The Dialogue That Rarely Happens
Frank V. Cespedes
Originally published in Top Sales magazine (February, 2016)
In any organization, influence is bestowed as well as earned. It requires relevant expertise and results, but also being recognized by others as adding value. Sales managers are no exception to the rule. In many firms, Sales is still treated as a mysterious black box—essential for meeting quarterly revenue targets, but hermetically sealed off from other functions as a tactical tool that’s rarely part of strategy formulation. Moreover, many Sales leaders like it that way. But those days are passing. Consider what’s happening between Finance and Sales.
In the past two decades in U.S. companies, the number of executives reporting to the CEO has doubled, largely driven by more functional specialists (CIO, CMO, etc.), not general managers responsible for integrating activities across functions. Business requires more specialist knowledge. Simultaneously, Fortune-500 and S&P-500 companies with COOs have decreased to about 35%. COOs once outnumbered CFOs in those firms, but the proportions have flipped.
Finance now plays a prominent role in strategic planning and in evaluating sales’ execution of strategy. A function called Financial Planning and Analysis (FP&A) evaluates sales effectiveness in companies ranging from Dunkin Brands Group to internet domain seller GoDaddy. At Dunkin, 36 people work on FP&A projects involving customer acquisition and retention, and the CFO (who ran FP&A before becoming CFO) notes that “We stick our hands in absolutely everything”; at GoDaddy, FP&A focuses on analyzing performance metrics and reallocating marketing and sales spending. The function is growing. The Association for Financial Professionals offers credentialing programs in FP&A and thousands have enrolled. Similarly, the burgeoning number of Sales Operations groups—charged with applying analytics to sales processes and selling expenses–are often staffed by people with Finance backgrounds.
How well prepared are Sales leaders for this increased scrutiny? In my experience, most understand the funnel activities that currently drive the top-line in their company. But they rarely understand other financial components of selling beyond sales volume. For example:
Efficiency (doing things right) versus Effectiveness (doing the right things). Depending upon a firm’s strategy, some sales forces require cost-efficiency measures while others require effectiveness metrics. A simple expense-to-revenue ratio, for instance, can shed light on the relative cost efficiency of the current sales process but not its cost effectiveness, which is a more complex relationship between selling expenses, revenues, margins, and customers acquired through one or another means of organizing sales efforts.
Price versus Cost-to-Serve. Profit is the difference between the price customers pay and the seller’s cost to serve customers, which can vary dramatically. Some customers require more sales calls; some buy in large, production-efficient order quantities, while others may buy more in total volume but with many just-in-time orders; customers differ in their product customization and post-sale service requirements. Most sales compensation plans (about 70%, according to surveys) bonus reps solely on volume, so the message is that any customer is a good customer. But differences in cost-to-serve are important to understand and manage if, like Finance, you take seriously the notion of positive returns on invested capital. When Sales leaders ignore this and simply chase volume, their people are typically driven by competing price proposals, resources are not allocated optimally, and the firm is ultimately at the mercy of competitors who can manage their true costs.
Conversely, while Finance rightly demands value-creation plans from Sales leaders, many in Finance are often unaware how sales decisions affect enterprise value. Hence, many FP&A professionals are perceived as “financial bureaucrats” who only focus on missed budget projections. There are basically four ways to create value for shareholders and daily sales activities are crucial to each:
Invest in projects that earn more than their cost of capital. Most projects are driven by revenue-seeking activities with customers. Hence, customer selection criteria and sales call patterns materially impact which projects the firm invests in and its capital expenditures.
Increase profits from existing capital investments. Here, key determinants are the interactions that ensue once a sale has been made and that accrete costs, time, and asset utilization patterns in the firm.
Reduce assets devoted to activities that earn less than their cost of capital. This requires understanding cost-to-serve different customer groups and how performance metrics affect selling behaviors and deals closed.
Reduce the firm’s cost of capital. Financing needs are mainly driven by the cash on hand and the working capital required for conducting and growing the business. Most often, the biggest driver of cash-out and cash-in is the selling cycle. Accounts payables are accumulated during selling, and accounts receivables are largely determined by what’s sold, how fast, and at what price. That’s why increasing close rates and accelerating selling cycles is a strategic and financial issue, not only a sales task.
How well prepared are Finance leaders for this scrutiny? How many understand how compensation plans, territory design, metrics, and other factors affect selling? Without that understanding, reallocating Sales spending becomes either an academic exercise or an unwitting impediment to the use of assets that do remain essential to profitable selling.
Changes in companies are altering what it means to be seen as an effective Sales leader. It requires more informed dialogue with Finance, because there is no such thing as effective selling if it’s not connected to business goals and value creation. In turn, effective leaders can transform Sales into what it should always be: a core agent of strategy, not only a vehicle for a given selling methodology.
Frank Cespedes teaches at Harvard Business School and is the author of Aligning Strategy and Sales: The Choices, Systems, and Behaviors that Drive Effective Selling (Harvard Business Review Press).
 Julie Wolf, “The Flattened Firm: Not as Advertised,” California Management Review (2012) and Jason Karalan, The Chief Financial Officer (New York: Public Affairs Books, 2014).
 Alix Stuart, “Metrics Sell Doughnuts and More,” The Wall Street Journal (December 21, 2015).