IGNITE INNOVATION: “If you’re losing money on every deal, try to make up for it in volume." Say
The situation:
This company, a systems integrator, engaged my services after tripling in size the prior year. I was brought in to provide some structure and training to the sales department. What I discovered was the sales team was being paid handsomely for bringing in unprofitable deals, based on top line revenue numbers only. Products were very low profit, and were becoming a commodity. Services were high profit and were true differentiators. The sales force was discounting services (the value-add) to win bids for products. Top line revenue growth was through the roof, but bottom line profits were declining at an alarming rate. At the same time, hundreds of competitors were entering the market when the prior year, they’d been non-existent.
Compounding the aggravation was the fact that part of the compensation package for departmental directors was based on profitability of their department. A good idea on paper, but not so great in practice when you consider these department heads had no input into the client proposals as presented by the sales force. In other words, the sales department had full autonomy over the pricing for goods and services provided by the other departments.
The friction between the sales force and the other departments was palpable.
The solution(s):
First, I worked together with the departmental directors to find out what they needed to run their departments profitably. This made them more willing to actually listen to the sales team challenges. We put processes in place that required department director sign-off on all sales proposals that included their goods or services. This practice gave the sales and service departments insight into each other’s processes, provided more realistic proposals to the clients, streamlined project deployment, and increased the profits of the company.
Second, I rewrote the sales compensation plan. Instead of paying commissions on top line revenue dollars, the various goods and services were divided into “buckets”, with higher commission rates going to services with higher profits. Commission accelerators kicked in only after each “bucket” was at quota.
Of course, no sales team likes changes to compensation plans, especially when the changes involve more accountability. So communication was key, and upper management support was required. After only a few cycles, everyone on the sales team agreed that selling the more profitable products was actually easier and more fun than constantly getting beat up on the pricing of products.
The conclusion:
What happened to this company happens every day to small businesses who are lucky enough to experience rapid growth. Goods or services – and people – are added to meet customer demand and remain competitive. And often the processes that support the new infrastructure become obsolete. If the company had maintained the status quo and profits kept declining, it would not have survived. With these changes and others, they continued to be a dominant player in their market until the company sold to a large conglomerate, making all the principals very wealthy people.
