Wednesday, March 29, 2017

More questions about commissions and sales compensation

A couple of weeks ago, one of our articles covering sales compensation and commissions ran in two major industry
trade publications.  Never in the previous 12 years of writing for this type of publication have we received anything even vaguely resembling the outpouring of thoughts and ideas.  Thinking more about the situation, it seems our industry is reconsidering and re-evaluating a six-decade old compensation plan.

Many readers asked us to expound on the topic.  This is an attempt to provide some additional thoughts on the topic. 

Do you pay commission on accounts where the salesperson does very little work?
One of the biggest lies in our industry comes by way of the assigned account list.  Sometimes it’s geographical and other times it comes under the heading of “covering all the available accounts," but we continue to see sellers responsible for 100, 150 and even 250 customers.  Either way, it’s more than they can physically support, influence or actively promote your products.  Let’s explore the situation.

First, based on experience in the industry, it’s really hard to influence an account with anything much less than ten or twelve calls per year.  Additionally, most major accounts require many more: perhaps pushing as many as 30 calls a year to service and support.  With the average distributor sales person making around 12-15 calls per week, the numbers don’t add up.  Yet, commissions are paid.

Certainly, you might expect orders from the “long tale” customer list.  Occasionally the orders can be large enough to garner the attention of the seller; resulting in services provided to the customer.  However, most of the time these dribble in small value purchases without any value added by the seller.  Do you really want or need to pay commission?  Are the commissions justified?  Are the commissions serving the intended purpose of driving behaviors or compensating for sales efforts?

In a team based environment, others could be plugged into occasionally servicing inactive accounts.  Specialists, applications engineers and others might be directed to an unassigned account with a technical issue.   Further, a business development specialist might be trained to measure the potential and partnerability of these accounts for later official assignment or an alternative selling channel – web store, telesales, etc.  

Are some accounts “easier” to sell than others?  Is the commission rate the same?
I believe accounts with long term ongoing business are easier to sell than customers who were just introduced to your company.  Extending on this premise, customers who have “standardized” on one of your exclusive lines are locked in for the extended future; this type of sale is practically automatic.  And, customers where you have embedded services (i.e. crib maintenance, engineering support, training and other) will continue to send orders your way for a very long time.  We call this “flow business,”  The commission is often the same as new yet it is harder to develop the business.

Compounding matters, it is often the practice to reassign existing accounts with an existing book of business to sellers.  Typically when this happens, the seller gets an instantaneous raise.  Many times this includes flow business.  It has nothing to do with the work of the seller and instead is merely a function of being assigned the account.  While some sellers might deserve a raise for their loyalty, devotion to the company’s selling process and a myriad of other things, I wonder if a boost in base pay wouldn’t send a better message. 

Tied to the heading of “easier” business, let’s explore another scenario. 

Do you pay commissions on product which are sold via the internet?
Distributors across the country are adding internet based selling tools.  Amazon-like web stores are popping up across the country.  Employing marketing tactics and search engine optimization plans traffic is beginning to pick up.  Proving the plans are working, many distributors have seen significant growth in their e-commerce business.  By and large, local customers are more likely to channel their orders to the distributor.  Further, many of the customers are assigned accounts.  The question becomes, do purchases made via the web justify commission or the same commission as “regular” business?  Let’s explore an example. 

The web store runs a promotion on a new product; something the customer has never purchased. Perusing the site, the customer reads the specifications and decides to place an order for the product. No salesperson has presented the product, yet an order manifests itself. While a case could be made for the salesperson’s efforts in supporting the product after the purchase, a legion of distributors have mechanisms in place for such support. Is this a commissionable sale?  

I believe this will be a much more common scenario over the next few years.  Still the question remains, does your commission plan really align itself with longer ranging company goals?

The 800 pound Gorilla off to the side.
Does your compensation plan encourage the right behavior?  We’ve lumped this group together for additional thought and discussion.  Let’s review their potential impact.

Do they see the customers they call on as belonging to them or to the company? 
Experience shows sellers tend to see customers as “theirs."  I can recall a litany of cases where the salesperson related how they “saved” their accounts from the hassles of some new policy.  In one instance, to improve a downward trend in gross margin performance, the distributor invested in one of the wholesale industry’s best known pricing process.  After an otherwise successful year long roll out, it was noted that two sellers had unilaterally exempted most of their accounts from system pricing.  Excuses were flimsy and all pointed to a situation where every customer in these two gentlemen's territory were exceedingly price sensitive. 

Speaking off line, one of the sellers explained to me that he “Worked for the customer and because these customers were his, he would do everything in his power to protect them from unscrupulous plans coming down from management…”  The implied threat was that if management didn’t leave him alone he would take his customers and go to another company. 

Not too strangely, this same salesperson was notorious for hoarding customer information including contact names and opportunities identified.  He claimed this was his “job security” (his words.)  While it’s impossible to determine if the commission plan (he was 100 percent commission) was the motivator for this outlook, it probably didn’t help matters.

Of course, this isn’t the only issue tied to actual performance. 

Do salespeople “protect” their account information from the rest of the team?
In a team-centric selling environment, withholding information from the rest of the team not only hampers the overall strategy, but potentially robs the customer of added services.  We regularly discover sellers who are leery of introducing product specialists and other necessary team members to their accounts.  They lay down a barrage of excuses every time a product specialists asks for a direct audience with the customer.  Joint calls are postponed, canceled or simply refused. 

Further, the seller insists each specialist’s (and other team member’s) work follow their own personal process rather than the company dictated sales model.  Heaven forbid, a mistake is made by any member of the team, it becomes a long lasting reinforcement of their need to be totally at the center of any customer interaction with their customers. 

I don’t want marketing to bug my customers with spam emails and other crap.
For years, marketing efforts in wholesale distribution were clunky.  Marketing endeavors focused on sending out questionably written newsletters, customer events and coming up with occasional product specials.  Happily, those days are mostly behind us.  Marketing teams are generating leads, gathering customer purchase preferences and some other really cool stuff.  This is also a team based activity and requires critical data generally held by the sales team.

The trouble comes when even rudimentary data like customer contact email addresses and titles are poorly maintained and slow in coming.  Reports back from the field indicate much of the data flowing back to the marketing group is poor; lots of misspelled names, bad email addresses and positions at the customer are not clearly identified.  While I don’t believe all of this is malicious, I do believe there is no commission driven motivation for this behavior, yet it is of strategic importance. 

Do they nurture and help cultivate relationships with strategic vendors?
Have you ever heard the comment, "I’m not making joint calls with that guy?"  If not, you’re one of the lucky few.  I hear it far too often.  Each time the comment comes with a long tale of missing professional demeanor, trust issues or a personal commitment to another product line/manufacturer.   Often times, these issues happened years ago; however, if they didn't, one should ask whether management has the right to determine which supply partners are pushed forward by the company’s sales department.

If commissions are paid regardless of the status of the supply partner, they provide no motivating direction to the seller.  If management is willing to overlook this type of issue, strategically important opportunities fall by the wayside.  Why?  Increasingly, our supply partners look for fast results-- we can no longer wait for new product lines or technologies to trickle through a slow and time consuming sales process. 

Summing this up…
From where I sit, the commission structures most commonly used in our world are flawed.  In some instances, they are terribly unsuited and archaic.  With companies striving for teamwork, the plans in place may actually be doing something completely different.  Taking technology and customer buying styles into consideration, many current compensation plans are already or soon will be obsolete. 

I would love to hear your feedback.  Shoot me a message or drop a comment.  Stay tuned for more information on this topic as we've barely scratched the surface.  We’ve only worked our way through about 30 percent of the comments from others.  There will be plenty more examples worth sharing.  Maybe one of them is yours

Monday, March 20, 2017

Understanding your Customer – A simple tutorial

Most distributor salespeople identify themselves as solution sellers.  Yet, experience dictates only a few dedicate the time and resources to truly comprehend the drivers behind
customer decisions.  When questioned, most struggle to understand customer issues outside of their own products.   Truth is, their version of solution selling is mostly service and support wrapped around the technologies they sell.  While this wrapping of service and support probably does justify the “solution seller” mantra, I believe we, as sellers, will soon be obsolete if we don’t move our attention to providing solutions which push beyond supporting our line card.  Many agree with this opinion, but just don’t know how to get started.

For years, I have advocated for distributor sales professionals reading the trade publications covering their customer’s industry.  Because so many of our readers are actively calling on manufacturing facilities, I thought I would share some comments from Plant Engineering Magazine.  But before we launch into the meat and potatoes of this piece, allow me a few word on the magazine. 

Plant Engineering focuses on things a broad-based plant engineer, maintenance manager, facilities supervisor and others responsible for keeping the facility running.  Each month there are articles covering product technology; mostly basics, but containing enough meat for a newbie seller to gain some insight into the products.  For instance, the latest edition (March 2017) contains an article on selecting the right LED lighting system, a short bit on thermography and a story outlining the expenses associated with leaking plant air lines.  But the feature story is a survey of plant engineers (called the Maintenance Report.)  And, that is the real deal for all of us in sales.

Let’s explore some of the findings….

The average survey participant has 22 years of experience with 32 percent having over 30 years of experience.  This means something like a third of these folks are fast approaching retirement.  The average facility has 406 employees with a quarter of the plants pushing over the 500 employee mark.  The industries represented are a representation of manufacturing in North America.  Everything from fabricated metals and pharmaceuticals to automotive and aerospace is represented.

Unscheduled downtime is ripe with selling opportunities…
The leading causes of unscheduled downtime is aging equipment at 42 percent and operator error at 19 percent.  Lack of time for maintenance and not maintaining equate to another 24 percent.  When asked how these would be addressed, the answers indicate a number of selling opportunities:  

Sixty (60) percent of the survey respondents point to equipment upgrades as part of their strategy.  Here might be some questions for a seller:
·         Do you know which pieces of equipment at your customer’s facility are the most troublesome for unscheduled downtime?  If not, why not ask?
·         Do you know the financial impact of loss time from the troublesome equipment?  Most facilities fix the machines which have a high payback first.
·         Are you calling on the people responsible for machine rebuilding and repair?  As strange as it may seem, your “normal” contacts in engineering and maintenance may not have a handle on the process of equipment upgrades.

Fifty (50) percent of the respondents point to improved training and more frequent training in their plant.  Again, this opens the doors for a salesperson.  Here are some questions:
·         What are your customer’s training needs?  Many don’t actually know what exactly would drive greater uptime (and more revenue) to their facility.
·         What training offerings could the technical people tied to your organization provide?  Typically, the local community colleges, who are often working to get training dollars, have neither customer specific knowledge nor real world fundamentals tied to the equipment in place.
·         Could you offer training to “non-technical” people to bring up the level of competency of machine operators on the plant floor?  Typically, this is not something the plant engineering people have a handle on.  Instead, this comes under the purview of production and HR personnel.  Do they even know who you are?

Between 45 and 50 percent of the facilities are looking towards preventative maintenance and remote monitoring strategies for attacking unplanned downtime.  This is another selling opportunity.  Continuing with questions:
·         Do you have products with monitoring capabilities built in?  Looking backward, if you know the machines which might be updated and you have products with monitoring capabilities, you could position your company to partner on the projects.
·         A few very progressive distributors have added services to their product offerings.  Are you one of these companies?  If so, now might be the time to fine tune and relaunch your offering as a customer driven service.

The average facility is outsourcing nearly one fifth of their maintenance work.   For distributors who have embraced the fee-based service model, this could result in added revenue.  For those who do not sell services, it probably means you will be called on to provide added services for free, and that drags down profitability.  Decidedly against working fee-based services?  I suggest locating and cultivating a relationship with an outside source.  Acting as a conduit for new business will position you for making new sales. 

Where to start?  A real life strategy…
We started our conversation on the topic of reading customer-centric publications as a tool for understanding customers.  Let’s continue this thought. 
·         What would happen if you scheduled an appointment with the Plant Engineering Manager or Facilities Manager of your customer and showed up with this survey in hand? 
·         What would happen if you shared a copy and asked how the findings aligned with her location? 

There is an excellent chance the following conversation would result in a better understanding of your customer’s situation.  During the conversation, remember to follow this time tested set of guidelines:
·         Prepare questions ahead of time so they are on the top of your mind.  Many of the points outlined above can be morphed into great customer questions.
·         Avoid launching into “product spiels.”  The time for selling is later.
·         Whenever possible direct the conversation to money.  What are costs associated with downtime and how could improving productivity affect the bottom line are good questions.
·         Listen for the names of people in the production department who might benefit from training.
·         Take careful notes and ask if you can repeat back important points.

And for future reference, the website for Plant Engineering is here.  I recommend you review the report which is listed under research.  It’s free and I believe will drive business.  How cool is that?

Sunday, March 12, 2017

Every Silver Cloud has a Dark Lining – People Issues in a Good Economy

Last week, we explored the distractions presented to management during solid growth economies. Process breakdowns and loss of strategic initiative focus were on our minds.   This week we cover a couple of people related topics which can create roadblocks to success in distribution.  Since people represent the biggest single expense for distributors – actually something like 60 percent of our gross margin dollars go to employees – it’s prudent to explore the potential pitfalls.

Issue Three:  Good Economies Drive up People Costs
One byproduct of growth economies is an overall increased call for good people; the law of supply and demand kicks in.   Since distributors are notorious for poaching employees rather than developing themselves, the prevailing wage goes up.  Sales departments are heavily affected because the business level gives commission paid guys a lift in compensation.  Hiring someone during the upswing mostly sets a new base-line for future compensation. 

The upward push also opens doors of opportunity for new management types.  It’s a bit of a domino effect.  A sales manager gets lured away and new recruits expect more money, even though they lack experience in the role.  The whole phenomenon creates new pressure on the profitability of the organization.

Let me be clear, I am all for employees making money, lots of money; however, maintaining the health of the distribution business is paramount.  Further, any move with employee compensation must be sustainable.  If we have high skilled employees, we need to pay them accordingly.  This means being keenly aware of what one person calls the “current market rate.” 

The problem with most existing compensation plans in our industry is their commission-centric approach.  One study done years ago discovered a direct correlation between length of employment and commission dollars generated.  Sellers attach themselves to big commission checks by selecting their customer list.  As people exit the distributor business, sellers pick up better accounts by attrition.  Here’s how it works:  It’s a good economy, one of your sales people leaves the company.  You know it will be a while before a replacement can be found, so some of the better accounts are handed off to existing sellers. 

Generally, they get a raise because there is no adjustment to the commission percentage paid and they end up keeping the account forever.  Their compensation moves upward just for being in the right place at the right time.  While skill levels, dedication and drive are part of the equation, expediency is often the biggest driver.  It then creates unsustainable demands on bottom line profitability. 

[Note:  I believe it is time to reconsider the whole compensation issue.  I wrote an article here which created of both fan mail and hate letters.  You should check it out.]

Issue Four:  Great Economies encourage us to Hire rather than Redesign
As the economy grows, you can count on stress and strain in nearly every department.  Inside sales will have more calls, the warehouse will receive and ship more, A/R will process more invoices and everyone else will require just one more body to keep the wheels on the wagon. 

It’s easier to march into the bosses office and demand more than to invest in refining, streamlining or automating the existing process.  Conversely, when the coffers are full, it’s easy to just say “yes” and move on to the next problem.  Nevertheless, let’s look back…

For eons, the catch phrase among distributors has been “growth without adding people.”  Yet, after financial reviews of dozens of distributors, most are struggling to simply hold the productivity line.  A good many find themselves slipping in return on investment numbers.  All this after massive investments in “productivity enhancing” tools.  From an outside perspective, payoffs tied to ERP systems, CRM packages and marketing tools have been somewhere between zero and nada.  Why?  Because most of the time, we simply plug the new tool into the old process.

Now is the time to challenge your team to develop plans for doing more work with fewer people.  You can expect pushback, roadblocks and a thousand reasons why things “have to be done the way they’ve always been done” rather than innovative reengineering.   I recommend process reviews and interdepartmental 360 reviews to look for duplication in activity.  

[Read about interdepartmental 360 reviews here.]

Before we move on, allow me a couple of rapid fire comments on the topic of people:

  • Our customers face people issues, too.  According to research done by Plant Engineering Magazine, 64 percent of customers surveyed expect further increases in qualified people over the next five years.  Over half of those surveyed plan to decrease unplanned for downtime through expanded skills training of their teams.
  • Our suppliers continue to struggle with employees.  A good many have built strategic plans around “pushing tasks to their distributors.”  Expect more of the same.
  • If you have somebody with attitude or behavioral issues, get rid of them now.  It’s the humane thing to do.  They have a better chance of finding a job in a good economy and you won’t be stuck with them when the inevitable downturn happens (mid-2019.)

Finally, I am optimistic that next week we’ll cover a few more pessimistic points on plus sized economies.  

Monday, March 6, 2017

Every Silver Cloud has a Dark Lining: Things to Consider in a Growth Economy

Last week Industrial Distribution Magazine’s Jack Keough put out a recap the Alan Beaulieu
economic report as delivered to the National Association of WholesaleDistributor (NAW) Executive Summit.  I was immediately attracted to the article for three reasons.
First, Alan and his team at ITR Economics actually tracks indicators tied to our industry; we’re not talking pie in the sky stuff political puffery (as seen on TV.)  They have no political axe to grind.  For instance, they continue to make the point, the winning President has almost zero impact on the economy for the first 18 months they are in office.

Alan and ITR Economics are accurate.  I have been following them for something like twenty years.  During that time, they have accurately predicted the ups and downs of our industry with the greatest of ease.  Further, they called the “Great Recession” of 2008 to within 30 days and very accurately predicted a number of other ups and downs in the business cycle.  This is pretty big for guys making a living in the world of distribution.

Finally, the article was headlined: A Good Year Ahead!  It was late on a Friday afternoon, and, following long ago advice from a friend, I decided to end the week on a positive note.  Good business predictions from a trusted adviser; you can’t go wrong.

Here’s the news.  The U.S. economy is poised to grow 3.7 percent in 2017 and that rate will extend into the first half of 2018.  Quoting Mr. Beaulieu, “We’re going to experience some good times ahead.”   Further quoting the article, “There are many signs for optimism, he said, including favorable interest rates, non-residential construction improving, the rise of employment and wages and banks willingness to lend money.”  This is some pretty cool stuff, but not without issues for distributors.

Every Silver Cloud has a Dark Lining
Not to be a perennial bummer, but all this growth stuff presents a few issues for distributors.  For the next couple of weeks we will explore issues tied to operating in a good economic times.  So, without further ado, let’s explore the dark lining in what most view as a silver cloud.

Issue One:  Brisk Business Masks Process Breakdowns
Surging sales provides stealth cover for many problems.  You lose market share, but since the numbers are looking good you don’t notice competitors poaching business from some of your accounts.  Mediocre sellers post growth dollars and their lack of skills go unnoticed.   Sellers announce they are too busy for CRM data input.  Warehouses get dirty, shelves get cluttered.  Customer returns languish for months before suppliers are notified and credit received. 

Even the accounting department contributes by allowing aging A/Rs to creep to unprecedented highs.  Costly errors take place with sloppy handling of manually handled ship and debit rebate programs.  Credits are missed.  Money slides out of the distributor’s grasp.  We could go on, but you get the picture.

Sadly, the article goes on to state that “all good things must pass” and we will see a mild recession in mid-2018.  Do yourself a favor and fix things now, while there is time and money. 

Here are a couple of recommendations.  Document your
processes now.  No need for flowery wording, just put together an outline or a flowchart.  Measure your compliance to the process.  Review process improvement (as well as sales growth) during company meetings.

Insist that front line managers review their people and measure their performance.  Set improvement plans for employees with lackluster performance with drop dead dates.  It’s easy to postpone handling their issues because you are busy, but attention to detail will put you in a better position when the economy softens.

Issue Two:  Great Business Climates Distract from Strategic Thought
Without the right kind of discipline, distributor types find themselves consumed by urgent issues and procrastinate strategically critical issues.  It feels good to be busy and even better when busy is tied to the instant gratification of big business.  But our world is changing… Actually spinning faster than ever before.  Investing in strategic issues during good times is more important during upticks in the economy.  Experience dictates, those with solid strategy go into recession better positioned and rise faster with the next upturn.  Let’s think of strategically important topics.

I believe a solid pricing process is an essential part of any strategic initiative.  There’s three big reasons why:
  • Pricing Process drives bottom line results.  The typical distributor using David Bauders’ Strategic Pricing Associates improves gross margin by two points.  In some industries, this nearly doubles the bottom line results.  For most distributors the gain is still in the 50 percent range.  You can’t ignore this size of an increase.
  • Company value is dramatically improved.  Distributor businesses are valued on a multiple of bottom line profits before tax and interest (EBITA).  Here’s a simplified example of how it works.  A company putting $1M to the bottom line could be valued at 6 times earnings or $6M.  That company increases the bottom line via pricing by 50 percent to $1.5M.  Using the same formula, the company is now valued at $9M.  Further, our research indicates companies with higher performance than industry norms often attract a higher multiple of earnings.  So, the process may actually improve the value substantially more think multiple of 8, which means a value of $12M.  Yep, pretty strategic.
  • Processes in the sales department tend to interact.  Building a credible pricing process requires detailed customer and supplier segmentation; marketing improves.  Salespeople are forced to think more critically about the customers they invest time with.  Targeting improves.  And, sales teams with well-developed targets are 47 percent more effective in reaching their goals

Developing a strategy for e-commerce and internet-based sales tools should be part of your strategy.   Let me be clear on a point, I don’t believe every distributor needs to be the next Amazon; however, we do need to understand business is changing and we need to be on top of the technologies fueling these changes.  Further, technology is getting cheaper by the day.  In many instances, we’ve reached the tipping point of cost and benefit which allow even small distributors to have some pretty nice stuff.

Rather than take the Amazon-clone approach, I think we should look at technologies which allow your business to be more efficient, more effective and sometimes automated.  Dr. Al Bates of the Profit Planning Group shared an important point, “More than a third of a distributor’s customers are costing you 45% of your profits…”  That means you already have a lot of customer’s who cost you money to do business with.  And, in my opinion the number is growing.  This brings us to the question:  What is your plan?

One solution would be to take advantage of new technologies capable of automating the process of entering customer purchases orders.  A couple of my clients are using it and report a massive increase in customer service related productivity.  (I have information if you want to chat about this.)  Another solution is eliminating outside sales contacts with customers by providing a web-portal which allows small (and most likely unprofitable) customers to serve themselves.  The point is you need a plan today in order to be in position by the next downturn.

Before we go, this is a multi-part blog “series”.  Next week we will touch on how good economies impact people.  Stay tuned…