Alejandro Céspedes wrote to me the other day with the following question:
Just wanted to ask if you’ve designed a way of managing the sales budget of a company. In other words, how to review if the salespeople are meeting the budget or not. Most companies are affected by the end-of-the-month syndrome, and at the same time, salespeople – once they meet that month’s budget – are not interested in selling more. They’d rather stay still and avoid cannibalizing next month’s sales.
Here’s my response:
Good to hear from you!
Here are the two steps we take to eliminate these problems:
Eliminate monthly budgets – in favor of a T/cu type measure (Throughput per appointment-slot-consumed).
Eliminate commissions. Pay people what they are worth and make performance compulsory.
Alejandro’s question was a reminder of just how dysfunctional most sales functions really are. His email set me thinking: why have managers (us) historically designed the sales environment this way. (Presumably, it’s not because we’re daft, or ill-intentioned.) Among the assumptions that underpin the design of the sales function, there must be some that are false … what are they?
Three fallacious assumptions
Here are some assumptions that I suspect will fail to emerge unscathed from an exposure to reality. Feel free to critique my selection, or suggest your own.
Salespeople should be responsible for sales. Really? In how many organizations do salespeople actually have significant control over sales? What percentage of your transactions are the result of your salespeople:
- Originating their own opportunities (as opposed to responding to an inbound enquiry)?
- Prosecuting these opportunities single handed, without assistance from engineering, estimating or management?
If salespeople aren’t responsible for generating the greater majority of sales (all by themselves), wouldn’t it make more sense to hold them responsible for just the activities that they actually do perform?
Of course, in our model, we have salespeople performing only business-development meetings – nothing else. (Marketing originates opportunities, project leaders design solutions, etc). This means that they are accountable for only what they do in these meetings. “Sales” is management’s responsibility. Just like “production” is the responsibility of your production manager – not a lathe operator or a claims processor.
Monthly is a sensible measurement frequency for sales. It’s true that we calculate our profitability monthly. But does it follow that all internal processes should also be measured just once every 30 days. Consider your on-time-delivery performance, for example: should you stop and calculate this just once a month? Of course not. It should be calculated for every delivery.
We calculate profitability monthly because profitability is the consequence of a number of events that occur at different frequencies (and out of synchronization with one another). A more frequent calculation would probably generate less information, not more.
If the responsibility of the salesperson is to maximize the velocity of sales opportunities (and, yes, it should be) – and, if the salesperson’s effort is expended in discrete packets called appointments – why wouldn’t we calculate the progress of each opportunity, relative to each appointment?
As with on-time-delivery performance, you may choose to view the resulting number in the form of a rolling average, but that doesn’t alter the fact that the relevant time-horizon for the activity in question is an appointment slot, not a month.
Commissions drive positive behaviors. I had lunch with a director of a large (publicly listed) technology company in Sydney the other day. After hearing my position on salespeople and commissions, he asked about the negative consequences of eliminating commissions (replacing them with salaries).
I answered his question – as I usually do – with my own question. I asked him if he could first detail the positive behaviors, exhibited by salespeople, that he would be comfortable to attribute to the existing commission plan.
As usual, this question (an innocent one, I’m sure you’ll agree!) was met with a silence you could cut with a knife. He admitted that there were no positive behaviors – only negative ones! And he concluded, of his own volition, that it was probably more appropriate to try and find a justification for the existence of the commission plan than it was to look for a reason to not eliminate it.
As I’ve suggested before, if sales are important for your firm, I suggest that you identify the critical behaviors that contribute to sales, and then make them compulsory (commissions signal to salespeople that these behaviors are optional).