Ted Grossman: Welcome back to a new session of the Alexander Group podcast series. My name is Ted Grossman and I’m a principal and co-leader of our high-tech practice here at the Alexander Group. I’m joined with my colleague Rachel Parrinello, who is a principal and co-leader of our sales compensation practice. Rachel, hello. Hello.
Today, I’m delighted for the opportunity to interview you regarding your recent article called Five Key Sales Technology and Service Sales Compensation Challenges. Our Alexander Group Technology practice has had the opportunity to work with many XaaS companies over the years to help them solve their sales compensation challenges, and they are some of the more complex ones that we run into. If you are listening to this podcast, I’m sure you can attest to that. So let’s get started. Rachel, the first challenge you mentioned in your blog is aligning pay for land, adopt, renew and expand sales motions. So first of all, what do you mean by these different sales motions and why is this such a big issue?
Rachel Parrinello: Well, thank you, Ted, for the opportunity to discuss these issues with you and our fellow listeners. You and I have worked together with many clients on these topics, and I know firsthand how these issues are near and dear to your heart. So let’s talk about sales motions. Actually, we here at the Alexander Group like to call them revenue motions. And as you know, Ted, revenue motions, articulate marketing, sales and service processes, and actions required to achieve the organization’s performance objectives. So in a recurring revenue XaaS space, this manifests itself into four distinct motions and we like to call them land, adopt, renew and expand, which is that landing new customers in this world. The purpose is to land the lifetime value of that customer. Adopt is ensuring the customers adopt the solution and recognize value immediately. And this is super important. If they don’t adopt it and realize the value, then leaders will be managing what we like to call a leaky boat. The renewals will drop and there are big problems there, right, Ted?
Ted Grossman: You can’t let your revenue go away, so absolutely agree.
Rachel Parrinello: The next one is Renew, which is renewing the customers business. You can do this via a renewal contract or basically ensuring that the customer continues to pay for the services. And that’s usually when there is an auto renewal that’s occurring. Expand is expanding the footprint via expanding the usage of the current product or cross-selling new products into the account. Early stage companies may not have much cross-sell opportunities, but as they build out their portfolios via product innovation and acquisitions, their cross-sell opportunities will amplify. So how do these revenue motions impact the sales compensation plans?
Well, first, companies need to look at these different revenue motions and figure out which roles on each of these motions. This is critical to your go-to-customer coverage model. The level of persuasion and the actual success metric for each of these roles will vary. Consider a new acquisition rep focus on land versus a customer success rate focused on usage and adoption. The new rep is generally on a very aggressive, revenue-based sales compensation plan. The customer success rep may not even be on a sales compensation plan at all. This complexity increases when one role is responsible for multiple sales motions. They each require a different level of persuasion. The highest is usually the land motion, and the lowest could be the adopt, and the measures may be different for each of these motions. One of our key sales compensation principles is to keep the plan simple, so developing a plan with four separate measures does not make sense.
Ted Grossman: Thanks, Rachel. That’s well laid out, and this revenue motion challenge becomes more complex as companies balance solving their revenue motions with the other issues you identified. So let’s move on to the next challenge. Challenge number two is hybrids migrating towards as service from perpetual license and hardware. Boy, this is an evolving one, right? Most traditional perpetual license in hardware companies are migrating toward XaaS solutions. Here’s what I found to be the biggest issue, which isn’t a sales comp issue, but it immensely impacts sales comp. Companies very rarely have a clearly articulated XaaS migration strategy, and many of them are not necessarily biting the bullet and making a choice, but leaving it up to the customer. Rachel, tell us the challenges are when you are working with these hybrid companies.
Rachel Parrinello: Ted, you’re 100% accurate. Understanding the strategy is a key first step before driving any sales compensation solution, but let’s talk about what companies are doing today. Most companies are trying to drive parity in their sales compensation plan between their perpetual or hardware solution, and they’re merging XaaS solution. A recent cloud index, Debbie, being covered that 77% of companies are not using the sales compensation plan to drive focus cellar time on their XaaS solutions. Half of them are providing no treatment and the other half are providing parity with their exclusive service offering. 15% are providing some emphasis in. Only 8% are aggressively pushing their excessive service solution. So anyone providing parity focus or aggressive focus are using crediting rules, mechanics and measures to do so. These solutions in themselves are making the plan more complex.
Ted Grossman: I agree, and hybrid companies have it really tough. Not only do they have to deal with the revenue motions and the shift to the service models, but they’re usually dealing with actually your next challenge challenge number three, which is compensating for enabling services, which could be implementation, data, migration, consulting or training. This issue is not just for XaaS players. Most companies are in the business of selling their software hardware solutions. However, all hardware and perpetual software companies and many the service companies, particularly those in infrastructures as a service so more than just their main solution, they need to ensure that their solution is deployed and used correctly. So they offer implementation services, data migration services, professional consulting and training. Most organizations realize lower margins for these solutions and many leverage partners to provide them as well. So how does all this impact the sales compensation plan, Rachel?
Rachel Parrinello: Well, it basically boils down to this it’s a priority topic. How do you want your sellers focusing the time? So first of all, do you want your sellers focusing on selling the companies enablement service offerings? Or do you want your partners to sell them? And then secondly, if you do want your sellers focusing on it, should they be paid at the same rate as a primary software or hardware solution?
Ted Grossman: Well, sounds interesting, and I’m sure there’s a lot more there, but let’s talk about your challenge number for ensuring multi-year payouts aligned to strategy and financial goals. This topic comes up a lot with all of our excellent service clients. Any ongoing service, like maintenance contracts for perpetual licenses, break fixed service contracts or excellent service solutions typically include a term length. The length can be monthly on the low end and three to five years on the high end. Most companies try to manage the three-year contract the most, as companies will generally try to renegotiate after three years anyway. So why then is this such a big challenge for them, Rachel?
Rachel Parrinello: Well, the bottom line is it is difficult to accurately set total contract value quotas when term lengths very so term lengths basically add another challenging dimension to the quota process. Companies now not only need to estimate the number of closings, the monthly or annual contract size and the close dates, but now they need to estimate the term length and if paid on total contract value, sellers are known to manipulate their plan in their favor. They’ll throw out huge discounts to sell double the average contract term, so the seller blows out their quota. But does the company really fare out better? Do they bring in twice? The amount of customer lifetime value is a two-year 100k deal worth the same as two separate 100K deals, each with their own lifetime value? Typically, no. So there are about seven different sales compensation solutions to rewarding for longer term deals, each with their pros and cons, and companies need to select the right one that lines to their strategy and their financial goals.
Ted Grossman: Again, back to strategy issues. What I have found is that many companies have not fully articulated the multi-year strategy. Another way of saying this is do they understand whether they want their sellers to sell multi-year deals or not? They may think they do because it sounds like the right thing to do, but do they really need it? And is it costing them because they’re using higher discounts in order to achieve that?
Rachel Parrinello: You’re correct. Had strategy confirmation is super important to every plan design process. As you know, many times, sales compensation becomes a forcing function to drive these strategy decisions.
Ted Grossman: Tell me about the alignment of financial goals. What did you mean here?
Rachel Parrinello: Well, one common solution for multi-year deals is to provide an add on bonus, and that can take place in the form of either a quota credit uplift, a commission rate uplift, or even just an add on commission rate. If a company does a lot of multi-year deals, though, this can be an extremely expensive solution. We’ve actually seen a migration away from this methodology, particularly for companies who want to drive a multi-year strategy and then have a decent amount of those deals are multi-year.
Ted Grossman: Yes, I work with some companies to deal with that same issue, but let’s move on. Let’s talk about your final challenge, which is becoming more and more prevalent. Sales compensation strategy In a consumption pricing model, we’ve seen more and more companies move to the Amazon Web Services model, where companies just pay for what they need. Sounds great for the customer, but why is this such a big compensation challenge, Rachel?
Rachel Parrinello: Well, a key sales compensation principle is to pay for persuasion. If you really think about it, the entire reason why companies have a sales force in the first place is because they have the sellers there to persuade the customers or partners to buy their offering. So the sales compensation is actually the mechanism within which they reward for that persuasion behavior. When the seller is selling a committed order for a piece of hardware or perpetual software, even an exclusive service solution, the best practice is to pay the rep at the persuasion event. The persuasion event is usually the booking event or some sort of crediting event that is close to that booking event. It could be a shipping or billing event. However, in a pay-as-you-go model, this becomes very hard to pay for the full value of the deal at the time of the booking, since it’s basically unknown or uncertain. The customer may quit after a month, or they may decline their rates, or they may increase their rate. So the first month value is tiny compared to the actual billings at the year end or even the lifetime value to the company. So it measure accrediting rules should companies use companies that only offer pay-as-you-go, subscriptions have it a lot easier. Companies that offer committed orders, as well as pay-as-you-go offerings have it a lot harder. There’s one more challenge here that don’t want to overlook, and that is the persuasion event varies in a consumption pay-as-you-go pricing model. The first event is that the contract close the next event is actually ongoing, occurs as the customer uses or pays for the offering in the future. This discussion takes us back to the initial challenge, which role is responsible for which revenue motion.
Ted Grossman: Yeah, I get it. Compensating for the pay-as-you-go model also challenging. Well, Rachel, I want to thank you for all your insights on these really big challenges about XaaS companies are wrestling with. I’ll conclude by summarizing first one is aligning pay for land, adopt, renew and expand sales motions. The second one is hybrid companies migrating towards excellent service from perpetual license or hardware. Thirdly, compensating for enabling services such as implementation, data, migration, consulting or training. Fourth, ensuring multi-year payouts aligned to strategy and financial goals. And lastly, dealing with a consumption pricing model. I want to thank you, Rachel.
I want to thank all those of you who turned into the podcast. Hope you found this information helpful. And please do not hesitate to reach out with any of these big challenges or go to the Alexander Group website at www.alexandergroup.com. We’d be glad to help out and look forward to talking to you soon.
