We've all been to the meeting where the CEO asks for data from the senior vice president of sales only to find that it doesn't match the numbers presented by the CFO. The uncomfortable silence that follows is awkward for all involved, but more important, the lack of consistent sales and finance business data -- the lifeblood of any company -- has far greater implications, including a failure to meet key corporate objectives, noncompliance with federal regulations, or worse.
Finance and sales are the backbone of any company, yet the situation described above is not uncommon. While many companies understand the need to align these two critical groups, most have given little thought to how to develop and implement a strategy for doing so. Given the immense pressure on finance and sales to meet company and shareholder expectations, exposure of this magnitude is not acceptable, in particular for companies that are, or are aspiring to be, public.
What's needed, then, is a strategy for getting finance and sales on the same page. In the remainder of this article, I will discuss a concept known as sales performance management, and how automating and integrating the key business processes connected to sales performance management can help finance and sales executives meet their mutual business goals.
First, let's take a look at what typically takes place between sales and finance organizations in the absence of an implemented sales performance management strategy.
When gaps occur between sales and finance relative to sales performance management, problems ensue.
For example, when a sales representative is told by his or her management to sell a certain product, and they don't receive compensation commensurate with what is their understanding based upon their individual sales plan, suspicion and mistrust develop between sales and finance. This also drives up the number of commission dispute inquiries into the finance organization, forcing them to spend more time on tedious administrative tasks rather than being more strategic.
What's also lacking in this scenario is real-time reporting so that everyone -- sales representatives, sales and finance management -- knows where they are at any given moment in a quarter. If a company has set up a system or process that incorporates good reporting with real-time visibility for everyone, then this problem is alleviated. If not, sales representatives will again look at commission statements with suspicion. What inevitably takes place next is a practice called "shadow accounting," whereby sales representatives will maintain their own private accounting systems. They will spend less time selling and more time maintaining their own private accounting logs and comparing them against their commission statements from finance to make sure that they got paid correctly.
This brings up the question, "Aren't spreadsheets adequate for this task?" The answer is clearly "no." For several reasons, spreadsheets aren't the right tool for managing the sales compensation process. To begin, spreadsheets aren't scalable. Few organizations have uniform compensation programs for their sales teams. Juggling the specific needs of each individual can quickly get overly complex. For example, incentive programs can calculate compensation based on any number of metrics such as margin, product mix, discounts, or accounts receivable. Spreadsheets may work for a small office, but adding, changing, and working with large amounts of data in a spreadsheet can quickly turn into a nightmare.
According to Dr. Raymond R. Panko, professor of information technology management in the College of Business Administration at the University of Hawaii, in a survey of over nine separate spreadsheet audit studies -- including those from PricewaterhouseCoopers and KPMG -- 94 percent of the spreadsheets they audited had errors. This isn't surprising given the fact that most large spreadsheets have thousands of formula cells, that few companies have spreadsheet control policies (if any), and that organizations rarely test end-user spreadsheet applications. This is especially important as it relates to incentive pay, where independent studies have also concluded that companies using spreadsheet-based compensation unknowingly overpay commissions by as much as 3 to 10 percent.
Here's a final scenario. In any given quarter, sales teams need to make changes to sales plans to react to fast-moving market conditions or competitive threats. But they often do so without knowing how the finance team will deliver upon these plan changes. The result is a poorly executed or failed sales strategy or a strategy that isn't implementable. For those companies that haven't implemented a sales performance management strategy, the problems are further compounded because they typically lack reporting or real-time visibility into sales compensation. Sales management can't assess whether the plan changes are working, and both sales and finance are literally flying blind.
The bottom line? Both sales and finance are penalized by the gap problem. And both are penalized for lack of a solution.
As with any branch of knowledge or study that deals with a set of facts and truths, sales performance management is a science. Market research firm Gartner has defined the laws of sales performance management as consisting of "four fundamental components that address a combination of operational and analytic concerns in sales management: territory management, quota management, sales incentive compensation management, and monitoring and analysis."
In the sales performance management arena, the key driver is sales compensation management, or the process by which organizations design, implement, manage, and audit commissions data for sales representatives. Gartner discusses the strong relationship between sales performance management and sales compensation management: "A sales performance management market will coalesce around best-of-breed vendors largely originating from the sales incentive compensation management market. This is the domain that has developed into a sustainable, discrete market."
As sales compensation management systems are known to contain some of the richest data a company has, it is the natural centerpiece of sales performance management programs. The most advanced sales compensation management solutions have been architected from the ground up to automate a series of business processes, on top of which are layered tools for modeling and analytics. The goal is to maximize profits -- not just to automate spreadsheets -- and to provide substantive process improvements to optimize all finance and sales operations.
Despite this trend, the business processes to automate sales compensation have historically been nonexistent, broken, or loosely composed of islands of disconnected point solutions. Many companies continue to labor under the yoke of spreadsheets to manage incentive sales compensation and sales performance. This archaic approach simply is not feasible from a sales, finance, or compliance perspective.
Until recently, the only alternative to previously discussed spreadsheet-based sales compensation management has been conventional enterprise software, but the negatives of this approach so far outweigh the positives that even the largest vendors in this space are rushing furiously to find a new strategy. Common problems with enterprise software include inflexible application architecture; painfully slow system upgrades; a perpetual license model with an exorbitant price tag for maintenance; and deployment times measured in months, most of which fail to meet initial objectives. In fact, traditional enterprise software is so outrageously expensive that only the largest companies can even consider using it, and those that do deploy it end up wishing they had never even tried.
Most recently, a new software model has emerged. Software-as-a-Service (SaaS), or "on-demand" software, has many interpretations, but only one true definition. Real on-demand software is defined by a multitenant architecture, a cost-effective subscription model, upgrades and maintenance managed by the vendor, and deployment times measured in weeks. And since the software is Web-based, issues pertaining to data tracking and visibility are moot.
When sales compensation and complementary business processes have been automated and centralized in a hosted and secure environment, finance is free to perform the analysis that is necessary to properly guide and advise senior management. For instance, quick and easy access to sales performance management data would enable a finance executive to determine what impact a price change to a given product would have on the potential payout of commissions.
Assuming that the sales organization has put together a plan and a strategy for how they want to implement sales performance management, it will have little effect unless sales and finance first reach consensus. If not, gaps such as those previously cited will occur, resulting in both organizations being out of synch at best and distrusting each other at worst.
Where to get started? Following are a number of recommended best practices to get sales and finance on the same page with a sales performance management strategy.
For the company that is serious about designing and implementing a successful sales performance management strategy, the starting point is to get all the key stakeholders involved. Early on, establish a cross-departmental planning committee that includes not just sales and finance, but also other key stakeholders, including IT and operations. Planning committee members need to share an understanding of what needs to be done and what can actually be done. Through this first key step, companies will quickly determine whether they need to make a technology investment to make their plans work.
A common mistake most companies make is to approve a plan that they unknowingly can't implement. If you don't have the data or technology delivery vehicle in place, your plan will unravel. For example, a company may want to quickly implement a sales promotion in the last month of the year to hit their annual plan numbers. What happens more often than not is that the promotion was communicated only within the sales organization, and finance was not consulted to see if they could actually implement the promotion. The result? You've got a sales promotion that is dead on arrival and an annual plan at risk. Everyone is unhappy and angry, and downward adjustments will have to be made to their commission statements.
This is an area that sales vice presidents, CFOs, and controllers constantly worry about. The ability to forecast and model commissions as part of a sales performance management process is critical because finance needs to maintain accrual accounts for future sales commissions expenses. If a company doesn't have an application or forecasting and modeling tool in place to manage this process, a scenario will quickly develop in which there are insufficient accrual amounts in place to pay commissions. If a company has a large sales team and an outstanding quarter, the commissions expense shortfall can be in the millions of dollars. Public companies have been known to have to restate earnings as a result of this error.
Here's another scenario. If a company can't accurately forecast commission expenses from the finance side, and they underachieve on the sales side, they can still end up paying in excess of forecast commissions due to accelerators that are in individual salespersons' plans.
Organizations aren't static; they're actually quite dynamic. As a result of employee arrivals and departures, internal growth, acquisitions, or other events, territories and quotas change. Now what?
For example, as a result of increasing business opportunities, your California sales representative has his territory cut in half. He now handles just northern California. What's his new quota? Just because a territory may be halved doesn't mean that his quota is halved. Changes and adjustments in territories and quotas impact commission expenses in a nonlinear way.
On another note, you want (need) to be competitive with your compensation plans. Ask yourself, "Are we paying market rate for a particular position? Do we want to pay at, below, or above market rate?" Each company has a different philosophy when it comes to compensation, but a general rule of thumb is that you want to stretch your sales force but obviously not make sales goals unattainable.
But to run an effective plan, you need an application or tool to forecast and model commission expenses. Here's why: Your top performer could hit their annual target in midyear. They may now spend the rest of the year on the golf course or, worse yet, they might become a flight risk. Conceivably, they may see better opportunities elsewhere, leave the company, and join a new company -- or competitor -- and start all over again. The point is that poor forecasting of commission expense can negatively impact the sales organization in undesirable ways such as developing flight risk among top performers.
Finally, go back to the cross-department committee; review the theoretical plan that you've forecasted, modeled, and tested; and reach agreement or an adequate confidence factor that the strategy will work, is understood by all the major stakeholders, and is ready to be implemented.
Ongoing communication is key. Tell your sales organization what they have to do and how to do it, and give them the necessary tools to be successful. If you don't communicate your plan down to the individual salesperson in the field, the best you'll probably achieve is last year's plan results. Remember, what you are really seeking to achieve through implementing a comprehensive sales performance management strategy is to positively alter the behavior of every salesperson. If you can do that, you will have effectively aligned them to your corporate objectives and helped to maximize profits.
Once you have a plan in place, don't just put it on the shelf and pick it back up at the end of the quarter. Analyze the data on a frequent basis. As with anything in business, course corrections will almost certainly be required. Even the best strategy will require refinement. Don't be afraid to analyze results and make corrections quickly. This is a typical pain point for companies without a sales performance management strategy or a technology delivery vehicle to bring their sales plans to life. They feel immobilized in the face of fast-changing market conditions or competitive threats.
At the heart of any incentive compensation management application is the strategic business data that is the lifeblood of sales performance management. In order to deliver sales performance management capabilities, critical business data from multiple, disparate systems, including HR data, order management data, product data, and pricing data, must be integrated, cleansed, and available for finance and sales. They require this data to perform a multitude of analytics, including sales compensation analysis, product profitability analysis, channel sell-through analysis, customer profitability analysis, and more.
Now hear Xactly CEO Chris Cabrera discuss how finance can adopt the dictums of sales performance management at www.bfmag.com [1] (July 19, 2007)
Links:
[1] http://www.bfmag.com