We all do this, its human instinct. Novice engineers build scalability into Alpha versions of product where the primary problem is getting user number one. Office managers research and buy new equipment when there is little downside to letting the old equipment finally break and then buying a new. Sales Managers agonize over commission plans for pricing plans that have never sold (and may never sell) when the primary problem is hiring a team.
The amount of effort and opportunity cost wasted in solving problems that will never occur or will occur much later than people think is immense. This is most evident in company that are scaling as all processes are being pushed to their limit. This problem is difficult to spot and rectify as the people involved in wastefully pre-solving problems think and can justify that they are being productive … but they are not.
- People’s ability to predict the next most important problem is poor. Typically it’s an entirely unpredictable unkown unkown opportunity or problems that reveals itself.
- The longer you leave a secondary problem the more information you gather allowing you to create a better solution for when you have to solve it.
- The context of the problem and the solution frequently change making the original solution defunct.
- The longer you leave a problem the more likely you will be able to leapfrog solutions
Your job, as CEO, is to resist pre-solving secondary problem. Now don’t take this too far, there are lots of secondary problems that have to be pre-solved. For example don’t wait until you run out of office space before you start looking for a new premises. In general, let secondary problems break before you fix them.
Primary and Secondary Problem
This only applies to secondary problems. For example a Sales Manager’s primary problem might be getting new business sales in, a secondary problem might be the CRM. Delivering value to customers is always a primary problem but your telephony system that creaking but not broken is a secondary problems.
So these are very general rules of thumb: there are loads of exceptions and as always context is king. That said, I find these rules a useful shortcut when analysing possible direct sales models for companies. The rules are based on the annual average net revenue that your typical customer is responsible for:
- Below €500 annually you can’t afford to call a customer and you must have a 100% automated sales channel
- Below €5,000 annually you can’t physically meet a customer and you must either have an automated or inside sales channel
- Below €50,000 you can’t get on a short haul flight to meet a customer
- Below €500,000 and you can’t get on a long haul flight to meet a customer
Each of the different direct sales channels has radically different costs, and companies need to structure their sales operation so that they can expect to recover the cost of making a sale in well under a year.
A typical inside sales rep will have an OTE between €40K and €70K and a fully loaded cost of roughly 150% of that. If they close 10 deals a month then the cost of making the sale is going to be somewhere between €550 and €950. Clearly if the resulting customers are only going to bring in €500 in net revenue it’s going to take a long time to cover the cost of making the sale.
A typical field sales rep will have an OTE of €60K to €100K with a fully loaded cost of double that due to the cost of travel. They should be closing about 7 deals a month, but they typically require a full time inside sales rep to source the leads and set up the appointments, taking the total cost of making the sale to somewhere between €2,300 and €3,500. So while it’s possible to run a field sales channel at under €5k net revenue, it’s difficult.
Once you have to get on a plane the whole dynamic and cost base changes dramatically. Now we are realistically starting to look at enterprise based selling. OTEs range from €70K to €150K (and up) with a fully loaded cost of about 250%. You can expect a maximum of a deal a month. Typically one meeting a week is reasonable – more can be done if you have particularly high customer density, but in that case you should probably be considering a local field sales force. So your total cost of making a sales ranges between €15K and €34K although it likely to be higher as a deal a month is on the high estimate.
Inter-continental travel makes everything even slower and even though OTEs aren’t much different, the number of meetings possible in a month shrinks to about 1 a month and resulting sales to maybe three a year. This results in an cost of sale ranging between €60K and €130K.
I find this a useful ready reckoner to quickly evaluate the available direct sales channels when analysing a company. It’s a shortcut, and I know that if something is anywhere close to the boundary it merits further in depth analysis as the peculiarities of a particular business or context may make a sales channel that initially seems implausible possible.
There comes a stage in every growing start up where CEOs have to do more than just delegate tasks to their managers. Once the business reaches a certain scale these managers need to become leaders in their own right, making different decisions to the CEO as long as it is aligned with strategy.
Your managers are not mini-yous and they have different perspectives, experiences, relationships and personalities. If you are going to leverage these capabilities it has to mean that they will reach different conclusions to you. Building your managers into leaders requires that you allow them to reach these conclusion and put their plans into place with your full support EVEN IF YOU THINK THEY ARE WRONG!
The caveat here is that the company must be able to afford the mistake if one is made.
Failure to do this and every decision will be deferred to the CEO, leaving the CEO overloaded and suffering from decision fatigue. Your managers become little more than problem reporting robots rather than empowered, innovative problem solvers and will soon become disillusioned as you make poor decisions in areas of THEIR specialisation and supposed responsibility.
CEO / Manager Discussion
Manager: There is a problem/opportunity and here’s how I plan on addressing it
CEO: Why, why, why, why, why
Manager: provides rationale and backing information
CEO: Provides overall business context/resources that manager may not be aware. Suggests a different approach that the CEO think has merit.
Manager: Explains why their approach is superior.
* At this point the CEO doesn’t agree with the manager’s approach, however it falls within the company’s overall strategy and the company can cope with the impact if the manager turns out to be wrong
CEO: Okay, great – let me know how you get on
The important aspect of this conversation is that the CEO never tells the manager that they disagree. There is no undermining of authority, just support. If the planned course of action fails, the CEO should never disclose that they disagreed in the first place. It’s not important that the CEO was right, it is important that the manager knows that it is their responsibility and that they had the CEO’s support.
In this way the manager owns the success and failure of their decision. It will only be through their mistakes that they learn and grow. If you don’t do this then every mistake will be your mistake not theirs and that will only create a dysfunctional leadership team.