BIG Hat, NO Cattle? | Thriving in a Market Downturn

Thriving in a Market Downturn

By David J. Cocks, CEO

Is your business all hat and no cattle? In other words, are you focusing on increasing revenue at the expense of profit?

A lot of business owners focus primarily on top-line revenue growth, even though a business can't be run on revenue alone.

Here are some common misconceptions we see in the market:

Top Producers = Profit

Betting the farm on top producers might leave you without a farm. Big-name sales associates can negotiate high commissions and generous perquisites. Although their volume is impressive, it is not unusual to find companies losing money on their most productive sales associates.

Mergers and Acquisitions = Profit

One of the most popular ways to grow a business is by acquiring or merging with another company. But if the company was not properly valued, efficiencies don't materialize as expected, or compensation plans are not restructured to reflect the combined company's expense structure, the net result can be negative.

Cash Flow = Profit

In smaller companies, we often see owners who pay themselves with what's left over after expenses are covered. Although this helps ensure the company's cash flow, it's not an accurate accounting of profitability. Owners who sell need to pay themselves as if they were regular sales associates – and compensate themselves for the time they spend managing the business.

How Healthy is Your Business?

Even if your revenue is on a steady upward trend, your business may have hidden profitability problems. Now that you've paid your taxes and have all your year-end numbers, it's a good time to do a quick check to make sure your cattle are growing as fast as your hat.

You'll need a few statistics for the past three years to do the assessment:

• Total revenue;
• Total expenses;
• Operating profit;
• Sales representatives ranked by production.

First, look at the trends to make sure both revenue and profit are increasing, and then calculate the percentage increases. If revenue and profit aren't growing at the same rate, that's a red flag.

Now look at expenses. They should be growing at a slower rate than revenue. If not, that's a red flag.

Last, look at sales force production levels for the past couple years. If they're not stable, that's a red flag.

Did You Find Any Red Flags?

If you did, there's still time to make changes. Adjusting compensation plans can help solve some of the toughest profitability problems. We encourage you to discuss any red flags with your accountant, and of course, give us a call to see how we can help.

The bottom line: make sure you don't spend so much time focusing on your big hat that you don't have a place to hang it at the end of the day. 

Aligning the Goals of the Sales Force & Management

By David J. Cocks, CEO

When management start talking about increasing profitability, sales representatives start to worry. They know improving profitability usually means cutting commissions and eliminating expenses, possibly for marketing, administrative support or benefits they value. They are concerned the increased profitability will come at their expense.

But that's not the way CM Global Partners and CompensationMaster approach the situation.

One of the main reasons our system is so successful is we don't just come in and transfer money from sales representatives to the company. We wouldn't be able to achieve the 98% retention rate we are currently getting if that was the way we worked.

Instead, our strategy is to optimize the way our clients do business.

Better Meet The Needs Of The Sales Force

First, we re-allocate expenses to better meet the needs of the sales force. We come in and analyze the market, the sales force, and the company's financials. We talk with the sales representatives and find out what they want. Very often this produces some surprises for the management team, which may not have realized the needs of the sales reps have changed. We identify groups of sales representatives that are not having their needs met and look at what the company can do to better meet those needs.

Very often we can identify expenses no longer providing the value they should. In some cases there are benefits the sales force doesn't want anymore. For example, sales representatives might not want health insurance because spouses' employers provide coverage. In other cases, investing in training or additional administrative support might give the firm a competitive advantage in its market. We help our clients re-allocate their expenses to produce the maximum value for the sales force.

Motivate Effectively With The Right Commissions

Then we design compensation plans that are consistent and fair to everyone. We eliminate exceptions and disincentives to greater production. We try to give all the sales representatives the same opportunity to increase the amount of money they make.

We like to offer a variety of plans so each sales representative can choose the risk- reward combination that he or she finds most exciting and motivational. And we make sure the sales representatives are paid as much as possible while ensuring that the company has enough money to pay its bills and make a profit.

Reward Sales Force For Increasing Revenue And Reducing Expenses

One advantage of our system is we tie together human resources, finance and sales management, and align the goals of those three groups.

With a contribution-based approach, sales representatives are responsible for contributing their fair share towards corporate expenses and profit. Once a contribution has been made, they are able to keep most of the rest of the revenue they bring in.

Sales representatives are motivated to increase revenue; as they sell more, they make more. But with this system they also increase their income by reducing expenses. When expenses drop, the amount they have to contribute decreases, so they keep more of the money they bring into the company.

The result is that the sales representatives acquire a perspective similar to the one management has, with twin goals: increasing revenue and keeping expenses under control.

NEW PRESS: Your Front Line Sales Manager - Glorified Sales Rep or Driver of Growth?

CM Global Partner's CEO, David J. Cocks, has recently been interviewed by David Massover in an Ebook titled Your Front Line Sales Manager - Glorified Sales Rep or Driver of Growth.

We are thrilled to share the below with our community - below note from David Massover:

Being a front line sales manager or the executive that front line salespeople report to is tough - and even tougher when they have a personal quota to meet.

So which is it? Should front line sales managers sell to their own accounts and if so how much - and how does that impact their ability to help the salespeople who report to them do better...

In other words, which role is right - individual contributor or team leader?

In many cases, it is a little of both, and in most - not enough of the leader part, and a lot of conflict between the two roles!

To help open up this question, I interviewed six sales experts from a variety of perspectives and compiled their interviews into a “simulated panel discussion eBook” called Your Front Line Sales Manager - Glorified Sales Rep or Driver of Growth.

READ NOW

How Profitable Was This Year?

Now you're about to close the books for the year, it's time to take a look at your results and see what changes – if any – need to be made for 2016.

First, obtain the following statistics for the past three years. If you don't already have them at your fingertips, they should be in the end-of-year information you get from your accountant:

1. Total Revenue;
2. Total Expenses;
3. Operating Profit;
4. Sales Representatives Ranked by Production.

Start by looking at the trends. Revenue and profit should both be increasing. Now calculate the percentage increases. Are they comparable? Revenue and profit should be growing at the same rate. If they aren't, that's your first indicator of a problem.

Now look at expenses. They should be growing at a slower rate than revenue – and, optimally, slower than profit. If not, that's a second indicator. Also look at what expenses are increasing. Are they temporary investments that will help you increase revenue, or are they permanent?

Finally, look at production levels for your sales force over the past couple years. Are they fairly stable? If there have been lots of changes, particularly if revenue is up and profit is not, that's a third indicator. Significant increases in productivity, such as those brought about by the Internet or customer relationship management software, cause many financial problems.

How did your company do?

If you passed with flying colors, congratulations! If not, there's still plenty of time to make changes. Many profitability problems can be fixed, particularly in commission- based industries, by adjusting your compensation plans appropriately. At a minimum, though, you'll want to go over the results with your accountants. 

At CM Global Partners, we regularly perform 'current state assessments' which help to identify the pain, conflict and waste in sales compensations in companies.

Many companies rush to alter the sales compensation without going through this process. It's better to get your compensation plans right and introduce them mid-year for example, than to introduce plans in early January that you've rushed into and might have adverse consequences.

TALK TO US about how you can apply LEAN to your sales compensation and get a competitive advantage.

Happy Holidays, and have a fantastic New Year.

David J. Cocks, CEO

Applying Strength-Based LEAN Six Sigma to Sales Compensation

By David J. Cocks

Can applying a strength-based LEAN Six Sigma methodology augment and improve sales force compensation plan development? In short; YES.

Traditional LEAN Six Sigma

The traditional application of the LEAN Six Sigma method for sales force compensation begins by defining the pain, conflict, and waste in a company’s sales compensation strategy. But focusing on problems saps motivation and has negative effects on sales staff retention.  

Instead of conducting a LEAN Six Sigma analysis with the hope of correcting a perceived problem and an ultimate return to the even-keel state of business mediocrity, a strength-based approach draws attention to the strengths of the company as well as the sales team, and subsequently initiates changes that encourage continuous improvement and growth of both the company and individual sales representatives. 

Serious Consequences Result From Poorly Designed Compensation Plans

In the past, sales force compensation plans have been based on conjectured industry standards, competitive pressures, and outdated notions of objectivity. When exceptions are made for specific individuals, the unfairness quotient increases, eventually leading to the loss of vital members of the sales team. 

Imagine a sales representative who refuses to continue pursuing sales after reaching a poorly-designed predetermined compensation cap, or a company that loses a large percentage of its forecasted profit by promising unsustainable compensation to a sales team livewire. In both circumstances, someone stands to lose money and gain a mindset of resentment.

Strength-Based Approach is More Effective

When the strength-based LEAN Six Sigma process is applied to sales force compensation, significant benefits accrue to both the company and individual members of the sales force. 

Begin by thinking of your sales representatives as customers.

Just as you offer your regular customers products and services, consider how you can offer your sales executives a unique bundle of compensation and benefits that attract them to your company, motivate and retain them. 

With a strength-based approach, you can find the strengths of the company through the eyes of your customers (i.e., the sales representatives), who are in the market and aware of the strengths and weaknesses of your competitors.

A Strategic, Strength-Based Discovery Methodology

When CM Partners starts working with a client, we do interviews with the sales representatives and management team to identify those strengths. We use a narrative interview style, with 21 questions designed to identify the strengths of the company as well as the individual sales executives. Of the 21, only one is compensation-related. For example, we ask “Why did you join the company, and does that still hold true today?”  

Some interview questions help us identify issues that might be holding the company back, such as “Are there any policies that are unfair or make it harder for you to do your business?” and “Is there anything we are doing today that, if improved upon, would be really useful?”

Unlike internal company surveys, which are often designed around existing policies and agendas, this approach brings us in as an unbiased third party that can offer an environment of total confidentiality. Sales representatives typically respond very well to this approach. They are eager to share their thoughts and help make the company better. Often, they are ahead of us, telling us how to improve things before we even get to those questions. 

When designed like this, the interview process is a critical component of the solution, allowing the sales team to feel heard and helping bond them to the company. 

War Room Involves the C-Suite

Once the interviews are complete we analyze the results, looking for common themes, and present the results to the C-suite in what we call a “War Room.” We discuss the perceived strengths and barriers, focusing on the opportunities and continuous improvement. 

Executives join us for a productive exploration, focused on learning to see the strengths in their process and looking for ways to improve what they have, communicate more effectively, and get creative about addressing issues.

Coming out of the War Room, we craft a framework for a strategic approach to sales compensation. Then a mathematical layer is added.

Adaptive Algorithmic Business Model Validates the Compensation Strategy

We connect sales compensation directly to the profit and loss statement (P&L), creating an adaptive algorithmic business model that incorporates predicted sales distribution and expenses, and is compared with competitors’ plans.

The company can now develop a new compensation strategy that builds on the strengths of the business; addresses pain, conflict and waste; and delivers a powerful and sustainable competitive advantage.

It is possible, for example, to create different compensation plans to address various product lines, or to design specific plans for top producers who are willing to trade greater risk for a higher payout. With the model, compensation plans can be designed that sound very different and appeal to different sectors of the sales team while meeting the same profitability requirements. 

The model acts as a validity check – it allows the company to analyze the results of the projected changes with a great deal of precision – to know ahead of time what impact the sales compensation changes will have on revenue, profitability, sales force retention, recruiting, productivity, and shareholder value.

CASE STUDY: Revenue Increases to 209%

To illustrate the strength-based approach, let’s look at one client we worked with. When we asked the question “Is there anything that the company is doing that if improved upon could really be useful?” the sales force mentioned that the matching 401K retirement plan for salaried employees was very attractive. But they were not able to take advantage of it because they were independent contractors and not eligible to participate.

After discussion in the War Room, the company decided to implement a CMGP wealth-building program that followed approved SEC guidelines and would apply to the sales force as independent contractors. This program was build into the newly created sales compensation programs. 

The sales force was very pleased, stating that this was the best program the company had created for them and that it “beat the competition hands-down.” 

In the following year, the company saw a significant increase in production from the existing sales team and was able to attract more top sales talent. Gross revenue increased to 209% and company operating profit rose to 191%.

As you can see, with this approach, the sales compensation plan development process builds on the company’s strengths, and relies on the collaborative efforts of the entire team, not just the sales department or managers alone. 

Benefits From Applying Strength-Based LEAN Six Sigma

Why does strength-based LEAN Six Sigma work for sales force compensation?

• Allows a narrative process improvement – Sales and sales compensation are processes, not policies. When a company’s management treats sales compensation as a dynamic process that requires input and feedback for evolution, instead of a stagnant company dogma, significant improvements are possible. For instance, most sales processes are 85% pure waste. Considering sales force compensation as a process allows the team to identify and reduce the waste that is impacting the company and the top sales representatives.
• Doesn’t rely on sales volume metrics – Traditionally, when a member of a sales team closes a sale, there is a documented increase in sales volume and the sales representative receives predetermined compensation. Inherently inefficient, this method is like a manufacturing company that only develops cost-per-unit metrics for good parts but fails to calculate the loss of scrap or reworked items. For instance, consider the time spent on unclosed sales or manipulating a sale to better fit a needy client. However, when companies connect sales force compensation with the P&L, they are able to see how the sales process influences overall financials.  
• Manageable contribution-based sales compensation – When executives consider sales force compensation, they often only see an unmanageable tide of money that ebbs and flows with sales activity. By modeling contribution-based sales compensation plans, executives can more accurately predict the effects of a sales tsunami or drought on other aspects of their business.
• Provides bottom-line insight – Executives who consider the development of sales force compensation plans a process improvement can see improvements to the company capital, and not only the sales volume.  Also, the methodology allows for successful waste remediation that can improve efficiency and provide the company with previously lost funds.

Issues in Implementing Strength-Based LEAN Six Sigma

Despite the benefits of adopting a strength-based LEAN Six Sigma process for designing and managing sales force compensation, resistance to change can stand in the way of its successful implementation.

• Emotional attachment - Often, executives are unable to clearly observe all the moving parts of their company’s machine and instead rely on a nebulous impression to make decisions. Consequently, they fail to recognize the problems or innate waste in their processes. Similar to manufacturing, sales force compensation requires LEAN tools and processes to eliminate waste and discover obstacles to success.  For example, an executive that blindly trusts their established sales force compensation plans are competitive and comparable to other contender’s plans can expect to lose their tops sales talent, customers, and market share. Electing to preserve personal comfort and maintain sales compensation plans that are based purely on conjecture will eventually cause unnecessary setbacks.
• “Status quo-or-die” management – Some executives do not consider sales or sales compensation as a process, but a management decision that once made must be maintained like it is company policy. This is the same as if a manufacturing process has internal policies that are self-imposed and are keeping the process from being improved yet management does not view it that way.
• Aversion to change – Consider an executive who does not classify sales force compensation as a process, but rather a static policy. Since companies do not normally track the efficaciousness of policies, the executive does not have access to relevant compensation metrics. Essentially, the executive does not know what they do not know. The data dearth eliminates their ability to identify factors that compel preemptive changes and is subsequently limited to resolving crises discovered after damage is incurred.
• Fear of loss – Sometimes, a company’s management is reluctant to effect financial changes due to preconceived, and often unfounded, beliefs that the change will cause their company’s future financial failure. Citing the absence of a well-defined method on which to model new compensation plans, they automatically refuse to move forward. This is similar to a manufacturing company refusing to improve quality because they believe it will cost them too much money.
• Donning business blinders– In many companies, executives draw conclusions about their sales based on an erroneous perception of their company’s current state of sales force compensation. When executives see the valid current state through the strength-based lens, including the ever present LEAN visible waste, they can transform their decision making and sales process in to a more profitable and competitive model.

Focusing on what works raises energy and motivation. A strength-based LEAN Six Sigma approach to sales force compensation creates a committed and focused sales team that continues to generate sales and actively engage in an improvement initiative. Creativity is higher than that generated by following traditional improvement methods, and innovation is therefore easier to achieve. Leveraging current or past knowledge of experiences and successes from within the system provides great resources for the next generation of sales force compensation plans. 

Authored by David Cocks, CEO, and Kevin Klump, Director, of CM Global Partners. CM Global Partners specializes in applying LEAN techniques to sales force compensation. Over the past 20 years, the company has developed innovative compensation plans that are in use by more than 65,000 sales professionals around the world. David can be reached at david@cmglobalpartners.com.

Can Companies Improve Their Sales Process Using Strength Based LEAN?

By Kevin Klump

Sales are regarded as a mysterious art where performance depends almost entirely on individual ability. Organizations tinker with compensation schemes and metrics, but never really look to solve problems or eliminate the waste in their processes.

Most sales processes are 85% PURE WASTE and add no value whatsoever to either the customer, profitability of the company, or the performance of the sales representative. The way to unlock this huge cost drain is to apply Strength Based LEAN improvements.

Here is a great example. Let's say a sales person has a territory with a certain number of customers. Eighty percent of the time available to sell might be spent doing paperwork, waiting for things to happen, retrieving information or complying with internal requirements, which have nothing at all to do with the customer, the company's bottom line, or the company's or sales representatives profitability. 

The Right and Wrong Way to Use Strength Based LEAN

By David J. Cocks

Too often companies are afraid of making improvements to their sales process because they do not want to stop what they are doing and start over EVEN if their processes are broken. When applying Strength Based LEAN you can identify what is being done correctly -- and build onto it.

Strength Based LEAN allows clients to still remove waste from their processes while keeping their business and processes in place. Too often companies try to make improvements and end up destroying what is working and doing more harm than good; instead of building on what is right and identifying waste.

Top 6 Considerations When Applying LEAN To Sales Force Compensation

By David J. Cocks

The challenge of designing sales force compensation plans is to create an environment where sales people are motivated and a transparently business culture is created. It is vital as many obstacles as possible are removed from the process so sales people can maximize their results while ensuring the company’s greater goals are met. Those goals could include achieving profitability targets, increasing revenue, controlling expenses or recruiting and retaining a desired sales force.  

From our experience spanning over 25 years, the below points are vital to enhance the process of successfully setting up LEAN to your sales force compensation plans. 

Treat Everyone Fairly and Consistently

If you have longevity bonuses or other features built in that give one group of people a built-in advantage, this is a good time to remove them. The best way to be fair is to give everyone the same opportunity to excel – and to pay them based on current production, not what they did in the past or might do in the future. When you do this, you build in a level of transparency and trust that is deeply appreciated by your sales people.

Offer A Variety Of Compensation Plans

The reality is that not all sales people are the same, and what motivates them isn’t always the same. Someone who has just joined your company will need more training; a top producer may want administrative assistance or more control over money spent on marketing and lead generation. Personal issues come into play too – someone who has college age children or is getting close to retirement might be more risk-averse and prefer a compensation plan that offers greater security. Or they might be ready to go for broke and do whatever gives them the chance to make the highest income. The simple fact is that offering a variety of compensation options makes your company more competitive – your sales associates can evolve their capabilities and grow in their careers, and get compensated appropriately. They don’t have to leave your company to get a different style of compensation that is more suitable to their current situation.  

Take This Opportunity To Re-Examine Past Deals

Re-examine the company’s business model. Why are people working for you rather than a competitor? What sets you apart? Do you have a clear, defined value proposition? If you do, your compensation plan should support your value. If not, you may have some changes to make. Don’t be afraid to question long-standing policies or services. Just because your sales associates negotiated for something years ago doesn’t mean they still want or need it. Put everything on the table and don’t be afraid to craft a vision that is brand new – even revolutionary. You’ll be surprised at how much energy a brand new, crystal clear value proposition can create.  

Use Business Modeling Software To Project Results Ahead Of Time

When you are making significant changes to your company’s sales force compensation, it is essential to know ahead of time the impact those changes are likely to have on total revenue and profitability. You can do projections in accounting software or Excel, but using business modeling software such as CompensationMaster’s makes it easier to see the big picture as well as interpret the nuances.  

Make Sure The Sales Force Wins! 

Oftentimes, sales associates are reluctant to have commission structures changed because they believe any change involves money coming out of their pocket. But if your new plans are designed correctly, sales associates should be able to make more than ever before. You also want to make sure they win on the sup- port and services issues. This is one reason the focus groups are so important – when you know what the sales force cares about, you are better able to re-allocate expenses to give them what they want. A sales force full of people who are powerfully motivated and have had disincentives to greater production removed is going to propel the company to increase revenue like never before.  

Measure Results

There are a variety of numbers you should track when you change compensation plans, including the increased productivity of people who are on the new plans, enhanced recruiting, retention of sales associates, and more. Start with a bench- mark before you introduce the new plans and track important statistics over the year after you launch the new structure. You’ll find it easier to report on ROI, as well as to see which offices or regions are surpassing others.

Top 4 Tips To Ensuring 2015 Is More Profitable Than Last Year

By David J. Cocks

You have closed the books for last year so now it's time to look at your results and see what changes, if any, need to be made for this year.

Tip #1 

Obtain the following statistics for the past three years. If you don't already have them at your fingertips, they should be in the end-of-year information you get from your accountant: 

•Total revenue 

•Total expenses 

•Operating profit 

•Sales representatives ranked by production

Tip #2 

Start by looking at the trends. Revenue and profit should both be increasing. Now calculate the percentage increases. Are they comparable? Revenue and profit should be growing at the same rate. If they aren't, that's your first indicator of a problem.

Tip #3 

Now look at expenses. They should be growing at a slower rate than revenue – and, optimally, slower than profit. If not, that's a second indicator. Also look at what expenses are increasing. Are they temporary investments that will help you increase revenue, or are they permanent?

Tip #4 

Finally, look at production levels for your sales force over the past couple years. Are they fairly stable? If there have been lots of changes, particularly if revenue is up and profit is not, that's a third indicator. Significant increases in productivity, such as those brought about by the Internet or customer relationship management software, cause many financial problems.

How Did You Rate? 

If you passed with flying colors, congratulations! If not, there's still plenty of time to make changes. Many profitability problems can be fixed, particularly in commission-based industries, by adjusting your compensation plans appropriately.

Top 4 Things To Avoid When Applying LEAN To Sales Force Compensation

By David J. Cocks

When compensation plans are structured correctly, it is possible to achieve all of your goals at the same time. Sales people can be paid the maximum possible while ensuring that corporate expenses are covered and profitability goals reached. Goals of the sales team and executive management can be aligned, with it being clearly in everyone’s interest to maximize revenue and control expenses.  

The company that structures its strategies correctly and with the right partner can gain a competitive advantage over other businesses by drawing the right people to the business almost magnetically. Here are some key lessons to avoid to ensure a successful restructure. 

Don’t Assume You Know What Your Sales Associates Want! 

Talk to them and ask what style of compensation they would like. When we do focus groups and online surveys of sales associates, we often see situations where managers are surprised by some of the things the sales force says. It’s easy for perceptions to be skewed by a few vocal people, and even managers who do a great job of having their finger on the pulse can find that the needs of sales associates have shifted due to new competitors entering the market or economic changes. It’s important to consider issues beyond commissions, because those can have a powerful impact on motivation. The company may be spending money on benefits that are no longer wanted. Technology changes rapidly, and tools can become outdated fast. Marketing may be delivering collateral the sales force doesn’t value the way it used to. Even office furniture and fixtures can make a difference. You want to determine if you are offering the combination of services and support the sales associates need – you can often identify opportunities to reallocate expenses to spend money on the things that matter more now.  

Don’t Neglect Updating Plans.

 Merit-based compensation plans are not something you can design once and leave alone forever. They need to be updated regularly, partly to meet new competitive situations as other companies enter and leave your market, and partly to take into account the changes in the CPI and prices in your market. You also want to update plans whenever you make an acquisition or engage in a merger. This is the best way to keep your company nimble and aggressive in your market.  

Don’t Skimp On Training Managers.

 Make sure your managers understand the vision and know how to sell it. If they don’t fully understand the value behind your new plans, you won’t get the results you are expecting. So make sure you invest in training them and getting them excited.  

Don’t Make Exceptions. 

There will be people who push back about the new compensation plans. But don’t make exceptions or special deals to keep them satisfied. That undercuts the whole structure of your compensation strategy and damages your integrity. If there is a strong reason to create an exception, instead of making it an exception, consider making it one of your public plans. Hold it to the same standard of profitability as the other plans, and make it available to everyone.