In our previous installment, we reviewed the salesforce analysis completed by CEO Gordie McGrath on Sioux Falls’ outside sales effort. The company is reviewing how to reallocate the sales effort and make it more efficient as e-commerce is scheduled for completion in less than a year. From Part 3, we have the following statistics from the sales effort, including:
The company has 112 sellers averaging 1,200 calls per year.
There are 6,100 active credit-worthy accounts assigned to outside territories receiving 145,440 calls.
Activity costing finds that 40 percent of credit-worthy accounts have negative activity profits.
Exhibit I in Part 3, forecasts a call volume reduction of 79,560 calls to 65,880 calls, with a call reduction coming from: accounts that want no sales calls (28,800); accounts that want one call per quarter (36,600); and accounts that want one call per month (14,160).
Top line sales gains from using e-commerce and reallocating sales efforts are estimated at $38,942,400 and margin gain of $9,735,600.
When Gordie McGrath presents his results to the management team, they are skeptical, especially Sid Kinson, vice president of sales, and Jason Hostrom, vice president of operations. They view the analysis of the sales complement as flawed in several areas. First, customers who say they don’t want or need a sales call or want a reduction in sales call frequency are misguided.
Their view is that customers won’t buy as much online as they would with a face-to-face sales call. Additionally, they believe sales calls relay a lot more information than customers can research online and, without this information, sales will decrease. Kinson also is feeling pressure from the analysis in several ways. It puts him in a bad spot with his sales team and the potential reduction in sellers will reduce his value to the organization.
Using the Data
Since sales calls per outside seller average 1,200 per year, a reduction in 79,560 calls is a reduction in 66 outside sellers. Sellers, fully costed, are $110,000 per year, making a 66-person reduction equal to a decrease of $7.26 million in operating costs. Additionally, Sioux Falls’ forecasts from Exhibit I (reproduced here), show a sales loss at accounts that want no calls or one call per quarter and a sales gain at accounts wanting one call per month or two calls per month.
Practically speaking, and based on our experience, first-line analyses are almost always too optimistic. To perform a complete analysis of potential sales reductions, management should consider:
Territory coverage restrictions, including the understanding that some territories have large geographies or congested roadways where making 1,200 calls per year is not feasible.
Some accounts will opt for a call reduction but will reduce business to Sioux Falls. The only way to test for this is to review the activity costs of the account. Generally speaking, accounts with above-average activity costs have poor processes and rely on outside sellers to help with their problems.
There are substantial differences in sales tenure and ability. Some sellers would welcome territorial realignment and others are less enthusiastic.
Some sellers have strong relationships with their accounts. If they believe management is treating them unfairly, they will leave and take some or all of the business with them.
Performance of individual sellers should be taken into account. Large-scale changes to a functional area are a good time to move poor performers out and on to positions they are better suited for.
The Sioux Falls analysis did not consider these factors and they are pertinent to a solid analysis. Our work in salesforce restructuring finds that considering these “other factors” typically reduces the optimistic forecast by 40 percent or more. In short, the 66 sellers and $7.26 million in costs initially forecasted would likely be 40 sellers and $4.35 million in operating cost gains as other factors are considered.
Complete Analysis, Reduction Plan
This series does not have space for a review of the other factors to salesforce reduction as digitization is undertaken. However, we have a jaundiced view of distributors who have no plans for sales effort restructuring as e-commerce is undertaken.
The financial gains from e-commerce, the willingness of customers to move online, the reduced tolerance of Millennial buyers to pay for outside sellers when they can self-serve, and the growth of nontraditional, made-for-online distributors without outside sellers all points to a reduction in the generalist sales effort compensated on margin dollars.
Full-service distributors who maintain old-style sales efforts as online buying grows are, in our view, betting on an old-style, less-efficient business model. However, salesforces are important and will be so after digitization.
The ability of management to develop a solid, full analysis of before and after sales efforts is crucial for the future of the firm. Too often, we find where distributors make simplistic analyses or roll out changes to the sales effort haphazardly, resulting in a decrease in sales, delay in online success, and enemies within their ranks.
We will pick up Sioux Falls’ plans in Part 5 after they have considered the “other factors” in their sales change efforts.