This article was first published on Thomasnet.com. You can read the original here.
If you make revenue the responsibility of your sales department, you will handicap the growth of your organization.
If you want your organization to grow, operations should be responsible for revenue and your sales department should focus exclusively on new business.
Before we get to that, let’s unpack the idea that revenue should be the responsibility of operations.
Revenue: The Responsibility of Operations
If your organization is typical, it’s likely that more than 70% of your revenue in any given year comes from existing customers. You could think of the transactions that make up this 70% as yours-to-lose. You don’t need to win these transactions; you just need to do a good job of processing them.
The quality of your relationship with existing customers is almost certainly a function of how good a job you do of processing these yours-to-lose transactions. We know this because the most common reasons why customers defect are (in descending order): poor on-time delivery performance, uncompetitive pricing, and poor product performance.
It’s not a big stretch, then, to argue that operations should be responsible for revenue — and, consequently, for the transactions that generate that revenue. Your sales department cannot directly influence on-time delivery performance, pricing, or product performance so it makes no sense for revenue to be its responsibility.
Growth: The Responsibility of Sales
If revenue becomes the responsibility of operations, then operations will also have to take responsibility for a number of activities that have traditionally been performed by sales. Solution design, quoting, order processing, and issue resolution, to name a few.
What should sales be responsible for then?
Sales should be exclusively responsible for pursuing yours-to-win transactions. In other words, your salespeople should focus on winning business that is currently being awarded to your competitors. And, if you’re serious about growth, that’s all they should do!
To be more specific, salespeople should be responsible for winning transactions from new customers and transactions from new product categories, for existing customers. They should have no involvement whatsoever with yours-to-lose transactions.
Salespeople Won’t Like This!
Not surprisingly, your salespeople are unlikely to be happy with this line of reasoning. They will argue — without evidence — that your yours-to-lose revenue is actually a consequence of the personal relationships they have developed with individuals in your customers’ businesses.
On this, count your salespeople are almost certainly wrong, but your salespeople do have a good reason for concern. They understand that they are currently performing a large number of critical customer service tasks, and they recognize that if they were to suddenly switch their focus elsewhere the implications for the organization would be catastrophic.
Here, you have two choices:
- You can fortify your customer service and engineering teams before refocusing your salespeople on growth.
- You can convert your existing salespeople into customer service specialists and build a new sales department from scratch.
(For the record, we typically do the latter at Ballistix.)
The Economics of New Business
In your business, there are two types of revenue. And these two types of revenue are so different that they should never be summed — except once a year, when you submit your numbers to the IRS.
I’m talking about revenues that result from yours-to-lose transactions versus those that result from yours-to-win transactions.
The value of a yours-to-lose transaction is the number that appears at the bottom of the invoice. However, the value of a yours-to-win transaction is the value of the annuity associated with that first invoice.
Think of it this way. When a customer purchases from you for the first time, there’s a good chance they’ll make a second purchase, and a third. In economic terms, then, a customer is simply a future stream of payments (an annuity). And the value of that customer is the net present value (NPV) of that future payment stream.
I’ve already argued that revenues should be the responsibility of operations. Sales, then, should be responsible for the value of the annuities that they win. What this means is that you should agree on a formula to gross up first-time transactions to account for net present value. You should also use a term (other than revenue) to refer to the output of your formula (new business dollars, perhaps?).
If you must pay salespeople commission — I don’t recommend it — then they should earn a small percentage of new business dollars and exactly zero percent of revenue.
If you’re serious about growth, it’s critical that you keep these two numbers separate. To sum them is to treat them as equal, which they are surely not. In most organizations, the total invoice value of new business transactions is less than the normal variation in total repeat transactions. In other words, unless you break out new business dollars in your reporting, your growth signal will be lost in the noise.