Sales Performance Management What It Is and Why You Can’t Afford to Ignore It
by Susan Major
Originally published March 31, 2009
The (Unexpected) Cost of SalesEvery year, errors in forecasting and misaligned sales incentives cause companies to overpay or underpay their sales force, costing them millions of dollars. One company I worked with analyzed commission payouts against the documented compensation plan, and there was almost a million dollars in overpayments in just one quarter! What was the cause? There were errors in the Excel spreadsheet calculations.
Intentional or unintentional manipulation of sales data also leads to overpayments. Take the case of a company that compensates through a process with no easy way to audit sales from the source system. A sale is scheduled to close at the end of the month, but gets delayed. It is listed on the sales report for the month, but it does not close until the 15th of the following month. Since the reports are based on the current month’s data, there isn’t a way to compare to previous months' payments. So, it shows up both months, and the sales rep gets paid twice! Now, this may actually be a mistake on the part of the sales rep that is tracking sales in his own Excel spreadsheet and then sending it to the compensation analyst for processing, but the fact remains that a duplicate payment was made.
To manage, audit and track numerous Excel spreadsheets is time-consuming, manually intensive and error-prone. Often, the time and effort to properly calculate accurate commissions is not taken due to the tight timeline to process and approve compensation.
SPM solutions have the ability to automate data feeds, calculate commissions and close out transactions that have been paid, reducing the errors due to duplicate payments. This solution will also give the team the ability to compare period to period, and catch any changes or duplications in the data. Instead of spending hours reviewing and comparing Excel spreadsheets across periods, the system could identify and produce a daily report each morning for review.
Another issue companies face is when sales managers receive overrides or roll ups on the sales of their sales representatives. When a sales manager’s incentive is based solely on the sales of their representatives and not on the profitability of the unit, they are more likely to push through sales that may not be profitable for the company. One company I consulted for began to analyze this; and once the SPM software was implemented, they changed the sales managers’ incentive plan. They decreased the override percentage and created a bonus that was based on the sales managers’ branch net profit. This allowed the company to increase profitability and made each sales manager more responsible for his/her branch’s profitability and not just sales. The sales managers also became more cognizant of what they were compensating their sales representatives on and were less likely to give out extra incentives that were not part of an incentive plan, such as an extra percentage if the sales representative closed the deal.
The Importance of Transparency of Data and TraceabilityWith new and increasingly tighter Sarbanes-Oxley (SOX) compliance requirements, many companies are finding that their sales and incentive compensation departments have become key exposure points. In an environment where incentive compensation is calculated through a manual process and it is difficult to tie back to the source data, these new compliance rules cause a great deal of concern.
As more companies move into a customer relationship management (CRM) world with on-demand reporting for customer management and sales management, the need to manage sales performance and incentive compensation with a touch of the fingertip increases. Imagine a world where with a click of the mouse, a sales executive can analyze his team’s sales to quota by product or region. He can see where he needs to spend his time and where to concentrate his resources to get the greatest growth from his team. What a world that would be!
SPM systems and performance analytics tools give companies the ability to tie compensation to sales and sales to revenue. There is a clear traceability between the source system, through the integration and into the sales performance management system. Data should be massaged as little as possible between the SPM system and the performance analytics tools. The ability to view reporting metrics will give key executives the tools to make business decisions based on facts, not hypothetical judgments. The CFO can look at a report that ties sales to revenue, and compensation back to sales. This gives the CFO the comfort that from a SOX perspective, he can explain revenue and compensation that affect his financial statements. The CEO can see if sales are growing as targeted, or if the company needs to review their targets and identify why they are not making them. The sales executives can review how the compensation plans are affecting sales, and if they are performing for the company as expected. In other words, are they incentivizing the sales force to sell?
Top Ten Questions to Ask Your SPM Software ProviderThere are a number of SPM systems that fit almost any size company and any number of participants. The needs of the company should be carefully analyzed, and the product selection based on the software that best fits the requirements of a company. No software will meet every criteria, but the key is to prioritize the needs of the company and rank the software against those needs.
The following is a sample of suggested questions you should ask SPM solution providers so you can rank their answers against your company’s needs:
Calculating Return on Investment (ROI)Each company needs to analyze their potential exposure to overpayments and lost margin, and consider this a significant part of their ROI calculation in considering a sales performance management system. There is also the impact to the financial statements to consider. A compensation audit by an independent third party is a must for companies to determine if their compensation is out of line with what it should be.
The ROI is one of the driving forces behind determining the budget for an SPM solution. To make a case for the investment of dollars and time, an organization needs to look at hard and soft costs associated with their current practices. They also need to look to potential savings to drive the ROI. These savings will make a case every time. In most organizations, and it really is surprising, there is an overwhelming amount of manual work that is being done that the executives are not aware of. Case in point: one company I worked with had one compensation analyst doing all their commissions manually in Excel for about 500-700 sales representatives. When she quit, they discovered that it was an overwhelming job that took three people to do. Once they implemented an SPM system, they were able to audit the sales data, their sales representatives accessed their reports online throughout the month, errors were corrected in the source system immediately, and they were able to more reasonably allocate the resources to perform the compensation functions.
ROI = Total Benefit – Total Cost = _______ * 100
Benefits may include:
The Culture of Sales Performance Management and Its AdoptionSPM is not a one-time thought or implementation. It is an ongoing process that needs to be integrated into the company culture. This can take six months to two years on average, and in some cases even longer. An SPM system is a commitment and must be embraced by companies at an executive level. It should become an integral part of the company culture.
The benefit of this commitment is that a company can see the results of sales decisions in a timely manner. Some systems allow for modeling of proposed sales compensation changes. This helps the company executives to see the bottom line effect of those changes.
In a world where most companies need to track compensation as a material expenditure, it becomes critical to tie compensation back to key events. I sat in a client project meeting with a CFO, and he jokingly informed me that his compensation was not an audit point for him so he had no concerns about incentive compensation or its impact on his financials. I smiled at him and congratulated him on that. Two weeks later, he walked into a project meeting, looked at me and informed me that it was all my fault. I looked at him blankly and asked, “What are we talking about?” He shook his head and told me that he had just been informed that he needed to provide the documentation for his incentive compensation to the auditors, and that they needed to be able to tie it back to the plans and the events that triggered it. He finally understood why he needed an SPM system, and why it was so important for the company to embrace it, from top management down to the individual users.
Once the SPM software is selected, the company needs to be committed to the implementation. This means that resources may need to be dedicated. The company’s sales management team should clearly communicate the plans for the system and expectations of their employees. They also need to be aware that this is a cultural change, and many employees will resist this through the initial stages until the system proves itself out. Training is crucial to ensure adoption.
The sales teams need to see that the data is trustworthy and that the calculated results make sense. It is crucial that the sales resources clearly understand their compensation plans – especially if they have an understanding that is not in line with the corporate intent of the plan. In an intensively manual environment where there is reliance on many spreadsheets, there is often a personal interpretation of the plan that does not match up with the true global interpretation of the plan. This calls for a realignment of expectations and definitions. This communication and realignment is tantamount to a successful acceptance of the software by the compensation administrators and the users.
Don’t Ignore the Impact of SPM SolutionsIn today’s economy and with the viability of so many companies hanging in the balance, can a company ignore the impacts of SPM solutions on managing the performance of their sales teams? Leading companies are realizing the limitations of Excel for developing, managing and analyzing sales performance. SPM solutions can help companies accurately calculate, compensate and manage the impact of sales on their bottom line, enabling the sales force to focus on selling while reducing the overall cost of sales.
SOX compliance issues are a driving force behind tracking sales and compensation, and this is driving companies away from manual initiatives and toward automation and a broader range of reporting. SPM solutions can enhance audit and compliance capabilities and bring real-time visibility to key metrics required to make informed decisions.
There are many SPM solutions out there, but which one is the right fit for your company? Be sure to evaluate your unique requirements and rank the SPM software vendors on their ability to meet your needs. I can’t underestimate how helpful a compensation audit can be in helping to identify where you are and where you want to go. Remember, in addition to hard costs, there are numerous soft costs to consider when calculating ROI.
Most importantly, a sales performance management solution is only as successful as the people using it. An SPM implementation must be embraced and communicated throughout the organization by top management. The expectations of employees must be clearly stated and adoption must be mandated. Remember, this is a change in culture as well and many might bristle at the idea of change. Consistent communication and training can help with adoption rates.
In a world of Wall Street failures, auto company bailouts and a massive government economic stimulus package, many organizations will be reviewing where they stand on compensation packages and will need the ability to manage and track the impacts to the company’s viability and profitability. Will you be one of them?
SOURCE: Sales Performance Management
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