sales

It’s not Rocket Science – What you Measure Defines how People Behave

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A while back I wrote a post titled, To Measure is to Know.  That is only part of the story, so please read on.

The other side of the coin is that what you measure defines how people behave. This is an often forgotten aspect of Business Intelligence, Compensation Plans, Performance reviews, and other key areas in business. While many people view this topic as “common sense,” based on the numerous incentive plans that you run across as a consultant it seems that is not the case. Picture showing an astronaut floating in space above Earth

Is it a bad thing to have people respond by focusing on specific aspects of their job that they are being measured on? That is a tough question. This simple answer is, “sometimes.” This is ultimately the desired outcome of implementing specific key performance indicators (KPIs), but it doesn’t always work. So, let’s dig into this a bit deeper.

One prime example is something seemingly easy yet often anything but – Compensation Plans. When properly implemented these plans drive organic business growth through increased sales and revenue (both likely items being measured), as well as drive steady cash flow by constantly closing within certain periods (usually months or quarters). What could be better than that?

Salespeople focus on the areas where they have the greatest opportunity to make money. Presumably they are selling the products or services that you want them to based on their comp plans. Additionally, certain MBO (management by objective) goals are presumably focused on positive outcomes that are important to the business, such as bringing-on new reference accounts. Those are forward looking goals that increase future (as opposed to immediate) revenue. In a perfect world, with perfect comp plans, all of these business goals are codified and supported by motivational financial incentives.

Some of the most successful salespeople are the ones that primarily care only about themselves. They are in the game for one reason – to make money. Give them a plan that is well constructed and allows them to win and they will do so in a predictable manner. Paying large commission checks should be a goal for every business, because when they are doing that their own business is prospering.

But, give a salesperson a plan that is poorly constructed and they will likely find ways to personally win in ways that are inconsistent with company growth goals (e.g., paying commission based on deal size, but not factoring in the overall impact of excessive discounts). Even worse, give them a plan that doesn’t provide a chance to win and the results will be uncertain at best.

Just as most tasks tend to expand to use all time available, salespeople tend to book most of their deals at the end of whatever period is being used. With quarterly cycles most of the business tends to book in the final week or two of the quarter – something that is not ideal from a cash flow perspective. Using shorter monthly periods may increase business overhead, but the potential to significantly increase business from salespeople working harder for that immediate benefit will likely be a very worthwhile tradeoff.

What about motiving Services teams? What I did with my company was to provide quarterly bonuses based on overall company profitability and each individual’s contribution to our success that quarter. Most of our projects used task oriented billing where we billed 50% up-front and 50% at the time of the final deliverables. You needed to both start and complete a task within a quarter to maximize your personal financial contribution, so there was plenty of incentive to deliver and quickly move to the next task. As long as quality remains high this is a good thing.

We also factored-in salary costs (i.e., if you make more than you should be bringing-in more value to the company), the cost of re-work, and non-financial items that were beneficial to the company. For example, writing a white paper, giving a presentation, helping others, or even providing formal documentation on lessons learned added business value and would be rewarded.  Everyone had the right motivation, performed work and delivered quality work products as needed, and made good money doing so.

This approach worked very well for me, and was continually validated over the course of several years. It also fostered innovation, because the team was always looking for ways to increase their value and earn more money. Many tools, processes and procedures came out of what would otherwise be routine engagements.

Mistakes with comp plans can be costly – due to excessive payouts and/or because they are not generating the expected results. Back testing is one form of validation as you build a plan. Short-term incentive programs are another. Remember, where there is not risk there is little reward, so accept the fact that some risk must be taken to find the point where the optimal behavior is fostered.

It can be challenging and time consuming to identify the right things to measure, the right number of things (measuring too many or too few will likely fall short of goals), and provide the incentives that will motivate people to do what you want or need. But it is definitely worthwhile work if you want your business to grow and be healthy.

This type of work isn’t rocket science, and therefore is well within everyone’s reach.

Acting like an Owner – Does it matter?

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One of the biggest changes to my professional perspective on business came during the seven years that I was running my own consulting business. Prior to that I had worked as an employee for midsize to large companies for ten years, and as one of the first hires at a start-up technology company. I felt that the combination of doing hands-on work, managing, selling, and helping establish a start-up (where I did not have an equity stake) provided everything needed to start my own business.

Well, guess what? I was only partially correct. I was prepared for the activities of running the business, but really was not prepared for the responsibility of running a business. While this seems like it should be obvious, what I’ve seen many times since then is that small business owners usually focus the majority of their efforts on growth / upside. That type of optimism is important for entrepreneurs – without it they would not bother putting so much at risk. I will write more posts about my business ownership experiences later.

People tend to adopt a different perspective on the decision making process once they realize that every action and decision can impact the money moving into and out of their own wallet. Even in a large business you can typically spot the people who have taken these risks and run their own business. It’s more than just striking out on your own as a contractor or sole proprietor. I’m talking about the people who have had employees, invested in capital equipment, and went all-in. These are the people thinking about the big picture.

What do these people do differently than people who have not had this type of experience?

One of the biggest things is they view business in terms of “good business” and “bad business.” Not all business is good business, and not all customers are good customers. There needs to be a fair commercial exchange where both sides receive value, mutual respect, and open communication. You know this is working when your customers treat you like a true partner (a real trusted advisor) instead of a vendor.  A business is in business to make money, so if the work is not profitable it is very likely that you should not be doing it. And, if you are not delivering value to an organization it is very likely that you would be better off spending your time elsewhere – building your reputation and reference base.

When you are not thinking or acting like an owner it is all about the sale and your commission. Selling products and services that people don’t need, charging too little or too much, and making promises that you know will not be met are typical signs of a person who is not thinking like an owner. Their focus is on the short-term, and they often feel that someone else will fix this once it becomes their problem.

How you view and treat employees is another big difference. Unfortunately, even business owners do not always get this. My feeling is that employees are either viewed as Assets (to be managed for growth and long-term value) or Commodities (to be used-up and replaced as needed – usually viewed as fungible and treated as if they are easily replaceable). Your business is usually only as good as your employees, so treating them well and with respect creates loyalty and results in higher customer satisfaction. Successful business owners usually look for the best person out there, and not just the most affordable person who is “good enough” to do the job. The flipside is that you need to weed out the people who are not a good fit quickly. Making good decisions quickly and decisively is often a hallmark of a successful business owner.

Successful business owners are generally more innovative. They understand the need to find a niche where they can win and provide good and/or services that are different and often better than what larger vendors offer. Sometimes this means specialization and customization, and sometimes this means more attention and better support. Regardless of what is different, these people are observant of the small details, understand their target market, and are good at defining a message that articulates that difference. These are the people that seem to be able to see around corners and anticipate both problems and opportunities. They do this out of necessity.

Former business owners are usually more conscientious about money, taking a “my money” perspective on sales and expenses. Every dollar in the business provides safety and opportunity for growth. These usually are not the people who routinely spend hundreds or thousands of dollars on business meals, or who take unnecessary or questionable trips to nice places. Money saved on things like travel or training expenses can be invested in new products, features, or marketing for an organization.

While these are commonly traits found in successful business owners, it is possible to develop them even if you have never owned a business. Do you understand the big picture vision and mission of the company that you work at? Who is your competition and how are they different? How is their messaging different? When selling, are you focused on delivering value, developing a positive reputation within that organization, and profiting on the long-term relationship? When delivering services, is your focus on delivering what has been contracted – and doing so on time and within budget? Are your projects used as examples of how things should be done within other organizations?  Are you spending money on the right things – not wasteful or extravagant?

These are all things that employees at all levels can do. They will make a difference and will help you stand out. That opens the door to career growth and change. And, it may get you thinking about starting that business you have always dreamed of. Awareness and understanding are the first steps to change and improvement.