Rep Disconnect: Are you not working with your Local Rep?

It happens with distributors everywhere. For some reason you don’t have a great relationship with one of the manufacturer’s reps assigned to your company. The reasons for this are many. Let’s dig into the big three:

The rep is responsible for lines which are competitive to your company’s key suppliers. Many distributors fear working with reps who are tied to competitive products lines. The reasoning is simple, introduce them to our best customer and the next day, they will return to the customer with a demo of a different brand product. Further, if they know more about “your” customer, proposed solutions become more focused and effective. When the product they sell are an important part of your value proposition, it’s easy for them to offer something similar but better or cheaper or both.

The rep is closely aligned with a competitive distributor. When the rep has close ties to a competitive distributor, it raises a number of trust issues. Will important information be leaked to the guy down the road? Are prices really fair or does the other distributor get some kind of competitive advantage? We recently talked to a distributor who was very certain a rep had shared the dates of their big open house with another distributor, who magically announced their big shindig would happen the week before. While no real evidence supported it, the whole thing wasn’t just a coincidence, they made the decision to not invite the rep to other similar events.

The rep has baggage which precludes you from trusting with your accounts. When Will Rogers said, “I never met a man I didn’t like” he obviously hadn’t met this rep. Unethical behavior can be found anywhere and it sometimes rears its ugly head in our industry. Associating with these kinds of people causes their reputation to rub off on your organization. Misleading statements and lies impact customer service and ultimately create situations where business is damaged.

Reps play an important role in our industry
After surveying distributors across a number of industries, I have discovered a number of breakdowns caused by rep disconnect. The table below things we have discovered:

Issue	Implications to selling
No joint calls	Distributors rank joint calls as the single most important selling tool available from a manufacturer.  These are used to answer detailed technical questions, respond to customer commercial issues and to launch new products.
New literature not available	No literature means proactive sales calls are more difficult and experience tells us that in spite of all the electronic hoopla, customers still want you to place a glossy brochure in their hands when talking about a product.
New programs poorly discussed	How many times have you learned of a 90 day program a month late?  This means lost opportunity for coordinated market attacks and often translates into lost business.
Special pricing agreements (SPAs) missing	SPAs have become a cornerstone of our business.  As both an offensive and defensive weapon, they can lock in business or lock you out of business.  In candid conversations, manufacturers tell us they judge a distributor’s sales effort by the number of SPA requests submitted.
No sales leads shared	“Even blind pigs occasionally find an acorn.”  Reps are trained salespeople.  They find business opportunities.  Most likely, they are not sharing with you.  Manufacturers spend millions mining for solid sales leads.  Most intend for them to trickle down to the distributor and you won’t get any.  This costs money.

This whole issue is serious. When the rep is disconnected from your organization for any reason, it costs you money. I believe it’s important to have a company-wide plan.

Rep exclusion needs to be a business decision…
First, I believe the decision to disconnect from a rep is not something to take lightly. With all the negative consequences, it shouldn’t be an emotional decision. Most importantly, it has to be a management decision. Unfortunately, many distributors allow salespeople to make the rep disconnect decision. What’s more, some of these decisions are based purely on personality and emotion. Here are some real world examples.

One salesperson reported, “I wouldn’t work with Joe because he sells the same type of products as my good friend. I trust him and we’ve worked together for something like 20 years. Because of that, I have decided not to include Joe’s company in any of my customers.” Sadly, the company Joe represented was strategic to the sales guy’s company.

Another seller related a story of issues presented by the rep being discussed. Listening to the tale, it would seem this person was not the right kind of business ally. But, I happened to know the company in question and things weren’t adding up. After a few questions, things got interesting. The issues were nearly 15 years old and several of them could potentially be cleared up with a discussion. Still, the distributor salesperson persisted. What’s worse, his particular point of view had spread to others in the organization, who had never had an issue. An important product line flat-lined because the rep had been excluded.

Addressing the issues…
First, allow me to restate, the issues we described in our two examples are common. We are not discounting the need to occasionally make the decision to disconnect. It’s a business decision and as with every business decision their needs to be a plan. Here’s a sample plan:

1. Gather facts. Specifics on the situation are important. Issues with past performance should be tied to dates, customers and how the rep behavior could impact future business.

2. Speak to the owner/principle of the rep agency. Even if the owner/principle is part of the problem, arrange a meeting to share your grievances and outline why you feel that working directly with them creates issues for your business.

3. Explore potential work-arounds. Is there a way the rep could work with your organization which would not impact business? If the issue is with a single salesperson, would it be possible to assign someone new? If the rep agency carries a highly competitive line, could there be at least a few accounts which could be worked? If not, move to the next step.

4. Talk to the manufacturers involved. First, this is a business discussion with the manufacturer’s regional manager or VP of Sales. Avoid personality issues and character assassination because you have no real way of understanding the depth of relationship between the manufacturer and the rep. Ideally, your plan would be to find a way to “work around” the issues of not having a rep. This would involve identifying the right people to call for getting negotiated pricing, sales backup, customer support and a source for sample, demos, literature or other selling tools. An alternative training plan might be needed as well.

5. Build a working plan with the manufacturer. Make certain the manufacturer knows that you still want to build your business with them. Further, make sure they understand the potential financial impact of operating with rep disconnect. Set up a plan for providing the necessary services for your growth and pre-schedule monthly check-ins to keep the plan real.

6. Periodic reviews with manufacturer. Without a rep, you are outside of the normal lines of communications. You miss news on programs, specials and sometimes new products. These are important for distributor and manufacturer alike. Even though some might argue this is backwards (with the distributor being the customer… and all that jazz,) I recommend the distributor take a leadership role to ensure the reviews actually take place.

Is this perfect?
In most instances, operating without a rep is more difficult than with a local rep. When the relationship is strong, the work is properly assigned to the right person (whether they be on the manufacturer or distributor side) and everything is running well, the rep/distributor combination is a thing of beauty. When things are dysfunctional, profitability and business growth for both manufacturer and distributor are stressed. The worst case scenario is to ignore the situation and hope things change.

Finally…
Distributors and their supply partners regularly have this kind of conversation at association meetings, marketing group conferences and conventions; I know because I have been involved in many of them. I’ve seen some discussions become very productive and others take a turn for the worst. Most turned from business to emotions. First and foremost, this is a business discussion; specific details and data are important. Comments like “Joe is a slimy snake” make you look petty and unprofessional.

Just in case the conversation turns in this direction, be prepared with a list of reps you believe do a good job in your territory and be prepared to explain why.

I am further researching and revisiting some of the distributor-rep relationship issues. I would love to hear your thoughts either via comment here, email or by phone. Once again, those sending us emails get the River Heights Grand Prize… A lovely hand addressed postcard from Iowa.

Negative Customer Feedback is the Greatest Gift

My assistant came in today happy as a clam about the steak she had for dinner last night.  Hoping to score some great Iowa beef, I asked where she bought it.  "They were free" she said "because the chicken I had last week was terrible."  She went on to explain that her horrible chicken meal was such because it was stuffed with apples.  She complained to the Meat Manager who offered to give her an upgraded replacement and promised to be more forthcoming with signs and descriptions in the future. 

This got me thinking about a customer focus group I assisted with last week, where I received an "ear full" of nasty news.  During one of the sessions, one of the customers asked for a one-on-one meeting with me concerning my client. I’m not sure if this particular customer woke up on the wrong side of the bed, was having severe heartburn from the Mexican buffet served prior to the session or was just cranky, but he decided to let me have it with both barrels of nastiness. Here’s the scoop:

The customer had played an active role in the focus group. I asked questions on behalf of my client and this customer provided some great suggestions and offered up a couple of unique thoughts for new services. Our one-on-one (actually the sales manager for "the other side" was there,) however, turned out differently. In the words of the sales manager, the customer “turned on me.”

We walked into the conference room and sat down. After a brief warm up, including comments on how great it was that the sales manager’s company wanted to hear from their customers, the guy shifted the focus on his comments to issues faced when dealing with this distributor. The customer went on to say something like this:

“You know we have been buying from you for a long time, and we have gone through a lot of stuff over the years. But, we need for you to get better with providing us the products we need quickly. Your guys are good with the regular day to day products, but when we discover the need for something just slightly out of the ordinary, your service is getting worse instead of better. As a matter of fact, we never seem to get anything in less than a couple of weeks.”

Here’s where things took a surprising turn. Instead of digging deeper into the situation with questions about the nature of the parts or types of deliveries, the sales manager went on the defensive. The sales manager’s response covered a gamut of issues ranging from the size of the distributor’s inventory and the impossibility of stocking everything to how the customer needs to plan better to eliminate this type of issue. For a guy who has been in the industry for twenty plus years, I found the response to be shockingly emotional and poor. Let’s look at what might have been a better approach.

Acknowledging the feedback is critical…
In this particular situation, I would have recommended the following statement from the sales manager:
“Geeze this sounds like something we need to address for you. Let me get this straight, when you need something out of the ordinary, our service is getting worse instead of better. I can see where this could create issues for you. Thanks for sharing this important concern.”

Taking this approach indicates you are concerned for the customer’s welfare and take the feedback seriously. But just being appreciative probably isn’t enough to solve the problem. To really solve issues, you need details.

Get more clarifying details…
It’s difficult to react to a sweeping statement like “your delivery stinks.” In order to improve, make process changes or solve problems in general, having more details simplifies the task. A customer providing painful feedback should appreciate and understand efforts to gather more background information and detail. Going back to our story, the following could have been a follow up question:
“I want to explore this situation further so we can improve. Would you be willing to share a few recent examples of the long delivery you have experienced?”

This question sends a strong message that you are concerned and you are going to explore solutions to the issues you are causing the customer. Experience dictates, customers typically calm down and get into a spirit of mutual cooperation once you start asking intelligent questions about their situation.

Give the customer a preliminary work plan…
Outlining your plan to drill into the issues presented proves you are taking the situation seriously. The customer understands you don’t have all the information. Providing a quick “off the cuff” solution without further study or work might send the message that you are willing to say anything to get through this tough conversation. Here might have been a good answer:
“Give me some time to research what is going on with our customer service group and the suppliers involved in getting the product to you. This will take me a few days and involves calls to some people who are not always at their desks. I will start gathering data right away and give you a status report in a few days.”

Note we didn’t say a solution, instead we offered a status report. It’s the old “under promise and over deliver” thing. Many times problems like this take much longer to resolve than expected; especially when others are involved.

Provide status reports along the way…
Let the customer know this wasn’t a “hear it and forget it situation.” Status reports typically can be handled with a quick phone call or email. Reports basically let the customer know what you are doing and what you have learned so far. Further, status reports should be ongoing if the problem cannot be solved in under a week. Think of it as a weekly reminder to the customer that you are still putting effort into their issues.

If a perfect solution can’t be found offer alternatives…
Let’s face it sometimes it’s impossible to give customers everything they want. Unlimited free deliveries, massively long payment terms, unlimited return privileges or infinite inventory all come to mind. If the problem can’t be addressed head on, I believe the customer should be given choices as to what actions can be made to at least alleviate the issue.

In the case of my sales manager friend, some of the following may have been good alternatives:

• The sales manager offers alternative products from suppliers with very good delivery mechanisms and creates a list of similar products which might be substituted for those which are difficult to obtain in a timely fashion.
• The sales manager assigns a person for expediting products coming from suppliers who are not normally part of the distributor’s business.
• The sales manager offers to work with the customer to develop a plan for better anticipating the unusual items required for a job.

Applying Scientific Theory from Human Sigma: Managing the Employee-Customer Encounter…
Mistakes happen, it is the nature of human encounters. Research outlined in the book point to a couple critical thoughts. First, customers who have problems (and provide negative feedback) which are handled properly are more loyal than a customer who encounters no problems. Secondly, employees (typically outside and inside employees) need to be trained and empowered to handle negative feedback.

Negative feedback is the greatest gift…
When you receive no negative feedback, you should assume something is wrong. Every organization, regardless of its business prowess, makes mistakes. Customers who take the time to tell you about mistakes are giving you the opportunity to save the business and build a better long-lasting relationship. Thinking back to my assistant and her terrible apple chicken.  Had she kept quiet, others may have been just as unpleasantly surprised to receive the same meal.  She provided negative feedback and changes were made for her and future customers.  She will continue to shop at that location.  Customer retention is huge for distributors. Accept the gift and make something good of it…

The First Time Call

Let’s face it, for most salespeople getting into a new prospect

is a tough job.  It takes persistence, requires lots of phone calls and typically puts the seller through an emotional wringer.  Discussions with hundreds if not thousands of distributor salespeople indicate this is one of the most difficult parts of their job.  First, it takes multiple (actually, our research shows seven) phone calls and email messages just to get to the right person.  Sadly, sellers, who are faint of heart, give up before the actual contact is made.  Many would rather put the task off and procrastinate for weeks.  Some, with established territories, simply refuse to make this kind of call until their managers apply massive pressure to open new accounts.

The point is, lining up this kind of call is not on anyone’s top ten list of things to do.  There are dozens of articles on the topic of getting the appointment; my intent is not to provide a tutorial on the topic.  Instead, let’s assume through hard work and “true grit," an appointment is secured.  

Let the selling start?  Not really.  Salespeople who come into the prospective new customer’s office with six guns blazing and a hundred catalogs under their arm are destined for failure.  I recommend a different approach.  

Exploring new accounts is an interview…
As weird as it may sound, you’re not here to sell anything.  Instead, the first time call is an opportunity to find out where we might be able to harness our products and services to provide something of value to the customer.  Just taking this customer-centric approach differentiates you from the dozens of other “drive-by salespeople” who have probably wasted the customer’s time in the past.  





Previous experience has conditioned the customer to politely give you a few fidgety minutes then start looking for an excuse to get you out of their office and back into your car heading down the highway.  You’re going to throw them off by not selling.  I recommend starting the conversation off with this statement: “I promise not to try to sell you anything today.  Instead, I want to learn a bit more about you and your company.”

Come prepared…
Nothing can turn off a potential client more than a seller who has not taken the time to learn about the account.  Back in the old days, this was a pretty hard task.  Today, the internet contains dozens of resources for discovering more about the potential customer.  Things like products, company history and industries served are right there for the taking.  Asking dumb questions labels you as a time waster.  Good questions; however, are still the key to success. 

Why leave success to chance?  Since selling is an emotional sport, nerves often get in the way of great questions “off the top of your head."  Prepare for the call by developing a list of questions you would like to have answered by the customer.  These are both personal and professional in nature.  Here is a short list:

(Not too) Personal questions
• Can you give me a quick overview of your career?  Where have you worked?  What kind of education prepared you for the job?
• In what are the areas do you work?  What are your responsibilities?  Are there other areas in the company with people doing similar tasks?
• What kind of information is important to you?  Are there areas where you might benefit from training?

The Company
• Who are your end customers?  What do they like about your company?
• What is the company best known for?  
• Can you describe the processes used within your organization?  
• Are there areas where you are working on improving the process?
• What types of engineering issues do you face?
• What do you look for in a supplier?

Getting off to the right start… because a lot of folks ask.
Here is a short couple of sentences to jump start your efforts with this kind of a call:

“Thanks for taking time to see me today.  I appreciate and value your time.  I represent a distributor who provides a number of products and services that I suspect may be of interest to you and others in your organization.  I’m not going to try to sell you anything, or for that matter bore you with a long list of the things we do.  Instead, I would like to learn more about you.  This gives me an opportunity to think about your situation and then, if it makes sense, come back with some thoughts and potential recommendations.  I am going to leave you with a single company brochure that shows the many things we have to offer, but that’s not my main purpose today.”

Once you’ve set the stage, get started with the questions you have already prepared.  Try to stay conversational, it’s not an interrogation, instead think interview.  

Some things to think about…
Regardless of how you might be tempted, stick with your no sales pitch promise.  There will be times when you are tortured by this commitment, but the only time to talk products or services is if the customer flat asks you; ie: do you stock left handed widgets.  Otherwise, wait till a later time.

Take notes.  Nothing shows your interest more than taking a

few notes.  Further, I have discovered that customers actually say more when you ask them if they mind if you take a few notes.  It reinforces the importance you place on their answers.

Let them know you want to think about their situation.  Ask if it might be possible for you to pay a short visit in a couple of weeks to talk about a couple of opportunities for your companies to work together.

Before we go…
If you are wondering about other questions to ask, I would be willing to share a chapter from my soon to be released book Customer Based Strategic Planning.  It guides the seller through a lot of questions they might find valuable.  Shoot me an email to receive your copy!

Explaining Sales to the New Executive

An Irishman, a Cowboy and a Salesman walked into a bar…

Remember those jokes from days gone by?  It’s been a long time since salespeople needed to have a couple of good jokes up their sleeves.  And for some reason, I could never remember the punch lines.  Thankfully, the world changed and jokes soon fell out of favor with customers and sellers alike and my career didn’t suffer.  But, sometimes life mimics old jokes.

Recently, I ran into a business executive in a local bar.  During the ensuing conversation, she shared her situation.  After years of climbing the corporate ladder and being groomed for bigger and better things, she finds herself in charge of her company’s sales effort.  Congratulations to her, but there was a problem.  She had no previous sales experience, no real exposure to the selling in any form and was struggling to understand how to make a difference in her new department.  

I quipped that I work with sales groups throughout the country.  Her eyes lit up and she asked me to give her the lowdown on sales.  To sweeten the pot, she bought me a beer.  How could I say no?

In the next four minutes, allow me to share my explanation.

Selling isn’t what you probably expect…

Common wisdom paints selling as a sleazy business where

customers are tricked, cajoled or somehow bribed into making a purchase.  With the possible exception of timeshare tours and used cars, this applies to every form of selling.  This is especially true in B2B sales, which is precisely where she lives.   Instead, selling is about skillsets and orchestrated team play.  For distributors, the team play revolves around specialists, inside salespeople, application engineers and even sales management.

Since selling is about skillsets, we can assume that

salespeople are developed and not, as common wisdom sometimes dictates, born.  During my forty year tenure in sales and sales management, I have seen successful sellers with all kinds of personality types; introverts, extroverts, techno-geeks and many more.  The differentiating fact between the best and average typically boils down to work ethic, skills and process.  Further, as one VP of Sales shared, “In today’s team selling environment, I won’t hire a cowboy superstar.  We have worked hard to develop a team, and there’s no place for prima-donna behavior on our team.”

Since sales skills are important, one would expect sales organizations to constantly reinforce the right skills.  At the same time, real sales skills are rarely taught.  I told her to review the agendas of the last few team sales meetings.  Did sales methods and sales skill refreshers even make the list?  This is an epidemic issue across the entire sales industry.  Sales meeting have digressed to technology reviews, community bulletin boards and product trivia.  Skills need constant refreshers, coaching and review.  

Sales people work without a great deal of oversight.  In most organizations, sales managers rarely make customer calls with their team; with two or three times a year being the norm.  Because there is little time/opportunity to gauge skills in action, there is a need for mid-stream measures of success which look into the progress.  Most sales managers focus on sales totals rather than the actions which drive sales.  This is a mistake.  

Sales is about determining the right customers…

Most sales organizations have more “prospects” than they can handle.  Many invest mass quantities of resources chasing down customers who probably won’t turn out to be profitable customers.   Companies who spend the time to identify the right best potential customer and focusing efforts on these “targets” are 47 percent more likely to meet their sales goals than those who blindly chase every lead possible.  

Many times the right customers are already doing some business with your company.  Sales experts, armed with research data, indicate it is five times easier to sell more to an existing customer than to pursue and open a new account.  The point is to evaluate existing customers for new opportunities and missed sales.  In the world of distribution, this is called a gap analysis.  (I have an example, I would share for the asking.)

Sale is ultimately about driving profitable sales…

Don’t confuse gross margin or sales volume with profitability.  Based on analysis of most organizations’ sales, the cost to service many of your accounts is higher than the gross margin generated by the account.  This takes into consideration things like technical support, order size, amount of handling and the overall hassle factors associated with dealing with the customer.  

By the way, this topic is heresy within most sales organizations.  The prevailing attitude is every sale is a good sale and every customer an important cog in the wheel.  While this model may work for establishments like Amazon where there are no sales professionals, for the majority of selling organizations, the need to understand this profitability thing is high.  

The more you understand your sales cycle, the better…

I have seen company presidents hire new salespeople and begin budgeting for increased numbers within months of the new salesperson’s arrival.  For the most part, everybody is disappointed and here’s why.  It’s called the sales cycle.  

The sales cycle is the time line from the introduction to the purchase of a product.  In many instances, the sales cycle is longer than most believe.  For example, if you are selling components which will be incorporated into an original equipment maker’s (OEM) product, the sales cycle includes OEM’s design and engineering time.  There may be testing, trials and other aspects in the evaluation.  Further, many OEMs only change their designs every few years.  The sales cycle is long.  For End Users of products the sales cycle can be shorter.  Keeping this in mind, let’s look at the error made by the previously mentioned company president.

Even with end users, the time required to determine the right person to call, build a relationship, earn trust and suggest new product alternatives takes months.  Only a small number of these relationships can be worked on during the early months.  With typical sellers (in distribution) averaging something just shy of 15 sales calls per week, this means that a maximum of only 60 accounts might be explored during the first month of the salesperson’s service.  Unfortunately, it doesn’t work this way, as the first call is mostly introductory and it generally takes at least four to six calls to develop even a modicum of trust.    

Without knowledge of the sales cycle, it’s tough to forecast sales growth or even budget for new sellers.  Minimize the cycle and success comes more rapidly.  Most companies, regrettably, don’t take the time to explore even this one principle area for improving performance.

Why a sales process is important… 

Without a process you can never focus on the right area for improvement.  No activity/task is completed the same way, so it’s impossible to understand what went right or wrong with each customer.  Improvement is difficult and continuous improvement is impossible.  A couple of years ago, we surveyed nearly 100 sales managers on their use of sales process.  The most common “process” listed by these managers was “informal.”    The problem is “informal” doesn’t really match the description of process.

What is a process?  The definition requires documentation, training, metrics and coaching/management points throughout.  There has to be a measures for intermediate steps in the sales activities.  Rather than focus entirely on whether sales are up, down or flat, the process allows for understanding opportunities as they work their way through the sales cycle described above.  

A process has a common vocabulary; it speeds the accuracy and efficiency of communications.  For example, what is your definition of a “prospective customer?”  For some, it means anyone possessing enough money to make a purchase whether they have been identified, researched or contacted.  For others, a prospect is a customer who has been identified and qualified in some material way.  The same applies to terms like “target account” and “key account.”  Without company-wide classifications, it’s impossible to discuss the landscape.  

River Heights Consulting has developed some definitions.  We use them to clarify conversations with our clients.  However, you may have definitions of your own.  For instance, Miller-Heiman has developed the following terms to describe people within an account:

• The Economic Buying Influence – The guy with the budget.

• The User Buying Influence – The person who will be actually using your product.

• The Technical Buyer – This is the engineer or expert determining if your product meets the specification.

• The Coach – A person within the account who wants you to get the business.  They are a guide.

Getting back to my new friend…

By the time we finished our conversation, I could tell she was in information overload.  And, since my beer was pretty close to dry, I left here with this thought:

Since you have managed manufacturing operations in your company, you probably already know it’s important to understand some of the operational details of the group.  You probably asked, what is our maximum capacity, how much time is lost to downtime, what is our reject rate, where are our bottlenecks and a dozen other questions.  In a good sales operation you need to ask a similar set of questions.  Here are my top six:

1. In as much specific detail as possible, how would you describe your ideal customer? 
2. How many of these customers currently counted in your selling efforts?
3. How many “ideal customers” do you lose every year?
4. How many “ideal customers” have you identified and begun building relationships?
5. Do you know of potential “sales opportunities” which could materialize in the next year and what is the probability of them buying from you?
6. If you don’t know the answer, why not?  

Finally…

I am interested in the things you would have had her explore.  Email me your suggestion and I will send you a postcard from Iowa…. 

For those who jumped ahead to read the punchline of the previously mentioned joke, here it goes:

An Irishman, a Cowboy and a Salesman walked into a bar and the Irishman ordered them all a whiskey.

When the bartender delivered the drink, the salesman asked, "Where is everybody?" The bartender replied, "They've gone to the hanging." "Hanging? Who are they hanging?" "Brown Paper Pete," the bartender replied.

"What kind of a name is that?" the cowboy asked. "Well," said the bartender, "he wears a brown paper hat, brown paper shirt, brown paper trousers and brown paper shoes."

"Weird guy," said the salesman. "What are they hanging him for?"

"Rustling," said the bartender.

Compensation/Commission Thoughts from Daniel Pink

In case you haven’t noticed, we have been doing a lot of research on the topic of commission-based compensation plans.  During the discussion, topics from Daniel Pink’s Drive, The Surprising Truth about What Motivates Us keeps coming forward.  I recently re-visited parts of the book and wanted to share a few points to further ramp up the discussion of the matter.  

The common belief is summarized by Pink this way:  “Rewarding an activity will get you more of it. Punishing an activity will get you less of it.”  This certainly falls in line with the sentiments of distributor managers.  When we asked the question,"Why do you employ commissions with your sales department?" the answer came back to drive both quality and quantity of effort (in that order.)  One-on-one examination of many plans revealed instances where distributors had applied greater rewards for selling select groups of products as well as rewards for selling into poorly performing or inactive accounts. 

Pink went on to site research done by the University of Rochester’s Edward L. Deci which states:  

“Careful consideration of reward effects reported in 128 experiments lead to the conclusion that tangible rewards tend to have a substantially negative effect on intrinsic motivation.  When institutions – families, schools, business and athletic teams, for example – focus on short term and opt for controlling people’s behavior they do considerable long term damage.”  

The intrinsic motivation referred to is the person’s internal drive to make things happen and achieve success in the work environment.  This is the opposite of the extrinsic motivation which comes from outside, i.e. the manager.

Looking further, Pink quotes from a London School of Economics study: “We find financial incentives… can result in negative impact on overall performance.”  This seems like a real bummer for those of us who have heavily invested in commission plans through the years.  

The Starting point in Motivation
The starting point for motivation is a fair and equitable salary.  Here the author refers to what one of the distributors we interviewed called the “Current Market Value of a Salesperson" possessing similar skills.  If an employee feels as if they are being shorted by the organization, it creates distractions.  These distractions, even in their most benevolent form, result in under-performance.  In the worst case, under compensation results in loss to a competitor. Your organization, however, doesn’t need to have the highest compensation in the market.

OK now what?
“Any extrinsic reward should be unexpected and offered only after the task is completed…” says Mr. Pink.  This is exactly the same advice long given by management expert Ken Blanchard; catch someone doing something right, as a tool for employee empowerment.  Both of these experts go on to state that intangible rewards work; often better than money.  Formal recognition and compliments on a job well done join fun awards as motivating tools.

Pink goes on to state that “providing useful information,” which describes how the work impacted the situation, can be a major motivator.  Here, an example might go something like this:  “John, the work you did introducing this new product goes way beyond a simple sale.  This product is part of our overall strategy for breaking into a new technology in the market.”

How does this apply to distribution?
Most distributors cling to a half century old compensation model throughout their sales department.  Change is tough.  As a matter of fact, most distributors recognize a lack of performance and candidly admit their plans often don’t drive the right kind of behavior.  Band-Aids have been applied, but largely we’ve played “kick the can” postponing the inevitable.  In spite of research and other evidence to the contrary, sticking with commissions.

Make no mistake, changing compensation plans comes with inherent risk.  The wrong move can create internal strife and many times can result in loss of scarce and valuable talent.  Unpredictable behavior by management scares the heck out of employees.  Making any kind of change without a researched and well thought-out plan is not advisable.  Now, while times are good, is the time to begin the decision making process.  

In the meantime, there are some steps we might consider to garner trust and support within our team.  Here are a few thoughts:

• Set reminders to “Catch someone doing something right” and create a habit of rewarding the right behaviors after the fact.  Be specific as to the reason for the reward and why you feel it is worthy of praise.

• Many companies honor someone on their team via a “President’s Award” or other annual award.  At the same time, we hear the award often goes to the guy with the highest sales numbers or largest commission check.  This is not a problem, as long as the recipient also follows company process, encourages the right cultural behavior and sells the right stuff.  Awards based on sales “tonnage” alone should be reconsidered and avoided.

• Up the ante on information provided.  Sellers need to understand not only what is expected of them but why certain behaviors are important to the company.  Arguably, and I say this because I know a number of successful folks who are not this way, Baby Boomers were receptive to following orders and “getting the sale” at any cost.  The next generation doesn’t see things this way.  They need to understand the reason behind the instruction.

Allow me to leave you with a final thought from Drive.  Employees respond to culture and culture is never exclusively about profitability.  Instead, profitability is a by-product of the right atmosphere.  While one of the purposes of a distribution business is adding to the bottom line, there is more to the equation.  Our style of business improves customer productivity while creating a stronger local economy.  Our business serves the employees; good paying jobs, opportunities and career advancement come to mind.  We also sponsor little league teams, scout troops and contribute to local charities.  We are the pillar of the main street business you hear about on TV.  We have a purpose and a higher calling which extends into the future.  Getting our compensation model right is a critical component of making it all happen.  

If you don’t have a copy of our white paper comparing the major compensation models in the wholesale industry, drop us a line, we’ll be happy to send it your way.   As always, there is no obligation, no sales pitch and we promise not to fill your inbox with emails.  

Our customers need our services. If you don’t provide them who will?

Last week I was honored to lead a discussion on fee-based

services at the Association for High Technology Distribution (AHTD.org). For those of you not familiar with the group, allow me an introduction: AHTD is the trade association for distributors, Automation Solution Providers and manufacturers providing a long list of technical “products” (things like programmable controllers, software, sensors, motion control, machine vision and robotics) into the North American manufacturing segment. It’s a highly technical group and literally all members provide some very expensive products and service bundles.

Historically, the members of this group have provided a wide array of both technical and logistical services to their customer base. Most openly admit salespeople are the gatekeepers for these services. Further, management oversight of service deployment ranges from “informal” to “talked about it in a sales meeting last year.” Ironically, even companies with well-developed turnkey service business (where fees are the norm,) still had little direct control over sellers deploying technical resources for non-project business.

Costs are going up…
Costs of newly graduated engineers track at somewhere around $60,000; not counting travel, training and benefits. Without exception, the group felt newly minted engineers did little for their business and required many months “before they could impact the business positively.” Even with the cost of service is going up, only a few distributors took the time to proactively track the expenses on a per customer basis.

The Whale Graph of Customer Profitability
According to industry experts, “More than a third of a distributor’s customers are costing you 45% of your profits.” I believe for the high-tech and high-touch distributors the number is higher. The graph looks like the one below:

Basically, the long tail of customers, representing approximately 50 percent of customers, cost more money to service than their gross margin justifies. Simply stated, these accounts generate negative bottom line profits. In an environment where sellers determine who receives free services, there is no throttle on the amount or type of services offered.

Commission structures, which the group agreed were based on gross margin, may actually encourage sellers to do “whatever it takes” to make the deal without regard to actual profitability.

If the distributor doesn’t provide the service, who could?
Midway through the presentation, we asked the attendees to list the types of services they provide and identify who might do the services if they somehow went away. The list of services was extensive; this was no surprise. But the answers to the “who could” question were quite eye opening. Here is an unweighted summary:

1. Some customers could do the work internally, but might need to add additional staff.
2. Systems Integrators could handle the work, but some might need training.
3. Engineering firms could do the work. Again, additional training might be required.
4. Supplier/Manufacturers could provide the services. But often the resources would need to travel from headquarters or the factory.
5. A few competitors might be able to provide the services.

The interesting point in the first four responses is this: 1-4 all would be fee based. Further, most are just a bit iffy. Unanimously, the distributors felt they had quicker response times and were generally better at solving the problems than the other options. Let’s do a quick review of why this situation exists.

Customers could do the work internally
Industry trends point to customers preferring to operate in a very lean environment. Most have consciously decided that maintaining large engineering departments and qualified technicians is not a good use of their budget. Further, the demographics of America’s workforce point to issues in finding, training and retaining the right folks needed for rare emergencies. This is highlighted in a recent Plant Engineering Magazine survey of North American Manufacturers where the average plant outsources 20+ percent of their maintenance work.

Systems Integrators might provide the services
For those not familiar with the System Integrator business model, these are organizations who earn their living providing engineering services in the manufacturing sector. Generally, they are called upon to assist customers who lack sufficient internal resources with automation upgrades. Most specialize in control system design. Experience indicates the majority prefer to do larger turnkey projects versus providing short duration onsite assistance. Some have candidly commented they struggle to make money on projects billing anything below $40,000 in labor.

Several of the distributors attending commented Systems Integrators sometimes struggle with newly released technology. Further, many specialize in a few of the major automation equipment maker’s products which often require outside assistance from the distributor to make things work.

Consulting Engineering firms might do the work
Consulting Engineers mirror the efforts of the Systems Integrator with the exception of typically providing a wider range of engineering based services. Previous efforts indicate these folks are both more expensive than systems integrators and often favor larger projects.

Supplier/Manufacturers could theoretically provide the service 
Most of the major makers of automation equipment offer up some kind of technical service. There are two issues associated with acquiring service from these sources. First, technical expertise tends to be centralized; often housed at the factory or headquarters location. This translates into lost production time for the customer and travel expenses tied to the service. Secondly, while the technicians are well trained and capable, they frequently lack experience with integrated systems which take advantage of the best of several suppliers. Communications between the equipment of several automation manufacturers often requires this expertise.

All of these potential providers of service come with a price tag.

Can competitive distributors provide the service?
The final choice does provide a bit of a pause in our reasoning. Can a competitor really provide the service? The answer is maybe. However there are a number of issues to ponder. Let’s explore:

• The competitor may not know your customer’s installations and applications as well as your company. This translates into a steep learning curve on many of the services provided.
• The competitor may not have access to the same product lines. Again, this implies both a learning curve and a lesser quality of service.
• The competitor may not have the same quality of resources. This is very often the case with larger logistics provider types of distributors and remote outpost branches of larger chains. When downtime and productivity are involved, the customer knows the difference.

Summarizing these points leads one to believe the addition of fees to some services is both warranted and arguably, risk free. Referring to the “whale graph” shown earlier, one must wonder what the impact of moving an account with negative profitability would be for distributors. Additionally, what might happen if a competitor accidentally acquired a negative profitability customer.

A funny thing happened on the way to the bar…
Immediately following our time together at the meeting, the AHTD group hosted a great ending reception. The weather

was perfect, everyone was relaxed and the message had soaked in. Then it happened, one-by-one, a half dozen distributors walked up began sharing their stories. Lots of service provided. Extensive support staff. No fees currently being charged. These stories came with a resolve to go back and make something happen.

Since I had billed the presentation as “A License to Make Money,” I asked them what the impact to their business might be. The minimum amount mentioned was north of $60,000. Here’s a portion of that conversation: “We have three application engineers on staff. Currently, we do absolutely zero in fee-based service, but we’re consistently busy. Sometimes, I cringe when I hear the places we go. I’ve heard of others charging for their service, but we never pulled the trigger. After thinking more, I believe I will require each of these engineers to add fees to just ten percent of their time. That works out to something like 600 hours a year at $125 per hour with a total of $75,000 in added revenue. We’ll probably end up $60,000 ahead out of the gate.”

Before we sign off…
Quite frankly, I can’t imagine any distributor not assigning a value to their service and recouping at least a portion of the expenses tied to the service. While I personally believe ten percent is a bit low, it is a start in the right direction. Another point to consider is the typical return for a distributor runs in the 4 percent range. So, to add the same amount of money to the bottom line would require a sale of between 1.2-1.5 Million dollars. Demonstrating fee-based services really is a license to make money.

If you want to talk about your opportunity to move from free to fee, shoot us an email or give us a call.

Frank Hurtte Talks about Distributor Compensation

Last month one of Frank’s Articles was featured on the front cover of Distribution Center Magazine. They liked it so much they decided to do an interview with Frank. Here are his personal comments:

“Videos not only make you look ten pounds heavier, they make you look 100 years older. I guess my chances of becoming a key contributor to Fox News are pretty limited, so I’ll be hanging around the world of knowledge-based distribution for the foreseeable future.”

While we had better not comment on the 10 pounds or 100 years, we do feel like many of our readers will enjoy seeing the interview.