• January 1, 2006
  • By Colin Beasty, (former) Associate Editor, CRM Magazine

Dangling the Carrot: Drive Your Sales Force to Profitability

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Jennifer Graham knows the importance of tracking her commission. As the legal placement director at Conduit Recruiting, a small recruiting agency in New York City, figuring out what her bonus is every month means the difference between planning a vacation or simply paying the bills. "When you work off commission, you can be rich one month or broke the next," she says. Small wonder that salespeople are so vigilant about tracking their expected compensation. For Graham, an Excel spreadsheet works well enough to help her keep track of her commissions. Despite its simplicity, it accomplishes the task that all sales compensation tools (SCTs) are designed for: enabling a sales force and its management to calculate income and provide motivation to make the most of its existing products, services, and customer relationships. "Being able to calculate your goals is a big motivation, especially when you first start working off commission and you realize you don't have a fixed income," Graham says. "As you get better at your job you keep raising your goals to strive for improvement, and make more money in the process." All of this can be tracked and managed in a simple spreadsheet application. With constant pressure to improve quarterly performance, handling a sales force with a single, centrally managed incentive system can mean the difference between high and low employee morale and performance. An inefficiently managed incentive program keeps a company's true goals hidden from the people who are supposed to attain them. Sales incentive tools allow firms to make nimble, complex decisions about how employees should be paid for meeting and exceeding their targets. They help get products and services to market faster, motivate a sales force to sell those new products, and focus a sales team on selling instead of shadow accounting, or privately keeping track of their earnings to make sure they get paid. "Incentive systems are so key to sales behavior," says Jim Dickie, partner at CSO Insights. "You put compensation technology in place to direct the behavior of the sales force. That's important, because they're the ones bringing your product to the market and the customer." Sales teams operate off a multitude of metrics, including their own size, transaction volume, and sales plans. The key to a company's success with an incentive tool lies in its ability to select the one that can operate most effectively within its sales environment. "When you're talking about sales compensation tools, you're talking about driving your sales force," says Judy Sweeney, research director at AMR Research. "They enable management to direct a sales force to sell the right products at the right time by providing visibility into a compensation plan." When selecting an SCT delivery model (build, buy, or on-demand), there are three factors to consider: size of its sales force, complexity of its sales plan, and transaction volumes. Homegrown Solutions There's no place like home, and when it comes to SCTs home is where the majority of incentive tools originate. For most of corporate America an in-house designed and developed SCT means a sales force's commissions and bonuses are being handled through an Excel/Access database combination, Excel being the front end, the Access database representing the back. While the balance of companies that use homegrown solutions are SMBs, that doesn't mean that publicly traded corporations on Wall Street aren't suitable candidates for this simple method. An international aerospace firm could have revenue in the billions, but if it's only selling rocket boosters to NASA, chances are it doesn't need to invest millions of dollars in an enterprise incentive solution. The three determining factors of what delivery model a company should select when considering an SCT are first, the size of its sales force; second, the complexity of its sales plans; and third, transaction volumes. In general homegrown solutions are best suited for companies with approximately 25 sales representatives or fewer. One advantage of building your own system is the upfront cost savings that a vendor's solution would not provide--these fixes can range from $100,000 to $300,000. However, companies must keep in mind the requirements placed on their IT department when using a homegrown solution. Companies will be limited in functionality by the Access database and will need the in-house capability to write a lot of code. Last, system limitations can delay new products or services from getting to market, because a company's IT department is busy updating the corresponding incentive plan in-house, a limitation that doesn't exist with a vendor-offered solution. "If you have more complexity within your sales plan, a homegrown solution becomes difficult," says Bob Conlin, CMO for sales compensation solution firm Centive. "So many people think [sales plans are] easy to do, but when you start talking about credit assignments, overlays, tier or ramped rates, and adjustments when products get returned, you're talking about a lot of variables. More times than not, a homegrown solution simply can't handle it." In short, homegrown solutions work for companies with small sales forces, low transaction volumes, and simple sales plans. The result? IT departments can handle the workload without impeding the company's capability to introduce new products to market or hampering its sales force's ability to sell those products and stay motivated while doing so. That said, there are signs that indicate a company's in-house incentive tool is beginning to burst at the seams. If products or services are being delayed to market, the system of spreadsheets and emails isn't holding up to audit and regulatory expectations like Sarbanes Oxley, or your SCT won't be able to handle the escalating requirements due to a growing sales force, it's probably time to start consulting with vendors. Buying On-Premise Apps
SCTs are available from various types of independent software vendors. Some are best-of-breed pure players whose solutions are designed to handle the most complex sales plans. Others are core CRM/ERP providers that offer a sales compensation tool with their overall suite product. Most pure play SFA providers bundle an SCT with their offerings. Whatever their specialty, they all have strengths and weaknesses that must be ascertained before selecting one. Today, many companies purchase their SCT from either their CRM/ERP or SFA provider. The payoff is that a company is getting an incentive tool that's already integrated with its SFA solution, as opposed to going through a third party best-of-breed player. This saves both time and money in implementation and rollout costs, and has the added advantage of offering management and executives a 360-degree view of their sales operations. "A lot of companies are saying, Let's embed these tools as part of our CRM system so we can track a lead all the way through to its close and then figure out who gets paid," Dickie says. The disadvantage of these solutions is, they lack the functionality of the best-of-breed players. Currently, Oracle, Siebel, SAP, and NetSuite all provide SCTs as a part of their suite offerings. Of the SFA vendors, companies like Sage Software, Salesnet, and Maximizer Software also offer SCTs. While most industry analysts agree that Oracle's SCT is the most robust of the suite providers, in general, these solutions fall somewhere between homegrown tools and the best-of-breed solutions in terms of functionality--their offerings capable of handling moderately complex sales plans and sales forces. These solutions have found a strong customer base among companies that don't have the bank account or requirements for an enterprise incentive tool. Best-of-breed players like Callidus, Centive, and Synygy are about enterprise incentive management (EIM). The list of calculations and variables an EIM application can handle is as perplexing as the math required to figure out who gets paid what amount. These solutions are designed to handle the largest sales forces and most complex sales plans, which can include multiple partner channels and distributors, credit assignments, sales forces that are multitiered and involve overlay and ramped rates, territory management, and adjustments when products get returned. In general, insurance, healthcare, financial services, and certain manufacturing (such as high-tech) companies are prime users of EIM solutions. From the customers' perspective the biggest advantage to using an EIM solution is the tool itself; they're using the best solution capable of getting the job done. These solutions are designed to roll out new plans to the largest sales forces in a matter of days. Designing a homegrown solution for a 500-plus sales team is illogical and chances are a tool on offer from an CRM/ERP provider won't have the functionality to handle the complex sales plans and transaction volume. The downside of an EIM solution is its costs. In general these solutions can run from anywhere between $250,000 and $300,000 up front. In addition to the software is the supporting technology. Most EIM deployments require the customer to purchase a back-end database server and a reporting tool to support it. Then there's the software maintenance and support agreement, which industry analysts have estimated to cost an additional 15 to 25 percent of the software and hardware expenses, depending on the vendor. Finally, companies must consider solution upgrades. "When you're upgrading a technology that involves an organization's payroll, there's a great deal of parallel testing that needs to be done," Conlin says. "The dirty little secret in the EIM market is that on-premise solutions have been and continue to be very expensive to purchase and implement. That's because of the complexities that surround sales compensation plans. These tools are being asked to operate in extremely complex environments." These multifaceted environments also lead to huge implementation costs. By itself, the rollout of an EIM solution can cost hundreds of thousands of dollars and take anywhere from four to 12 months. "If you have two [integrators] working at $150 an hour for six months, you're talking about a minimum of $350,000 just for the implementation," Conlin says. "There have been very few companies who have been able to purchase and implement an EIM solution for under $1 million." In general companies should consider EIM solutions only when they have the financial assets and requirements for a solution capable of handling the multitude of sales complexities needed to go to market. On-Demand Just like on-demand CRM solutions, on-demand incentive tools offer the potential to increase this market's growth by extending the functionality of EIM systems to midmarket companies that otherwise couldn't afford costly on-premise applications. This is still a developing market for vendors, as there are few that play in this space. One that does is Centive, with its Compel product, and another is NetSuite, with its EIM product line offering. In addition, Callidus offers an ASP model of its on-premise solution. "We're beginning to see a lot more demand for on-demand," says Greg Wynne, director of solution marketing at Callidus Software. "The medium-size companies that don't have the IT department or don't want one are going to lean towards this solution first." On-demand incentive tools have the same pros and cons as their CRM brethren. Companies forgo the huge upfront fees and installation costs while reducing the time it takes to get the product up and running. According to Conlin, Centive is capable of getting Compel implemented in under two months. In addition, on-demand solutions require no maintenance support agreements, no additional hardware, and a company's financial risk is no more than the number of months it subscribes for. However, companies must be comfortable with their data being housed at a third-party location. Security and data integrity are always important considerations when looking at an on-demand solution. Predicting the future is tricky, but most industry pundits and leaders agree that this market will see strong but steady growth. Driving this growth will be on-demand SCTs. As the importance of these tools is recognized, on-demand solutions will bring "incentive compensation management to the masses," Conlin says, though he admits big-ticket purchases will continue to represent the foundation for this market. Regardless of company size or delivery model, having an SCT that operates effectively within a company's sales environment incites a sales force to sell the right products. It also motivates a sales team to maximize the value of its sales plans and customer relationships. Contact Editorial Assistant Colin Beasty at cbeasty@destinationCRM.com 3 Tips for Selecting an SCT 1. Make sure you adopt a tool that allows managers to model plans quickly and efficiently. This lets executives create a new compensation plan, run mock transactions against it, see the results, and compare it against a company's financial plans to calculate costs and commissions. "This is an important step that enables products and their corresponding incentive plan to hit the market this quarter instead of the next one," says CSO Insights' Jim Dickie. 2. Ensure the tool has strong sales representative modeling and reporting capabilities. The ability to allow a sales rep to see a close date, enter a probability, and calculate what his/her commission is going to be, anytime during the sales cycle, is a great motivational tool. In addition, one of the big problems with many homegrown solutions is the inability to see results before the close of the period, not only for reps but managers. With strong reporting capabilities, management can see which territories, products, and reps are selling the best, and make decisions accordingly. "You can only model what you can measure,"says Centive's Bob Conlin. "Without strong modeling and reporting, it's like trying to manage a black hole." 3. Any SCT must be able to integrate well with a company's SFA solution. This is one of the biggest advantages of going through your CRM/ERP or SFA provider. Chances are, they'll have a SCT already incorporated, but again, if your sales force requires best-of-breed functionality from a Callidus or Synygy, make sure to consult with a like company. Most of these vendors do a good job of providing solutions that integrate well. "With sales incentive tools, there is always a high degree of integration required," says AMR's Judy Sweeney. "Companies need to determine how complex their territories are, how much overlay is involved, double compensation, all that good stuff, and choose a vendor based off that information." --C.B.
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