In September of 2019, Sales Insights had the pleasure of interviewing Frank Cespedes. He is a Senior Lecturer at Harvard Business School and the author of Aligning Strategy and Sales: The Choices, Systems, and Behaviors that Drive Effective Selling. This book is widely credited with awakening the C-suite to the central role of sales in strategy implementation. Frank is currently working on a new book on sales, due to be published in 2020.
The following recounts our conversation with Frank.
Are the Lessons from Aligning Strategy and Sales Still Relevant?
Implementing strategy is still the CEO’s number one challenge. The amount that companies spend on their sales forces is, by far, the single biggest expense in implementing most strategies. A CEO can worry all she wants about “disruption,” but she needs a sales force aligned with a coherent strategy to do something about it. And as online media and digital channels become increasingly cluttered, distrusted, and subject to quickly diminishing returns as marketing vehicles, these realities about sales loom even larger.
What Mistakes Do CEOs Still Make?
First, many companies do not have strategies. Many CEOs still confuse things like “vision . . . mission . . . purpose” with a business strategy. Big mistake.
Second, research consistently shows that the C-suite generally does a terrible job in communicating strategy beyond its confines. Year after year, surveys indicate that more than 50% of employees in most companies say they do not understand their organization’s strategy. And here’s the perverse part: business strategy understanding declines as you get closer to the customer. In other words, people in sales and customer service indicate more often that they do not understand the strategy.
Third, there is often a disconnect between espoused strategic goals and daily sales incentives. Over two-thirds of companies still base commissions on top-line sales, rather than on contribution, margin, cost-to-serve, or profitability. The message this sends to salespeople is, every customer is equally valuable. But in any market, all customers are not equal, and any coherent strategy is about trade-offs and choices. If the strategy is coherent (a big if), then it includes a definition of the best target customers for whom the company can create and capture the most value. The strategic targets and value propositions should produce higher contributions. If you compensate for top-line sales, strategy gets lost, like smoke in the wind.
Why Don’t Companies Look Beyond Top-Line Revenue in Sales Comp?
A few reasons. One is that many senior executives see sales compensation as a tactical decision to be made by the local sales manager. It’s not; you can’t separate sales from strategy in a coherent business model.
Another reason is a generalized problem with how companies set compensation: they tend to follow the herd in their industry, so it becomes a self-perpetuating process year after year.
I suspect part of the answer as to why a herd mentality drives sales compensation is this: Over the last twenty-five years, the number of people reporting to the CEO has doubled (Gary L. Neilson and Julie Wulf). But relatively few of them are general managers with P&L responsibilities. Most people reporting to CEOs are staff specialists, like CIOs, CFOs, CMOs, regulatory affairs, and so on.
Companies do not staff the C-suite with specialists because they like bureaucracies. The reason is the data revolution. Data is forcing businesses toward greater specialization. Consequently, most people in the C-suite of many companies do not understand the sales function. Relatively few executives in the C-suite now come from sales. So, one reason for comp misalignment with strategy is they don’t know enough to ask the penetrating questions. In effect, the details around sales comp are delegated and not addressed in the C-suite.
For example, the CFO checks the comp plan to make sure the quotas fully cover the revenue forecast. By the end of the year, though, the sales team might hit quota while the company struggles with profitability. Why? Because the sales team was not concerned with margin or retention.
Another reason for misalignment between sales comp and strategy is also relevant: Many companies intentionally keep salespeople—and sales leaders–away from calculating customer profitability. They only want salespeople bringing in opportunities. They believe that other functions like marketing and finance can make strategic alignment happen, for example, with pricing, offer construction, bidding, and contracting. So, it is an interesting topic with two credible sides. But sales compensation needs much more senior-level attention than it currently receives, and that attention needs to go beyond unexamined folk wisdom about “coin-operated” salespeople and “keep sales comp simple.” Many strategies and sales tasks are complex. You can pretend that complexity is not there, but it is.
What Has Changed Since Aligning Sales and Strategy Was Published?
These changes are the subject of my new book which will be published next year.
At this point, I would say a couple of things. One is there has been a kind of renaissance of research and interest in sales on the academic side. Sales is historically an under-researched and under-taught subject in colleges and universities. That is changing. Much of the reason is because of all the academic interest in entrepreneurism. You don’t have to convince entrepreneurs that they better know something about selling and sales management. So that’s the big thing on the academic side.
Then, on the practitioner side, which is where I focus in my new book, I see a few things going on. One is that sales is going through a data revolution, and that has significant implications. I’ve served on a number of boards, and I’ve seen this happen probably a half dozen times in the previous, pre-data era: The sales VP made a presentation to the board and then the board moved into executive session. In private, they politely said: “I’m not sure he really knew what he was talking about. He didn’t really inform us about important things like x, y, or z. But he makes the numbers every quarter, so let’s leave him alone.” Those days are gone.
More data and easier access to that data are transforming sales from being a kind of black box in many firms to a highly transparent function for many other functional areas, especially finance. A McKinsey study found that over 40 percent of analytics groups report up through the CFO. So now the CFO begins to ask questions, and the sales VP better have the answers. This is a new day for sales.
The other thing I see going on is all of these little factoids and myths and unexamined assumptions about what the internet and something called “digital” allegedly mean for sales. The majority of those assertions have no empirical support. In fact, empirical data often contradict conventional wisdom.
For example, you can find daily claims that e-commerce has disintermediated salespeople. But here are the facts: the internet has been a commercial medium for about 30 years, and e-commerce has been part of the internet since its inception. But the number listed as salespeople in 2017 by the Bureau of Labor Statistics (BLS) is 14.5 million—more than 10% of the U.S. labor force. Sales jobs as a percent of all U.S. jobs have, according to BLS data, declined by 1% since 1999 (although the absolute number of jobs listed as Sales remained the same and, in fact, increased slightly in the 21st century). You’d expect a much steeper decline given the claims about how digital is “disrupting” sales. Moreover, the BLS data almost certainly undercounts the numbers of salespeople because, in an increasingly service-oriented economy like the U.S. (and most other industrialized countries), business developers are often called Associates, Managing Directors, or Vice Presidents. They are not placed in a ‘sales’ category for labor-department reporting purposes. But selling is what they do.
Similarly, in 2018, e-commerce as a percentage of total U.S. retail sales was slightly more than 10%: about half from Amazon and most of the other half from the websites of brick-and-mortar retailers. Even if this percentage doubles or triples—which is unlikely because the growth is slowing and, in many product categories, is flat—the vast majority of retail sales are still made in stores. That’s part of what my new book is about: using empirical data to test conventional sales wisdom.
A third change is that technology is blurring the traditional boundaries between marketing and sales. In many areas, sales is now doing stuff that one or two decades ago would have been done by marketing. In turn, that affects sales hiring profiles, required skills, training and development, and compensation plans.
Is Much Written About Sales from a Scientific or Analytical Perspective?
This is a pet peeve of mine. I don’t want to blow it out of proportion, but we need to be careful about using the word science in the sales area. It implies a level of causality, where if you do “x” then “a” happens. That kind of scientific causality or engineering precision is a rare occurrence in sales, where so many external factors influence and often determine sales outcomes. The field of sales is the most context-specific activity in the value chain. What works in one situation will fail in the next. Selling drugs is different than selling software. Selling software as a service is different than selling enterprise software. Selling in the United States is different than selling in China or Latin America. And so on.
One thing we know about the business world is that it does not give a damn about you, your approach, or your sales strategy. The business world will change for lots of reasons that are outside your control. It’s the responsibility of your company to adapt to customers. It’s not the world’s responsibility to adapt to you.
Yes, we need to do a lot more research and testing in sales, and technology makes that easier now. But I think using phrases like “scientific selling” or “predictable revenue” are, at best, physics envy and, in practice, obscure the practical data needs and choices that managers must make.
That said, sales analyses are indeed increasing in number and quality, because there is more data available. The issue confronting most sales organizations these days is not a lack of data or metrics. In fact, with more data, many companies proliferate metrics because many sales managers and C-suite executives often lack a clear sense of what is really driving customer conversion in their business. Meanwhile, salespeople get lost in the day-to-day noise. Nassim Taleb—the “black swan” guru—puts it well: “There is plenty of information. The problem is that the needle comes in an increasingly larger haystack.”
What is the Risk of Acting on Sales Myths?
Sales Insights: What is the significance of misaligning strategy and sales (your previous book) and acting on the myths of conventional sales wisdom (your next book)?
Frank Cespedes: There is no such thing as effective selling if that selling does not support your strategic goals. It may be good for the individual rep’s paycheck, but it’s not good for enterprise value. Research indicates that, on average, firms realize only about 50-60 % of the financial return their strategies and sales forecasts promise. That’s a lot of wasted managerial effort and, socially, a deadweight productivity loss. And if you act on myths or unexamined assumptions, then in a competitive market you’ll eventually fall victim to those who can distinguish fact from fiction, hype, and misunderstood cause-and-effect links between buying and selling.
For instance, we read many stories about a “retail apocalypse.” But retail employment has held steady in this century and mall closures are misunderstood. The number of malls in the U.S. was about 300 in 1970, 1,000 by the year 2000, and 1,200 by 2019 [see data from International Council of Shopping Centers in “Mall Owner Bets Outlet Bargains Can Thrive Online,” Wall Street Journal October 7, 2019]. That’s an increase. During the same period, outlet centers went from a handful in 1970 to about 400 in 2019. The headlines about mall closings are almost always about older shopping centers that lack trendy retailers, lively restaurants, and other things associated with a good shopping experience. This should not be surprising: demographics change and retail does, too. A study of 72 mall closings found that newer shopping centers, not e-commerce, were the most common cause of the closings (see research by Brad Thomas). The three most important things in retailing have always been location, location, location.
If you don’t make the right distinctions and simply follow conventional wisdom, you can cut and stumble your way to oblivion. This is arguably what many retailers in fact have done for the past 15 years: respond to the apocalypse headlines with self-fulfilling–prophecy behavior: not investing in in-store merchandising and training of their point-of-sale associates and, until recently, being oblivious to online/brick-and-mortar interactions that sales data now makes clear. Numerous retailers have found that shoppers who pick up their online orders in store spend more, and that processing returns costs twice as much for online orders versus in-store orders. Meanwhile, you now see the growing trend of “clicks and bricks” even for once pure-play e-commerce firms like Birchbox, Bonobos, Casper, Warby Parker, Wayfair and—yes, indeed—Amazon, among others. As always, smart managers ask relevant questions, and bad managers follow the herd.
How Does Sales Drive Value Creation Today?
A key goal of strategy is typically profitable growth. There are basically four ways to create value for shareholders: 1) invest in projects that earn more than their cost of capital; 2) increase profits from existing capital investments; 3) reduce the assets devoted to activities that earn less than their cost of capital; and 4) reduce the cost of capital itself. Most CEOs, CFOs and others involved in strategy formulation know this. But far fewer understand and operationalize the core customer and sales factors that affect each value lever. For better or worse, a firm’s selling activities always affect these drivers of enterprise value.
Sales Impacts All Four Firm Value Drivers
- New Investments: Most investment projects are driven by revenue-seeking activities with customers. So, the customer selection criteria used in sales directly impact this value-creation lever.
- Existing Investments: To increase profits from existing investments, remember that it’s sales outcomes—dealing with the orders brought in by sales initiatives–that accrete most costs, time, people and other resource allocations in most businesses. Sales is central to increasing profits.
- Asset Reduction: Reducing the assets devoted to activities that earn less than their cost of capital requires good links with changing customer realities. It takes more than a CRM system or—that conveniently vague term—“big data.” If you don’t have on-the-ground knowledge of evolving needs, not yesterday’s realities (and no matter how big, data is about yesterday), then asset redeployment becomes either an academic exercise or, worse, it becomes an unwitting impediment to the reallocation of assets.
- Cost of Capital Reduction: When it comes to reducing the firm’s cost of capital, consider the impact sales has on cash and capital on hand and the working capital required for conducting and growing the business. The selling cycle is the biggest driver of cash-out and cash-in. Accounts payables are accumulated during selling, and accounts receivables are largely determined by what’s sold, how fast, and at what price. That’s why increasing close rates and accelerating selling cycles is a strategic issue and not only a sales task.
Business is more complex, data more abundant, and more specialists are needed to stay up to date with functional best practices. Senior executives must stay in-touch with how their sales models and salespeople affect the core drivers of enterprise value creation. Otherwise, they are flying blind.
SalesInsights: Thank you, Frank, we look forward to more conversations after your next book is published.