A Better Path to Growth
By Ronald J. Fior, Senior Vice President, Finance & Operations and Chief Financial Officer Last week, I attended the CFO Leadership Summit 2012 in Orlando, where I hosted a workshop on financial modeling on profitably driving sales revenues. As I prepared for the workshop, I realized that my standard sales capacity model for meeting Wall Street targets and growing sales revenues had evolved to look at a series of potentially more powerful variables than just capacity, including sales force productivity and pipeline. In fact, adding sales capacity is the easy answer, and as long as you are capacity constrained and not market constrained, this is an important model to start with. Understanding if you are in fact capacity constrained is a key question you have to answer before you use this model, because if you’re market constrained, you have to apply a model that focuses on other parts of the business. If you make the assumption you are capacity constrained, you can use basic sensitivity analysis showing the number of quota carrying reps against the expected level of attainment (this is based on looking at historical attainment for the last 2 years.) This gives you a ballpark of the revenues each incremental rep adds. Figure 1 is a simple sensitivity analysis of the impact of adding new reps on revenue at various levels of attainment. Adding new reps will have a positive impact on the topline, but that is not necessarily the case with the bottomline because of the various fixed costs associated with bringing on new employees. Marginal profit from adding new reps is a function of the quota attainments, and unless you can guarantee attainments, your results from adding new reps will be less than optimal. Adding new reps will have a positive impact on the topline, but, again, the key word is profitably driving revenue. It’s very important to look at the cost of adding these reps, and understand the capacity against the revenue that brings profitable revenues. This tells you straight away the levels that will be profitable when you’re pulled into staffing discussions. Other Variables Drive Bigger Wins On looking closer at the model, you can see that a small change in quota attainment makes an even bigger impact on revenues, and holds employee costs constant. For example, consider a company that is at the 400-person, 70% attainment level in the chart above. Adding 10 sales reps increases revenue $1.8 million whereas a 10% increase in attainments will add $10 million, a more than 5x. At a given level of capacity, the biggest opportunity for improvement may well be on quota attainment. Here are some of the key investments we reviewed in the workshop for driving higher attainment levels: Replicating the success of top reps - The fundamental premise of coaching is that high sales performance can be replicated across the sales team, bringing a lift in overall team attainment. By tracking and quantifying the activities and behaviors that drive your top reps, you can begin to correlate top performance with business outcomes, and then use that insight to drive specific improvements in your “B” and “C” players. Use the right incentives - Consider investing in targeted incentives to drive the business you really need, and build models to investigate the impact of these incentives before you roll them out to the field. These include investigating higher leverage on your compensation structure, stepped versus flat for attainment, and accelerators based on monthly, quarterly & annual targets. “Social-ize” the team - Organizations accumulate vast amounts of “tribal” knowledge but struggle to deploy this knowledge to their benefit in sales cycles. The key to doing so is to make this information easily accessible to your highly mobile sales force, and to foster a culture of constant collaboration both within the team and with the customer. Focus on lead quality - The key to selling success starts at the top of the funnel—by generating higher quality leads. By passing quality leads up front you can increase your close rates – potentially the single biggest impact you can drive on attainment levels given fixed capacity. In summary, while head count is a good starting point for modeling, you may be able to deliver strong growth without adding capacity. You may actually be better off making an investment in the productivity of your sales force to boost revenues profitably. Let me know what you think. Email me at email@example.com.
CallidusCloud | March 23rd, 2012