Are You Stuck in the Technology Sinkhole?
[ read time: 4 minutes ]
How do you get out of the sinkhole?
[ read time: 4 minutes ]
How do you know you are in the technology sinkhole? You invest in technology...
Your agents become more productive... Your revenue goes up... BUT your profit goes down!
About three years ago, we started to see a pattern in the companies with whom we were consulting. Firms that had invested in technology, and had seen significant revenue growth as result, were now losing money.
WORSE in the second year!
Interestingly, a number of companies did see the increase in profit they expected in the first year. The losses didn't show up until the second year, making it difficult to identify the cause of the problem. We found it because of the thorough financial analysis we do as part of our consulting. When we noticed the same problem in company after company, we realized this was a problem affecting the whole industry.
How does an investment in technology cause this problem?
What we discovered was that the investment in new computers, new software, and the Internet worked the way it was supposed to – agents became more productive. Revenue went up. But selling more pushed many agents up to higher split levels. This reduced the company dollar, making it more difficult to pay for the increased technology expense. As an example, let's look at a company where:
GCI = $5 million
Company dollar = 32%
Profit = 2% (or $100,000)
Technology investment = $50,000 annually
Let's say the technology investment results in a 5% increase in revenue. 5% of 5,000,000 is $250,000. So revenue goes up by $250,000.
32% of $250,000 is $80,000. So the company dollar increases by $80,000. $80,000 less the technology investment of $50,000 leaves a net profit increase of $30,000. So in the first year, profit increases to $130,000.
So far, so good. Now, let's look at what happens in the second year.
Let's say all the agents benefited equally from the technology, and everyone moved up to a higher split. Say they go up 2.7%.
Now company dollar drops to 29.3%. You now have $135,000 less to pay your bills than you had last year. Your revenue is up, but your profit is gone.
The situation can be even worse if all agents do not benefit equally from your technology investment, which is what happens in the real world.
Suppose the entire increase in revenue comes from your top producers, who are at an 80% split level. The company dollar on those sales is just 20%, so instead of gaining $80,000 you only increase profit by $50,000 – just enough to pay for the technology investment. Although revenue increased, profit stayed the same. That's in the first year. It could be worse in the second year.
How do you get out of the sinkhole?
You need to be able to recover your investment in technology. Some firms do this by charging user fees for technology or referral fees for leads that come in over the Internet. Other companies increase off-the-top fees, like relocation, for business directly attributable to the new technology. However, these fees are not popular with agents, who feel they are being "nickel-and-dimed" on one thing after another.
The best approach
Your best strategy is to re-design your compensation plans so they are based on your current costs of doing business, including the amount you invest in technology. When you use CompensationMaster's system to design your plans, you can make sure your expenses are covered and build in the profit you need to grow your business. Our consultants can help you design compensation plans that are aggressive and highly competitive in your market. We can also work with you to introduce them to your sales force and managers, ensuring that the introduction occurs with a minimum of disruption and that you get the results you need.
How to Handle Sales Performance After a Merger or Acquisition
No matter how generous the plans are, representatives are going to feel that "the other guys have a better deal."
When companies go into a merger or acquisition, there is often a tendency to leave compensation alone – the feeling is that the ownership change will be traumatic enough without changing the commission structure too.
However, this leads to problems. Invariably, representatives compare plans. There are bound to be differences: different commission levels, base salaries, incentives, perquisites, benefits and more.
No matter how generous the plans are, representatives are going to feel that "the other guys have a better deal."
One company's reps see that sales associates at the other company receive a higher commission, while the other company's reps notice the higher level of administrative support and lead generation the first company provides.
To keep everyone happy, there's a tendency to creep towards a plan that has the best of both – higher commissions and higher levels of support, services and benefits. This can be disastrous.
The longer it goes on, the worse it becomes. Top producers have the leverage to cut better deals for themselves, and resentments build and fester.
Additionally, the longer plans are left alone, the harder it becomes to find a good time to make a change.
Right after a merger or acquisition is the perfect time to rationalize compensation. Creating new compensation plans makes a clear statement of the company's goals and positions everyone to move forward without the baggage of the old arrangements.
Start by asking sales people from both companies what they like and don't like about their compensation structures. You'll get good feedback that will help you design new plans, and you'll also have information about what works and doesn't work that you can use to better manage the combined sales force.
The simple act of asking what they want sends a powerful message to the sales force and is an excellent retention device.
Then you need to decide what value proposition you want to offer the sales force. Can you combine what each company is doing now? If one company has a particularly attractive culture, you may want to transition everyone to that offering. Or it may make sense to start over with something brand new.
You can take this opportunity to rationalize the compensation structures, bringing them into line with what the sales force needs and wants. Maybe some of the services or benefits one of the companies offered are no longer needed. We have actually seen companies pay for an acquisition simply by restructuring compensation.
Don't forget to do a thorough financial analysis of any proposed changes. We saw a merger once where one of the companies offered a very generous commission at high sales levels, which they could afford to do because very few people ever reached that level. The company they merged with had far more high producers, and when management decided to offer that plan to everyone they quickly found themselves in serious trouble.
Of course, you need to take into account the revised cost structure of the new company. You'll be saving money through consolidation and reducing duplicate costs. Those savings can go to the bottom line.
Or you might invest them in your sales force by designing plans that provide higher commissions – which would be highly motivational to the existing sales force and very useful for recruiting.
By taking advantage of a merger or acquisition to revise your compensation plans, you can better meet the needs of the combined sales force and position your company for greater growth in the future.
But the increase in productivity is the most powerful benefit. It is not at all unusual to see productivity gains of 30% in the first year sales representatives are given a choice of compensation plans.