Friday, August 29, 2003

Sales Management Irrationality

Before 9 am this morning I had two sales events that caused me to reflect on sales management irrationality.

The first was the CEO of a small company wanting to sell to a large brand name company. The CEO in question has unproven technology, no track record, no reference sites, no demonstrable business model, and in my judgment was about to try and sell the totally wrong product to the wrong buyer, even if he did have all the missing pieces. But it would have been big if he were right.

The second was a company where the sales reps are paid on what they close for the quarter. The sales rep however, was working with a client following a two step purchase process. First, test and validate the technology. Second, upon demonstration of success, the client would roll out to a hundred sites. The CEO of the supplier was resisting special terms for the initial sales. She was driven by short term goals, is probably going to mess up the test phase and jeopardize any hope of closing the second and larger phase.

So what are some basic sales rules for selling new technology?

1. You better have a compelling reason for people to want to do business with you.
2. You need to have sales people who understand how to pioneer new markets. Typically, that means being able to understand what motivates the buyer, who the buyer is and what their buying process is.
3. You need to have different evaluation measures for those pioneernig relationships than those who are responsible for account development.

Many managers in new companies fail to understand the importance of relationship profitability. In contrast, retailers and financial services organizations know that they live or die by getting repeat sales. Relationships per household is often a key metric in retail financial institutions. And corporate clients are almost always looked upon as relationships.

Now, relationship profitablity in high tech firms has been given a bad name by the many DotCom failures who confused usage with a business model. But it's important to remember that your assumptions about the buying process will have dramatic effect upon:

1. Your pricing model.
2. Your sales management approach.
3. Your close rate with customers.
4. Your overall profitability.

Basically, the way it works in many industries is as follows:

1. It is more expensive to acquire new customers that sell to existing customers.
2. A small number of customers demonstrate a Pareto phenomenon. Often 20% of your customer account for 130% or so of your profits
3. Customers go through a life cycle in their relationship with suppliers. Managing the perception of risk is key to acquiring and growing customers. Price and terms can be varied to reflect the risk customers perceive.
4. Most accounting and incentive systems are focused on short term outcomes not relationship profitability outcomes.

So, if there is a high level of frustration in your organization in the sale force, maybe it's time to think differently about how you pay them.

Consider the two following sale people.

1. The first works very hard and has a very low close rate. He brings in a few very large clients.
2. The second works very hard and has a high close rate, but account penetration dollars are very small initiatially, in spite of the fact he is selling to very large clients.

Which is the better sales person?

I would suggest that it is almost impossible to tell unless you look over the relationship life-cycle. If Salesperson 2, is recent and in subsequent periods of his relationship, his revenues to existing clients continues to increase, while Salesperson 1, keeps on bringing in new accounts who never buy more, then the Salesperson 2 is probably being more effective.

From a revenue risk perspective, Salesperson 2 is probably much lower risk, because his installed base of customers who have tried and validated the product, represent a more likely source of new business than the "Big Hit" strategy with unfamiliar accounts of Salesperson 1.

From a profitability perspective, expanding usage at a client is frequently much less expensive and much profitable as well.

One useful way of thinking about buying models is that there are six stages:

1. Time to qualify
2. Time to purchase
3. Time to competence
4. Time to productivity
5. Time to repeat purchase
6. Time to reputation

It takes time and effort to qualify whether a prospect has the interest, motivation, power and budget to buy.

Time to purchase is a traditional measure of sales activities.

In some industries, it takes a while before the customer can use the product successfully. Making the product easier to use accelerates later stages.

Time to productivity is the least obvious and typically the least well managed by companies. It is the time before the economic decision maker realizes the value from the initial purchase or usage.

Time to repeat purchase is affected by time to productivity.

And the goal for most firms is to build such a reputation that they have become the supplier of preference. In such situations you can say "Noboby ever got fired for buying from IBM/Microsoft/Adobe or whatever vendor has established themselves as the value/reliability leader in their category."

Alistair Davidson

Thursday, August 28, 2003

Why Enterprise Models Can Help Improve Your Performance

Financial modeling, marketing modeling, activity based cost models, simulations, production models -- they have all been popular since computers started to get widely used in the late 1980s and early 1990s.

Buzz words get invented faster that the average manager can keep up but one useful class of models is the "enterprise model". I consider an enterprise model a tool that can help a manager improve his performance by modeling connections and complexity that he cannot model by him or her self. A typical model will look at optimizing the choices and spotting connections that are not easy to address without the help of a tool.

Generally, an enteprise model is characterized by being able to be:

1. Set up quickly.
2. Modified easily.
3. Based up on operational data, but able to abstract operational data into modellable data.

Spreadsheets are one approach, but larger organizations need to look at more capable and robust models. Alacrity Results Management from Cherniak Software at is one such model. It offers the following abilities:

1. Information warehouse class scalability.
2. The ability to provide Business Activity Monitoring or BAM as Gartner now calls the class of software.
3. Modeling and reporting capabilities that can be changed easily.

ARM is unusual in that it can represent enterprise models that traditional technologies such as OLAP (on line analytical processing or multi-dimensional information marts) and relational databases have a hard time representing.

OLAP tools like Hyperion, tend to experience run away growth (or exponential growth) as you try to link too many things together. And they get very slow as a result.

Relational databases e.g. SQL databases such as Oracle or DB2 or SQL-Server have a hard time representing complicated (many-to-many) relationships. They get very slow when the problems become complicated.

ARM is based upon state of the art object database technology but is end-userized to make it accessible to a trained analyst who does not have to be a DBA.

It's very powerful. Take a look at it on my web site at the section on Performance Reporting.

If your OLAP tool is so big that it has to be divided into smaller models. If you can't quite get the information you need out of your databases, then look at ARM. It's an order of magnitude less expensive, can be maintained without a DBA and scales better than traditional technologies. And it can integrate operational and decision support data.

Alistair Davidson
Improving Sales Cycles

When customers aren't buying, you need to ask yourself some important questions:

1. What do my customers care about? What would I want in their shoes?

2. What are customers spending money on that I am currently not providing?

3. How can I provide better value for my customers?

4. How can I take off my inwardly focused set of filters and put on my customer set of filters? How can I walk in the shoes of the customers?

5. Can I add value to my product and service by acquiring other technologies, adding other services, changing sales and business models to match customer needs?

In some cases, you are going to be able to increase your value proposition for your customers and increase your sales.

In other cases, you are going to have to do something new to grow your business.


Sometimes the problem in getting customers to buy is your own set of expectations. In high tech, if you expect purchases to take a long time, they probably will. But if you ask the question: "How can I close customers in two weeks?" you often end up with different ways of running your business.

For an example of this kind of analysis take a look at the white paper

Selling next generation solutions on

Alistair Davidson
Good Technology

Over the past two decades, I have been looking at how technology can improve the way organizations perform.

There are some simple lessons that people often lose site of:

1. I once asked Harvey Gellman, the eminent consultant, buyer of the first computer in Canada in 1952, one of the earliest computer consultants and founder of two major IT consulting firms what he had learned in his career about good information technology and management. He preferred the term "information management" as I do.

His coment was, in his typical humble fashion: "Alistair. I've really only learned one thing about what makes good information technology work. If the CEO doen't care, then the company won't get good information management."

Harvey went on to comment that a typical danger sign in a company was when the CIO reported to the CFO. In such situations, the company tended not to get good information management. When a CIO reported to the CEO, things tended to work better.

2. Most information technology does not work very well. Most people are too insecure about their own knowledge to complain. But take it from an expert, most IT is not very good.

3. Information technology, or more generally, information management can be optimized in many different ways. You can optimize for:

- speed of development
- flexibility
- low cost

But it's pretty hard to optimize for all three. So, understanding your purpose is always the most important aspect of getting good results.

4. Technology is very complicated. I have a rule I have developed. "Increased usage trumps standardization" In other words, although standards keep emerging, the rate of computer usage is broadening so fast, you can't be expert in everything. So you need suppliers, packages and services that simplfy your life. Suppliers can descend learning curves faster than you can.

In the 1980s, Imperial Oil Canada (the Canadian sub of Exxon) built its own "spreadsheet". You can't imagine anyone bothering today. It's a metaphor for the evolving use of information technology.

5. Perhaps the most important lesson of all is that there are differences in the way companies use technology. In my own experience, I have found the following rules of thumb:

- in innovative new technologies, companies can often waste between 50 and 90% of their investment
- it can be worth hiring expertise to save this learning curve
- there are in fact some dramatic differences in performance between suppliers, individuals and technologies

So, the challenge in technology is selecting and working with the people who can perform.

The difference can be an order of magnitude (10X) in costs and sometimes you can obtain both a 10X better cost performance and also get better capabilities too. It's like eating your cake and having it too.

Alistair Davidson

The Future of Broadband

I am positive on broadband. Here's my logic.

SARs, the August blackout of 50M American and Canadians, today's blackout in the London Underground, 9/11, snipers in the Washington, DC area all highlight the fragility of modern society.

Current fiscal policies are refocusing government spending away from infrastructure. Even important infrastructure like education and roads are being underinvested in.

Education has to date not really benefited from reengineering of its educational processes. Road and bridge maintenance programs are major problems. And we have population and car growth.

The inevitable result is transportation gridlock and worsening education.

Broadband is not a panacea, but it does have the following characteristics:

1. It has become very inexpensive and is likely to continue to do so.

2. Communication can substitute for travel. I see nothing but growth for video conferencing. The first spate of digital cameras, and cell phones with cameras is just the first step.

3. It's cheaper to make it easier to communicate than it is to try and build more roads or make flying safer.

So, if you are governments, people are going to figure out that encouraging broadband makes a whole lot of sense if you want to minimize travel and create redundancy in a complex society.

Remember, it's no coincidence that the precursor to the Internet, the ARPANET was designed to provide a network that could survive a nuclear attack. Terrorism may not be nuclear, but the distributed network approach still makes sense.

And then of course there is the issue of decentralized micro-electricity generation via windpower, solar, fuel cells, etc. It seems to make a lot of sense in an uncertain world.

As to the impact of broadband on education, let's look at that in another column.

Alistair Davidson

On-Demand Organizations

IBM is pitching these days the idea of an "on demand organization". It's a clever campaign. It simultaneously is talking about the need to think about Dell as a prototype for business and also their new offering of on-demand computing. When you think Dell, you are looking at how you can transform your organization to:

1. Take advantage of telecom networks like the phone and the Internet;
2. Not get stuck with slow moving and often depreciating inventory;
3. How you can focus on creating the highest possible customer value by selling the best product at the lowest possible price.
4. How you can customize value propositions to create high value and obtain high repeat purchase.
5. How you convert the fixed costs and attendent risks of your business into variable costs and even more importantly, how you can be an incremental cost on someone else's cost structure.

These are important issues today. Most companies underestimate the importance of repeat customers. In many financial services organizations, a small number of customers account for for in excess of 100% of the profits. If you want to destroy a competitor, target their profitable accounts. If you want to increase your profits, make more customers profitable.

And most companies underestimate the cost advantage of high repeat purchase. You can spend less on marketing and sales, sometimes an even more important issue that driving down production costs.

Alistair Davidson
The Integrated View of the Organization

Strategy is often about taking an integrated view of an organization. That means looking at how things work together.

Cathleen Benko and Warren McFarland write in their book, Connecting the Dots, HBS Press, 2003 that companies now are betting their future on a collection of projects. And often, the way you manage your business does not look at how the combination of projects you are working on work together or fight each other.

They have three big ideas:

1. In the future, companies have to think of themselves as a virtual value chain. The new management task is to manage the delivery of creation and value to your customers by putting together activities that may exist within and without your organization.

2. A useful way of thinking about business processes is "Sides". They talk about In-side, Out-side, Multi-side - the ways in which you operate internally, the ways in which you deal with customers, suppliers and consituencies. Often your organization makes it difficult and expensive for others to deal with you. For example, why should customers in a financial services organization be approached by multiple sales people when they want a single point of contact?

3. Information management projects and business projects should be managed as stages or Chunks. That way, you can terminate a project that is not delivering value, or change it in the next phase as you learn what works or how a market is evolving.

In other words, in a complicated world, you may not be able to forecast the future, but you may need to position yourself to adapt for the future.

I use the term a "reversible decision". Good decisions are often reversible.

I also like solutions that solve more than one problem at the same time. Generally, if a solution solves more than one problem at the same time, it is a good one.

Alistair Davidson

Wednesday, August 27, 2003

Businesses seem to forget about the concept of value.

It's not enough to be in business.

Rather you have to offer superb and compelling value. Some researchers suggest and experience also confirms that if you offer a compelling value, you will do better. Customers will buy more frequently. They will cost less to acquire. They will forgive you if you make a mistake. They will tell their friends.

Some studies suggest that being in the top 20% of companies offering superior value produces 25X better outcomes than being in the bottom 20%. So, simply put, it is the easiest way of being successful.

Let's put it another way. If you have a choice between projects and one has a return 25X greater than the other, why oh why would you pursue a me-too project offering me-too value propositions?

My personal belief is that creating value is about

1. Understanding what customers will pay for.
2. Looking at all aspects of what a customer is buying when the buy a product or service from you.
3. Listening very closely.
4. Understanding that different customers have different perceptions of value.
5. And organizing your business to "act on behalf of" the customer.

But there is a caveat. Not all customers are created equal. There are bad customers who will not fit with your value offering for whatever reason.

Deciding whom you will not service is as important as deciding who you will service. Actually, it may well be more important.

Alistair Davidson
Improving Performance
If you want to improve your performance, there are some simple rules.

1. Don't put all your resources in areas that aren't producing good results.

2. Eliminate tasks and activities that are value subtracting.

3. Change your mix of business. Focus on the people you make money on. Focus on the products that make you money.

4. Change your business model. Get customers less expensively. Offer more value to customers. Communicate the benefits more clearly.

5. Hire better people. Train the ones you've got or get rid of them.

6. Make your employees enthusiastic about creating value for customers.

7. Do something different. Experiment. Measure. Test. Vary.
Technology alters the economics of your strategy. It alters the way you run your business. Ignoring technology is like ignoring the industrial revolution, the telephone, TV, the car and birth control. Things are different.

Why is technology still important in spite of HBR articles to the contrary?

Well, one good example: in economic geography, there is a wonderful law "Small markets support few niches. Large markets support many niches."

So, the impact of less expensive travel, shipping and communication is more competition. Maybe you do need a strategy after all.

It's not like the Internet is going to disappear. Or phone service is going to stop.
Strategy is about doing lots of things with high pay-off.

If you are working too hard, maybe it's a good idea to think about changing the mix of activities you are spending your time.

Someone once said: being neurotic is about doing the same thing and expecting a different result.

Alistair Davidson