Drawing the Wrong Conclusions
by Howard Shore, Date: Jun 09, 2011
It is often said that numbers don’t lie. While the numbers in your financial statements are correct, the conclusions you draw from them may be wrong.
This misinterpretation can cause significant revenue loss in your company. One area where this happens most often is the sales department. Senior management typically spends the majority of their time looking at the end-of-the-month, quarterly and yearly sales and gross margin numbers. They are not taking the time to accurately measure who their best managers and salespeople are, nor are they looking at the data that can help them properly manage their sales organization.
Why, you might ask, do I contend that they are studying the wrong data points? Let me give you a list of ways I’ve found that ”benchmark numbers” can mask real performance:
- There are three types of prospects: 1) those who will always buy from you; 2) those who will sometimes buy from you; and 3) those who will never buy from you. If you have not been watching your sales staff’s close ratios for each kind of prospect carefully, you will miss the fact that some salespeople may only be closing the “always” prospects, those who buy because of your company brand or reputation, not because of sales skills. We call such salespeople “order-takers” and recommend that you replace them.
- All sales territories are not created equal. If your territories are drawn correctly, and the opportunities are not equal, then comparing salespeople by gross sales or margin will give you misleading numbers. Sales goals should be set based on the opportunities in the various territories.
- The way in which leads are divided among the staff could be showing favoritism, making one person’s job harder and another’s easier.
- Profit margin should be differentiated depending on territory. Many times your salespeople have no control over margin, as it is set by someone else in the company.
- In some industries, margin is a game of pennies, and all the larger deals must be approved by someone in corporate. Many times, there is no certain way in which these decisions are made. There is no consistency in deciding which deals are approved and which are not. Sometimes there is favoritism with clients or product mixes in the final decision. This can make one salesperson look better than another.
- If your salespeople have to grow new and existing accounts, you may have some staff riding the coat tails of your best accounts while failing to bring in new accounts for years. They have been holding you hostage to their supposed rapport with your best customers. If you don’t recognize it, you are paying them for past instead of current performance.
To keep this article simple, most organizations monitor the wrong data to determine the health of their sales organization. The other day a VP of Sales mentioned how his CEO would not let him fire the person that he (the VP) considered his worst region manager. When I inquired as to the reason, “The CEO thinks he is the best because his was our best performing region in terms of revenue growth and margin, and numbers do not lie.” I asked this VP why he thought this manager was “the worst”, and his answer was clear and concise: “He violates our core values consistently, is unwilling to change, is a poor coach; his people are complacent; we are not getting the market share we are capable of ; and ultimately our growth could have been double in the region. With regard to margin, those people have no control over it.”
His dilemma happened for a few reasons:
1) The CEO was using past history and other regions as benchmarks instead of using market share as his measure.
2) The CEO used lagging rather than leading indicators. A lagging indicator is actual revenue. Leading indicators are number of outbound calls, number of visits to existing customers, number of visits to new prospects, number of first meetings, number of new prospects in the pipeline, etc.
3) Lastly, the indicators are too broad. Goals need to be broken down so that there is line of sight. Sales goals should be broken down between new accounts and existing. How many new accounts are acquired each month, and what is their ramp of revenue? What are the activities that it takes to get these new accounts and to grow the existing ones?
To evaluate sales force effectiveness a CEO needs to be able to answer the following questions:
SALES PROCESS AND SYSTEMS:
- If people complete the actions in the business plan, is there certainty in plan achievement?
- How effective is our territory management?
- Does training and coaching meet the needs of the sales organization?
- Does the compensation system properly motivate the sales force?
- Is the work environment properly motivating our sales force?
- Does the organization have the right support systems in place to keep people motivated?
- How effective are staffing processes in terms of finding, selecting, setting expectations, ramping up, terminating, and holding people accountable?
- How effective are reporting systems in terms of content, frequency and automation?
- What is the quality of the sales pipeline?
- Are measurement systems strong enough so that sales can be predicted with reasonable accuracy for the next 3 months?
- Time Management – Are managers spending the proper amount of time coaching, motivating, holding accountable, and recruiting salespeople when compared against the “ideal” manager?
- Skills – Are manager skills in the areas performance management, mentoring, coaching, motivating, and recruiting comparable to those of the “ideal” manager?
- Effectiveness – How effective are managers in terms of impacting our sales force when it comes to holding accountable, motivating, mentoring, coaching, growing, and recruiting sales people?
- Top Grading – Healthy turnover in a sales force is between 20% and 30%. A higher percentage usually indicates a recruiting and/or management problem. A lower percentage usually means management has set too low a standard for the sales force. The company should always be recruiting salespeople and pruning the lowest performers.
- Which salespeople do not understand and/or experience high discomfort with the way in which they are managed, the company’s marketing plans, and/or the products they sell or the clients they sell to.
- Is it clear which salespeople are intrinsically and extrinsically motivated?
- Which of our salespeople are capable of selling a lot more than they do today?
- Who can be trained to sell more effectively, and who is not trainable?
- Does our sales team have the “Crucial Elements” for sales success?
- Are there hidden weaknesses preventing our salespeople from performing at higher levels?
- Who is effective at hunting, qualifying, farming, and closing?
- How do our people really compare to the ideal salesperson?
My point here is that most organizations are misdiagnosing the performance of their sales organization, and sales people and not taking the right actions. I have yet to analyze a sales force without finding that significant dollars have been left on the table. Worse, it is always a lot more revenue than management suspected. The main culprit is that organizations often mistake good and bad managers and salespeople. In addition, there is always misalignment in strategy, sales process, and sales systems. As a data point, Objective Management and their distributors have been analyzing sales forces for the last 20 years. Out of a possible score of 150, the average organization typically gets a 74 for sales process and system effectiveness. In addition, it is common when asking 17 rather simple questions of the CEO and those same questions of the sales management to find 50% consistency in their answers. Worse there is typically conflicting answers in the CEO’s responses that need to be resolved.