Posts Tagged ‘ted briggs’

You Can Set Better Quotas by Focusing on Better Sales Planning

Monday, May 13th, 2013

By Clinton Gott and Ted Briggs

Quota Plans are Plentiful but Good Quota Setting Processes are Not

Quota based plans are very prevalent today and with good reason.   Quotas allow for customizable plans taking into account the unique qualities and potential of each territory.   They promote “fairness”, are easy to understand, and are relatively easy to administer.

However, the most common complaint that we hear  when working with clients that use quotas is “we are not good at setting quotas” followed by “ can you help us set quotas better”.   As sales compensation and sales effectiveness consultants, we at BSC most certainly can and do help our clients set better quotas by employing a tried and true process that includes both top-down and bottoms-up forecasting along with a mathematical approach to allocating national and regional forecasts to territories.  A basic quota process methodology often looks like Exhibit 1.

That being said, we often encounter overly simplistic approaches to allocating quotas to individual territories such as the “peanut butter” method where the national goal or growth goal is equally spread out over all territories.  Some augment this approach using a “chunky-style” peanut butter method (if you will) that includes territory size as a modifier for allocation (e.g., larger territories have to grow less as a percentage than smaller territories).

Quota Setting is a Direct By-product of Sales Planning

However, what these simplistic approaches ignore or gloss over is that quota setting is really just a by-product of good sales planning.  The best methods for sales planning include taking into account both “internal” factors such as financial data and “external” data such as market opportunity and access.  This type of approach allows each territory manager to take into account the key drivers of sales potential.  That includes not only territory size but characteristics such as customer population density, competitive threats, access to customers, regional cultural norms, and regulatory differences, to name just a few.

The good news is that companies are already capturing data on most of these characteristics in the ubiquitous salesforce automation systems that have been increasingly deployed over the last few years.  And even if at headquarters, some characteristics like customer access lack hard quantitative data, we  can use these tools to get directionally accurate information from the people who should have the most insight, namely the territory representatives themselves.

Set Better Quotas and Improve Sales Planning

That is why we encourage our clients to use a Quota Setting Framework that utilizes both internal and external factors to set quotas (see Exhibit 2).

A simple such framework would involve picking the 3 or 4 factors that impact sales potential for each territory and for which you do not have hard data (such as sales volume) and have the territory reps and their managers rate each factor on a scale of 1 to 3.  These ratings can be aggregated and translated into a growth or allocation factor for each territory that leads to better quotas that reflect a truer picture of territory potential. While not a perfect mathematical solution, these inputs can represent “the art” element in the art and science nature of quota setting.

Of key importance, these same factor ratings can then be used for more meaningful and impactful sale planning discussions between territory reps and their first line managers.  These strategic and tactical coaching opportunities can have a great impact on overall sales results.

In summary, using a better quota setting process is really using a better overall sales planning process, which can help you to recognize the true value of a great sales incentive plan – increased sales performance!

Introduction to Compensation Cost of Sales (CCOS)

Monday, May 6th, 2013

By Ted Briggs

After almost 25 years of consulting with leading companies on sales effectiveness and sales compensation, I’ve come to the conclusion that other than calling every sales compensation plan “commissions”, the most misunderstood and mis-applied concept in sales compensation is CCOS, compensation cost of sales. In this blog, we will examine what is CCOS and why should a company look internally rather than externally when using this important metric.

What is CCOS and Why Should a Company Look Internally rather than Externally?

Before providing a definition of Compensation Cost of Sales (CCOS), let me first tell you a familiar story. Whether it comes from an email question to our firm, or a question in an initial client meeting, we are frequently asked: “What’s the average commission rate in our industry?” as if it’s a test of our knowledge and expertise, or some attempt to defend a company’s current plans against some internal attack that their plans are too rich. My favorite answer is “2.4%”, said with much certainty and a wry smile or emoticon if electronic. I often want to reply as Marisa Tomei responded in her Oscar winning performance in “My Cousin Vinny”…”That’s a b&%%$#!+ question.”

Naturally, commission rates vary widely even in similar industries, as well as within a single company, as roles vary (e.g., major or global account roles versus territory or inside sales roles). This is because compensation levels and base salary to incentive ratios typically vary by role, as do the range of expected sales volumes. Try creating an average rate by company, more or less across companies, and you quickly realize how unimportant that comparison actually is. Try selling the comparison to your sales leaders and you’ll be pushed back farther than you may be able to able to recover.

The question companies really seek to ask is how much am I spending on my sales force versus other companies. This too is a challenging concept. Cost of Selling studies are rife with definitional inconsistencies as to what categories of cost to include (sales office building leases, overhead allocation, etc.) as well as whether the denominator should be actual current period revenue, or sales bookings.

Ultimately, the one comparable ratio becomes CCOS, which looks at what current period compensation (base and variable) is as a percentage of current period revenue. This measure is really a productivity measure answering: how much of every dollar do I have to spend to get a dollar of revenue? Naturally, in some businesses, total bookings, or even total gross margins (especially in distribution) may be a better denominator, but for most product based companies, revenue is the best metric. Of critical importance is to use a real financial measure, rather than sales crediting, which can be a distinctly different currency due to modifications in deal values and multiple sales crediting.

CCOS = [Total Salaries Paid + Total Incentives]/Total Revenue

Once calculated, the question becomes how to get data to compare it to. Absent having a benevolent consultant conduct one for free, you can charter a study with comparable companies. But once you get the data, what do you do? Let’s say you find that you are in the 70th percentile of spend….what do you do?

Do you cut pay, increase quotas, or reduce accelerators? Probably not! Assume you’re in the low 30th percentile of spend…now what? Raise pay, add salespeople?

Actually, what you need to do is look internal… deeply internal, and look over time to see trends. A total company CCOS rate is like an average of averages, and an average productivity measure gives you nothing with which to analyze and improve. First, you need to look at the detail, segment by segment, as well as region by region. Here, you can identify where you are performing most effectively, and least effectively. Next, you should look at not just last year, or this year’s target; include two years ago, so that you can see a trend. Which segments or regions are improving. This data gives you a chance to look for root causes of increased or decreased effectiveness.

One other cut of CCOS we like to see is new hires versus sellers with at least a year of experience. This can help you examine your investment in incremental headcount growth, and not apply the same treatment to all sellers. This can keep you from burdening legacy employees with extra quota to try and afford new talent.

One last thing to examine is a look at relative performance of each of your segments and regions versus your market. By defining and reviewing the growth rate with the CCOS trends, you can identify where results and effectiveness are best aligned, and of course, where they are not. This can help you understand your relative achievement versus the competition or broad market, and how effective your spend is in reaching those performance levels. The following table shows examples and some conclusions you might make.

This can help you focus your sales management efforts on coaching, training or even talent recruitment to try to drive incremental results. You can also do root cause analysis to see if there are competitive factors hurting or helping you in those specific segments or regions. Lastly, it can help you develop segment specific sales compensation plans and targets that better suit the environment in which the sellers are actually performing, and can better drive their motivation to succeed.