A few months ago, I was having a meeting with the Managing Director and Chief Sales Officer of a mid-tier IT company. When I asked about their business performance and outlook for the previous year the CSO was gung-ho and exclaimed that they delivered over 100% of the plan. Amidst predictions of an impending recession in the western world, this was music to my ears. The discussion then moved to profitability, and I could sense the MD’s face becoming a bit red, and the CSO was feeling uncomfortable. At this stage the MD remarked, “We sell well but we do not sell profitably.”
Let me pause this narrative and delve into the evergreen issue faced by organisations in general, but specifically sales teams and sales organisations. I was reflecting and reminiscing about the experiences I’ve had with various clients in the last two decades, and I’m pleased to share some nuggets of wisdom on generating more profit.
Top line orientation alone is a tyranny
As organisations build, the promoters feel the need to gain visibility for the organisation, win marquee logos, scale up, get revenue stability, and survive the business. Size matters at this stage. Economies of scale is an excellent competitive advantage. Top line focus is a necessity at this stage. However, taking it too far and prolonging the focus on turnover as a key result area for sellers and sales teams, proves to be detrimental to the business in the long run. Organisations need to shift the gear towards a balanced top and bottom-line oriented selling for profitable growth. Compensation structures with incentives aligned to both parameters will yield rich dividends.
The concept of the Account Manager/Client Partner acting as the CEO of the account, and who is responsible for Sales, Service, People, Productivity and Profits, is working well in service organisations. This model is worth emulating for greater share of wallet and profits.
Volume Vs Value game
Organisations would have an array of offerings right from commoditised products to highly specialised ones. Many products would have a pull factor from customers whereas others need to be pushed. Sellers resort to demand capture of volume business, which is fine, but generating demand for specialised offerings is even better. I remember my days in an IT services major where a celebration was organised and we cut a cake for signing an enterprise agreement worth INR 100 crores with 0.5% margin as pass through commission, whereas an advisory deal worth INR 1 crores with 50% margin was not celebrated. Here the behavioural change towards bottom line needs to be driven and adhered to from the top management.
What to sell and what not?
Organisations have a product mix / stock keeping unit (SKU) wise target in FMCG/D industries. Adapting the same in other industries is prudent. The issue noticed in some organisations is disguising a cat to look like a tiger. For instance, the operating margin of Indian IT majors for digital services reported few years ago was over 20%, whereas the margin of MNCs for digital services was double. The difference here is simple to decode – the former was supplying manpower for digital work, whereas the latter was doing true digital transformation work. Sellers in the former, have taken the path of least resistance by resorting to body shopping for overseas clients rather than walking the difficult terrain of value-based selling. Organisations need to choose the field they wish to play in and ask the sales teams to work in it.
End of life / end of service products are best phased out sooner rather than retaining them in catalogue and lamenting about low margins. Organisations need to keep a constant watch of their portfolio and churn it as required. There is no point crying over spilt milk that the realisation from deals is pathetic.
Choose your customer
This may sound like a utopian situation in sales. But if sellers identify the right segments and clients to focus on, they have a better chance of meeting the profitability targets. Typically, organisations prefer a blend of corporate and public sector business to take care of their business cycle. Corporate businesses provide the bottom line, while government businesses provide scale and help to absorb any shocks from downturns. Whatever may be the segment mix opted by the organisation, the endeavour of the seller must be to achieve the bottom-line target set for each class of customer. Even within an industry it may be prudent to pick deals, with some discount, from a player who pays upfront than from another who delays the payment.
Profitability across Sell-Bill-Collect cycles
Large bid/pursuit meetings in organisations are mostly led by sales/pre-sales functions. Delivery is roped in for a technical sign off, and finance and legal are brought in to offer advice on the risks and rewards. Structured bid management process which envisions the Sales, Delivery, and Receivables cycle results in systematic elimination of risks with mitigations. Deals in which “Pricing calls” are taken purely to win the contract have greater probability of turning to red in subsequent phases.
For small and medium size deals, looking at terms of purchase in total covering price, quantity, logistics/delivery, and payment termsis a better approach. In short business acumen coupled with financial acumen will lead to a lucrative business.
Good negotiation is not a proxy for poor selling
Death and taxes are inevitable in life and so is negotiation! This tug of war exercise is dreaded and liked by sellers and procurement professionals. Smart sellers cut above the rest by negotiating not only for price but also for value and access with prospects. If value comes first, price will come last and vice versa. Sellers who exercise greater deal qualification and control are better placed to win the deal. Month, quarter and year ends are vulnerable and trying times for sellers in the pursuit for profitable deals. The need of the hour forces sellers and organisations to bend if not buckle under pricing pressure. There is a simple yet tough solution to address this issue and that is having a healthy pipeline of closable deals.
Summing it up
Profitability of the organisation is contingent upon many factors. But sellers (sales executives and sales managers) and sales teams who are the ambassadors have a pivotal role to play. Their orientation towards numbers and quest for profits needs to be systemically driven from the top.
Contact us to learn more about how your sales teams can generate more profit.