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Outsourcing Sales
This is the second and final of two articles on outsourcing.This issue will look at the outsourcing of sales. As more and more technology companies examine all aspects of streamlining costs, yet maintaining and increasing sales, we look at whether outsourcing some or all aspects of the sales function is both desirable and inevitable.
The Economic Argument
If salespeople are not productive, then clearly they are a significant cost base. In a boom economy where the few outstanding performers can carry the underachievers, this may be acceptable. In today’s market conditions it is probably a recipe for financial ruin.
Let us take a closer examination at the annualised costs of a salesperson in the software industry
Recruitment typically is between 10% -20% of salary or expected earnings. So if the salary is $70k and total earnings are the equivalent of $150k, then recruitment fees will be anything from $10k to $25k.
Salaries, Bonuses, Commissions and Advances will of course vary according to whether the total renumeration package is based on performance, bonuses, commission and experience but will probably be within the $100k to $250k range.
Training should be both for product and industry training. Very few companies at the moment are investing in improving the skills of their sales staff. Conversely, most companies will ensure that sales staff understand the major features and benefits of their products, through both formal and informal training sessions
For new staff this learning curve to become productive will mean that very few, if any, sales will materialise in the first three to six months. Let us assume that these costs are between $5000 and $15000
Expenses will vary according to the territoryand the amount of travel and entertainment, but let us assume that annual amounts will vary between $8000 and $15,000
Administrative Costs include phones, computers, software, office space (or home office), secretarial, technical, sales management and general administrative support. Many companies often dramatically underestimate these costs which are typically between $30,000 and $60,000 annually.
Totals
Low High
Recruitment 10,000 25,000
Salaries 100,000 250,000
Training 5000 15,000
Expenses 8000 40,000
Administration 30,000 60,000
Totals $153,000 $390,000
On top of these figures need to be added the cost of sale in relation to the amortised development costs, royalties and other costs associated with product development and marketing. Therefore, to break even from the figures illustrated in the “Low” figure would be $250,000 and the “High” figure nearer to $600,000.
Retention of Knowledge
One of the main arguments for creating a direct salesforce is control over the “sales” message and the dedication of effort that salaried staff should be expected to make for the corporate good. However, the dramatic reduction in early adopter sales and the demands of buyers for clear return on investment have cruelly exposed the weaknesses and lack of skills in many salespeople.
Buyers are now reluctant to buy technology for its intrinsic worth and have shifted their attention and rationale to ROI and relationships with vendors. Unfortunately, many salespeople cannot make the adjustments necessary to change their methodologies to this paradign and are failing. Therefore, it could be argued that product knowledge is now not so important as the relationship with clients.
Our industry has also grossly compounded the problem by paying over-inflated salaries and now a severe lack of productivity is widening the gap between performance and return.
So what are the options?
Outsourcing alternatives
- Reduce headcount
- Outsource sales to those who will act as agents or resellers
Reducing Headcount
Rather than fire salespeople, ask them to act as an agent where they will get significant commission and a nominal retainer (or none). That way you do not lose all the investment in them and, if they are good, they will accept the challenge to make more money than they did as an employee.
Resellers
Notwithstanding the merits and disadvantages that have been traditionally associated with selling through third parties such as resellers, distributors or any other nomenclature, third party sales makes a fairly compelling economic argument in today’s market.
What are these costs?
Assuming that you engage a professional partnering firm (such as SSP) your search fees are likely to be between $6000 and $15,000 to identify multiple potential partners.
You will have management costs in negotiating agreements, establishing quotas and monitoring performance as well as travel and lodging expenses. In our experience, the annual amortised cost per reseller is between $20,000 and $40,000. So if we make some assumptions on revenues and the profitability of EFFECTIVE resellers then the economic arguments are compelling.
Totals
Low High
Revenues $50,000 $250,000
Royalties $17,500 (35%) $125,000 (50%)
Search Costs $6000 $15,000
Management Costs $20,000 $40,000
Profitability $6,500 $70,000
Assuming that the reseller keeps between 35-50% of revenues on new business sales, it becomes rapidly transparent that your cost of sale can be dramatically reduced and, even with a very low expectation of revenues, a reasonable margin can be obtained.
The Emotional Factor
Therefore, we would challenge the notion that owning a direct sales force is always either desirable or economic. After all the buyers will have their preferred suppliers as well as their preferred salespeople.
There are many resellers who have the desired relationship that you seek with your potential customers. Those same resellers may also have outstanding salespeople.
Our industry is consolidating and must continually drive down the cost of sale while finding more ways to sell to new customers. This is the challenge.
Look at your numbers, look at your cost of sale. Are they close to our assumptions? Be honest and try not to be seduced into believing that selling skills are unique to your company. Many resellers employ oustanding salespeople who can offer a more profitable means of generating revenues.
If you have not considered outsourcing sales or sales management, maybe now is the time to do so.
SSP is continuing to help companies grapple with the challenges that confront software companies in today’s markets and further details on our search services, consulting and other services can be found at www.sspltd.com
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