Marketing Expert's Corner
This article written in 2003
Part 1: What's Next for the Enterprise Sales Model
You know there's something odd going on when Computer Associates is running TV ads making fun of pushy sales reps. Odd times indeed, when Tom Siebel and Larry Ellison have no visibility into their sales pipeline. I'm going out on a limb here, but I'll give my forecast of how the selling function will evolve.
Predicting the future of the Enterprise Sales Force isn't possible with any accuracy. The crystal ball is pretty murky when it comes to demand, customer purchase habits, and sales cycles. But a triage is possible: things that won't change, things that must change, and things that ought to change but may not. Let's start at the beginning.
SAP and Oracle are the twin archetypes for the Enterprise Sales model. Oracle invented the relational database market, and their aggressive sales style is legendary. Salaries were low, commissions were high, and reps chosen for their testosterone level. Reps could pull in $500K if they were lucky. In battling Ingres, Sybase, and Informix, Oracle pioneered the scorched-earth deal: a multi-year "all you can eat" contract for several million dollars that would effectively remove the customer from the market. Oracle's style and product-driven sales tactics were incredibly effective at taking the IT infrastructure market, but it was SAP that mastered the monster business-unit deal. SAP's all-encompassing software was sold to the executives who owned the production line, and they avoided IT in the sales cycle. Since SAP is a full-blown solution, their tactics focused on business issues. Their deals typically involved huge amounts of services and a synergistic sales cycle involving a systems integrator.
The two largest sales these companies did were in California. Oracle did an infamous $125 Million deal with the State of California: it was "all you can eat," but the state only ate 5 new licenses in the first year and consequently the state's CIO bureau was reorganized out of existence. SAP did a $100+ million product deal with Chevron oil that mushroomed into a $700 M total implementation budget. Deals like this just won't happen any time soon.
When the conditions are right, the Enterprise Sales Model generates phenomenal growth and good profits. But when market conditions change, a large aggressive sales force is phenomenally expensive and surprisingly inflexible. So let's see where things are going.
What won't change
The internet may have changed a lot of things, but one thing is abundantly clear: organizations will not buy products above $25,000 without having a sales rep involved. Even for $200 products (unless you're Microsoft), the web by itself will not generate significant sales -- a telesales team is needed. BMC and Remedy proved that you could do $75K deals over the phone, but aggressive reps were still involved. Products of any complexity require a pre-sales engineer, and the politics of large purchases require the skills of a salesperson. Having a tightly knit sales, pre-sales, and telesales team is more important than ever.
Because customer emotions drive big sales, the productivity of even the most proven reps will be difficult to forecast and manage. While it's easy to identify issues that will kill deals, there isn't a universal solvent to make every rep more productive or consistent. Wide variations in rep productivity will continue.
Another thing that won't change is wild swings in discounting to get big deals. Right now, 80% discounts in software are happening -- not sustainable, but that's where the pendulum is today.
Channels (VARs, distributors or agents) will not create demand or help you figure out how to sell your product. Their business depends upon the vendor doing these things. All the experimentation and learning from sales cycles must be done by the vendor's direct reps, and then tightly packaged for the channel.
The economics of the Enterprise Model can't change much (they do vary by country, but within a country things will change very slowly). Sales reps are your company's highest-paid non-managers. Your top rep may make more than the CEO, but that rep is gladly paid because he or she brought in millions in new business. In the early years of a company, commissions range between 3 and 10%, and in special situations even higher. But as companies mature, the leverage of sales commissions shrinks.
What must change
The real cost of the Enterprise Model isn't commissions: it's the difficulty of finding qualified prospects and the expense of long, complex sales cycles. Today's market will not support lots of million-dollar deals for even the largest vendors, and small vendors find it hard to get above $100k. Yet deals increasingly involve 5 sales calls and on-site proof-of-concept sessions. Sales forces must figure out how to make each deal go faster, or handle more deals in parallel, as the cost structure dictates that reps close between $1 and 4 million per year. Sales forces that can't make more, smaller deals and that can't leverage partners will find their compensation decreasing.
Many companies -- public and private -- hired too many sales reps, ramping the staff before demand was proven. This strategy only works when hypergrowth is in play, demand is obvious, and the main constraint is a lack of people to negotiate deals. The high tech world is now littered with companies shrinking their teams and consolidating territories to fix this investment mistake. The real problem has been that reps haven't been doing productive work enough of the time. This low utilization is usually caused by a thin pipeline -- we'll talk about this next month -- but that must change.
Once sales cycles are repeatable and references are in place, vendors must move as rapidly as possible toward a hybrid sales team and develop a channel structure. Even Oracle, the poster-child for the direct model, is working to make the net and the phone into powerful supplements because a purely direct sales model isn't very profitable over the long run of demand cycles. The pure-direct model should be thought of as a developmental stage in a company's life.
If you look at other industries, the sales function is focused on working their channel and making a transaction valuable to both sides. Unfortunately, the software industry has found ways of making deals that are really bad for the customer. The sales rep is sometimes seen as a trickster, playing the customer emotionally and politically so they pay for more software than they will ever consume. But these games also hurt the vendors: dissatisfied customers and shelfware are only the tip of the iceberg. For the long term health of the industry, this has got to change.
Since sales forces are coin operated, I need to touch on the compensation plan. The days of $100,000 commission checks are over for a while, but even today's compensation plans aren't doing the right things for the health of the company. Management needs to put specific incentives and disincentives in place to achieve needed behaviors, and a mix of MBOs and SPIFs for reps will often be needed.
What ought to change, but may not
As products become more commoditized, prices go down and unit volumes increase. However, higher-volume products mean channels, standardized deals, and less sales finesse, so enterprise sales teams often engage in "passive resistance" to needed change. A healthy way out of this is to follow the hamster defense: if you don't "eat your own babies," the competition will. By aggressively pursuing volume, you'll at least be in control of the evolution, rather than a victim of the inevitable.
The last few years has seen the growth of home-office selling and shared office facilities for remote reps. These solo arrangements do not work very well because sales reps and SEs learn from and get motivated by competition in the office. It is very difficult to control, train, or retain remote reps, so their productivity is spotty. I expect that one-man sales offices will fall out of vogue and be replaced by regional sales offices with a critical mass of 3 or more people. While the travel costs of this may seem daunting, the current "sales archipelago" wastes opportunity and is rarely productive.
The classic "meat eater" rep has been the darling of VCs and companies wanting hypergrowth. And when the conditions are right, macho works. But in more sophisticated markets, customers don't want to be hunted: they want to be cultivated and have a trust-based relationship. This is not just an issue of style, as building an aggressive and successful "farmer" sales force involves different investments and management skills. Companies should rebalance their cost of customer acquisition to optimize total lifetime revenue from an account.
Generally speaking, the level of sales competency needs to increase. According to a survey of 4,000 B2B sales forces (about half in high technology), over 70% of Sales VPs rated their team's skill levels as unsatisfactory. The sales rep has got to become smarter either about technology or the customer's business. Likewise, the level of marketing competency and its fit with sales has to improve. For some industries, it may be enough for marketing to be the master of brand and advertising, but not in high-tech. The high-tech marketer must be an expert in technology, customer trends, market influence, and persuasive communication.
Likewise, sales and marketing management needs to become much tighter. There has been too much guessing, and not enough meaningful measurement or follow-through. If you look at many in sales and marketing, the valued skill seems to be managing the boss and managing (or even hiding) information. Going forward, the key to personal and business success will be managing time -- the one resource that you can't buy from anyone at any price.
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