Say Goodbye to Willy LomanBy Dr. Albert D. Bates
Article Date: 07-01-2010
Copyright(C) 2010 Associated Equipment Distributors. All Rights Reserved.
Weak performers seriously impede your company’s profitability and should not be indefinitely tolerated.
Most distribution businesses operate exceptionally efficient warehouse, trucking and backroom operations. At the same time, there tend to be some serious inefficiencies in the sales side of the operation. This is not because the sales force is riddled with apathetic individuals – but the Willy Lomans of the sales world (think Arthur Miller’s “Death of a Salesman”) do more harm on your sales team than you may realize.
Many dealers do not appreciate how severely salesforce ineffectiveness penalizes the firm and, in turn, causes marginal results to be tolerated. This misunderstanding is frequently expressed as: “He is on commission only, so he is not hurting us.” The reality is that the pain is significant; it is simply unrecognized.
This report will examine the impact of poor sales force performance on industry profit levels. It will do so by addressing two key issues:
Sales Force Economics – An examination of how inadequate salesperson performance decreases profitability
Rejuvenating Sales Force Results – A discussion of the alternative approaches available to management to drive enhanced performance
Sales Force Economics
For several years the Profit Planning Group has been reviewing salesforce performance in a wide range of industries.
That research suggests that the salesforce composition follows a “1/2/5/2” model.
Namely, out of 10 salespeople:
One is a superstar and probably a prima donna to boot
Two are very strong, disciplined salespeople
Five are good soldiers
Two are inadequate performers
The key to management of this disparate group is to be able to stroke the ego of the super star, help the disciplined stay content, build the soldiers into something better and tolerate inadequacy only in the short run. Most management teams are willing to take all of the actions except the last one.
Aside from just the basic unpleasantness associated with terminating employees, there are two main factors that drive high tolerance for inefficiency. The first is that the cost of replacing an employee is considerable. It is also relatively visible. The second is that the ongoing cost of inefficiency is not easily determined.
The table above presents financial information for a typical AED member based upon the latest results from the “Cost of Doing Business (CODB) Report.” As can be seen in the first column of numbers, the typical firm generates $35 million in sales, operates on a gross margin percentage of 21 percent of sales and produces $700,000 in profit or 2 percent of sales on a pre-tax basis.
Like every firm in every industry, this typical AED member has both fixed expenses and variable expenses. Fixed expenses are overhead expenses that tend to be difficult to shed as sales fall. The base salary for the salesforce, if any, is included here.
Variable expenses have been broken into two groups. Commissions are assumed to be 10 percent of the gross margin generated. Other variable expenses, such as interest on accounts receivable, bad debts and overtime pay, are estimated to be 2 percent of sales. According to the “CODB Report,” these figures are reasonably close to most AED members.
In the next column of numbers, sales have been decreased by 20 percent. While this analysis is at the total firm level, it mirrors the profit impact in the territory of a single salesperson who is only 80 percent as productive as the typical salesperson. It indicates the firm’s results if every salesperson was an 80 percent performer.
The impact on profits is significant. With a 20 percent sales decrease, commissions and other variable expenses also decline by 20 percent. However, fixed expenses remain constant and profit falls from $700,000 to a $483,000 loss. This clearly demonstrates the sales sensitivity for the total firm, something which everybody knows and accepts. However, it also reflects the sales sensitivity in a territory. An 80-percent performer reduces potential profits in a way that is never seen.
The second column of numbers indicates the impact of a 1 percentage point decline in gross margin. Notice that Cost of Goods Sold remains the same as it was originally, but prices are reduced enough that the gross margin falls from 21 to 20 percent of sales. This also is indicative of the impact that problem-salespeople inevitably have. Once again, profit is severely impacted.
The final column of numbers looks at the impact of sales problems being simultaneously compounded by a gross margin problem. This column indicates that if every salesperson operated at this level, a $700,000 profit becomes a $791,000 loss. This model probably understates the problem, as the lowest producers in the “1/2/5/2” model often perform very poorly on both sales and gross margin. It seems apparent that the temptation to “keep on truckin’” with the lowest producers must be avoided. With the proper people in the field and with the proper level of support, the profit improvement opportunities are huge.
Rejuvenating Sales Force Results
A complete discussion of sales force productivity is a topic best left to the sales professionals. From a financial perspective, though, the issue is one of controlling the Three Ms – measurement, motivation and management.
Measurement – Distributors do a fine job of setting goals and measuring the performance of salespeople against those goals. The financial problem is that too often the goals do not adequately reflect the true sales and margin potential in the territory. Instead, they are inexorably tied to percentage increases. While growth (or minimizing declines) is important, measurement against the actual market is an essential addendum.
Motivation – The very first requirement of a compensation system is that it is understandable. Most systems pass muster on this essential goal. What is overwhelmingly the case, though, is that compensation systems underpay superstars and overpay poor performers, because it is difficult to measure and explain profitability in a territory. Despite that challenge, compensation in relation to the profit generated is essential.
Management – The reality is that poor performers must be replaced. They should be trained, cajoled, and encouraged first, of course. Ultimately, though, if they do not respond, they must be replaced. When the profit penalties are as massive as they are with poor performers, doing nothing is not an option. The cost of inaction far outweighs the cost of replacement.
The challenges of sales and margin generation have been exacerbated by brutal economic conditions. As the economy slowly improves there is an inevitable feeling that as long as sales are increasing everything will be fine once again. Indeed, as sales rise profit should also. The question is whether it will rise to anywhere near its full potential. That will happen only when every salesperson is operating at close to 100 percent. It is essential to measure actual sales and gross margin. It is equally important to measure missed sales and margin.
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