Analytics in action: A services company uncovers risks to future growthBy: Mike Meisenheimer Sales Analytics
Now is a great time to be a sales leader looking to take advantage of sales analytics. Cloud-based analytic tools, larger and more diverse data sets and a growing talent pool of analytical skills are making it easier to apply analytics to your sales organization. Analytics brings with it the allure of big insights and game-changing findings, drawing high levels of resource focus and investment dollars. But it also risks becoming “the new shiny object,” garnering lots of attention without the desired results or impact. To best leverage analytics, sales leaders need to focus on the foundation metrics of sales effectiveness. Foundation metrics are less about “big data” and more about “the right data”. . . the data and metrics that drive tangible value both now and into the future.
In previous blog posts we introduced the concept of sales utilization and the related five drivers: Investments, Alignment, Execution, Perception and Results. Several key metrics fall under each of these drivers, providing the quantitative backbone of sales utilization analysis. These drivers, or categories of metrics, allow leaders to benchmark their organization against market practice, inform planning and strategy, and reinforce direction or guide needed course corrections. This series, “Analytics in Action,” will look at how companies are using these metrics to improve sales productivity.
Today’s Story: A Services Company Uncovers Needed Course Correction
Alexander Group recently helped a professional services company evaluate their current go-to-market model and sales readiness for growth. Concerned about high operating costs and lack of a clearly defined coverage model, management asked Alexander Group to examine the company’s expense profile (Investment), coverage model (Alignment) and sales process (Execution).
As a first step, we evaluated sales expenditures against Alexander Group’s sales investment database (see Chart 1 below). At $2.8 million per rep, the company’s productivity was 12 percent higher than the benchmark. However, to achieve this level of productivity, the company was spending 30 percent more per sales rep. While there were slight variances in infrastructure expenditures and productivity investments (e.g., demand stimulation, training), a significant portion of the cost variance was driven by sales compensation. Relative to the benchmark, the company was spending 36 percent more compensating their salespeople. Assuming a market competitive product, the company was paying 36 percent more for a 12 percent bump in revenue per sales person, resulting in an overall expense to revenue ratio 14 percent higher than the benchmark.
As part of the assessment, Alexander Group worked with the client on a detailed look at the coverage and job design practices. For its core sales role, the company had historically deployed a blended job with individual sales reps responsible for customer acquisition, retention and penetration. We analyzed revenue by source for 2011 – 2013 (see Chart 2) and found little change in the relative contribution of new or penetration revenue during this period.
Further analysis revealed the issue was related to low rep bandwidth. In spite of a sufficient number of leads coming in to the sales team to increase acquisition and penetration sales, reps were too focused (or bogged down?) on retention selling to capitalize on those conversion and penetration opportunities.
We then examined the results by rep tenure and found an even more alarming trend. Highly tenured salespeople were deriving as much as 95 percent of their revenue from existing customers. Although reps were asked to both hunt for new business and farm existing accounts, they were failing to sufficiently cover new leads and opportunities. Sales leadership contemplated whether a better lead distribution model might help. While passing more new customer leads to less tenured sales people might have a small impact in the short term, it was not a long-term solution for success. The client was better off redeploying the coverage model using more specialized roles (e.g., hunter/farmer, strategic accounts) to ensure the right skills and cost profile are aligned to the right customers and type of selling.
A robust sales process analysis typically includes an examination of sales process steps, rules of engagement, close rates, and sales capacity. In the case of our professional services company, excessive ramp times were a red flag for future growth (see Chart 3). The average sales rep was taking more than a year to generate enough revenue to cover their costs ($514K per rep per year, excluding gross margin considerations) and almost four years to achieve the desired level of performance, or $2 million of revenue per rep per year. The long ramp time to sales productivity meant that a large percentage of the company’s revenue — nearly 50 percent — was coming from a relatively small percentage of tenured salespeople. This concentration of business among a small number of reps represented a significant risk for the business.
The examples above represent a portion of a comprehensive evaluation of the company’s readiness for growth. While the company had been successful in the past, a targeted analysis across the categories of sales utilization identified several areas for improvement. Alexander Group’s recommendations focused on how to rebalance the investment profile, improvements in the segmentation approach, increased role specialization and redesign of the sales compensation plan.
The evaluations didn’t require big data or advanced software solutions. Rather, the client benefited from the right data, targeting a core set of metrics to diagnose specifically glaring issues and push towards consensus for future improvement.
Contact us to learn more about Alexander Group’s sales utilization framework or how we can help you benchmark your organization and build a road map for growth.