magazine | November 18, 2016
The CEO’s No. 1 Priority: Sales Productivity
Despite significant capital investments to deploy a dominant sales force, most big companies trail behind smaller, more nimble firms in sales productivity. SBI 100 CEOs can set the course to maximize ROI from a position of competitive strength.
CEOs at SBI 100 firms bank on their customer experience strategy as a key competitive advantage. Over the years, the largest-scale enterprises made enormous investments in sales and customer service resources to enhance relationships.
Commanding the world’s largest sales forces, SBI 100 companies recruited, hired, and trained vast numbers of people to deliver a superior customer experience. But many CEOs still have not found a way to maximize the impact of countless sales employees who interact with customers and prospects. In spite of all the investments, their sales productivity rates—defined as revenue per sales head—are often surpassed by smaller firms.
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When we listen to what these CEOs say publicly in press releases and earnings calls about priorities, we rarely hear how they will leverage their commitment to the customer experience strategy. Other more glamorous or compulsory initiatives may get the limelight, but an enormous strategic imperative often appears to be overlooked. One can only speculate why CEOs are not talking about this. It may be because virtually none of them rose to the corner office from the sales ranks.
Cost Estimates for a Fully Burdened Sales Resource
How much do SBI 100 firms invest in customer experience? SBI analyzed this investment by industry, measuring the amount invested in sales to maximize this strategic advantage. To calculate the investment in sales, we measured the average fully burdened cost of a sales employee multiplied by the size of the sales force.
SBI 100 firms employ a total of 689,174 sales resources who build and maintain vital relationships with customers. Using wage and overhead rates from July 2015, this translates into an average annual expenditure of roughly $370,000 for each sales head count (see figures). For the collective SBI 100, this amounts to a staggering $255 billion annual outlay. The median SBI 100 firm spends over $227 million per year on sales resources.
SBI estimated the average percentage of annual revenue invested in sales head count for 10 industries that are being disrupted by changes in the buyer’s journey (see figure below). This investment represents a substantial portion of overall expenses, ranging from 11 percent to 28 percent of annual revenue.
For business services and software firms, the investment in sales employees represents an expenditure of 20 percent or more. Clearly, this single expense category can make or break the bottom line. Nonetheless, the firms in these verticals often fail to leverage their core strategic investment to boost the productivity of their sales assets. Ironically, companies in these industries need to focus on sales productivity more than all the others. Why? Channel innovation is disrupting these industries the most. The experience a customer has today when buying products in these industries is vastly different than it was just a few years ago.
The Key Metric: Sales Productivity
We compared sales organizations using a basic metric that we label sales productivity. This measures the average revenue produced by each person in the sales organization. It’s calculated simply by dividing the total revenue by sales head count, which comprises all sales roles including executives, operations staff, management, specialists, trainers, and front-line sales reps.
The higher the number, the better: It means that each sales employee is producing more. But it’s just a raw number that requires further investigation. Because some industries sell more expensive products than others, the metric needs adjustment to make a fair comparison across industries. But within industries, sales productivity is a good measure of how companies stack up.
For an individual firm, sales productivity is an important benchmark to evaluate performance over time. It answers fundamental questions: Are salespeople selling more or less each year? If we add more sales head count will our revenue increase? Have we maximized our sales systems and methods to deliver a customer experience that meets our strategic intent?
SBI measured how sales productivity of the 10 industries experiencing channel innovation compared with the sales productivity of the other 18 industries in the SBI 100. We found all but one rank at the bottom when measured by average annual revenue per sales resource (see figure below).
These 10 industries have invested heavily in sales, employing an aggregate of 244,000 employees. But many of them have not implemented programs and systems to maximize the return on that investment. Given the magnitude of the commitment to deploying a huge sales force, it stands to reason that a three-year ROI for programs to increase sales productivity would leap immediately to the top of a CEO’s priority list. The potential revenue growth far outweighs that incremental investment.
Since a considerable bet has already been made on customer experience, it stands to reason that CEOs would prioritize initiatives that improve results. For example, when a firm invests in a manufacturing plant, they follow up with programs to boost ROI by investing in new robotic systems or advanced materials automation. They study production rates and efficiencies with a relentless drive to squeeze out more. Unfortunately, measuring and improving the ROI of sales initiatives often don’t get the same attention from CEOs, even among the largest sales forces on earth.
Investments in Sales Productivity
To evaluate how SBI 100 companies capitalize on customer experience, we used publicly reported selling, general, and administrative (SG&A) expense as a proxy. Sales and marketing investments ultimately impact the customer experience. Our research into how SBI 100 firms invest in SG&A uncovers some valuable lessons.
The initial hypothesis was that CEOs who spend a higher percentage of revenue on SG&A reap superior sales productivity results.
For this analysis, we concentrated on the pharmaceutical manufacturing industry (see figure below). Although companies in this industry are under intense regulatory pressure, they still rely on large direct B2B sales forces to bring their products to market. Pharmaceutical firms such as Pfizer, GlaxoSmithKline, and Sanofi each have sales forces staffed with more than 10,000 employees. Ten pharmaceutical manufacturers dominate the SBI 100, ranking among the top 35 and accounting for more than a quarter of the firms with the largest sales forces.
The 11 SBI 100 firms in the pharmaceutical manufacturing industry are ranked by sales productivity, shown in the figure as the average annual revenue produced by each sales employee. In the leftmost columns, we see that each Roche Group sales resource produces about $8.62 million in annual sales, while the firm invests about 25.1 percent of revenue in SG&A. Contrast that with AstraZeneca, whose sales force is less than one-third as productive at $2.74 million each, yet the relative SG&A costs are significantly higher at 51.0 percent of revenue. This runs directly counter to our initial hypothesis. Spending more does not necessarily yield a more productive sales force.
The figure also shows that sales productivity is not a linear function driven by SG&A investment. Other SBI 100 pharmaceutical manufacturing firms exhibit varying sales productivity results when compared with SG&A investment. There are two root causes for this disconnect.
First, all investments in SG&A are not equal. There are countless sales effectiveness initiatives to choose from. Selecting, implementing, and executing the optimal ones depend on the specific situation. When invested properly, a higher SG&A ratio should produce improved results. But without a strong connection to sales productivity, these investments can be an enormous waste of money. Admittedly, it would be best to separate sales productivity from SG&A, and we have done so in other articles. However, for this analysis we feel SG&A is an interesting proxy.
Second, the gross sales productivity value is not an absolute. In general, a higher number is better because it means that more revenue is produced from a smaller head count. However, if the number is too high, it may mean that individual sales territories are too rich and reps are not maximizing the potential revenue in their assignments. The most successful CEOs and sales leaders keep a balance in mind to drive the highest returns. It’s clear from the pharmaceutical example that sales productivity is a relative number. Each firm needs its own benchmark and in turn, a plan to drive its own sales productivity number higher.
At first blush, sales productivity may not seem to have a direct correlation to the customer experience. But the metric is indicative of an environment where sales reps have adequate customer-facing time to be responsive. They are supported by effective systems and processes. Marketing content nurtures prospects through the early phases of the buying journey. And sales reps are trained to help customers through the final steps of the decision-making process. A high-functioning sales and marketing ecosystem creates a customer experience that yields a strong competitive advantage. Higher sales productivity metrics follow.
The largest component of SG&A is head count expense. As sales forces increase in size and organizational complexity, specialized roles proliferate. Strong support organizations enable repeatability and scale. It’s one thing to accumulate a large sales force. Sustainable results come from leveraging what’s successful and cross-pollinating it throughout the organization.
SBI 100 companies have amassed sales forces numbering thousands of individuals who use role specialization. Even though it’s central to the sales mission, the investment in non-customer-facing roles often has a negative perception. It’s an overhead cost. Financial analysts tend to view a reduction in overhead roles as an increase in efficiency. When it comes to sales, this can be a dangerous notion.
In large, complex sales organizations, many overhead functions facilitate the sales role. These people leverage the impact of the individual sales rep and accelerate buying decisions. Examples of roles that make the individual rep more effective in front of the customer include:
To understand the impact of supporting roles on sales productivity, we started by measuring the relative number of employees who support the sales function at SBI 100 companies. It stands to reason that an individual sales rep can produce more revenue if he or she has assistance. Our initial hypothesis was that firms with a larger percentage of sales support roles would outperform others in sales productivity.
Then we analyzed how SBI 100 firms that rank in the Top 10 for highest sales productivity invest in sales support positions (see figure below). We excluded oil and gas exploration and production firms from this analysis because they produce outsize revenue with relatively small sales forces, which skews the metrics.
McKesson ranks No. 1 in sales productivity, with an average of $51.9 million in annual sales per sales head count. Those in supporting roles account for 18 percent of the total sales organization head count. Contrast this with Hitachi, where 27 percent of its sales organization is engaged in supporting roles; sales productivity averages $40.6 million per year or 20 percent less per head count. Understandably, there is significant variation by industry. Some buying decisions require higher levels of support than others. Looking at this cross-section of Top 10 firms in sales productivity, we see no correlation between the percentage of resources supporting sales and the results achieved.
However, the difference between individual firms is significant. In this small sample, the percentage of sales population in supporting roles ranges from as high as 27 percent to as low as 8 percent. This wide variation shows that there is no ideal percentage for supporting staff to deliver an excellent customer experience. The SBI 100 firms demonstrate that investments in staffing to support the customer experience are quite dissimilar and require customization.
An optimal amount of overhead increases the amount of selling time and results in improved productivity. But there are diminishing returns. At some point, shifting non-selling tasks to support roles no longer results in an equivalent improvement in sales productivity. Increasing selling time requires a comprehensive and balanced investment in administrative and operations support, training, and enablement.
For example, removing friction from channel partner relationships can be critical. If partners experience less flexibility or support than competitors provide, they will direct end users to other solutions, steering away an unknown amount of business. As a hidden part of the customer experience, channel mindshare is highly dependent upon ease of doing business.
In SBI’s experience, there’s a sweet spot for each company. Investing too little in support hampers the effectiveness of the sales force. Investing too much is often a sign of inertia, when resources have been added over time to shore up weaknesses. Without optimization, investments that solved a temporary bottleneck are not integrated and fail to produce maximum results.
The Ideal Mix
Finally, we performed a more detailed investigation on how CEOs at SBI 100 companies invest in the support structure for their large, complex sales organizations. This part of the study examined the mix of roles deployed to impact the prospect’s buying process. We assessed how SBI 100 firms that rank in the Top 10 for highest sales productivity invest in sales support positions (see figure below).
Nearly half of the support head count was engaged in operations, support, and analysis roles. The specialist role accounted for another third of the total. We then compared similar head count investments at the other end of the spectrum on the SBI 100 list: the 10 firms with the lowest levels of sales productivity (see figure below).
At first glance, the 10 SBI 100 firms with the lowest sales productivity appear to invest significantly less in operations and twice as much in presales and sales engineers. However, this anomaly is explained by industry. Half of the Bottom 10 firms are in the software vertical, which has a heavy reliance on presales and engineering. There are no software firms in the Top 10 group, so their presales support cohort is significantly smaller. When the values are adjusted to account for presales, the mix of supporting roles does not differ significantly between the top and bottom performers. This further validates the concept that there is no one size- fits-all formula to determine the optimal quantity and allocation of support resources. It’s unique to each firm. The proper mix of support resources can be an unmatched accelerator to sales productivity. Without regular adjustments and balancing, it can also be a strong negative headwind.
The CEO’s Ultimate Priority
For CEOs at firms in the SBI 100, the high-level competitive strategy is set and the priority is clear. Year after year, they’ve invested capital to deploy a dominant sales force. Strong customer relationships keep them ahead of the market. Their No. 1 priority is to generate even more revenue and share from the investment in sales resources.
But the sales productivity numbers show that most can’t match smaller, more nimble firms. We recently interviewed Doug Landis, who is the senior vice president of sales productivity at Box Inc. Previously, Landis held similar roles at Google and Salesforce.com in their earlier days, before they became large companies. It was a good opportunity to discuss three examples of best-in-class sales productivity. These relatively small sales forces have implemented radical new techniques for interacting with customers. They are optimizing the way they use social media, mobile technology, and a local focus to stay top of- mind with existing customers and connect with new prospects. They only wish they had the resources of a giant firm, because they know their competitive advantage could be even more potent.
Here’s a quick checklist for CEOs to maximize the ROI from their competitive strength:
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