Situation
A mid-size IT services firm was struggling to maintain revenue and acceptable gross margins during a tough economy. The organization consisted of over 20 branch units throughout the U.S., each responsible for selling, pricing and delivering IT consulting services in their local business communities. The organization’s sales force exclusively drove revenue generation through direct selling. Virtually no dollars were spent on advertising, other than the website, due to the customized nature of the services they provided—personal selling was the optimal sales process. The effectiveness of sales force was critical to the organization’s success, yet they were not getting top performance. Their sales force displayed the following characteristics:
- The sales representatives were struggling to sell the value of the high-end services they provided. The price-cutting pressure they were facing from those smaller organizations struggling to stay in business or those offering a lower quality service resulted in their own price-cutting. Margins suffered.
- The majority of the sales representatives had been very successful in prior years, partly because the economy was strong and there was high demand for their services. Most attributed their prior success to their own ability (not the good economy) and they were frustrated in the new economy when legitimate sales skills and substantial effort were required to make the same income they had in the past. Many of the representatives felt entitled to earn their prior salaries. Bad attitudes were prevalent.
- Some of the sales representatives who had sold long-term service contracts were earning standard commission on business they sold one or two years earlier. These individuals, typically the best sales professionals on the team, were not motivated to get out and develop new business in tough conditions and were primarily living on annuity streams. The organization was paying for prior success with current salary dollars.
- Most of the sales representatives were selling to existing clients because it was easiest to do so and there was no incremental upside for the hard work required to diversify. Existing clients were typically capable of being serviced by the delivery teams with only limited assistance from the sales rep. However, only the sales representatives were capable of breaking into new accounts for the organization. The organization’s client base was shrinking because those responsible for client expansion were engaged in full-time client management.
- The organization paid their sales representatives a standard commission rate/percentage on all revenue generated by the sales representative before he/she met his/her annual sales quota and two times the standard commission rate/percentage for revenue generated after he/she met his/her annual sales quota. Each manager set rep quotas independently. This resulted in:
Disparate challenges for different reps. Some had to produce at high levels to earn the bonus commission and others merely had to maintain a minimum threshold. The system was viewed as unfair and was a source of frustration.
The time-based quota took the focus off each transaction. The representatives were merely watching their aggregated pool of revenue v. trying to maximize the value of each transaction. They were leaving money on the table.
Solution
Operant developed a modular variable compensation system for the sales force that specifically rewarded for:
- Developing business in new accounts.
- Hitting target-level profitability for each transaction, automatically maximizing aggregate production profitability.
Increasing the number of transactions. - The system paid different commissions rates for transactions of different values, independent of one another. The rate earned was based on the transaction’s specific revenue and gross margin characteristics. Additionally, bonuses were paid for transactions in new accounts for a specified period of time. The commission rates paid on high-value business were substantially higher than the existing plan’s standard rate. By design, the system paid above-industry average commission for target performance and below industry-average commission for sub-par performance. The system eliminated paying an annuity stream for prior year activity. In total, the system offered substantial upside for target business development results and paid less than the prior plan for performance that failed to contribute to the organization’s goals.
The new variable compensation system was fully tested before implementation. It had sales management buy-in, accounting and finance cooperation and a budgeted compensation payout that was acceptable to the executives.
The documentation of the system was extremely thorough, eliminating all “gray” areas that might lead a sales representative to believe he was to be paid X, only to receive less. All ancillary issues, such as multi-branch business development, were addressed and an exceptions policy was established.
A tracking and payment system using existing accounting tools was created and tested before roll out. Commission reports were developed.
The new variable compensation system was rolled out to the full sales force in live meetings in each region with some remote attendance. The rollout occurred a full 6-weeks prior to implementation to give the sales representatives time to modify some of their activities so that they maintained or increased their income, based on their modified production. This communication plan not only enriched the sales force’s understanding of how the plan worked, it helped build trust between the field organization and management.
Outcome
The organization experienced an increase in gross margin from 21.5% to 24% for new business developed during the first three months after implementation. The annualized dollar value of this increase was in excess of $3 million dollars.
Business in new clients increased substantially.
Sales management viewed the Operant-designed variable compensation plan as a management tool—it helped drive targeted business development results, rewarded top performers, strengthening their commitment, and was attractive to top recruits.
The top sales representatives valued the plan and were motivated by it. The design of the system made very clear what was important to their organization. In exchange for delivering solid performance, that supported the organization’s strategy, they earned excellent incomes. When they did well, by definition, the company was doing well.
Ineffective sales representatives did not like the new plan. Most voluntarily left the organization saving the organization the time and money typically required to move out under-performers.
The organization has reviewed the compensation plan each year and it is still being used as designed due to the improvement in results they attribute to it yet today, three years later.