F d d i 1967 Founded in 1967 Specialized business resources for wholesale

distribution executives and manufacturers that selldistribution executives and manufacturers that sell through independent distribution channels

In addition to Webcasts, MDM offers a subscription l tt bl d t d tnewsletter, news, blogs, data and more at

www.mdm.com

1

AgendaAgendaPart I: Understanding Territory CoveragePart I: Understanding Territory Coverage

EconomicsJuly 29th at 1 p m EDTJuly 29 at 1 p.m. EDT

Part II: Designing Incentives for RecoveryAug 5th at 1 p m EDTAug. 5th at 1 p.m. EDT

Part III: Tools of Effective Sales ManagementAug 12th at 1 p m EDTAug. 12th at 1 p.m. EDT

2

This Is The UpsideThe old model probably broke in the nineties but the

bubbles hid it until now You will be moving forward now instead of using hope as

a strategy Incremental fixes simply absorb your energy without

creating meaningful, lasting change As you eliminate wasted activities like drive-by sales As you eliminate wasted activities, like drive by sales

calls, you can make the same net profit on lower gross margins

You can gain more of the right customers and they will be more satisfied

3

This Is The DownsideYou break what is currently working and don’t know it

until it is too late A sales force mutiny means that only the worst stay You go down the customer profitability death spiral You fail to invest in the skills and capabilities necessary

for market strategy; e.g. there are no product markets and SIC codes are mostly useless as a segmentationand SIC codes are mostly useless as a segmentation tool

“There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its

success, than to take the lead in the introduction of a new order of things.”a new order of things.

Niccolo Machiavelli

4

Step One: What Is The Role of Field Sales & How Does It Evolve?Sales & How Does It Evolve?

Field sales behavior is actually customer interruption behavior, getting the customer to choose the sales rep’s company as

their chosen s pplier of choicetheir chosen supplier of choice The primary mission for the distributor sales rep is:

– To gain the maximum share of spend available from the major users of product in the assigned geography, becoming the first call and theproduct in the assigned geography, becoming the first call and the recipient of the last look

In the early days, before the model broke, the sales rep:– Chose who to call on and who to ignore– Was a generalist who took care of pre sales customer support,

transaction support, and post sales service requirements, all paperwork, order entry, even ordering from a supplier, physical delivery, returns processing, and collectionsI ll di t ib t (< $5 illi i l ) fi ld l ft– In small distributors (< $5 million in sales) field sales expense was often over 40% of generated gross margin

As margin pressures increased, along with firm size, the roles began shifting from generalists to specialistsroles began shifting from generalists to specialists– The key question is, “Were these incremental costs simply added on or

were they a reallocation of total selling costs?”

5

Step Two: Decide Who Is Responsible for Revenue Growth?Responsible for Revenue Growth?

Johnny Unitas Lost Super Bowl III Before the model broke this was clearly the sovereign ground of the Before the model broke this was clearly the sovereign ground of the

field sales rep and poor performance by an individual resulted in replacement

– They sold the services of an undifferentiated business where they made the only significant difference to the customer

Today it is about breaking the cycle of self-directed sales reps who kill whatever they can find and then you have to service it at whatever

t i i dcost is required It is now about the company taking responsibility for business

development and using the sales force as an offensive weapon to i hgain share

– Companies need a clear sweet spot value proposition– Tools are provided to the sales force

The sales force is aligned to specific missions– The sales force is aligned to specific missions

6

The Beginning Of The ProfessionS Bi th f S lSource: Birth of a Salesman,

Harvard University Press, 2004, Walter Friedman

Ford Motor Company Sales Training on “Model TTraining on Model T

Specialist,” 1925

The key takeaway is: y y“What is your process and

how do you model it?7

Danger: This is an economic and market analysis process that requires discipline and discontinuous adoption

50.0%

IRCG Best Practices Model

30.0%

40.0%

%

h

40.0% This data is from a group of

distributors in

10.0%

20.0%

Gro

wth

20.0%distributors in

2008 right before the financial

crisis. The idea

20 0%

-10.0%

0.0%-10.0% -5.0% 0.0% 5.0% 10.0%

even

ue

-0.5%

-20 0%

is to examine the firms in the top right and see if

they are just

-40.0%

-30.0%

-20.0%

Re 20.0%

-40.0%

they are just lucky or if they

are doing things differently than

-50.0%

12.0%-12.0% 2.4%ROS ROS

the others

8

Territory Design Economics2006 US electrical distributor samplep

Source: NAED Par Reports & IRCG data

50.0%

This is how you find the money for specialists

35.0%

40.0%

45.0%

50.0%

GP$

)

20.0%

25.0%

30.0%

35.0%

Bur

den

(W2/

G

Median:15.6%, $3M Optimum:

8.5%%, $8M

5.0%

10.0%

15.0%

Cos

t B

0.0%$0 $5,000,000 $10,000,000 $15,000,000 $20,000,000

Territory Size

Basic Idea: Taking low-value activities away from sales reps lets them cover a larger set of customers so perhaps you need fewer reps

9

Step Three: Determine What Your Customers Really WantCustomers Really WantSegment #1 You spend g

Critical

pmore money

where it really

matters and

CriticalNeeds

CriticalNeeds

$$$$$$

$$ matters and fund it by spending

less where it

S t #2

doesn’t matter

Segment #2If we don’t understand our segments we spend lots of money but

still miss the mark Understanding segments allows us to tailor our investment

(think field sales time) for maximum effect 10

Team Selling ExampleIn the electronic components distribution industry sales/sales rep went from $1.2M/yr to $4.8M/yr between 1982 and 1992 as they adopted this

specialist model (Source: NEDA Par Reports)

FSR Demand creation ($70K/yr)FSRAssigned

Acct

ISR Demand fulfillment ($45K/yr)

CSR Transaction support ($30K/yr)HouseAcct Pod

ISR

Assigned

Demand fulfillment ($45K/yr)

Specialization increases productivity

FSRFSRAssigned

Acct Demand creation ($70K/yr)

(e.g. ROI from training, recruiting, automation)

11

Generalists To SpecialistsWhy doesn’t your Doctor do the Medicare forms?

Easy to manage

R ll Reps own all relationship equity

Inefficient and Inefficient and expensive

Reps must be jack-of-all-

4 X $130K = $520K 1 X $100K1 X $130K

jack of alltrades

Hard to segment

1 X $130K 1 X $60K1 X $40K

= $330Kcustomers Can’t

implement a t t

Pulling this off means re-designing

strategyeveryone’s roles

12

Another Example Of A Segmented Sales StructureSales Structure

House CustomerCentral Call

C tHouseAccounts

CustomerService Reps

(unassigned)

Center

“Prime”Accounts

InsideSales Reps

(assigned)

TechSpec

“P ” O t id

Routine ordersand info requests

Support

“Partner”Accounts

OutsideSales Reps

(assigned)

Floating or BranchFloating or Branch

13

Do the analysis of what the customers want and are willing to pay for, then design the structure so the service outputs that

you supply equal the service outputs that they demand

Action Plan1. Start gathering customer information to segment by what they need

and are willing to pay for separating demand creation (your investment) from demand fulfillment (what they pay for)

2. Categorize the services that customers want and group them by their economic benefit so you can develop the organization

3. Design a model that uses specialization to improve services provided to targeted customers and lower the recurring costs of selling overall

4. Design appropriate incentive structures so the sales team gets paid to do what you want them to do

1. Design a sales management process that is aligned with your

Session Two

g g p g ystrategy

2. Develop scorecards to track performance and include some warning indicators to catch any design mistakes early

Session Three

g y g y

14

Tune In Next Week Invest some time to see how far you can get on steps

one through three easily. That will create follow-up questions for next weekquestions for next week

For preparation for number four, start gathering some views on the effectiveness of your pay plans and incentive programs

Ask these questions:Has o r c rrent incenti e plan kept o from making necessar– Has your current incentive plan kept you from making necessary territory or organizational changes?

– If your pay plan structure was not an issue and you rearranged everyone’s account deck based on your judgment in a “do over”everyone’s account deck based on your judgment in a “do over”, would there be an increase in revenue?

– Are there some sales behaviors that are not in the best interests of creating long term shareholder value that are driven rather byof creating long-term shareholder value that are driven rather by the incentive structures?

15





16




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17

This Is The Upside

A motivated sales organization that is actively managed with clear objectives is a powerful offensive weaponj p p

Ensures clarity of company business objectives Provides the needed flexibility to achieve company sales

and cost objectives Limits annuities (free-riding) without punishing “A” players Limits annuities (free riding) without punishing A players Provides sales managers the ability to use sales

compensation as a management tool

18

This Is The Downside

Changing compensation programs will be disruptive and consume management bandwidth, and if done g ,

poorly, disastrous Changing pay plans in the absence of effective sales

management ill generate s boptimal res ltsmanagement will generate suboptimal results Changing roles without changing compensation

programs will inhibit real change in behaviors and results p g g A sales force focused on understanding or “gaming” new

compensation programs will not be selling Insufficient modeling of any new compensation program

can create unintended cost (company) or income (participant) consequences(participant) consequences

19

We Actually Did Write The BookEffective design requires a real balance between the art

(differing opinions) and the science (analytics)

StraightCommission

StraightSalary

Order from NAW at www.nawpubs.org

20

NAW is publishing an update later this year

Background

Sales incentives are important for aligning an organization around a shared set of objectivesj

Changing pay programs will only produce desired results if– Objectives are clear, which means some GP$s are more important

than othersthan others– Active sales management exists and the sales organization is

optimally structured

There are a few key and difficult choice points

Sales compensation design is an art and a science. Understanding the options and

tradeoffs is an important first step

21

tradeoffs is an important first step.

Key Concepts – Part 1

Self regulated program (absolute performance)Straight commission– Straight commission

– Goals not used; territory size is a key variable Management regulated program (relativeManagement regulated program (relative

performance)– Performance objectives or expectations influence j p

earnings Target compensation

– Income target established by management and not territory size

22

Self regulated program (absolute Self regulated program (absolute performance)– Straight commission – Goals not used; territory size is a keyGoals not used; territory size is a key

variable

Management regulated program– Performance objectives or expectations

influence earnings by determining applicable commission rateTerritory size still heavily influences– Territory size still heavily influences earnings

T t ti Target compensation – Income target established by

management and not territory size

23Could be $200,000 or $2,000,000 GP$s

Self Regulated Programsg g Key benefits

– Perceived fairness• Income exclusively tied to efforts• Absolute instead of relative performance

– Easy administrationEasy administration – Cost is completely variable

Key weaknesses– Annuity and free-riding– Lack of focus and/or accountability

• All $s are created equal / reps establish priorities -and/or-• Opportunity and growth not a consideration

– Territory sovereignty and/or inappropriately assigned accounts

24

Management Regulatedg g Key benefits address all weaknesses of self regulated

programsprograms– Annuity and free-riding– Lack of focus (all $s are created equal)

T it i t d/ i i t l i d– Territory sovereignty and/or inappropriately assigned accounts

Key weaknesses– Burden and/or difficulty of setting targets – Program administration– Participants’ perception– Participants perception

25

Key Decision

Accountability always sounds goodFor accountability to exist expectations must exist as– For accountability to exist expectations must exist as well

Moving from a self regulated to a management g g gregulated program is not easy– Requires an ability to set goals– Requires an ability to tell sales reps that growth isn’t

an option and/or they are not self-employedWh th th f l i ti iWhether the use of goals is an option in program

design greatly influences alternatives

26

Key Concepts – Part 2

Salary – an amount paid as long as employment maintained regardless of performancemaintained, regardless of performance

Commission – a rate multiplied by an amount, typically GP$s

Bonus – a set amount or percent of salary used to reward performance or achievement of objectives– Not to be thought of as “extra”– Not to be thought of as extra

Leverage – a way that multiplies the outcome of one's efforts, also known as risk/reward, represented by the slope of the payoff function

27

Illustration

A salary allows for the use of leveragethe use of leverage– Risk is gap below

goal (lower income)– Reward is gap above

goal (higher income)

Two considerations– How much income is

really at risk?– How much additionalHow much additional

risk/reward is appropriate?

28

What’s Really At Risk?

Many companies that pay straight commission are under the impression that 100% of pay is at risk p p y

The reality is different

Out of a sample of– Out of a sample of 1,000 sales rep months• 96% were > 50% of• 96% were > 50% of

average• 91% were >60% of

averageg• 84% were > 70% of

average• 73% were >80% of

29

average

Territory Driven Options

Straight commission = single rate multiplied by GP$s Varying rate commission = different rates multiplied by Varying rate commission different rates multiplied by

different categories of GP$s Commission multiplier = different rates multiplied by

$overall GP$s with rate determined by performance to goal in multiple areas

30

Territory Driven Example

Existing commission rate until GP$ goal or previous year’s GP$s achieved– Previous year’s GP$s equate to previous year’s income

Above GP$ goal or last year’s GP$s– Different commission rates based on achievement of secondary factorsy– 14% for achievement of no secondary factors– 20% for achievement of one secondary factor – 26% for achievement of two (all) secondary factors ( ) y

Logic – Consequences of sales reps not

reaching previous year’s g p yearnings are penal enough

– Consequences will be lower increase in earnings if other

bj ti t hi d

31

objectives not achieved

Target Compensation Optionsg p p Performance adds or subtracts from predetermined

amount instead of building up from $0amount instead of building up from $0 Target compensation disconnects incomes from

territory size – Facilitates the movement of accounts in and out of territories– Allows double counting of GP$s or dual account assignment – Can keep costs from scalingCan keep costs from scaling

directly with GP$s– Allows the use of salaries

without decreasing leveragewithout decreasing leverage

Structure Alternatives– Target commission

32

– Bonus– Bonus and commission

Target Commission

Incentive determined by adding or subtracting from a target amount g

Amount added or subtracted based on difference between actual GP$s and goal GP$s and rate

Single rate or multiple rates can be used– If multiple rates, achievement in secondary objectives

determines rates

33

Target Commission Example

Commission rate below goal is 20% (existing rate) Above goal commission rate is 14%, 20%, or 26%g %, %, % Applicable rate based on achievement of secondary factors

(strategic suppliers, target accounts, etc.)– 0 secondary factors = 14%0 secondary factors 14%– 1 secondary factor = 20%– 2 (all) secondary factors = 26%

If sales rep is $100 000 below goal $20 000 is subtracted from If sales rep is $100,000 below goal, $20,000 is subtracted from target commission

If sales rep is $100,000 above goal, an amount between $14,000 and $26 000 is added to target commissionand $26,000 is added to target commission – $14,000 if no secondary factors are achieved– $26,000 if both secondary factors are achieved

Typically a salary (floor) is also included Typically, a salary (floor) is also included

34

Target Commission Illustration

In this illustration: – Sales rep has $500,000 GP goal– $60,000 salary– $40,000 target commission

Main impact is hitting overall GP$ goal

Below goal impact unchanged except goal likely to be an increase over prior year (assuming performance

60% f )>60% of goal) Above goal income

moderately better or ff d di

35

worse off depending on secondary factors

Action Plan1. Start gathering customer information to segment by what they need

and are willing to pay for separating demand creation (your investment) from demand fulfillment (what they pay for)




1. Design a sales management process that is aligned with your g g p g ystrategy


Session Three

g y g y

36

Tune In Next Week Invest some time to see how far you can get on step four

and prepare follow-up questions for next week I ti f t fi d i th i In preparation for steps five and six, gather some views

on the effectiveness of your current sales processes Some questions to ask yourself: Some questions to ask yourself:

– How would you rate your sales organization’s accountability for performance?

– Do you have clear measurements that accurately indicate– Do you have clear measurements that accurately indicate individual rep performance?

– Do you have explicit processes for marking out and managing sales growth or is it just assumed to be a part of normal jobsales growth or is it just assumed to be a part of normal job duties?

– Do you know the activities and habits that separate your top performers from the others?performers from the others?

– If you require call reports how are they actually used?

37





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39

This Is The UpsideThere is a proven science and set of analytics that you

can apply to sales managementpp y g Identifies and eliminates wasted activities like call reports Allocate sales resources to growth instead of simply

servicing existing volumes Quantum leap in accountability

40

This Is The DownsideYou build it and no one comes

Lack of strategic focus leads to too many conflicting Lack of strategic focus leads to too many conflicting sales programs and initiatives (“flavor of the month”)

Making a limited set of expectations mandatory will initially create pushback from sales reps

Adding to existing jobs, without taking things away, will reduce adoption probabilityreduce adoption probability

41

Mapping Strategy to ActionStrategic Objectives

Rep Roles Success Metrics (KPIs, Scorecard)

Best Practices (tools and activities)

Increase OEM sales to grow revenue and improve margin mix

Leverage MRO industrial and safety relationships to sell OEM products

• OEM product revenue• OEM pipeline

opportunities qualified and won

• Introductions to engineering decision makers

• Design opportunity pipeline

Become supplier of choice for high growth commercial contractors

Identify and nurture survivors who are capable of taking permanent market share

• Target contractor revenue growth

• Business training course attendanceC i t

• Territory research to identify targets

• Account targeting• Value of service modeling

share • Consignment agreements

• Conducting business training courses

Reduce selling costs for t ti l

Transition low potential accounts to

lt t h l

• Account transitions to inside reps

• Call budgeting allocation to high potential accounts C did t d l t ltransaction only

customersalternate channelsMentor junior inside sales reps

• Revenue retention of transitioned accounts

Candidate development plans• Joint sales calls

Part 1 Part 2 Part 3(today)

42

Sales Effectiveness Process Principles

1. Alignment with strategyTailored solution for your unique situation and objectivesy q j

2. Accountability for performanceMutual commitments between reps, managers and the organization

3. Create the conditions for learning and ownershipClear expectations + stress from deficiencies + tools to resolve

4 Give more than we take4. Give more than we takeAvoid the CRM trap

5. Proactive managementMeasure results, manage activities

“I love to learn but hate to be taught.”- Winston Churchill

43

SEP ComponentsProactive Responsive

PlanningAccount Targeting

Call Budgeting

ExecutionTargeting Tasks

Opportunity Pipeline

ResultsScorecard

Toolkit

FeedbackMonthly Review

Applying some science to our largest single expense

y

Applying some science to our largest single expense

44

What Do the Best Reps Do Differently? How do they allocate their time? How do they avoid low-value activities? How do they determine which customers to

see and how often? How do they prospect? y p p What do they discuss with customers? What answers do they have for typical

customer objections?SalesMojocustomer objections?

How do they negotiate pricing? How do they manage others internally within

our company?

MojoPrescription Only

our company? Where and when do they seek help? How do they develop their own skills?

These questions form the basis of a Best-of-the-Best design session

Account Targeting Targeting is the process of selecting high-potential

accounts to receive intense sales focus It represents a shift from transaction-driven (reactive) to

strategic and customer-driven (proactive) The key elements are: The key elements are:

– Numeric goals for each target that roll up to the territory quota

– Customer profiles– Target task plans– Refinement based on better

information and task progress

Reps create their own goals and penetration plansStrategic customer penetration plansStrategic customer

intimacy

46

Call Budgeting Look ahead 1 week, 1 month and/or 1 quarter Determine the total number of calls available (hours available / average call time

including travel) Identify the strategic and tactical factors that should determine call frequency Develop a budget for calls to customers Compare actuals to budget at the end of each period and take corrective action

A tool for account managers, not bosses

47

Pipeline Management Provide visibility of key opportunities across the entire company and

keep them from falling through the cracks Assign resources based on true potential rather than anecdote Assign resources based on true potential rather than anecdote Excellent success metric and analysis tool

– Rate of generation, qualification, winC l ti– Cycle times

– Loss reasons and alternative sources– Variations by customer segments (and abusers)

V i ti b d t t d b h– Variations by product type, vendor, branch

$10MCaution: keep it simple!

Cycle time

$5M

Caution: keep it simple!

WonBidRFIIdentified

Cycle time$1MBilled

48

The Sales Manager’s Best Friend

Scorecard design • 3 – 5 results metrics• 3 – 5 strategy success metrics• All numbers roll up: rep manager branch division company • Rankings within each position• Updated daily, logged monthly• Tied directly to compensation

Are they discussing their y gopinion of the score?

49

Scorecard IllustrationMetric Perf Rank Class Leader Toolkit Resources

Revenue to Goal 102% 16 Lennon: 144% Targeting BPs, Consult BPs

Gross Profit Growth 3% 32 McCarthy: 26% Pricing BPs

Pricing Realization -2% 92 Starr: +4% ABC tool, negotiation tool

Pipeline Opportunities Won $243K 3 Harrison: $301K Opp Identification BPs

Target Account Growth 23% 2 Daltry: 25% Targeting BPs

Customer Training Courses 4 51 Moon: 11 Consult BPs

Pipeline Opportunities Qualified $488K 19 Townsend: $752K Opp Identification BPs

Specialist Utilization 8% 83 Entwhistle: 30% Specialists BPs

Overall Performance Score 19 Hendrix: 1

Estimated Bonus (current performance) $21K

Potential Bonus (all targets met) $32K

50

Results Measures Performance Drivers

SEP Foundation: Monthly Reviews

Every sales manager must conduct a formal territory performance review with every rep at least monthly

The managers #1 job is to improve reps’ performance Reviews develop the habit of making and meeting formal

it t ti l l d i lt Thcommitments, creating real plans and measuring results. They create a culture of accountability.

Monthly frequency creates urgency limits microurgency, limits micro management

Every sales rep needs support, guidance coaching and feedbackguidance, coaching and feedback

51

Why Do 70%1 of CRM Projects Fail? Takes more than it gives

– Data entry intensive– Complex functionalityComplex functionality

Threatens reps’ autonomy – Asks them to divulge key customer information

Micro manages their activities and interactions– Micro manages their activities and interactions Poor strategic fit

– Designed for light touch, B2CDi t ib ti l f f d t– Distribution sales force focused on customer intimacy

Implementation shortcomingsImposed from the top down

Implementation death spiral:

Incomplete data– Imposed from the top down– Business processes insufficiently designed

(“solution in a box” fallacy)Not aligned with strategy management processes

Reluctance to use

– Not aligned with strategy, management processes, performance measurements, compensation plans

1. Giga Information Group study, 2002 52

Giving More than We Take(An Example)(An Example)

Flexible reporting instead of email blizzard and calling IT (~8 hours/month) Fewer low value customer calls (~24 hours) Fewer low value customer calls ( 24 hours) No more call reports, contact entry or activity tracking (~10 hours) No more guessing or wondering about incentive pay (intangible) No double entry of quotations (~8 hours) No double entry of quotations ( 8 hours) Annual reviews are far less painful (intangible)

Activity Estimated Time Per MonthView scorecard 15 mins each week 1:00

Budget calls at start of month 15 mins per month 0:15

Log calls and opportunities each week 15 mins per week 1:00

P f t it i 30 i th 0 30Prepare for territory review 30 mins per month 0:30

Conduct territory review 30 mins per month 0:30

Target account planning and profiles 4 hours per month 4:00

Target account management and goals 30 mins per week 2:00

53

Target account management and goals 30 mins per week 2:00

Total (out of ~180 working hours/month) 9:15

Action Plan1. Start gathering customer information to segment them by what they

need and are willing to pay for separating demand creation (your investment) from demand fulfillment (what they pay for)




5. Design a sales management process that is aligned with your strategy


54

Indian River Consulting GroupFactor DescriptionFactor Description

Our Business Providing business advisory services to the executives who are responsible for results in their firms

Our Brand We will deliver what we promise and we are very careful what weOur Brand Promise

We will deliver what we promise and we are very careful what we promise

Our Expertise Domain

Strategy development, sales effectiveness, incentive design, channel design and channel management

Our Story We provide expert insight based on experience along with research, and where necessary provide the support to implement major change that improves competitive performance for our client

Our Four 1 Wholesale distributors; 2 Manufacturers who go to market throughOur Four Customer Segments

1. Wholesale distributors; 2. Manufacturers who go to market through wholesale distributors; 3. Equity firms or hedge funds who are interested in, or own a business in, the first two categories; and 4. Service groups of wholesale distributors including marketing groups, trade associations, trade press and service providerstrade press, and service providers

Our Four Key Differentiators

1. Clients work with partners, not junior staff; 2. Significant depth and multiple relationships within many narrow verticals; 3. Can provide either advice or project implementation, as appropriate; 4. Pricing is fixed by project and we aren’t trying to sell the next job at the end of the first

www.ircg.com


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As published in Modern Distribution Management



The Trouble with ‘Best Practices’Book excerpt: Examine fi rm’s strategy, market position before making change

The authors of Value Creation Strategies for Whole-saler-Distributors implore distributors to defi ne strategy in terms of closing gaps with the market rather than operational weaknesses. Tactically driven initiatives may meet intermediate goals, but they often produce unsatisfactory business outcomes.

This is an excerpt from Value Creation Strategies for Wholesaler-Distributors reprinted with permission from the NAW Institute for Distribution Excellence. Order the book at www.naw.org/valuecreationstrateg.

By Steve Deist, Michael Emerson and Michael Marks

Strictly speaking, best practices are business op-erations that are statistically correlated with su-perior fi nancial performance. The study of best practices is now widespread and has contribut-ed to signifi cant productivity improvements by wholesaler-distributors across all lines of trade. The most comprehensive review of distribu-tion best practices was the 1996 report Facing the Forces of Change: Transforming Your Business with Best Practices, which examined more than 150 business processes (Arthur Andersen, 1996).

The best practices approach originated from a simple, almost obvious premise: At some level, most business organizations do the same things. Therefore, by emulating high-performing orga-nizations’ processes, we can quickly fi nd ways to improve our own business. Intriguingly, best practices offer a way to learn from any organiza-tion in any industry, provided that both organi-zations share a common process.

One of the most beguiling aspects of a best practices approach is that it offers a straight path to the solution without detouring to examine underlying assumptions, market forces, or orga-nizational problems. Our research indicates that wholesaler-distributors are especially suscep-tible to this enticement. Their culture of respon-siveness can make them impatient and skeptical of overly complex analysis.

As a result, they are more likely to initiate process improvement projects for tactical rather than strategic reasons. By this we mean that the justifi cation for the project was a perceived defi ciency against some form of best practices standard rather than an opportunity to close a market gap. It is important to emphasize that tactical does not necessarily mean bad. We ex-

plore the implications of bottom-up versus top-down process improvement in the next section.

Improvement projects often spring from the perceptions of a problem (such as losing sales events) for which wholesaler-distributors seek a straightforward solution (such as more training). This approach is consistent with the world view of winning more events than losing, which we described earlier. Based on a sample of current and past projects undertaken by many compa-nies, more than two-thirds of major wholesaler-distributor process improvement initiatives are driven by tactical considerations instead of closing market gaps.

Most Common Improvement ProjectsHere are the most common process improve-ment projects:

Sales force automation (SFA) and customer relationship management (CRM) software. These projects are often begun as a reaction to falling sales, lagging sales force productivity (usually based on line of trade benchmarks such as performance analysis reports) or a perceived lack of accountability or motivation on the part of the sales force. Software vendors offer canned best practices and tout improbable sales growth fi gures.

Training. It is hard to argue with the “more is better” attitude toward training, so this is a common solution for a wide variety of prob-lems. Training courses are often used to educate staff on “what we need them to do,” focusing on motivation as much as skills development.

Inventory management. These projects are usually initiated to address poor inventory turns (again, usually based on line of trade bench-marks) or perceptions of inadequate fi ll rates. We use the term perception because it is surpris-ing how few wholesaler-distributors measure their true customer service levels reliably. New software usually plays a big role in these proj-ects.

Pricing. At an executive level, pricing initia-tives are sold as a simple matter of increasing gross margins. There is usually more skepticism farther down the organization, where the inher-ent risks of snapping customer trust are often more fully appreciated. These projects typically attempt to do two things: apply mathematical algorithms to identify opportunities to increase prices and apply process changes to reduce sales



rep discretion in pricing. Unfortunately, by using best practices as a

starting point, wholesaler-distributors often end up creating initiatives that are poorly aligned with their market positioning. Although they may or may not actually degrade the company’s value proposition, poorly aligned projects rep-resent a diversion of resources and focus from more strategically vital areas.

Solution First Falls ShortOur research revealed an interesting pattern of outcomes. Tactically driven initiatives tend to have higher success rates in meeting intermedi-ate project goals, but they often produce un-satisfactory business outcomes. More strategic projects are often diffi cult to execute, but when they are completed they can have a striking impact on bottom-line performance. The link to strategy tends to make these projects “big effort for big reward” propositions.

Some examples of tactically driven initia-tives from our research are as follows:

A large computer products distributor consolidates its distribution centers and decides to implement a new warehouse management system (WMS). One of the primary goals for the WMS is to increase picking productivity.

Pickers represent the majority of its ware-house staff, and informal benchmarking indi-cates that the company lags behind its peers in lines picked per man-hour. The distributor designs a highly automated outbound process that incorporates carousels, a pick-and-pass conveyor system, and batch picking for high-velocity items.

The company succeeds at greatly improving picks per hour, but pays a huge price: It fi nds itself no longer able to meet its 7 p.m. ship-ping cutoff time and experiences considerable sales erosion as a result. This company failed to recognize that a large portion of its customers (smaller retailers and system integrators with limited working capital) opted to place orders for overnight delivery late in the day, after they knew what they would need for the next day. As a result, 90% of the distributor’s orders were received after 4 p.m., creating a very narrow window for processing them in the warehouse.

In its old warehouses the company could simply fl ood an area with pickers to meet the deadline. In the new, modern distribution centers, the carousels and conveyors created a rigid bottleneck. Ultimately, all the expensive equipment had to be ripped out. From a mar-ket standpoint, the ability to compress a day’s worth of activity into a three-hour window was

far more important than the “effi ciency” of the process. The solution was based on measuring the wrong thing.

An offi ce products distributor becomes anxious to consolidate its supplier base. It believes that by carrying “12 different kinds of toilet paper,” it is foregoing volume rebates from vendors and reducing service levels to custom-ers. The distributor convenes a cross-functional team to tackle the problem.

The team makes quick progress, developing a list of preferred vendors and products for an entire category. But the project stalls when sales reps are asked to convert customers from their current brands to the preferred suppliers. How hard should the company push a reluctant cus-tomer? How much time should reps divert from creating new sales to converting existing sales? Which customers are too important to risk? Which suppliers are too important to ignore? The distributor realizes that these questions are impossible to answer without a more clearly defi ned strategy.

Based on benchmarking studies, a con-sumer products distributor determines that its operations and customer service costs are too high. It evaluates various process improve-ment methodologies and selects an approach based on Six Sigma. It methodically analyzes the steps involved in order processing, warehouse picking, and customer returns to determine the sources of costly exceptions. It designs standard process fl owcharts to reduce variations and implements order minimums and other policy changes to reduce exceptions.

As a result, exceptions go down, but so do orders. Many customers stop buying anything from the distributor because they no longer have the option of returning the one item they are not sure about.

These examples show both the appeal and the risk of the best practices approach. It is of-ten much easier to buy material handling equip-ment or send staff to a training class than to grapple with strategic questions. But the reality is that the very concept of best practices requires a strategic context.

If your company is pursuing a price leader-ship (operational excellence) strategy, then Six Sigma is potentially a very powerful tool, as it can help you drive cost-killing variations out of your processes. In contrast, if you are using a customer intimacy approach, variations are at the very heart of your value proposition. Wheth-er or not Six Sigma is statistically correlated with superior fi nancial performance in general,



it is likely to be poisonous to your particular business.

By starting with a solution instead of a diag-nosis, the best practices approach can also fail to address root causes. It is usually very diffi cult to drill down from an income statement or balance sheet to a specifi c process defi ciency. Consider, for example, the simple measurement of inven-tory turns.

Most distributors must carry a mix of fast- and slower-moving items to satisfy their cus-tomers. Poor inventory turnover could indicate a preponderance of dead stock, potentially caused by poor forecasting or overbuying to get better pricing from suppliers. However, it could equally mean that your supply chain is unable to meet demand for higher-moving items, thus reducing the portion of high movers in the aver-age fi gure for assets. The solution to the former problem (buy less) is diametrically different from the solution to the latter (buy more).

Strategy First SuccessesCreating a clear and compelling link between a project and a company’s market strategy certain-ly does not guarantee its success. But examples from our research show that good linkage helps to ensure that the initiative addresses critical is-sues and opportunities.

An industrial distributor in the Southwest faces an insurmountable disadvantage against national competitors in serving Fortune 500 companies. Local plants are moving a growing portion of their spend to negotiated contracts, which are tendered at the corporate level, typi-cally outside of the distributor’s sales area.

The sales force is adept at providing a high level of customized services tailored to unique customer situations. This skill does not protect them from losing business to national agree-ments, so they decide to re-evaluate the market.

As a result, the distributor redefi nes its target customer as a plant that is not a division of a Fortune 500 fi rm (so they will not lose the local relationship to a top-down corporate deal) and has poor supply chain management skills (so they value the heroic recovery capabilities of a local sales rep).

After the distributor determines that the size of this customer base is more than suffi cient to meet its long-term growth objectives, it proac-tively retasks its sales force to focus solely on these customers by using performance measure-ment tools and compensation plans. The result is a slightly lower growth rate, but higher margins. More importantly, the distributor ends the risk of losing a major revenue stream due to events

beyond its control. The company continues to sell to Fortune 500 plants, but at higher margins.

A building products distributor analyzes the economics of its lumber yard customers. It determines that because those customers focus on merchandizing more than buying, they place a high value on distributor bundling. That is, the ability to buy a broad range of items from a single supplier to reduce the time, complexity, and cost involved in purchasing.

The distributor also concludes that the yards have very little economic incentive to seek ex-ceptions to builder specifi cations. Based on these insights, the distributor redeploys its sales force from calling on lumber yards to calling on build-ers. The intention is to induce builders to specify a marquee brand of windows the distributor carries. Since the company is the only supplier in the market that offers both a broad range of building supplies and the specifi ed window, the strategy works brilliantly. The distributor’s growth rate is four times the average of its com-petitors.

A heating, ventilation, and air condition-ing (HVAC) equipment distributor in a rural area recognizes that the low sales density of its territory represents an opportunity. Its core contractor customers highly value local inven-tory because they are typically generalists who cannot predict what they will be working on tomorrow.

Since the cost of stocking inventory at a branch is largely driven by transportation, the distributor analyzes its logistics processes. It concludes that the best way to lower cost enough to justify local inventory is to deliver only full truckloads to the branches from a dis-tribution center.

But to do so while maintaining daily deliv-eries, the distributor realizes that it must sell twice as much of something every day. It embarks on an intensive program to build sales volume at branches by offering a wider range of relevant products, including electrical supplies, tools, and consumables. It also drops prices of its core HVAC products to stimulate demand, expands branch opening hours, and actively markets to consumers. Competitors are driven out of some smaller markets completely.

The key was for the distributor to let go of some long-held assumptions about its core competency (its HVAC expertise) and fi nancial performance metrics (gross margin percent, for example).

A specialty components distributor exploits a niche market by supplying military-grade components to airframe manufacturers and



other risk-obsessed customers. It has aligned its entire organization to meet their unique needs, creating a robust barrier to competitors. Procure-ment and warehousing operations are ISO-cer-tifi ed, with strict procedures for quality inspec-tion, lot tracking, and documentation control. Sales reps have technical backgrounds and are fl uent in the language of “engineering change orders,” military specifi cations, and cost-of-failure calculations. This company would never have achieved its great success by following the standard wholesaler-distributor effi ciency cookbook.

A small oil and gas products distributor wants to expand geographically, but chooses to open in smaller markets instead of large cities. They recognize that in smaller towns there is a stronger desire to support local business. By hiring local staff from competitors, they acquire local relationships.

By staying under the competitive radar screen, the company is able to generate solid growth at higher margins. This model creates a strong market position in a short period of time

and the company is acquired for a large multiple by a consolidator. Part of the premium was due to the lack of customer overlap.

These examples share a similar method-ology. The fi rst step is determining strategic priorities based on a genuine understanding of customers’ economic drivers. Next, identify the critical few elements for success. Finally, align the company behind these necessary changes.

Few executives interviewed for this book explained their approach to us in these terms. From their market-driven perspective, they simply sensed a need in the market and reacted forcefully.

Every company has a limited number of employees to devote to improvement projects, limited fi nancial resources, and limited execu-tive bandwidth. Any investment in noncritical areas represents an investment that is not made in critical areas. The strategic approach is the best method that we have found for identifying those few critical areas.

Align Selling Resources to the MarketStrategic approach is needed to maintain revenues after a sales force reduction

For distributors who have had to implement reduc-tions to their sales force, there is a legitimate concern that as the number of salespeople go down, so will revenues. A three-step process exists to help mitigate these potential effects.

By Mike Emerson

One question many distributors are asking is, “How can I reduce costs without losing sales?”

The answer: “Align your selling resources more closely with the market.”

Achieving this is not simple, but a proven three-step process for doing so does exist. The steps: Segment customers, utilize effective sales management practices, and ensure incentive structures are in alignment. This article will discuss the importance of each step and illus-trate how the outcomes from each will enhance profi tability.

Segment CustomersCustomers ascribe different value to the services provided by wholesale distributors, yet often-times distributors offer the same level of service to everyone. Some customers are price-conscious

and whichever source offers the lowest price will receive their business.

Other customers assign value to product availability, extended credit terms, the ability to procure most of the products they need from a single source, frequent delivery, and so on.

The sales support provided by a distribu-tor is no different when it comes to infl uencing customers’ purchasing behavior. It has material impact on some customers and very little, if any, on others. Evaluating the customer base with a critical eye and understanding their economic drivers is essential. You can start by asking the following questions:

How much does a given customer rely on you to help select products or do they always know what they are going to buy?

What is their ratio of purchases relative to quotes? How have the products purchased by the customer evolved over the last few years and how do you expect them to change in the immediate future?

How much untapped opportunity exists within the customer? How many strong rela-tionships exist with the customer, aside from the outside salesperson? (The inside relationship is



key, if there is one.)Is the customer signifi cant enough to your

business that having an outside salesperson call on him is necessary strictly from a defensive per-spective? Do sales reps primarily fulfi ll demand that already exists or do they create demand by, for example, showing customers how a product or service can improve productivity?

The answers to these questions will identify what type of sales resource is appropriate for each customer based on a customer’s needs. Customers that require assistance when select-ing products clearly need active involvement while those that use internal capabilities to select products need passive involvement.

Customers that rarely purchase but are constantly asking for quotes likely make buying decisions based on price, and an operational fax machine is the only selling resource required to maintain or grow sales within these customers. Customers whose purchases have changed little may only require support from inside sales as fulfi llment, not selling, is all that is required.

The objective of this analytical customer segmentation exercise is to identify how custom-ers can be aligned with selling resources so that their needs are met at the lowest cost.

Most companies that complete this analysis will fi nd that more than 20 percent of the ac-counts assigned to an outside sales representa-tive can have their needs met by a lower cost function. This translates to an opportunity to reduce outside sales staffi ng by an equivalent amount.

Utilize Effective Sales Management PracticesSales productivity is frequently measured by sales or gross profi t per person. One of the rea-sons this metric is commonly used is because it is easy to measure.

Companies have no diffi culty obtaining sales information and the number of individu-als employed, but it gives no insight into the activities that generate the results. It is similar to measuring how hard an engine is working by looking at the speedometer instead of the tachometer.

To understand sales productivity more, you must analyze activities rather than results to gain the insight needed. A helpful exercise is to look at the accounts in a sales territory and assign a required call frequency for each. Fac-tors to consider would be account size, growth potential or likelihood of additional business, level of support required, and risk of business being lost. Accounts would typically be assigned a weekly, bi-weekly, monthly or quarterly call

frequency. When all the accounts are assigned a fre-

quency, sum the required calls per quarter or year. Take the total required calls and divide by the number of available selling days. If you’re like most companies we work with, you’ll be surprised at how low the number required is.

This by no means is an indictment of a sales force work ethic nor does it imply that 30 per-cent to 50 percent of their time is idle when call duration is fi gured into the equation.

Of course, calls are being made to prospects that have yet to be added to a rep’s account base, and essential activities must be performed in addition to making sales calls. However, we have found that idle capacity exists within a sales force and that this capacity can be used productively through effective sales manage-ment practices.

In our book, What’s Your Plan: Smart Sales-force Compensation in Wholesale Distribution, we describe effective sales management as, “a structure for continuously improving sales force performance through focus, discipline and a coaching process built on a platform of account-ability.” For the sake of this article, we must presuppose that a “platform of accountability” already exists.

(If not, we suggest you visit our Web site, www.ircg.com, where you will fi nd many ar-ticles that are helpful on instilling a platform of accountability.)

Sales management is the piece that takes the analysis performed so far and makes it action-able. Sales managers should present sales reps with the required sales calls per day analysis. The information should be presented for discus-sion, not as a “gotcha’.”

The goal is not to accuse the sales rep of being lazy or unproductive. The discussion’s context should be that the analysis conducted illustrates that internal or external obstacles may exist that prevent sales reps from maximizing their time growing sales.

Two areas should be explicitly addressed during this discussion. The fi rst is the identifi -cation of internal obstacles that are consuming sales rep time and preventing them from grow-ing sales. Once these areas are noted, manage-ment should consider whether the value of having sales reps undertake these activities is greater than the return that could be realized if the reps were working with customers and potential customers.

Ask yourselves, what would happen, if reps stopped doing some of the reports required of them, or if someone else took responsibility for



checking inventory or sourcing products for special orders? Being able to eliminate perceived low-value activities from sales reps will, by itself, increase productivity.

The second focus area should be around targeted growth. The overall point of this part of the discussion is increasing productivity. This step is about what the best use of a salesperson’s time is. Selecting a handful of target accounts (3-5) and creating action plans for gaining sales is ideal.

Action plans including activities, dates for completion and the individual responsible. Gen-erating $50,000 in new business is the outcome of an action plan; not a step in it. Considering the urgency that exists today for some compa-nies, these action plans should be of no more than three months duration.

Target account action plans help reps to be-come more proactive and thoughtful about how they spend their time. Instead of helplessly fret-ting about the soft economy, reps can use target-ing to take charge of the situation. You can read more about targeting and other sales manage-ment best practices in our book, 5 Fundamentals for the Wholesale Distribution Sales Manager.

Once the action plans are created, the sales manager and rep should meet bi-weekly to review progress. There is nothing like a deadline to instill focus, discipline and create a sense of immediacy.

Plan, act, and measure the results. In the near-term, the results likely won’t be measured by the income statement but by the fact that a meeting occurred or an appointment was made. In the medium term, targeting opportunities is one of the best ways to maintain or grow overall revenues.

Ensure Incentive Structures Are in AlignmentTo reinforce the importance of the initiatives derived from the process outlined thus far, it is a good idea to consider the structure of the sales forces’ pay plan.

Based on the outcomes of the steps thus far, it is likely that fewer outside sales territories exist and accounts will have been absorbed by the remaining sales reps. Inside sales may have greater responsibilities than before, e.g. making calls to accounts when this is all that is necessary to meet account needs, and sales reps are likely to have action plans for growth with a handful of target accounts.

Consideration should be given to ensuring that incentives are aligned with these changes. Structuring bonuses or commission rates to place a premium on target accounts is one pos-

sibility. Moving from a commission program to a salary and bonus program to account for sig-nifi cant shifting of accounts is another. Provid-ing incentives to inside sales for retaining and growing business for accounts they are assigned would also be worth some thought.

It also makes sense to ensure that the basic principles that many distributors use as part of their pay plans are still applicable. Some compa-nies structure their incentive programs such that growth over prior year is the threshold for vari-able pay to kick in. If this is the case and growth over the previous year is completely unrealistic, it may make sense to adjust the threshold to a reasonable stretch goal.

Other companies base incentives on ag-gregate sales or gross profi t dollars generated. These companies may want to consider modify-ing their programs so that reps can replace some of their lost income through successes that are within their control. The market may be down 20 percent, which means a rep would be wildly successful if his or her territory were only down 5 percent, however, this would still result in a pay reduction relative to last year. Bonuses for new business or increases in the sales of higher margin products may prove motivating.

At the end of the day, the No. 1 thing is to ensure that “A players” earn incomes necessary to endure the downturn, as these individuals will be critical to capturing market share when conditions improve.

Through the process outlined in this article, wholesale distributors can tackle the daunting task of changing their selling effort to deal with today’s economic situation.

Reorganizing sales territories and roles, increasing sales productivity, and changing compensation programs are never easy. The silver lining is that when conditions improve, sales growth and profi ts are likely to be at levels above where they were historically because of these changes.



Missing Sales ManagementA sales effectiveness program requires good execution

By Mike Marks & Mike Emerson

The vice president of sales at a distributor of safety products was called into a meeting with the president of the company. The president in-formed the V.P. that he was not pleased with the progress being made in a number of areas. His displeasure centered on market share growth and profi tability.

The company, founded in the ’20s, had grown through acquisitions to exceed $200 million in sales. The president was eager to continue this growth. He recognized that the company had become highly leveraged with its most recent acquisitions.

His father and grandfather, still on the board of directors, were not shy about taking money out of the corporation. He knew that if he was to continue the growth demonstrated in the past he would have to do it organically, through improved performance in all areas leading to increased market share.

The president reminded his V.P. that he had approved spending over $100,000 on consultants to create a new incentive plan and the develop-ment of a sales effectiveness program, with the key objective being increased market share with-out sacrifi cing margin. The new incentive plan and the sales effectiveness program, launched si-multaneously, had been in effect for six months. Yet sales were actually falling behind last year’s levels. Market share was stagnant at best. The V.P. tried to explain that these things take time, that the salesforce was just now getting comfort-able with the new incentive plan, that there had been a lot of grumbling over the fi rst six months. He also tried to explain that the sales effective-ness program had created a new culture the salespeople had yet to get accustomed to.

The president informed his vice president that he had 30 days to put together a steering committee and determine why the results were unsatisfactory. The V.P. decided to form a team of his regional managers, his two best sales man-agers and his two best salesmen.

The vice president’s fi rst meeting with his team told him that all things weren’t what they seemed. It was as if they were in a comfort zone and focused on things only they deemed im-portant. The two sales managers in the group confi rmed that over 95% of the salespeople were in compliance with the sales effectiveness

program. But on further investigation it became apparent that the compliance was more admin-istrative than philosophical. The entire sales force seemed to be missing the point. Several key constraints were discovered.

Target accounts were selected based on volume and the existing relationship instead of maximum potential.

Prospect selections weren’t qualifi ed ad-equately and were being changed too frequently. The purpose was to identify prospects, qualify them and then determine whether further sales representative time was warranted. The sales-people did not seem to be taking this seriously.

Goals and objectives were not well thought out and were not based on historical data with intuitive judgment and market investigation.

The review process had become an exercise to get credit for success instead of a chance for sales mangers to coach, mentor and counsel in improving performance.

The V.P.’s group discovered that the sales compensation plan, which suggested that the sales representatives needed to be accountable in growing the company, did not apply account-ability consistently and equally. The regional managers were given far too much autonomy in setting quotas. Some salespeople were given “slam dunk” quotas; some weren’t. Some re-gional mangers awarded extended grandfather timelines, which led to complacency.

The sales effectiveness program was de-signed correctly. The salespeople were trained properly. But sales management had dropped the ball during the execution phase. The incen-tive design was in alignment with company goals, but some managers were making up rules on the fl y, which circumvented the alignment of the incentive design with corporate objectives.

The V.P. remembered a statement from one of the consultants during the introduction of the sales effectiveness program: “The sales effective-ness program will eliminate hiding places. Some of your people may have to be thrown off the boat.”

He knew his toughest challenge would be in replacing the two regional managers who just didn’t support either the new incentive plan by creating slam-dunk quotas or the sales effective-ness program by not holding the sales manag-ers accountable for the process. They had been allowed to keep doing things the same old way.



This case clearly shows the interdependence between sales effectiveness and effective sales management. It is not just about sales incen-tives. It’s not just about the sales effectiveness program. It’s not just about sales management. It’s actually a combination of all three, with the support of executive management.

The incentive plan should link desired be-havior to company strategy, which is supported by targeting and goal setting. Salespeople must be managed so they know when and how to stress confl icting components of their responsi-bilities. The components include when to push volume over service, one product over another and one vendor over another. The salesforce bridges the boundary between the company, its culture and its customers.

The salesforce is the pipeline to market reali-ties. This demands that salespeople have sound judgment and the ability to make decisions based on company objectives. They must create congruence between company objectives and customer needs.

The major mistake made by this company started in the targeting and goal-setting process

and continued in the lack of coaching in the review process. Setting quotas and defi ning tar-gets in a down economy can be quite challeng-ing. (Goal setting is diffi cult even when business is booming.) Uncertainty magnifi es the diffi culty of goal setting. Quotas have been predominantly top-down driven in distribution. Salesmen sometimes are asked to submit forecasts, but they are rarely accurate.

Targeting (which means identifying those accounts that promise the greatest return on meeting goals) and goal setting are proven tools that will increase sales effectiveness and help motivate salespeople by providing focus. Accu-racy is directly dependent on the quality of the input. This includes how well you know your accounts, how well you know your territory, how well you know your market and the quality of the historical data used.

This case study is from the book What’s Your Plan? Smart Salesforce Compensation In Wholesale Dis-tribution, published by the National Association of Wholesaler-Distributors. For more information on NAW publications, go to www.naw.org.

By Mike Marks & Mike Emerson

A wholesaler-distributor of janitorial supplies had just gone through a management succession where the son had taken over from his father as president of the company. The new president had been in the business as long as he could re-member, holding, at one time or another, nearly every job within the company.

The job he enjoyed most was that of outside sales representative. Being out of the offi ce, meeting with customers and helping them solve their problems was appealing, as were the chal-lenges of balancing the expectations of custom-ers, vendors and the company.

His years as an outside sales representative proved to be valuable after he became presi-dent, because one of the biggest challenges he had inherited from his father was dealing with a clearly overpaid outside salesforce. Having grown up in the industry, the president knew a great deal about what competitors paid their sales representatives and what their overall sales costs were. Knowing this information was almost a curse, because it meant he couldn’t

ignore the fact that the low return on sales his company was realizing was due in part to the overpayment of his salesforce by several hun-dred thousand dollars.

The average age of the company’s eight sales representatives was 58 years. Most had been with the company for nearly 20 years. The president’s biggest wish was to fi nd a way to keep these valuable employees and friends happy, but not at the expense of his business.

He set out to rectify the problem, including the sales team in the process from the beginning. He called a meeting and brought all eight sales reps in. He showed them data that supported his perception that they were being paid well above market value. He asked for three sales representatives to join the committee that was developing a new compensation program. The president made it clear how valuable he felt the sales reps were to the company, but that it was unacceptable that the company had barely made any money in years.

The fi rst casualty occurred the next morn-ing. One of the more vocal sales reps came into the president’s offi ce and gave the following

Salesforce OvercompensationThere is no magic to reduce overpaid salesforce expense



ultimatum: “If you change the pay plan, I’m going across the street and taking my customers with me.” The president’s response was, “You know I wouldn’t be doing this if I didn’t have to, but none of us will be around much longer if the company can’t make money to reinvest in the business.” Despite all of the president’s efforts, this sales representative did indeed leave the company.

The episode with the fi rst sales representa-tive was repeated several more times in one form or fashion over the next 12 months. Those who did not leave voluntarily were terminated, because their attitude had become destructive to the new sales representatives hired as replace-ments. Ultimately, at the end of a year, not one of the original eight sales representatives remained.

The president’s proposed plan provided many special rewards but it fundamentally reduced earnings. In the real world there is no formula that will work if it is intended to reduce the earnings of the sales representatives.

The lesson is that there is no way that an overcompensation problem can be fi xed without signifi cant disruption. The wholesaler-distribu-tor executive needs to exercise care to avoid the problem in the fi rst place.

This case study is from the book What’s Your Plan? Smart Salesforce Compensation In Wholesale Dis-tribution, published by the National Association of Wholesaler-Distributors. For more information, visit www.naw.org.

With the recent attention in this industry given to strategic pricing, distributors who change their pric-ing structures must consider developing new sales compensation plans that reward improved profi ts. Before attempting a change, consider all appropriate structures and take steps to avoid implementation pitfalls.

By Michael Emerson

According to a recent study, U.S. companies are “markedly more satisfi ed with their sales compensation programs today than they were two years ago.” Having spent the last 10 years designing and implementing sales compensa-tion programs for hundreds of fi rms, I found this intriguing.

Upon further reading, I discovered that “markedly more satisfi ed” meant that 59 percent of companies surveyed in 2006 were satisfi ed compared to 34 percent in 2004. In other words, about four out of 10 sales compensation systems in this country are failing to meet their objec-tives!

Why such high levels of dissatisfaction? The authors of the study provided descriptions of the disappointments, such as failure to achieve desired results, contributing activities from the sales force not meeting expectations, overcom-pensation of poor performers, under compensa-tion of high performers, low program under-standing, and excessive administration time.

While all these factors clearly lead to dis-

satisfaction, the question as to why the problem continues to go unsolved went unanswered. My experience is that the core issues leading to unresolved dissatisfaction around sales compen-sation programs are the result of three factors:

Fear. Today’s dissatisfaction is tolerated be-cause it’s perceived to be better than what might happen if change were attempted.

Misdiagnosis. Sales compensation program changes do not produce the expected improve-ments they expect because the program itself is not the real problem.

Lack of awareness. Companies have a diffi -cult time coming up with structural alternatives to the program that is currently in place.

FearCompanies with long-tenured sales reps and compensation programs that haven’t changed in several years are often very reluctant to change. Their executives may fear that changing the compensation program will irrevocably destroy the cultural dynamic that has served the compa-ny well over the years, threatening its long-term vitality.

They tolerate their dissatisfaction with the plan because they perceive that it is better than what might happen if they changed it.

Concerns about disrupting the company culture are very legitimate. Changing compensa-tion programs is risky. If the programs are not well conceived, clearly communicated and prop-erly implemented there is a high probability that

Why Sales Compensation Plans FailConsider these points before implementing a change



an unintended, negative and permanent culture shift can occur. Sometimes, of course, cultural shifts are the whole point, but the law of unin-tended consequences should not be ignored.

To combat these unintended consequences follow these steps:

Don’t do it yourself. Enlisting individuals from different functional areas of your company (accounting, IT, HR, etc.) will ensure that all angles that need to be considered are consid-ered, i.e. it’s affordable, the information needed is available in the computer systems, no employ-ment laws are being broken, etc.).

Ensure that agreement and clarity exist on objectives. It is vital that a clear and detailed answer exists to the question, “How will results be different next year if we’ve done a good job?”

Be open-minded. Invest the time to become aware of the different compensation structures that exist (salary, bonus, commission, multipli-ers, thresholds, etc.). There are some compensa-tion structures that are very poor matches for certain situations and others that fi t very well. Many companies get into trouble trying to tweak what they are currently doing or copying the competition when neither of these is well aligned with their strategy.

Don’t be surprised. The saying “measure twice, cut once” applies here. The consequences of failing to consider different scenarios or not examining the personal impact on important individuals can be severe and irreparable. Make sure enough modeling is performed before mak-ing any changes. Adjustments after the fact will erode credibility, encourage ongoing lobbying for special consideration and may be too late to fi x the damage.

Communicate. There are two messages that are important. One is how the program works. A well designed compensation program is one where the more program participants earn the happier the company is. Therefore, it is critical that program participants understand how they can maximize their incomes.

The second message is why a change was necessary. Rarely will a sales rep be more atten-tive than when his or her compensation is being discussed. Do not miss this opportunity to ar-ticulate to the troops the strategic direction and business objectives of the company and their role in achieving them.

MisdiagnosisAs for the second root cause, many companies attribute dissatisfaction to their sales compen-sation program when the reality is that other factors are the primary reason for substandard

market execution. Rarely will a sales force achieve its objec-

tives if it is unclear as to what it is expected to achieve or does not have the necessary tools, training or inherent capabilities. If conditions such as these exist, efforts made to modify the sales compensation program will generate mar-ginal, if any, improvements.

Sales compensation can be a powerful, tacti-cal tool for driving market execution. Before at-tempting a change, however, ask your self if the following strategic issues have been addressed:

Are sales roles appropriate? For example, are sales “generalists” still the right approach, or would your company be better off with more fo-cused sales roles such as hunters, harvesters and market specialists? Should you deemphasize the outside role and bulk up inside sales and/or Web site capabilities?

Do sales representatives have the tools they need to succeed? Having the right people is not the end of the sales manager’s job. Good manag-ers also ensure that sales reps receive continuous coaching and have appropriate sales, product and market knowledge.

Is there clarity and agreement on the key metrics that defi ne performance for each sales role? What customers, products, markets, etc., is each one targeting?

When prepared sales representatives have clarity around sales roles and key performance metrics exist, a company is in a position where the desired performance improvements from a sales compensation change are likely to be realized. If a company does not have shared agreement that “yes” is the answers to these questions, you can continually change your sales compensation program and will fi nd yourself still dissatisfi ed.

Lack of AwarenessI no longer fi nd it surprising but I believe it’s pretty insightful that when companies contact me they typically ask for assistance “fi xing their commission program.” Unfortunately, for many companies the best solution is to abandon their commission program and replace it with a dif-ferent type of structure.

Most companies do not have in-house expertise in sales compensation design because they make changes so infrequently. Thus, modi-fi cations are investigated by someone in his or her “spare time,” limiting the amount of time available to research alternatives outside the prevailing structure. This approach can lead to situations in which the new plan perpetuates the errors of the old one, is overly complex or mis-



aligned with the company’s evolving strategy or culture.

Ideally, once a company has clearly defi ned its program goals and concluded that an ef-fective sales organization is in place, it should consider the full range program types available in a modern compensation system.

If the company is focused on increasing rev-enue, adding a sales goal, with a higher commis-sion payout above it and a lower one below is a simple way to improve alignment.

Companies that are interested in maintain-ing the positives associated with a commission program (motivation, variable pay, etc.) but are interested in improving margins can benefi t

from adding a load (fi xed percent of sales sub-tracted from gross profi t) to their program.

When trying to build a specifi c part of the business, e.g. product line/group or customer segment using a multiplier (measuring perfor-mance narrowly and applying the result broad-ly) can be very effective.

There is no reason to accept a sub-optimum sales compensation program. By ensuring that strategic issues are addressed fi rst, considering all appropriate structures and avoiding the com-mon implementation pitfalls, any company can leverage the power of a modern compensation system.

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