Orig. Post October 2014 by Frank V. Cespedes, Harvard Business Review | Re-Post December 2, 2014
For many years Document Security Management (a pseudonym) had a thriving business in retrieving and shredding or securely storing organizations’ documents. Executives and their assistants loved its one-stop-shopping value proposition, and the sales force cultivated deep relationships with them. By the early 2000s, however, it was clear that cheaper digital storage technology, especially the cloud, would disrupt the company. So DSM introduced its own cloud-based storage and directed the sales force to bundle it with traditional services.
The results were disastrous. Many of the salespeople lacked the technical knowledge to work effectively with clients’ IT departments. Pricing was a problem, because the physical and digital services had very different cost structures. And in spite of being trained to bundle offerings—a key to the new strategy—reps often sold only the lower-priced, digital service. Contract renewals for traditional services fell sharply, as did profits. DSM modified its sales compensation plan, but then digital sales dipped; meanwhile, new competitors began signing clients. Ultimately DSM spun off its digital unit.
What went wrong at DSM goes wrong at many companies: Management embarks on a strategy without considering the realities facing the people who must execute it with paying customers.
Research indicates that only a fraction—according to some studies, less than 10%—of companies’ strategic plans are effectively executed and that firms deliver just 50% to 60%, on average, of the financial performance their strategies promise. One reason is that strategists, years removed from customer contact, are often blithely unaware of the embedded strategic commitments that daily field activities represent and have an obsolete vision of the company-customer interface. I describe the problem as a divide between “strategy priests” and “sales sinners,” to convey that plans made in the C-suite can be “sullied” by the people who live and die by monthly quotas if those plans say nothing about how sales should allocate resources.
“Strategists, years removed from customer contact, often have an obsolete vision of the company-customer interface.”
The sales organization should be part of every conversation about strategy. U.S. companies cumulatively spend about $900 billion annually on sales efforts—three times their spending on consumer advertising, more than 20 times their spending on online media, and more than 100 times their spending on social media. Predictions that the internet would disintermediate sales have not panned out: Although sales forces in some industries have shrunk, the overall number of salespeople in the economy is unchanged.
My research reveals four steps companies can take to improve the alignment between strategy and sales.
Communicate the Strategy
People can’t implement what they don’t understand. Yet few strategic plans articulate the implications for customer-contact behaviors in the field, where value is created or destroyed. Moreover, the process for introducing and reviewing plans often exacerbates the separation of the strategists from the “doers.” It typically involves a kickoff sales meeting followed by a string of e-mails from headquarters and periodic reports back on results. There are too few communications, and most are one-way; the root causes of underperformance are often hidden from both groups.
Similarly, even when sales teams are trained in negotiation and selling tactics, the larger strategic context—especially the implications for target priorities—is often left out, either because the company isn’t clear on its strategy or because leaders are afraid of leaks to the competition. Companies suffering from the first problem should recognize that clarifying strategy is a leadership responsibility. When the second is the issue, leaders should realize that they’ll have bigger troubles than competitors’ reading their big-picture strategy documents if their own people don’t understand those documents.
Continually Improve Sales Productivity
Three variables drive the productivity of a sales model: customer call capacity, close rate, and profit per sale. The relative importance of each differs from company to company. Managers can boost capacity by providing better leads or giving salespeople incentives to make more calls; they can increase close rates by emphasizing the need to select the right customers and match them with optimal products or services; and they can increase profit per sale by lowering selling costs, improving the pricing or product mix, or selling more to each customer. If the sales team doesn’t know how a strategic goal affects or should affect any of those variables, it will devote resources to activities that don’t help, and probably hinder, execution.
Business Processing Inc. (a pseudonym) discovered and remedied such a problem. An outsourced payroll service founded in 2000, BPI had a 75-person sales team and $40 million in revenue by 2004. But then growth stalled, and in 2008 a board member urged the CEO to analyze a question that should be central to any actionable strategy: “Who are our ideal customers?” A deep dive into the customer relationship management system yielded an answer: Clients with 15 to 50 employees, in urban locations, with at least five years of operating history. With this insight BPI shifted its selling focus. It started tracking how many calls reps placed to CPA firms in search of referrals, along with the contacts thus obtained, and paid commissions only on sales to customers of the designated type. Some salespeople hated the new system—within a year the number of reps dropped to 35. But during that time bookings increased by 25%, churn slowed, and profits and revenue jumped. Salespeople knew exactly what criteria to use to maximize productivity, and incentives encouraged behavior that supported strategy.
Improve Human Performance
Research by Jim Dickie and Barry Trailer of CSO Insights shows that the average annual turnover rate in sales organizations is 25% to 30%, which means that companies essentially replace their sales teams every four years. And individual performance differs much more than in other functions. In B2B contexts, rep performance in similar territories often varies by 300% between the top and bottom quintiles, whereas in retail selling productivity typically varies by a factor of three or four.
Yet much of the hiring and training of salespeople is ad hoc—overly reliant on gut feelings and sales experience elsewhere. Research by my HBS colleague Boris Groysberg shows that “star talent” isn’t very portable, and that’s especially true in sales. Sales tasks are determined by a firm’s strategy and choices, and selling behaviors are driven by the sales control systems and culture—not by a generic selling methodology or what a rep has learned at a previous firm. Companies need to understand which sales skills are most important to their particular strategy and work to upgrade them.
HubSpot, a Massachusetts-based inbound marketing firm, does this well. Its chief revenue officer, Mark Roberge, hadn’t run a sales organization before joining the company, but with a degree in engineering, he had the skills to create hiring and training processes based on metrics and analysis. He devised specific job criteria and carefully scored each of the 500 candidates he interviewed in the course of a year; subsequent regression analysis at six- to 12-month intervals showed how his 20 hires performed, letting him see whether he was correctly weighting particular criteria. Instead of having new reps shadow a star, as is common practice, Roberge instituted a monthlong classroom training session, a 150-question exam, and six certification tests about HubSpot’s products, sales methodology, and overall strategy.
Make Strategy Relevant
The goal of strategy is profitable growth, meaning value above the firm’s cost of capital. There are basically four ways to achieve it: investing in projects that earn more than their cost of capital, increasing profits from existing capital investments, reducing the assets devoted to activities that earn less than their cost of capital, and reducing the cost of capital itself. Most C-suite executives know these value-creation levers, but too few understand and operationalize the sales factors that affect them.
In most firms, projects are driven by revenue-seeking activities with customers, so customer selection efforts directly impact which activities the firm (knowingly or unknowingly) invests in. Earning more from existing investments requires all elements of sales productivity. Reducing the assets devoted to underperforming activities requires understanding evolving customer realities and therefore depends on communication between the C-suite and the field. And financing needs are set in large part by capital on hand against the working capital needed to conduct and grow the business. The selling cycle is usually the biggest driver of cash out and cash in: Accounts payable accumulate during selling, and accounts receivable are largely determined by what’s sold at what price and how fast. So increasing the close rates and accelerating the selling cycle is a strategic issue, not just a sales task.
If you and your team can’t make the crucial connections between strategy and sales, then no matter how much you invest in social media or worry about disruptive innovations, you may end up pressing for better execution when you actually need a better strategy or changing strategic direction when you should be focusing on the basics in the field. As I once heard Sam Walton remind his executives, “There ain’t many customers at headquarters.”