spearheading profitability -...

CFOeBook

Spearheading Profitability

Digging Into Data To Boost Sales Performance

Spearheading Profitability is published by CFO Publishing LLC, 295 Devonshire Street, Suite 310, Boston, MA 02110. Mary Beth Findlay and Kim Zimmermann edited this collection.

Copyright © 2016 CFO Publishing, LLC. All rights reserved. No part of this book may be reproduced, copied, transmitted, or stored in any form, by any means, without the prior written permission of CFO Publishing, LLC.

TABLE OF CONTENTSFOREWORD: CFOS TAKE THE REINS ON SALES PERFORMANCE 4

MINDING THE MARGINS: DATA IS THE KEY TO UNLOCKING PROFITABILITY 5

IN CONTROL: DON’T BLAME ‘UNCONTROLLABLES’ WHEN YOU MISS FORECAST 9

COMPENSATION CONUNDRUM: IS IT TIME TO ABOLISH SALES COMMISSIONS? 12

CONCLUSION: WHAT ARE YOU DOING TO IMPROVE SALES PERFORMANCE? 14

CFO PUBLISHING 3

SPEARHEADING PROFITABILITY

CFO PUBLISHING 4


FOREWORD: CFOS TAKE THE REINS ON SALESPERFORMANCEM

odern CFOs are involved in all facets of the business — working across business units and functions to a ensure smooth and efficient operation. This provides finance

executives a window into all aspects of a company’s performance.

While finance teams have a wealth of data at their fingertips, it is becoming increasingly challenging to sift through the onslaught of information to home in on the relevant numbers. Meanwhile, the pressure on CFOs to boost profitability will only increase going forward.

Cost control can result in better margins, but that will only take you so far in your quest to maximize profitability. More often, CFOs have to look to the data to uncover opportunities to take the business to the next level.

As much as finance executives try to keep a tight rein on performance, there will still be unpredictable internal and external forces that can be detrimental to projections. Savvy CFOs look for ways for blunt the impact of uncontrollable forces and learn from negative events.

With an eye on top-line growth, CFOs are taking a serious look at restructuring the way the salespeople are paid in their efforts to boost sales performance. While the move may seem counterintuitive, some say that shaking up the compensation structure can actually boost profitability.

This eBook highlights a strategy for CFOs to position themselves as business performance leaders by strategically using data to highlight areas for improvement and identify growth opportunities.

CFO PUBLISHING 5


MINDING THE MARGINS: DATA IS THE KEY TO UNLOCKING PROFITABILITYW

ho is responsible for profitability? Increasingly, concern about managing a company’s profit margin is no longer confined to finance and the C-suite,

but is shared across the enterprise. For this reason, finance teams feel a growing responsibility to serve up the timely data and targeted insights that can help businesses meet profitability targets.

To find out more about finance’s role in catalyzing profitability improvement, CFO Research recently surveyed 104 senior finance executives from U.S. firms with more than $1 billion in annual revenues. In this survey, sponsored by Vendavo, respondents

confirmed that margin management is indeed a challenging task.

A strong majority of survey respondents (73%) agree that it will become increasingly difficult to improve margins over the next two years. This will be just as true for companies that have recently been successful in making margin improvements as for companies that have recently fallen short. Nearly 6 in 10 respondents (57%) report that their companies are more profitable this year than last, while 43% say they either have gained no ground (18%) or have slid backwards (25%).

Finance executives also recognize that they need

CFO PUBLISHING 6


to step up their efforts to weave profitability tightly into the corporate fabric rather than focusing only on cost control. The corporate head of a media/entertainment firm writes, “We are crash dieting to fit into a wedding dress, rather than thinking about what sort of life we want to live in the future.”

CFOs are optimistic that finance is up to the task of supporting profitability improvement. More than 8 in 10 (84%) respondents say they are likely to see their finance functions serve as key players in enterprise profitability improvement, and 7 in 10 (70%) say they believe their current finance teams have the expertise and knowledge needed to support profitability improvement.

The first challenge for finance is developing an understanding of what information will have the greatest impact on profitability when it is shared across the business. An increasingly complex business environment generates enormous volumes of data, and companies are increasingly looking to the finance function to help them sift through the data, identify critical trends, and develop effective responses that will help protect and improve margins.

Survey respondents say that finance teams will have to become more flexible, responsive, and forward-looking to manage the data challenge, and to do so they will need to rely on advanced information-management capabilities. IT systems and tools must be able to handle “an environment

highly influenced by F/X rates, inflation, and market volatility,” as a controller from a large manufacturer says in the survey. An executive from the financial services sector underscores the importance of having the right tools when he writes, “Improved IT systems have helped profitability. The reduction in staff has not worked as well.”

Technology Still LaggingAnd while a majority (56%) of respondents say that their finance functions have the technology and information they need to support enterprise profitability improvement, finance chiefs representing the largest companies surveyed (i.e., $10 billion +) are more likely to indicate that technology and information to support profitability improvement are lacking. Likely this is because the larger the firm, the more data that is generated by and stored in multiple systems across multiple business lines, subsidiaries, or separate companies.

Finance leaders also recognize that responsibility for profitability extends beyond the finance function. One respondent describes the most effective action his company has taken to improve profitability: “The establishment of a dedicated enterprise analysis team has enabled company leadership to learn more about the company margins.”

And an enterprise-wide understanding of the drivers of profitability is grounded in the accuracy,

CFO PUBLISHING 7


reliability, and relevance of the information that the finance function can provide. Two-thirds of respondents (66%) say that their companies are effective at accessing and analyzing relevant data to discover profit opportunities. But they believe they can do even more: Nearly three-quarters (74%) agree that using data more effectively could make a substantial difference in their companies’ ability to improve profitability.

Empowering SalesPlacing the right information in the right hands is critically important, and a majority of finance executives believe that the “right hands” belong to their sales organizations. A large majority (85%) of the executives in the survey say that a close working relationship between the finance function and the sales organization is important for optimizing their company’s profitability.

Survey respondents point to a key reason. Overall, nearly 4 in 10 (39%) say that their sales organizations rely more on their own skills and

experience than on information systems and data tools to make profitable sales. At the same time, nearly three-quarters of respondents (74%) say that “providing better customer information to the sales force would go a long way toward improving my company’s profitability.”

Finance executives taking the survey feel that their sales and marketing organizations would benefit from additional help in understanding their companies’ profitability drivers. Most respondents (63%) say that their sales forces should be emphasizing profitability more than they do currently — despite the fact that two-thirds (67%) say that profitability already is one of the metrics used to evaluate their sales forces.

In fact, 6 out of 10 finance executives (60%) give their sales organizations a grade of C (“average”) or lower in terms of their understanding of their companies’ profitability drivers. (See Figure 2, below.) They rate their marketing functions just as low, with 62% of respondents assigning them a grade of C or lower.

CFO PUBLISHING 8


Interestingly, only about two-thirds of respondents (69%) believe that their corporate leadership has either a good or a deep understanding of profitability drivers. For some companies, the need for education may well extend into the C-suite.

Finance executives see themselves as one of the best resources for that kind of education. Respondents rate their own finance functions the highest, with 45% saying they have a deep understanding of their company’s profitability drivers and 40% saying they have a good understanding.

Wanted: New Tools, Better DataGiven their confidence in their own understanding of profitability, finance executives feel some responsibility for working with their sales organizations to provide them with the information and tools they need to make decisions that support profitability goals. In fact, in our survey, a stronger working relationship between finance and sales is associated with companies that have been more successful in making profitability improvements.

So, in answer to our opening question, everyone in an organization is responsible for profitability. But finance will remain at the center of margin management across the enterprise, using new tools, capabilities, and technology to lead the way.

It’s not hard to validate the oft-expressed observation that sales is typically the sole responsibility of autonomous agents. Companies advise their salespeople that they will be held accountable for outcomes, not activities. They are paid commissions — and sometimes only commissions, with no fixed salary. And they are encouraged, in most cases, to manage their territories, their accounts, and their sales opportunities as if they were, well, their own.

Answer these three simple questions:

• If an important sales opportunity is lost, who is ultimately responsible?

• If an important customer is dissatisfied, who is ultimately responsible?

• If an account falls into arrears on its payments, who is ultimately responsible?Salespeople spend so little time selling because

they have so many responsibilities competing for their limited time, because each salesperson is a self-contained sales function.

Consider this: What has caused both the productivity and the quality of manufacturing to

increase by many orders of magnitude over the last 100 years?

The answer is centralized scheduling and division of labor. And division of labor has had the same catalytic effect on project environments (think construction, aerospace, finance, and even marketing). Yet the modern sales environment is, in key ways, analogous to manufacturing as it looked more than a century ago.

That’s about to change. Silent revolutionaries have fruitlessly scrutinized sales for evidence that the function is somehow unsuitable for centralized scheduling and division of labor. Their new assumption, around which their sales environments have been engineered, is simple but powerful: Sales is the responsibility of a centrally coordinated team.

The Dedicated Sales CoordinatorSales must be viewed as a machine, where tasks like prospecting and setting up sales meetings are shared and delegated within an in-house team.

We should not begin this discussion by asking whether sales commissions make sense. Rather, we should ask whether we should sell via autonomous agents, or via a centrally coordinated team where sales professionals are paid as salaried employees and team members rather than independent outsiders. With this reengineered model, salespeople get dedicated executive assistants, or sales coordinators, who will free them to do nothing but sell.

CFO Summary

• Finance is taking a more active role in improving enterprise profitability.

• Modern finance teams will have to become more adept in the strategic use of data.

• Savvy CFOs are fostering close relationships with sales leadership.

• New tools and data will help feed the sales “machine.”

CFO PUBLISHING 9


IN CONTROL: DON’T BLAME ‘UNCONTROLLABLES’ FOR MISSING FORECAST

Over the past decade, companies on average have given less guidance on expected financial results than they had previously. One reason for that is an increase in the

volatility of uncontrollable factors, such as those facing the oil industry.

In the past year in particular, the strengthening dollar, along with falling prices for oil and other commodities, have created many variances to plan

— both positive and negative — in companies’ sales, operating margin, and net income. Given the market’s start in 2016, this year may be no different.

How to Optimize Project Portfolio ManagementVariances attributable to fluctuating commodity prices and foreign exchange rates typically are, indeed, usually uncontrollable, so many companies

CFO PUBLISHING 10


resort to hedging those risks. But hedging can take you only so far, and its availability doesn’t mean you shouldn’t prepare for negative fallout from those risks in ways that could mitigate the impact to the business.

Even variances that are at least somewhat controllable may not get the attention they deserve. Unfortunately, there is a tendency for management, in the wake of any negative variance, to explain it away as simply an uncontrollable exogenous force.

The risk in an uncontrollable does not derive from its expected level (for example, deflation of -2%). Expected levels can be planned for. The risk lies in its degree of volatility, measured by the variance of business drivers such as demand and price, inflation/deflation, degree of regulation, supply chain disruptions, weather, political events — in other words, many of the business risks listed in a company’s Form 10-K.

Deflation, for example, can be tough on a variety of businesses, but if the level of deflation can be reasonably projected (for example, the aforementioned -2%) management can at least create a plan to reduce its impact.

Too often following a negative event, an executive enters a press conference without the proper information and makes excuses and assumptions that subsequently have to be recast. The excuses often ring hollow, because the same executive who blames a negative variance to plan on uncontrollable external events may be quick to take credit when such events work in the company’s favor — for example, crediting a drop in commodity prices to successful supplier management.

If you experience a miss due to an uncontrollable circumstance, can you look back and honestly say that you and your team did everything reasonable and within your resources to be prepared for dealing with the negative outcome? If so, you have no need to offer an excuse. Just ensure that your team adapts its future planning to incorporate learnings from the negative event.

Following are ways to anticipate and get ahead of the potential for uncontrollable to damage your business.

Base Decisions on Ranges of OutcomesGeneral managers who are quick to give excuses around uncontrollable events tend to rely on single-point budget estimates. In a chaotic and volatile global economy, cross-functional decision-making cannot rely on point estimates. It is critical today to

look at ranges of outcomes instead.The decision-making process has to encourage

team members to voice divergent opinions, creating a dialogue around extreme events that can point to new ideas. When contrarian views are not allowed to enter the discussion, there is real risk of being caught unprepared by a negative that was overlooked.

After a negative has occurred, ask yourself if that outcome was within the range of the feasible outcomes you originally analyzed. If so, you probably did all that you could have done and the negative variance to plan will become a positive learning.

Prepare as Well as You CanEven when ranges of outcomes are considered, misses can still occur, and even the best business leader will never be fully prepared for some uncontrollables. For instance, a negative variance on top-line volume or pricing can be very difficult to make up via cost reduction.

Being prepared as much as possible to minimize the downside involves asking tough questions and being honest with your answers. Examples of reasonable questions to ask in today’s world might be: “Are we prepared for the potential of parity, or less, of the dollar versus the euro?” Or, “How would business be impacted if a key supplier in a particular part of the world experienced a tsunami,

CFO PUBLISHING 11


leading to a critical supply chain disruption?” Or more generally, “Do we have an effective enterprise risk management process in place?”

An effective ERM process recognizes that things can and will go wrong; it prepares you to respond quickly and to know a priori the degree to which internal controls are in place to deal with the risk in question.

Check for BiasAlways keep emotions at the door and ensure that your team understands that biases can negatively impact decision-making. Self-serving bias often manifests itself in the making of excuses.

One common bias is overconfidence, so recognize that some members of your team will be naturally subject to it. You should watch out for it, because overconfidence inherently will tilt the scale toward thinking that exogenous shocks are more controllable than they really are.

The Buck Stops with YouAllowing excuses can harm proper development of your people and weaken your business. Uncontrollables will inevitably occur and, when they do, someone must take responsibility for them.

If you are a true leader, the buck will stop with you.A leader will never use uncontrollables as an

excuse for a negative variance, and likewise should not take credit for a positive one. If the fact that you did not put into practice the ideas outlined above contributes to a variance, that’s something that should only occur once in your career.

CFO Summary

• Effective leaders plan ahead in order to best mitigate the impact of uncontrollable factors.

• In a chaotic and volatile global economy, it is critical today to look at ranges of potential outcomes rather than rely on point estimates.

• Keeping biases such as overconfidence in check can help reduce the chances that unexpected variances will derail your plan.

CFO PUBLISHING 12


COMPENSATION CONUNDRUM:IS IT TIME TO ABOLISHSALES COMMISSIONS?

If salespeople don’t have the opportunity to earn commission, why would they sell?

I wish I had a dollar for every time an incredulous executive has asked me that

question.You would think the onus should be on the

defender of performance pay to present an argument. After all, receptionists answer the phone

when it rings, without getting incremental pay. Your controller does a good job of paying bills on time, without getting a per-check rebate. Even senior executives perform important tasks absent special incentives. (I’m assuming that no one is paying you to read this!)

Should salespeople differ from almost every other worker on the planet? The reason behind the

CFO PUBLISHING 13


obvious answer to that question (“No”) is simple: Absent the opportunity to earn a commission, salespeople will still sell because they are salespeople. (Just as receptionists answer the phone because they are receptionists.)

The “new” plan being proposed here, then, is not even new: It’s exactly the same plan used to compensate everyone else in the organization.

In the excellent best-seller “Drive: The Surprising Truth About What Motivates Us” (Riverhead Books, 2009), Daniel Pink presents a powerful case against performance pay. His conclusion — backed up by many social sciences experiments — is that external rewards retard the performance of knowledge workers. Such rewards have a positive effect only in situations where workers are performing mindless, repetitive tasks.

With these points in mind, commissions may be defensible in traditional sales environments — not because they motivate salespeople to sell, but because they motivate them to prospect. But that argument is moot with an internal, team-based sales approach that frees sales folks from the requirement to generate their own sales meetings.

When a significant component of salespeople’s pay is performance-based, management has formally abdicated its responsibility for sales. In so doing, management has telegraphed to salespeople that selling is optional! It is up to each individual salesperson to generate sales in the quantity of his or her choosing.

Calculating Salespeople’s SalariesThere are no surprises here either. As with all employees, there are two considerations:

Replacement cost (how much would you have to pay for another person with a comparable set of capabilities?)

Asking price (how much do you have to pay someone to ensure that the compensation plan is not a regular topic of conversation?)

It should go without saying that it would be foolish to propose that salespeople (or any team members) take a cut in pay when you transition to this new

model. Most of our fellow, silent revolutionaries shift their salespeople to a salary that’s equal to, or slightly greater than, their average total earnings over some prior period, often three years.

Both parties are getting a terrific deal here.Salespeople are receiving a not-insignificant pay

gain. Obviously, the potential to earn a certain amount of money is not worth nearly as much as the same figure, guaranteed.

Meanwhile, management is increasing the volume of effective work performed by each salesperson. In our experience, companies that have reengineered the sales function to a team approach, using coordinated scheduling and division of labor, have realized sales-productivity improvements that are worth far more than an incremental increase in salespeople’s compensation and the cost of a sales coordinator.

The transition to this reengineered environment can be difficult for sales managers. However, if the ones who have transitioned were to refer to a previously compiled list everything they thought they knew for sure about sales, almost every statement on that list would now be false.

Sources:“Minding Your Margins” Chris Schmidt, CFO.com, February 18, 2016. Copyright © 2016 CFO Publishing LLC. “‘Uncontrollables’ Are No Excuse for Missing Your Numbers,” Thomas E. Conine Jr., CFO.com, February 25, 2016. Copyright © 2016 Thomas E. Conine.“Companies Should Stop Paying Sales Commissions, ”Justin Roff-Marsh, CFO.com, February 12, 2016. Copyright © 2016 Justin Roff-Marsh.

CFO Summary

• With a commission-based approach to sales, finance executives have relinquished their responsibility for sales.

• Salespeople could potentially see a significant pay gain by eliminating commissions.

• A team approach, based on coordinated scheduling and a better division of labor, can boost sales productivity.

CONCLUSION: WHAT ARE YOU DOING TO IMPROVE SALES PERFORMANCE?

CFO PUBLISHING 14


As the role of the CFO continues to expand, many are seeking opportunities not only to control costs but improve the sales performance of their organizations. By

building strong relationships with their counterparts in sales and focusing on the data that matters, senior finance leaders become more than just they guys with the spreadsheets.

Today’s CFOs embrace these new responsibilities to move the business forward and shine a light on areas where their companies are performing well and identifying opportunities for growth and improvement.

Here are some takeaways for CFOs looking to give their companies an edge by building a clear path toward profitability:

•Finance executives are taking the lead in helping the sales and marketing teams identify the unique factors that drive profitability in their organizations. Knowledge and data, backed by a strong working relationship, are critical to success.

•While “uncontrollables” will always have some sway on the bottom line, knowing them ahead of time and learning how to lessen their impact can provide a competitive edge in an era where even incremental performance improvements are tough to achieve.

•Restructuring the sales teams’ compensation is on the radar of many CFOs as they look for performance-boosting strategies.

CFOs can unlock business performance by taking a holistic view of the company’s data and building strong relationships with business unit leaders to position their organizations for maximum growth.

spearheading profitability -...

Documents