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Greg: Welcome everybody. This is Greg Alexander, the CEO of SBI, a sales and marketing consulting company dedicated to helping you make your number. This is the SBI Weekly Podcast. Today’s guest is Lee Kirkpatrick. Lee is the CFO of Twilio who is reinventing telecom by merging the worlds of Cloud computing, web services and telecommunications. The company hosts and telephony infrastructure web service in the Cloud allowing web programmers to integrate phone calls and SMS messages into their applications.
The company was founded in 2008 and is backed by a dream team of investors such as Bessemer, Union Square and Founder’s Fund. Lee has been CFO for three years and prior to that was a CFO of Say Media. He also had stops at OPhoto, Home Shark and eight years at Thompson [inaudible 01:11]. Before all of this he picked up an undergraduate degree from the University of Southern California and an MBA from Columbia. Lee, welcome to the SBI podcast.
Lee: Great. Thanks Greg. It’s a pleasure to be here.
Greg: Okay, today’s topic is sizing the sales force. Key questions we’re going to try and answer for the audience today are do we have too few or too many sales people? If we miss the number, is it because we don’t have enough feet on the street? Conversely, is our customer acquisition cost too high due to a bloated sales force? As we grow and divide territories and ad reps how do we do it without losing the original superstars? This plus other juicy subjects that will be enhanced quite a bit by the CFO perspective that Lee is going to provide.
The reason I chose this subject today is that when this show airs it will be late summer, early fall and many of our listeners will be right in the middle of their annual planning process. They’ll be trying to size the sales force for the new year. Okay here we go. Lee, you ready?
Lee: All set, yes.
Greg: All right. As a way to guide our conversation and stay on point today we’re going to use SBI’s sales force sizing methodology. If you want to follow along at home just go to SalesBenchmarkIndex.com, type in sales force sizing into the search bar and our methodology will pop up and you can follow along. Our method starts by choosing from one of three sales force sizing approaches. The idea is to match the business life cycle of a company with the appropriate sizing approach.
As a way to explain this is layman’s terms, business life cycle refers to the launch of a company, the scaling of a company, the maturation of a company and ultimately the decline of a company. Kind of classic crossing the chasm stuff if you will. The three types of sizing methods that I mentioned earlier are rapid build, pay as you go and safety build. Let me give a brief description of each of those then I’m going to ask Lee’s opinion on them.
The rapid build, this approach is to hire and hire fast, deploying this newly sized sales force all at once. The idea here is that more people means more revenue. This is often used in a low risk, low uncertainty environment. Pay as yo go is defined as an approach that says to allow for incremental revenue to fund incremental head count. This is the most conservative of the three and is used in high risk, low certainty environments.
Then lastly is the safety build. This approach says deploy half now and half next period. Period is defined as sales cycle length plus new sales rep ramp time. If you have a sales cycle length of 60 days and it takes 90 days for a new sales rep to ramp, then you have 150 days as your definition of the new period. What we’re trying to do here is match the business life cycle with the sales force sizing method. Let me ask you a series of questions regarding Twilio, Lee. What business life cycle stage is Twilio in?
Lee: Yeah, absolutely in the high growth stage. I’ve been at Twilio for three years and our monthly recurring revenue has increased over ten times since I’ve been here. We actually announced we’re doing over 100 million in ARR [inaudible 04:40] last year, so in that high growth stage. Probably a little higher risk though I think in terms of your model. Still high growth, still high growth, but obviously a big market opportunity.
Greg: That’s impressive, 100 million dollars of ARR. That puts you in one of the larger categories in terms of SaaS software companies. There’s lots and lots of SaaS software companies that are doing well, but haven’t quite reached that level of scale just yet. Yet we’re still in the high risk mode which I guess is not surprising given the fact that you’re still in rapid growth. With that as our context, when you think about sizing your sales force and if you close your eyes for a moment, assume that you were doing this heading into 2016, of the three or if you have a fourth or a fifth idea, which of these methods do you think is most appropriate for you?
Lee: Still thinking in high growth and if I step back, when I joined Twilio or actually any more of, and this is where a classic venture back company as you said Greg, it’s really important. We might go out and raise money say for a period. Say for an 18 month period and for argument’s sake let’s say a company is spending, burning 500,000 a month. You raise 9 million dollars which seems kind of quaint with fundraisers today, but the clock is ticking. There’s a certain amount of time and you’re spending money on R&D, marketing, building of GNA.
If you’re taking your time to try to get the sales right and tweaking around and fussing around too much metrics, if you waste three months, that’s a million and a half dollars of that precious fund raise that’s wasted. I do think in the very early stages that clock is ticking fast and there’s a big owness to get traction quickly.
Twilio has moved beyond that stage now and so as we’re looking at it, we’re still looking at international markets and we’re looking at, we’re at a highly disruptive enablement situation. There is big opportunities. Again, the owness is on us to get out there and grab share and we still are in a loss situation. We’re investing heavily so there’s big pressure to get out, grab share and spend and invest which is the top priority to drive top line revenue.
Greg: Interesting. In our nomenclature anyways you would be in the rapid build category because of this burn rate issue. It’s an interesting way to look at that. I haven’t considered it because normally sometimes when I have this conversation with CFOs they don’t want to add sales heads because it increases the burn rate.
Lee: Yeah, but I thought that through, but if I’m not making progress on sales as I’m adding engineers and building up my team and launching products and testing products, that’s costing me money and the clock is ticking on my funding. Again, the goal is to make significant progress to your next funding until you drive profitability. If you’re not thoughtful and don’t invest in sales while you’re at this stage, you’re really going to spend the money, but you’re not going to get the market penetration. Ironically it’s a reverse world that the incremental selling costs and effort, it’s not that much incremental in terms of overall spend. It’s a little bit reverse thinking that it can get you your progress faster and actually be more capital efficient in the long run.
Greg: Yeah. Yeah, that’s insightful. You’re right. It’s counter-intuitive, but listening to you to say it, it makes perfect sense. Okay, in Lee’s particular case at Twilio and we’ll talk about his other stops in a moment here, he’s in a rapidly growth business so he’s using this kind of rapid build approach to sizing the sales force. You know Lee, your answer made me think of an article that we just published in the SBI Magazine that was written by Alex Shupman who is now the President of Aptio. Prior to that he was the Head of Sales for Elequa leading up to the IPO and ultimately to the sale of Oracle.
Your answer makes me think of how he did this at Elequa which is consistent with what you just discussed. It dawned on me that maybe the listeners on this podcast might want to read that article in the SBI Magazine. We’re going to take a quick break and we’re going to play a spot here that tells these listeners how to get a copy of that magazine, so we’ll be back in 20 seconds.
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Greg: Okay, welcome back everybody. This is Greg Alexander, CEO of SBI. This is the weekly SBI podcast. Today I’m talking about sales force sizing with the CFO of Twilio, Lee Kirkpatrick. Right before the break we were talking about the fact that Twilio is a fast growing company now with 100 million dollars of ARR. Lee offered some insight, and that is he is even in the situation where they’re operating at a loss because they’re investing heavily, he’s adding sales heads. Which is somewhat counter-intuitive. It makes perfect sense because you’re not going to get the penetration of the products that you’re investing in on the engineering side unless you have feet on the street.
Okay, so let’s move onto the next stage in our kind of use case here. At this point we’ve matched the business life cycle with the sales force sizing method. We have some structure or business rules that tell us when to add, delete or keep steady sales heads. Next in our process is perform the analysis which is both tops down and bottoms up.
For this we’re trying to do two things. We’re doing an activity analysis, a pipeline analysis and what we call a turn per sales call analysis. Let me just quickly identify each of those terms and get Lee’s commentary on them. The first is activity analysis. This looks at which activities a rep needs to perform to win a deal, how many times these activities need to be performed and how long it takes to perform each.
This calculates the workload required to hit quota and when coupled with the number of accounts in a territory it can tell us how many reps we need in each patch. The second one is pipeline analysis which adds to activity analysis by putting on top of it the pipeline with assumed conversion rates at each stage. We can work backwards from the number of deals we need to win, at what price point and we can back in to how many reps we need.
Then building on those two is the third type which is return per sales call analysis which looks at the number of sales resources needed based on the required amount of revenue. This brings into the equation non-quote carrying sales heads. Things like pre-sales engineers, professional services, product overlays, et cetera. Lee, having heard that as our kind of academic theory, do you guys do any type of mathematical analysis when trying to figure out how many sales reps you need?
Lee: Yeah, we do. We look at, by the way, this is a great model that you’ve talked through. I think we cover a lot of those not exactly in that format. We certainly look, we’ll start at the very high level and take a look at sales as a percentage of revenue which I know is very basic and can be different for different type of companies, but at generally level we’ll want to see we’re in the range in being efficient there.
We’ll then also look at an overall growth efficiency ratio and say how much money are we investing in sales and marketing to drive in a recurring revenue? We’ll look at our model and see are we efficient. You might have heard the magic number being thrown around in terms of SaaS companies, but in general is our overall model efficient today and going forward? As I’m investing in sales and marketing is it efficiently bringing on recurring revenue?
Then we look at customer acquisition cost ratios which actually brings is a gross margin benefit. Again, investments, sales and marketing are driving gross margin and how long does it take for that to pay back over a time period. Those are our macro issues where I can look and say hey, is the overall model efficient? As I’m bringing on more people in terms of sales, does that make sense for the business?
That’s one look at it. The second look at it is at a very individual level which is getting close to the three items you’ve talked about, we’ll actually look at the sales rep, we’ll look at their base cost, their commission and look at the amount of annual recurring revenue or annual contract value that person is going to drive over a specific time period. Then we also will look at pipeline and pipeline coverage per person, sales rep and say hey, taking one step up, what type of pipeline and coverage do they have to have to drive the efficient cost per annual occurring revenue? Then what investment do we need across the company in terms of product, product marketing to drive the top level pipeline?
Greg: Interesting. Okay. Let me ask some follow up questions around this growth efficiency ratio which I love. I find sometimes it’s challenging though because when you lump sales and marketing together, and I understand why you do that when creating that ratio, the problem is that 80 to 90% of the sales expense is labor. Two-thirds to three-quarters of the marketing expense is program spend. It’s non-labor.
As it relates to today’s topic which is sizing the sales force, that makes it difficult to balance those two things out and come up with a real efficiency ratio as it relates to sales excellence. What I find CFOs doing is just literally trying to calculate a break even point per sales rep based on contribution margin. Then determining to add heads when the break even point is cleared.
I can’t see that working in a shop like yours where you’re not trying to be profitable right now. You’re just trying to gain share and you’ll worry about profitability later. What are your thoughts on looking at contribution margin, break even analysis? Is it worth it?
Lee: Yeah, absolutely. I agree with you. That’s why you have to look at both, because you can look at a specific model and identify the sales rep and the cost and what you’re spending on that rep and expected ramp up to breaking even, both on a revenue basis and on a gross margin basis. Obviously in a high growth environment you’ll have a little more leeway in terms to not having to be as efficient or taking a little bit longer. The goal is revenue growth and share, but I do find looking at the top level very important because you can do stuff. What might make sense on the micro-level and you’re not really accounting for the entire cost model itself.
On a micro-level something might make sense, but I’ve been in the situation before where you look back at the bigger picture and the overall model might not be efficient. Efficient today is different than efficient in the future. The key is to understand here’s my current efficiency and then where do I want to be down the road.
Greg: That’s a good point because those would be different things as a company moves through its life cycle stages. That’s right. That’s a very good point. One of our colleagues here, George Delos Reyes, who is a subject matter expert in this area, he writes for our blog frequently about this subject and recently he published a post called Best Practices For Matching Market Demand and Selling Capacity.
If you’re enjoying this conversation with Lee you might want to check this blog post out. Let’s take a quick break and make this audience aware of how to get a free subscription to the SBI blog. We’ll be right back.
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Greg: Okay, welcome back everybody. This is Greg Alexander of SBI. Today we’re talking about sales force sizing. I’m joined by Lee Kirkpatrick who is the CFO of Twilio. Right before the break we were having a conversation around performing the mathematical analysis to determine how many feet on the street that we need and we were discussing the pros and cons of some of the standard methods such as percentage of revenue, growth efficiency ration, activity analysis, pipeline analysis and return per sales call analysis.
At this stage in our use case we have figured out the number of sales reps we need to make the number. The next several steps in our methodology deal with determining if we need specialist or generalist reps, choosing an organizational model from the seven dominant models that are out there right now and then defining roles and responsibilities.
Unfortunately this is a very, very big subject and all of those things are worth talking about, but we don’t have enough time today to go into those, so we’ll dedicate a separate podcast to those at a later point. As we have Lee here on the telephone, I want to ask him one final piece which is I wanted to get your take on how to create the pro form of revenue and cost model that accompanies this sales force sizing calculator. We’ve seen these models employed very well.
They typically hold in them all of the assumptions that make up the head count number the assumptions that it was based on and it allows the management team to keep track of these assumptions as the year progresses. It’s a very effective tool. The benefit of doing this is an ability to flex up or flex down based on real time data. Lee, I want to ask you before we let you go here, how you guys as a management team look at this stuff? Do you use a tool like this or something similar to this? If so, what’s in it? How elaborate is it? How often do you and the head of sales meet?
Lee: First of all the head of sales, as CFO that is my most important relationship in the company. I pick them that early in my career, getting close to the sales team and working close with sales was where I was going to get information. I can look back at the anecdotes where if the sales reps are buying new cars, that was going to mean one thing. If the sales reps are bringing leftovers in to lunch, that means something else.
All the time, first of all. Attached at the hip. At Twilio we’re looking in two directions. We do sit down with our product team and product managers and look on a product basis and build the forecast up based on product launches, history, performance in terms of growth rates, churn rates, retention rates, all of that. Then in parallel we do exactly what you’re saying, the classic head count and build up model, while we look at the rep’s expected performance, hiring by territory then triangulate based on those two models to come up with eh final revenue model.
Greg: Interesting. Tell me a little bit more about working with product management, the product managers themselves and doing it on a per product basis. Is Twilio a company where you have lots and lots of products or is it a company where there’s a few products?
Lee: We have a platform, so I guess I would probably say fewer products. We offer a communication platform, a communication API as you well said at the beginning of the podcast where you can really easily plug I your communication platform to your software. If you take an Uber car service and you’re talking to the driver, that’s Twilio. You can talk to him via voice, you can send him a message. We also offer a video product.
We’ve got this broad platform. In a way with multiple, multiple use cases. The product managers take those products and need to identify key use cases for us to market to your product marketing team.
Greg: Okay. Based on those use cases and the markets that you’re pointing those products at, you can come up with some type of forecasted penetration rate?
Lee: Yeah. Yes, that’s at one perspective and then we take that general format and look at the sales team and the sales team’s existing accounts and new territories. Then new potential hiring. That’s really, I don’t want to say the old fashioned forecast, but really in terms of adding people to expand and sell, that’s a different perspective also. That’s based on bringing on effective sales people delivering their quotas.
Greg: Got it. I sympathize with you because I have a visual in my head of the product team on one side, the sales team on the other side and you in the middle. Two versions of the truth and you playing referee.
Lee: Yeah. Yeah, but there’s good information from each. In a company like ours where it’s a new market, let’s take the on demand economy for communication services, there was no Uber of Lift Car Services several years ago, so I think one thing if you’re going into a set market and taking shares that’s one thing, but when it’s a brand new market you need all the information you can get. Having both sources is very helpful.
Greg: Do they usually agree or are there disagreements between those two groups?
Lee: There’s general good alignment, yes. I’ll leave it at that.
Greg: Okay, very good. All right, well listen, some of you might be wishing we covered today the other items we mentioned earlier, such as org charts and specialist versus generalist and roles and responsibilities. We just didn’t have enough time. However, let me point you to something that might help you out. John Gleason who is the Chief Sales Officer at Ryder recently appeared on SBI TV and he talked about these items specifically. You should watch this episode. If you’re not familiar with SBI TV, here’s how you can subscribe to our television channel.
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Greg: Okay, welcome back everybody. This is Greg Alexander of SBI and Lee Kirkpatrick, CFO of Twilio. This is our last segment on the podcast today talking about sales force sizing heading into the New Year. Lee, we’re a little bit out of time here. I’m just looking at the clock and we’ve got maybe two or three minutes. I wanted to before I let you go because I know you’re busy and it might be tough to get you back on the show and you’ve provided us some really insightful things. That last conversation regarding looking at the product view and then also your growth efficiency ratio and how that factors into your sales force sizing, those were two contributions to our field.
If you could speak directly to the audience and imagine you were in the room with them and you were going through your planning cycle and there were some CFOs in the room, some heads of sales in the room and you were going to give them maybe two or three pieces of advice to get this correct, to actually match market demand with sales force capacity, what would those two or three things be?
Lee: Actually I would start with how you led the show. Really making a fair assessment of the stage of the company, which I think really makes a lot of sense. I never really thought of it in those three categories. I do think taking a hard, realistic look at your business cycle, are you high growth? Are you scaling? Are you in the flat range? I think just getting that right and getting alignment across the organization, I look back on the past, that would have saved me a lot of misery in the past.
I think understanding where you’re at so there’s full alignment so you don’t have the CFO and the head of sales going back and forth. I think that is real critical. I will go back again to having that product look, so the product management team that has a good look of the roadmap and the feature set and the existing product, having them in the room and aligned. Those guys also with being accountable for those numbers is extremely helpful also too.
If they’re in the upfront discussion you can resource. Then you don’t come back later and say oh wow, I hired these people but the product didn’t come out on time or other way around. The product is released bu people were not trained and ready I think are key. I think those would be the two primary things that I would focus on.
Greg: Great advice. Really great advice. I was writing both of those down as we spoke. Well Lee, we’re out of time here so on behalf of all of our listeners I want to thank you for sharing your expertise with us. You made a real contribution to our field and we’re all going to have a better chance of making our number as a result, so thanks for being on the show.
Lee: No, you’re very welcome. Thank you for having me. It was a pleasure.
Greg: Okay. Bye bye.
Lee: Bye bye.
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