Business : Sales outsourcing - commission only engagement issues

Overview

This paper is not aboutSelling People Limited as an organisation. However, we have often beenasked about the possibility for undertaking commission only sales engagements for our clients. In many cases sales outsourcing agencies do not undertake commission only projects, preferring the availability of some form of monthly retainer.
This whitepaper was written in response to these requests, and to discuss the various thoughts that a vendor and potential sales outsourced supplier may have, enabling a constructive discussion to take place.
The paper relates to 'business to business' situations only, and is aimed mainly at technology companies selling software and/or services, the issues raised being applicable to either scenario.
We believe there are many issues and practical problems with commission only sales and these are discussed along with some potential solutions.
Background

Many start up and small organisations, or new divisions of existing larger organisations with new products and service offerings, are starting to consider sales outsourcing as an option to build their sales functions.
Existing business, built on relationships and referrals, faces a new dynamic when a professional sales strategy is employed, and the sales activity becomes outbound.
 
In many industries the outsourcing concept is not only familiar but also very popular. ConsiderIT services and HR, to name but two.
 
In these cases the main drivers are cost reduction. However, sales outsourcing it is more aboutincreasing revenue and improving practices, and providing a better more flexible and focussed solution.
 
Surprisingly, few organisations have so far considered outsourcing their sales function. So what does a sales outsourcing solution look like? There are several different outsourcing models available, the basic options and services provided are described below
 
Sales - the key aspect of the solution is of course the sales resource. For relatively small value sales, less than £1500, probably telesales, otherwise field sales executives taking qualified leads and closing them down, and signing up additional business. Outsourcing provides much flexibility, rather than one full time resource; a solution may use two part time resources. Such could be split by territory, geography, product or industry vertical, thus providing a more focussed solution.
Lead generation - all organisations need good quality leads and almost all sales outsourcing models include a lead generation component. Many sales people are poor at generating leads; in an outsourced solution this function is often undertaken by different people to avoid the feast and famine regime so typical in many organisations. This activity could typically be an e-marketing programme with telemarketing. The left had side of the diagram above shows aspects of marketing that are specifically used for lead generation activities.
 
Sales management - once a small team of people is in place then some management time and activity will be needed. Even where provided by the sales resource, the functions of management exist in any engagement; forecasting, reviews, managing the pipeline etc.
 
Facilities - typically the outsource provider will bring experience and facilities, these may include: offices, CRM / contact management systems - usually web based, phone and reception services, PCs, networks etc.
Examples of sales outsourcing in other industries are given in this paper, for further details concerning outsourcing; reference the whitepaper listed in the references section at the end of this document.
Direct or Indirect vs Sales Outsourcing
When organisations are deciding on a 'go to market' strategy, there are usually two main choices to make. Do you sell direct to end users and customers or develop a sales channel of distributors and resellers?
Either option will need a sales force of some type, even if it just to 'set up and prime the pump'in the indirect approach.
 
Depending on the vendor organisation's attitude to risk, and availabilityof fixed and working capital, then knowledge of and access to chosen markets,will determine which approach an organisation prefers.
 
The use of a distributor will typically gain access to the vendor of existing customers, new markets and domain knowledge, or all of these.
 
However, the problem with any distributor is that the product marketed by that vendor often comes secondary to selling its own services, or in the case of a VAR or reseller, part of a solution involving several products. Systems integrators can also act as a channel, though will not usually be tied to a particular vendor, and may recommend several alternative solutions to clients.
 
For these reasons many vendors only use the channel when they cannot afford the investment, or when specific domain or geographic knowledge, such as when setting up overseas is required. The vendor may also reserve an option to buy out the distributor at some future point when the business is established.
 
If you are really looking for a distributor then you have a different value proposition to that sought by a sales outsourcer, and must be careful not to be confused by the similarities between the fundamentally different approaches. Sales outsourcing is, in our view, more closely related to direct sales than a distribution model. Sales outsourcing can be used for both models though, and is an alternative way of establishing your chosen distribution or go to market method.
Forms of sales outsourcing
A sales outsourcing solution is in effect your own dedicated sales force, whether it is a direct orindirect sales model you wish to follow. It is however, managed on a day to day basis by a third party.
 
So how does sales outsourcing compare to the self managed/in-house direct and indirect sales approaches.
 
In most cases an outsourced solution sits mid way between the direct and indirect models. However the differences depend on the type of charging arrangement entered into withthe outsourcing vendor.
 
There are three main types of sales outsourcing contract engagement. All of them should provide a rapid, flexible and responsive solution, with low upfront costs:
 
Time and materialsbasis - where the costs of the outsourcer are passed on, plus a margin, to the vendor.Full details of all costs are detailed; the contract is very transparent and would normally have a termination or variation clause period of only two to four weeks. Commission is paid but only at the rate at which a sales executive could earn - usually 5-10 percent in software. This modeof operation is very relevant in a start-up, or test marketing phase, where there is no track record of sales success provided by the vendor.
 
Base + commission - is essentially a variation on time and materials, but the sales fees charged are costs less a margin of typically 20-30%. Therefore the outsourcer will only make a profit if product is sold and commission/margin shared between the vendor and outsourcer. Set up costs would normally be charged for.
 
Commission only hasno external ongoing fixed costs to the vendor, though there could be, and usually is, a negotiated set up cost, particularly in new markets or with new products. When sales are made a relatively high commission (20-50%) is paid to the outsourcer, similar to the rates paid for a distributor. This will provide the lowest profit to the vendor as more commission / margin is being paid out.
 
Examples

In other industries, such as financial services and pharmaceuticals, the commission only model is well established. However, the key features of these markets are:
Widespread geographic territories mainly selling to individuals and small corporates.
Well established brand names, with large corporate marketing expenditure, under which independent sales agents can operate.
An example would be Citi-Financial, now defunct. This was part of the Lincoln Financial Group, a huge US financial services conglomerate. Whilst very successful for a period of time, thewhole industry was known for its sharp practices and miss selling, particularly of endowments and pensions.
 
In manufacturing markets, in certain countries such as the USA, it is a well proven model with the use of manufacturers' representatives or agents. This model has also been used in the UK.
There is a web site specialising n linking products and UK sales people who want to operate on commission only sales:
http://www.sales-agents.com/
However, if you look for technology products under the heading:Business Advising, Consulting, Software
You will find there are zero companies selling via this method (as of 1/6/06)
Does it work in high technology?
We are not 100% sure but we are not aware of any successful implementations.
We have to look quite hard to find examples of commission only sales working in the IT sector.
An example of one such organisation is given below; this vendor had an interesting approach:
They were a UK ERP vendor and recruited a commission only sales force who were then formally trained and provided with marketing collateral. However to incentivise the sales force and assist them, the vendor undertook a comprehensive lead generation programme based around seminars.
The company invested in marketing and lead generation support to run a monthly series of seminars to which between 15 and 25 prospects attended.
The sales executives attended these events, and were given an allocated list of names to speak to at the event and follow up.
This approach ensured that each sales executive was given a certain number of leads to keep their activity levels up. This is relevant as many sales executives are indeed poor at lead generation.
These examples highlight the differences between IT offerings and commission only 'successes', which are typified by a short sales cycle and relatively simple product offering. This compares with IT which often has solutions with long and complex sales cycles, sophisticated product offerings, with multiple vendors.
Possible solutions in high technology
Continued.......
To download this white paper in full please visit the Selling People website here and follow the white paper link towards the bottom of the page.
Alternatively contact Julian Poulter at 01494 790855 or email: enquiries@sellingpeople.biz