All businesses face opportunity costs. In the case of a sales organization, money, time, and effort allocated to accounts A and B are resources not available for accounts C, D, and so on. That reality drives the distinction between effectiveness (optimization by doing the right things) and efficiency (doing things right) that Peter Drucker and others made years ago.
A confusion between efficiency and optimization plagues many sales efforts. If we use an automobile analogy, sales efficiency (SE) initiatives — like CRM, training, and KPI dashboards — improve the engine’s horsepower. Sales optimization (SO) decisions — like aligning sales tasks with business strategy, customer selection, and sales force deployment across opportunities — set the direction in which the car will travel. As the saying goes, “If you don’t know where you’re going, any road will take you there.” But if a car is going in the wrong direction, getting there faster is not the solution.
Companies will spend about $30 billion on CRM alone by the end of 2015, according to Gartner. But consider the work of the Boston Consulting Group,which indicates that SO practices, such as targeting high-value customers and deploying sales resources with strategically-appropriate criteria, have more than three times the impact on revenue growth than SE initiatives.
The lesson is clear: How and where you allocate available sales resources is where the leverage resides for more profitable growth.
Once you appreciate the importance of sales optimization, you need to focus on four capabilities, which will help you form a foundation on which to build a productive sales culture.
Strategy and planning process. According to surveys, about two-thirds of companies treat strategic planning as an annual precursor to the capital budgeting process. Companies tend to do plans by business unit, regardless of the firm’s go-to-market approach (which often spans business units). Further, this process now takes, on average, four to five months. While this is going on, the market is doing what the market will do. No wonder only 11% of executives say that strategic planning is worth the effort, and why in a survey of 1,800 executives more than half (53%) of the respondents said their employees don’t understand their company’s strategy.
Keep in mind: Customers’ buying processes have no interest in accommodating your planning process, so sales must respond account by account. Hence, even if the output of planning is a great strategy (a big if), the process itself often makes it irrelevant to those on the front lines who must make important decisions throughout the year in accord with external buying rhythms and selling cycles.
Cost-to-serve and customer selection. All customers are not equal, and prioritizing customers is how firms make real the crucial “scope” component of a coherent strategy — i.e., decisions about where to play in a market. Profit is the difference between the price a customer pays the seller and the seller’s total cost-to-serve a customer, which can vary dramatically. Some customers require more sales calls, or geography makes them more or less expensive to serve; some buy in large, production-efficient order volumes, while others buy with many just-in-time or custom orders that affect setup time, delivery logistics, and other elements of cost to serve.
These differences are important, if you, or your investors, take seriously the notion of return on capital, because many capital costs are embedded in cost-to-serve differences, which are typically ignored in SE metrics. If you can’t measure your cost-to-serve, then your salespeople will be driven by competing price proposals. And when you chase price and volume — as most sales compensation plans provide an incentive for salespeople to do — you can wind up damaging profits and your business model. You won’t allocate sales resources optimally.
Finally, you are ultimately at the mercy of competitors who can measure their true costs and do these things more effectively.
Sales capacity and allocation of effort. Sales productivity is largely determined by how much the sales force can do in terms of call capacity and its capability to reach target customers. Allocating that capacity is a crucial SO lever, but many leaders lump SE and SO together and the result is a strategically inappropriate allocation of resources. The issue is not lack of data. It’s knowing what data and how to use it.
A common metric used by the C-Suite for evaluating sales is the expense-to-revenue ratio. This SE measure can shed light on the relative cost efficiency of selling activities, but not (by itself) on their cost effectiveness, which is a more complex relationship between selling costs, revenues, profit margins, and customers acquired through one or another means of organizing sales resources.
Big data analytics make these relationships accessible. But the average U.S. firm with more than 1,000 employees already has more data in its CRM system than in the entire Library of Congress. To make sense of this tsunami of factoids, never forget that data and analysis are not ends in themselves. To have value, your analysis must result in better resource allocation decisions.
Good leaders know that data are not just numbers; they are also a way of viewing reality by the people who should use that data. And sales people will ignore analytics that they can’t apply to where they live: in daily encounters with customers.
Performance reviews. The most under-utilized lever for improving sales is the performance review. Busy sales managers tend to treat reviews as cursory, drive-by conversations that are mainly about compensation, not evaluation and development.
Yet, core SO issues are often only apparent at the account level and via conversations with those account managers. Reviews are where strategic direction (versus a random-walk allocation of effort) is revealed, where call patterns and customer selection are supported or changed, and where data are applied to customer interactions. Effective reviews can look at options ranging from changing prices to reflect cost to serve, reducing technical support for certain customer segments, changing the locus of relevant support, determining different ordering or delivery options, and perhaps instituting a channel strategy that offloads some cost-to-serve to resellers whose economies of scope allow them to perform these tasks more efficiently.
Aligning strategy and sales also means sometimes “firing” customers that, despite all attempts, remain unprofitable accounts. It would be naïve to expect salespeople, especially those bonused on volume, to do that on their own. Managers must manage this decision.
It’s not our intention to discourage efficiency improvements. But ultimately there is no such thing as effective selling, no matter how efficient versus a benchmark, if it is not linked to your strategic goals. SO decisions are the prerequisite for any SE improvements. Among other things, a focus on SO allows sales leaders to grow the top line using the resources they already have by deliberately focusing selling efforts on what will really make a difference.
This article was originally published in Harvard Business Review on June 16th 2015