Wednesday, November 19, 2008

Those Who Measure, Measure Rubbish


is the translation of a play on words in German: “Wer misst, misst Mist”. Physicist use it to remind themselves that not all what they measure can be taken as hard facts.

Sales managers might want to adhere to this caution as well. Especially in uncertain times, it is important to have confidence, that what is measured are facts helping them to navigate through the turbulences.

Sales performance measured with company results
As the role of a sales force is to generate revenue for a company, and it is furthermore easy to measure, it is a frequently observed practice to use revenue as the primary performance indicator of the sales force. Andris A.Zoltners, Prabhakant Sinha and Greggor A. Zoltners remind us in “The Complete Guide to Accelerating Sales Force Performance” that company results are not necessary good hard measures for managing salespeople. They refer to findings from their statistical studies , suggesting that the one-year impact on revenue of a sales force at the sales territory level is anywhere from 20 to 90 percent. Admittedly, the book was published in 2001. I believe however that, with the self directed customers empowered by the Internet, the situation is probably even worse today,. But this is not the only problem. Revenue is also not an adequate indicator to understand coaching needs of salespeople.

Revenue is a lagging indicator
Revenue is the outcome of the sales process. It is the result of actions that have happened in the past. If the results are not satisfactory, we have to modify the process. For knowing where the process fails, we need measurements along the process chain, not only at the output

The root cause for missing the number might be found several months in the past. Despite this, result oriented managers tend to try to manage this outcome. directly This also means that corrective actions to curb the trend might show results much later than the patience of a sales manager lasts. Many “improvement plans” imposed to an under performing salesperson are thus self fulfilling prophecies for failure if results on revenue level are expected in a shorter time frame than the average sales cycle length.

Derived productivity indicators might be misleading
Also derived productivity ratios like sales per head or quota attainment are not necessarily good productivity indicators for the salesperson. As indicated in a previous post, quota attainment might reflect more on the ability of the sales managers to set realistic targets than on the salesperson to make the expected number.

The same is true for sales per head; especially if the manager has fallen in the trap of the law of diminished returns. This can happen when managers follow the rule that “more feet on the street” will increase revenue. In a saturated territory, there is just not enough potential for the additionally assigned sales person to bring in the expected revenue increase. So again it is more a result of a management decision than the salesperson's ability to sell.

Alternative Indicators from the sales formula
In 2000 at the first indication of the burst of the Internet bubble, I proposed to my then employer the first version of the sale equation, built from indicators than can be influenced directly by the sales force. The potential impact of the formula was not very well understood at the time. Today it is known as the sales velocity equation. As the equation in its original form lead to wrong interpretations, I have it now reformulated to:

Revenue = ((# of Opportunities*average deal size*conversion rate)/time in funnel)dt

Don't let yourself be scared by the math. Essentially, what the formula says is that revenue is dependent on the number of opportunities in the funnel, the average deal size, the conversion rate and average the time it takes to get an opportunity through the funnel.

The attractiveness of these indicators lays in the fact, that when put properly into the context of the sales situation, they allow to detect on what salespeople need to be coached to improve their performance. I have built a whole sales management training curriculum around this formula. Here we have only room to illustrate the use with an example.

Take a salesperson with a lower average deal size compared to peers. Root causes for this might be lack of capabilities for up selling or heavy discounting. With this knowledge, targeted coaching can take place instead of just pounding on the table and ask for more revenue. Also training initiatives become more targeted and outcomes become measurable.

Especially in tough market conditions, the conversion rate is probably the most effective parameter to focus on. Some experts go so far as to say that managing the conversion rate is the primary task of a sales manager. The conversion rate is also particularly important in complex sales situations as it is an effectiveness indicator. In view of this, I am always surprised how few managers, of those asking me for help to increase the productivity of their sales force, actually know their conversion rate on an overall level, let alone between stages of their sales process.

Conclusion
Performance improvement will have to start with the mindset of sales managers. Especially those believing that “only what can be measured can be managed” should accept that “not all that can be measured can be managed”. Eventually they will have to accept, that sales forces cannot be managed by spread sheets especially if they are full of revenue dependent ratios as sophisticated as they might be.

1 comment:

  1. I could not agree more with the comment that current sales numbers are a "lagging" indicator. This is more of an accountant's way to measure a sales force.

    I have also found it quite common for management to try to boost sales within a month when a 90 day sales cycle is the norm.

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