Sales Metrics…

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This posting is focused on sales metrics in general and sales quotas in particular, exploring best practices for quota setting and touching upon the differences for quota setting in traditional scenarios and scenarios that include software as a service.

We will get to the subject of sales metrics by way of a Yahoo Finance message board spammer’s comment on the performance of the management team of ClickSoftware, a publicly traded company that is transforming itself from being an organizations focused on selling traditional license based enterprise software solutions and associated services to being an organization focused on selling mobility solutions and software as a service based solutions to enterprises.

If you want to skip directly to the best practices piece, go here. Otherwise, read on.

A detour via Yahoo Finance message board spammers

In a recent posting, I went searching for the identity of a couple of the posters on the Yahoo Finance message boards. The first poster, thegunnerab, or Gunner, for short, tended to make postings that implied that he had insider knowledge and postings that were generally infantile, attacking other posters. The other poster, racheljlj1212, tended to post one-line postings with prognostications that inevitably showed to be wrong.

After my blog posting racheljl1212 has ceased to post. On the Yahoo Finance message board for MER Telemanagement Solutions/MTSL, for instance, racheljl1212 has not posted anything since March 8th, 2013, which is probably just as well, since his or her postings regarding MTSL, which is now trading at at a per share price of $2.77, down from $5.49 a couple of weeks ago, were pretty much … well … completely and utterly wrong (as usual, I apologize for the language and spelling of these posting excerpts… I simply quote it… I do not write it):

Forth q will be great $7 soon

$6 next week…mark it

TODAT 5,7… MARK IT

Interestingly, another spam poster has picked up the slack from the vanished racheljl1212. The account of this spam poster, shemulik1, was created during approximately the same period that the racheljl1212 account was created (late 2008, I think) and, generally, shemulik1 has through the years posted identical types and styles of postings as those of racheljl1212, and I, for one, has concluded that racheljl1212 and shemulik1 is one and the same person.

Note, for instance, the following postings by shemulik1:

$8… mark it

over $5 today… mark it

Forth q will be great $7 soon… Mark it buy not $15

Clearly, there is more than a passing similarity between the style and the type of postings for these two spammers.

So here we see the problem with the Yahoo anonymity: If a spammer’s ID is compromised, then he or she will simply switch to another ID, or a third ID, or a fourth ID….

So much for racheljl1212 and shemulik1…

Meanwhile, Gunner is continuing his particular brand of spamming.

In a recent posting, for instance, Gunner, prognosticating on the expected results for ClickSoftware and referring to a recent conference where Shmuel Arvatz, ClickSoftware’s Chief Financial Officer, presented the company to potential investors, wrote:

Shmuel mentioned that they are close to 50 Sales reps company wide. A sales rep quota should be at the very minimum, 2M per year. That said, they should bring at least $100M in new business to click. Add to that $40M in software maintenance, (it was $36M in 2012) so they should be doing $140M.

Shmuel is a boring and is not the right guy to deliver Clicks message to potential investors. I attended many presentations at Roth during the three days and Shmuel was the least exciting one.

This posting is, of course classic Gunner rhetoric, throwing out mostly unsubstantiated opinions and criticizing the leadership of a publicly traded company with $100 million in annual revenue as being incompetent.

In his pseudo-scientific posting Gunner arrives at a year-end revenue number for ClickSoftware of $140 million, considerably higher than the $120 million, or so, that the company has put forward.

The basis of his or her numbers and evaluation of ClickSoftware’s management team is questionable, unless Gunner has extensive experience running +50 person sales departments, selling a mix of SaaS, mobility, and conventional license delivery solutions on a global scale. He may have this experience, of course — I don’t know, but if he doesn’t, then his quasi-analysis really does not mean much.

However irrelevant the analysis by Gunner may be, his pocket-math did make me reflect on sales metrics in general and sales quotas in particular, which is the topic of the rest of this blog posting.

Sales Metrics

8568743839_92941ef190_o (1)In 2009 and 20010 the Bridge Group, a sales strategy company from Massachusetts, compiled and issued a really interesting report showing that over the four years preceding the report sales quotas had risen more than 25 percent while the percentage of sales representatives making these quotas had fallen by almost 25 percent.

Moreover, on average, only 50 percent, or so, of sales representatives managed to meet their quota.

This outcome is interesting, starting with the observation that companies appear to be raising their quotas in economic down times — a move that, perhaps not surprisingly, causes more sales representatives to fail in meeting their quotas.

Quota setting is difficult and frequently is linked to other criteria than the skill of the individual sales representatives, and we know, for sure, that an incorrectly calibrated quota can cause direct problems, including severe problems with morale, and incredibly dangerous indirect problems, such as investor problems when companies rely roll-up of quotas as a measure for revenues and earnings guidance.

For enterprise, business-to-business sales the challenge of quota setting has increased over the last years because of the way that deployment and license models have changed with the introduction of Software as a Service (SaaS) and mobility applications (for instance, a traditional license and deployment sales model emphasizes short term deal-size and cash flow while a SaaS license and deployment model emphasizes monthly recurring revenues.) However, the most important and fundamental rule of thumbs for quota setting, that, above almost all else, quotas must be fair in order to be effective, has not changed.

Looking exclusively at industry statistics when setting quotas is dangerous. Even without the new complications, the quota spread between companies is immense. In a Fortune 500 software company that I familiar with, for instance, the individual quotas are for sales representatives selling professional services are in excess of five million dollars per year — with the average quota in some departments being seven and a half million dollars per year, while a $300 million software company that I am familiar with has quotas for individual sales representatives in its service and software sales group that averages one million dollars per year.

Good quotas are fair quotas

Mostly, setting quotas is a no-win proposition because an easily achievable goal means that the company pays more in sales costs than it ought to while a difficult goal means that the sales representatives does not make money (and get hassled quite a bit in the process) and, therefore, leave. Moreover, quota setting gets harder as the economy gets sluggish or volatile — precisely at the time when companies need to pull in reliable revenues and cash flow.

Personally, I don’t think you can use a formula to set quota, and, in fact, I think attempting to do so, whether the formula is derived from top-down or bottom-up analysis, is dangerous. Rather, you must look at historic performance, skill, and capabilities of each and every sales representative and weigh these carefully against the market, the territory, the product or service being sold, the company’s cash and revenue requirements, and — critically — the average sales-cycle length.

Importantly, this approach leads to every team member having a different quota, which is something that companies and sales representatives frequently abhor.

Don’t worry about it. Individual performance vary and so should quota. In fact the issue of varying quotas becomes aggravated if you include a critical intangible into the mix, namely that of sales representative seniority (I, for one, expect more from a sales representative that has been with a company for five years than I expect from one who has been with the company for one year, and, certainly, my experience is that a seasoned sales representative’s long-term value to the company is orders of magnitude above the value of new sales representatives.)

Fair does not, by the way, mean easy. Although, from an enterprise standpoint, a good quota-level setting should lead to the majority of the sales staff meeting their individual quota, perhaps north of 75 percent of the sales representatives, it should not allow near-everyone to make it. For the problem is that if everyone makes it, you are not going to get a stretch, and you are going to have long term growth problems for the company.

So, as a general rule, when quota-setting you should embrace the chaos of customized quotas. Remember, however, that your primary goal, overriding the fairness issue, is to protect yourself against a catastrophic downside.

New offerings and new companies

With younger companies and/or younger products or service offerings, whatever scientific foundation we may have for quota setting tends to shift, leading us into the grey area of guessing.

Here sales cycle becomes critical for setting fair quotas. Although you may not have in-depth market or product sales history, you will generally have an idea of the amount of time and effort that is necessary to take a deal from zero to closure, and, so, you can attempt to triangulate the quota setting through capacity planning measured against available market data and product pricing.

Unfortunately, with SaaS and mobility sales we are hit from both sides. Not only don’t we have a historic foundation, but, also, our customers’ procurement approaches are constantly altering as they learn more about buying these offerings, and, unfortunately, such change in the procurement approach undermines our triangulation efforts.

On a side-note, my experience is that a critical difficulty in quota setting in a SaaS and mobility sales scenario is to converge the shifting expectations of the sales representatives and the companies as both groups have to come to terms with the setting of quotas that emphasizes recurring monthly revenue.

Revisiting ClickSoftware and Gunner

So even if our Gunner, our Yahoo Finance message board poster, is right in his assumption that the individual quota should be two million dollars — a bit of a stretch given ClickSoftware’s diverging sales and deployment models, then he fails in accounting for the systemic failure of sales representatives to meet quota. If we assume, for the sake of argument, that the effective, enterprise-wide failure rate is 25%, then the effective quota achievement becomes one and a half million dollars per year, or $75 million for the enterprise overall.

Adding $40 million or so in recurring revenues, places ClickSoftware’s expected results for the current fiscal year at $115 million, nicely within the company’s guidance.

Perhaps then, the company’s executives are not as incompetent as Gunner seems to think.

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