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By Jason Watkins, Principal, The Alexander Group, Inc., and Trey Klawiter, MBA, The University of Texas at Austin.
Solving a company’s period-end sales spikes requires a new management model.
With three weeks left in the quarter, you feel the steamy breath of executive management on the back of your neck. A directive goes out to scour the sales pipeline. Sales directors, managers, and account executives scurry for last-minute sales, while you rack up frequent flyer miles to push through any pending elephant deals. With some revenue from an unexpected source and a few major concessions, you squeeze out your revenue target.
OK, exhale.
Call this phenomenon what you will—revenue spikes, period-end sales cyclicality, or lumpy revenue—it has reached epidemic levels within the technology industry, particularly in the enterprise software space. Rather than the traditional reactive approaches of addressing sales compensation, training or technology, however, the solution lies in a shift from a sales-oriented culture to a revenue-management culture.
Short-term Boosts, Long-term Hazards
Wall Street hates surprises. Smooth, profitable revenue growth buoys stock prices and pleases shareholders, while missed forecasts exact an equally swift punishment—hence the scramble to make quota. But looking within the sales team and the organization as a whole, the quarter-end sales focus drives a myriad of long-term challenging implications:
- Encouraged or even compelled to make last-minute deals, sales personnel resort to cutting prices and reducing margins, directly and negatively affecting the bottom line—and therefore exacerbating the financial woes.
- Similarly, sales forces may unwittingly train their customers and channel partners to wait until the end of the period to get better terms by making concessions at the end of the period (despite customer incentives to buy earlier).
- The sophistication of the buyers has dramatically increased. Deb Tummins, former vice president of sales for BMC Software, says that some of the company’s customers became so sophisticated that “they knew exactly what impact their contract would have on BMC’s earnings per share, giving them tremendous leverage in the negotiations. Customers often learn this from outside advisory groups and via their own procurement departments.”
- The customer’s buying process, time frame and needs may be neglected in order to push the sales process forward. If sales executives become too aggressive in an attempt to make their numbers, the relationship with the major accounts and buyers can be permanently damaged.
- The frenzy at the end of the period creates a sales-force hangover, with salespeople relaxing during the first few weeks of the next quarter, thus causing the process to repeat.
- Non-linear revenue burdens finance, administrative and audit resources, and creates scheduling and project-management issues for implementation and customer-service teams. High-tech manufacturing companies also face the increased costs associated with inventory, production, freight and supply-chain disruptions.
While the temptation is to place sole responsibility of this problem on the salespeople, traditional solutions tend to be misguided, if not counterproductive. Take, for example, compensation tweaks to control salesperson behavior. Bonuses, incentive plans or new performance measures are rarely effective in combating sales cyclicality and may even create “compensation nausea.”
Another tactic often employed by sales management is to deploy a new customer relationship management application, which may cost millions. Without strategic sales-management direction, however, implementation can be painful, the systems are only as accurate as the information entered and payback can take years
Making the Transition to Total Revenue Management
While common tactical solutions may work in particular situations or for brief periods, sales cyclicality often persists. More often than not, the problem lies within the actual culture of the company—and future prosperity most likely necessitates a transition from a sales-oriented culture to a revenue-management culture.
Total revenue management (TRM) demands an ingrained culture of identifying, predicting and pursuing profitable business with a high degree of accuracy and with limited time-based pressure. This represents a fundamental shift away from sale-to-sale thinking, focusing instead in terms of ongoing account and territory management, timelines and funnels, and forecasts through delivery. A revenue-management organization, quite simply, pursues profitable deals.
Naturally, that doesn’t happen all at once. Young companies and sales organizations fundamentally focus on selling. The primary objective for the sales organization during this time is to acquire new accounts and customers. As the company matures, the sales culture is challenged by the need to do multiple things well, such as acquiring customers while keeping and penetrating existing accounts. Usually at this time, the organization launches more products and services, and there is an increased focus on margin and profitability. In starting to consider what business is good business, maturity inherently challenges the sales-oriented culture from when the organization was young.
To make the transition, the culture of the entire company and sales organization must re-examine (i.e., re-invent) its sales management model to become competent and agile in TRM. (See Insert I)
Five Steps to TRM
Taking a holistic approach to achieving TRM is not an easy path. To begin the transition from a sales-oriented culture to a TRM culture means admitting that what was right for yesterday may not be right for tomorrow. It further requires conceding that reactive, tactical approaches to fixing cyclicality won’t work and, in fact, may exacerbate the issue. A five-step approach, taken in a structured manner over a one-to-three year timeline, will help in instituting the changes.
Step 1: Start changing the culture.
Quantifying the hard- and soft-cost impact of short-term sales cyclicality can be a first step in creating urgency for upper management and throughout the ranks. Starting with the CEO, leadership should deliver a clear definition of the issue and messages about why change is necessary. Articulate what revenue management means to the company’s future and where the company is in terms of its lifecycle phase.
Within the sales organization, executives and management need to expand beyond traditional sales-management tactics and begin to coach sales personnel on broader aspects of business. By addressing the importance of margin, expense management and cash flow, the objective is to push the individual sales person to understand his or her role and responsibility: Don’t just bring in business, bring in good business, manage margin, and accurately forecast opportunities and manage the funnel accordingly.
Ultimately, this means getting closer to your customers and working with them in a partner-oriented fashion, conducting strategic sessions, and painting a clearer picture of their needs and timing. Executive involvement is critical in setting the partnership guidelines going forward. In essence, retraining the customer leads to a better understanding of the revenue flow, forecast, and the impact the account has on the bottom line.
Step 2: Establish a framework.
Traditionally, sales management is tackled issue to issue and day to day. To combat cyclicality, the executive and management ranks should develop a framework that allows the company to continuously and consistently examine the critical elements of sales management. This ongoing examination facilitates the transition to a revenue-management culture. (See Insert II)
Step 3: Deploy revenue-management roles.
“Sales-oriented cultures are hard to change,” says Jake Pyles, senior director of revenue management for BMC Software. “One way we’ve worked to achieve focus on revenue management is by designing and deploying revenue managers into the sales organization.” Moreover, says Gene Munson, senior director of sales operations for Forgent Technologies, “We’ve determined that connecting sales more strongly and directly with finance and operations has helped us to get deals done faster, with higher margins and better terms.”
Revenue managers, who generally have financial or operations backgrounds, may report directly to the sales executive or to both sales and finance. These resources are most often deployed in major accounts, although they may extend down to lower tiers of accounts as appropriate. Typically, they assist account managers and sales executives to structure major deals and contracts, manage margin and facilitate interaction between groups.
A revenue manager may help sales managers to gather, collect, examine and analyze the information, and then to determine the implications and take action. Munson, who reports to the CFO rather than the sales organization, provides an unbiased, objective and accurate revenue forecast to upper management as well as lending his financial expertise to sales management, assisting them in making the best possible deals. He keeps a pulse on the company’s cash flow and balances that with forecasts and expected revenue.
Step 4: Control discounting and manage margin.
Pricing, discounting rules and margin analysis are moving targets within the sales organization. A revenue-management culture requires close work with product houses and pricing resources to establish clear, consistent rules with regarding to pricing and discounting. Overall, there should be a habitual emphasis placed on margin, including controlling discounting, examining and monitoring price-realization (i.e., the variance of target price or ideal price), and profitability. Want to sharpen the point even further? Compensate sales executives on margin, not solely on revenue.
Most likely, high-level meetings will be necessary with major accounts to retrain them with regard to the business and the partnership. These conversations need to focus on forging a long-term partnership in which both parties understand the impact on the other’s business. In many cases, sales personnel will need to also be retrained to understand and facilitate linear revenue.
Step 5: Set realistic expectations.
To build the roadmap for the transition to a revenue-management culture, you’ll need to focus on the entire organization. Shifting the culture, establishing a framework, designing and deploy revenue-management roles, and managing the margins will help smooth revenue, but there is no silver TRM bullet. Your team should set realistic expectations in terms of the results, the timeline and the effort required to institute such change.
Meeting the Challenge
By combining the tactical aspects of this strategy and setting realistic expectations, the quarterly spikes in business can be managed, with the ancillary benefits to forecasting and margins. For maturing companies to prosper, they must incorporate a true revenue-management culture from the CEO’s office down. Missed revenue expectations and low profitability materially affects every department, meaning that every employee needs to be aware of the concept of TRM. Management derives the biggest benefit from being consistent with this message—not only within the organization, but also with customers—and measuring the results.
Ultimately, short-term sales cyclicality can be managed through a holistic and systemic approach. Transitioning from a sales-oriented culture to an optimized revenue-management culture may be difficult and may take time. A successful transition, however, will help to ensure your company’s success in its next phase of growth and maturation.
Insert I
Examining the Sales-Oriented Culture vs. the Revenue-Management Culture
| In a sales-oriented culture… | In a revenue-management culture…
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| Sales management has all or most of the power. | Power is shared among executive management.
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| Cost of sales is higher. | Cost of sales is lower and scrutinized; there is an emphasis on margin management.
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| Focus is on revenue growth. | Bottom-line oriented. Focus on profitable revenue growth as well as revenue management.
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| Focus on gearing (sales jobs, incentive compensation, CRM, SFA, call center, tools). | Focus on change management and procedures to maximize productivity of resources and investments.
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| Forecasting is less important and is less predictable. | Forecasting is vital, and more predictable.
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| Sales has ownership of customers and accounts. | Company has ownership of customers and accounts.
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Insert II
Eight Keys to a Successful TRM Transition
Source: The Alexander Group, Inc. (AGI)
By taking a structured approach, moving from the strategic to the tactical, companies can make a smooth transition to total revenue management within the sales organization.
- Confirm segment definition and targeting. Establish clear buyer and account segmentation tiers. The focus during the transition should be on targeting profitable customers and accounts with high potential, with the right resources.
- Clarify the sales strategy. Confirm retention, penetration and acquisition selling strategies based on target segments, or tiers of customers and accounts. Establish account-planning processes and approaches for appropriate tiers and resources. Establish sales approaches, strategies and tactics that emphasize total revenue management (TRM).
- Confirm sales channels. Confirm that the selection of channels provides the most effective and cost-efficient access to customer segments and supports the revenue-management culture.
- Examine the sales organization structure and sales job designs. Examine the sales organization’s structure in terms of ongoing revenue management, including new revenue-management roles within the sales organization, or stronger ties to finance. Further, optimizing job definitions will help to clarify focus and point personnel toward their revenue-management responsibilities.
- Assess the resource deployment situation. Determine the alignment of sales resources to customer and account segments that balance desired account coverage needs, resource availability and importance in terms of the potential profitability of the customer or account.
- Performance metrics and tools. Establish a sales dashboard using a Sales Datamart. This mean establishing the key sales-performance indicators and tracking systems that allow the sales organization to understand and monitor performance in terms of total revenue management (i.e., including effectively managing margin, the forecast and pipeline, and specific opportunities for accuracy and sales linearity).
- Align goals and compensation. Use a defined process to assess, design, implement and monitor the incentive compensation program. Set performance objectives and incentive programs for to facilitate the achievement of business objectives and revenue-management goals.
- Establish supporting people management programs. Develop a clear recruitment process, career-path planning, performance-review systems and training programs to support execution of the go-to-market strategy and the new revenue-management culture.
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