Sales Pipelines: An Economic Early Warning Indicator?

Contributor: Nicholas Read
Posted: January 14, 2018

sales pipeline

A sharp decline in global sales effectiveness could portend the start of another downward economic cycle, reports sales guru 

The view from the sales manager’s desk is deeply troubling.

If general company policy is to stop hiring in a tough market, sales managers are bound by the same rules and told to make do with the people they have or lose the headcount. 

This policy flies in the face of every assembled statistic that shows a sales team that is pruned yet also replenished annually remains more competitive than those that hold on to the dead wood.

Yet even when a sales manager is lucky enough to be granted the right to fire and hire, the average time for a new b2b salesperson to become profitable is almost eight months. This means where sales reps are given a 3-6 month probation to prove their worth, managers see those trees axed just as they’re about to bear fruit.

Often the wrong person can be hired into an open sales role. There are several reasons. Cronyism, lack of inspection, or being under time pressure to fill the slot rate high. Then there’s the coup of departments managing to transfer their own problem children to ‘try their hand at selling’, which amounts to a high-risk game of musical chairs.

Whatever the cause, a poor recruitment choice will cost an organization 1.8 times the direct salary of the non-performing salesperson. This does not include the ancillary costs of training, recruitment, and the drain on the manager’s availability, nor the cost of lost opportunities as a poor seller burns their territory. Some analysts project the total cost of a bad hire is closer to 3X a role’s basic salary.

When an organization makes a good hiring decision, but the talent leaves in the first year, more than $1 million in enterprise value walks out the door with them. Retention has never been more important, but only if it’s retention of the right people. 

This is why more companies are adopting psychology-grade competency and behavioral assessments as part of the hiring process: it’s now possible to know if a candidate is a 10% fit or a 90% fit to any product or service sales role. 

The advances in this field are nothing short of breathtaking in their accuracy, leaving no excuses for talent not working out. Yet more than 86% of companies still cling to the “I’ll know talent when I see it” approach to sales recruiting.  

The numbers speak for themselves on how well that’s working. Over the past eight years, performance metrics in the average sales organization worldwide have plummeted. This doesn’t just affect the end of quarter or fiscal year-end numbers; this collapse is endemic at all stages of the sales process.

Is this new? No, we’ve seen this before—in the years immediately preceding the 2008 global financial crisis. And it appears to be happening again.

Back in 2006 a retrospective analysis of sales effectiveness measures showed the number of calls converting into leads had been dropping steadily since 2004.

So too were the number of leads converting into first calls or meetings, meetings to presentations, presentations to proposals, and proposals to contracts. Across the end-to-end process, a 97% reduction in effectiveness was recorded. 

The salesforces of the world didn’t know it at the time, but the belt-tightening they were fighting in their pipelines was a canary in the economic coalmine, a bellwether of things to come across global markets.

Since 2008, sales performance was restored to a modicum of health. But the metrics are starting to backtrack again. 

Buying decisions of large enterprise service or sales solutions now take almost six months to go from “Hi” to “Buy”. Thirty-two percent of sales leaders expect this to lengthen as risk-averse decision-makers take more purchasing decisions by committee. 

As sales thinker Neil Rackham commented, “When the economy goes down, the decisions go up”. It may be sage and timely advice.

Another problem area is that the average salesperson spends only one-third of their available time actually selling to customers. The number of calls or meetings needed to move “from contact to contract” is increasing, with 70% of companies reporting that 3 to 9 well-prepared presentations are required to secure major deals. The other 70% of selling time is spent on internal administration and meetings. 

As one software president commented: “Using only 30% of our time to sell is like sending salespeople out on January 1 and calling them back on April 20, never to go out again. We pay them to do more non-selling than selling. What’s wrong with this picture?”

Solving the problem requires a reboot of interdependencies across a wide gamut of sales, marketing, support, technology and compensation issues—a field rarely owned by a single executive and therefore difficult to pull off.

The usual remedy is to raise targets and wring more effort out of the salesforce. This might have worked in the past. It won’t work anymore. Here’s why:

A national workplace study conducted across 12,000 executives by a major healthcare brand produced some shocking but irrefutable findings: 

  • • More than 62% of employees feel burned out. 
  • • 57% report low morale. 
  • • 63% are irritated and stressed.
  • • 56% are exercising less,  spending more time at their desk. 
  • • 69% report a serious erosion of their work/life balance, leading to absenteeism, a malady that’s easily obscured by the fact that salespeople don’t always work from the office. 
  • • Most critically, 78% fear they personally lack the capacity to take on any new challenge in the year ahead. 

Consider this last statistic. Before you even hand your salespeople their target for the year, nearly 80% are telling themselves they can’t do it, whatever the number is. 

A soon-to-be-published book, “The Salesperson’s Secret Code,” by Ian Mills, Mark Ridley and Ben Laker (LID Publishing, 2017), notes that ‘working harder’ is a trait of the bottom five percent of salespeople doomed to remain tactical and reactive, with the belief that the more calls they make, the luckier they’ll get. Perhaps they’re right: even a blind squirrel finds a nut now and then.

Faced with higher team quotas, emotionally detached sellers, better-informed buyers and broken internal processes, sales managers must pick the targets of their attention carefully. They can’t boil the ocean.

Some devolve to ‘salesperson behavior’, riding shotgun on every large deal, unwilling to leave anything to chance. Some paint a new veneer of sales training over last year’s varnish.

Some performance-manage the life out of their weakest salespeople, making them the team’s sacrificial lambs to explain underperformance. Some round on Marketing and the Inside Sales call centre for not sending better quality leads.

Despite investment in CRM systems, less than 44% of sales opportunities ranked at higher than 75% probability on the forecast are actually closed on time or on target. It is important to note that this isn’t the entire pipeline of opportunities, but those with an assigned revenue value, a close date, and a commit from the salesperson as being closable.

Of these, 30% result in a loss and 21% result in ‘no decision’. The last statistic has been trending upwards in recent years, either the result of insufficient qualification upfront, or inadequate justification at the close.

A related finding is that while it’s taking longer on average to close large deals (146 days) compared to smaller less complex sales (84 days), it takes longer still to report the losses (231 days). 

This indicates that salespeople are keeping deals on the forecast longer than the date of the customer’s decision to buy from a competitor or to not buy at all. In some cases this is because the customer hasn’t disclosed their decision, leaving salespeople to chase them for answers in the hope the deal might be resurrected. 

Sometimes it’s because salespeople record a new “contact” as a new “opportunity,” even when there is no formal project on the horizon. At other times the anomaly is from salespeople inflating their pipelines to avoid prospecting duty, or by pursuing opportunities incapable of being closed. 

When sales managers are asked if they received any formal training on how their new role is being a salesperson, 92% disclose their job promotion included an orientation on their reporting and HR responsibilities, yet nothing on how to plan territories, select winners, design compensation plans, or provide coaching and leadership. 

Most new managers take what they knew as a salesperson, mimic what they saw their old manager do before them, adapt as needed and hope for the best.

Improvements in sales management will readily yield high returns. The Sales Executive Council reports that when a sales manager invests a minimum of three hours per month coaching their salespeople, the number who hit their end of year target jumps from an average of 46% to 107%.  But despite having the science, few follow it.

Implications for Marketing

Marketing managers know growth is a critical issue. They believe more than half of new growth will come from mining existing clients, in existing markets, with existing products (up-selling).

They believe the balance of growth will come from selling new products to existing clients (cross-selling), winning new clients in existing markets (penetration), and winning new clients in new markets (evangelizing).

They also know they are expected to raise the quality and volume of demand creation using more effective pre-qualification and prioritization before leads are handed over as “sales ready.”

There is an expectation that if the quality of the lead is improved as a contact capable of making a decision, concept-educated about the problem the seller solves, and ready to engage in a real discussion, the sales team should be able to avoid discounting and achieve a higher contact-to-contract conversion.

Given this appreciation of their role, we asked how they have carved up their budget. Only 16% of marketers are allocating >30% of funding to demand creation. By contrast, 47% plan to allocate >30% on brand awareness. Of the funds earmarked for new sales collateral (slideware, brochures, etc) almost 60% will produce brand awareness, product descriptions and corporate overviews.

When most colleges teach marketing, the theory applied is based on consumer pull marketing which is about drawing customers from Product A to buy Product B. It’s about driving preference. Of course this only works when buyers know and trust your brand, which is why most of the budget is spent trying to woo people who already buy products or services similar to yours away from your competition.

It also serves to remind existing customers of their reasons for staying loyal to you. In short, it does little to grow a bigger pie; it just redistributes the slices.

Research with executive buyers reveals that when they’re in the market for solutions and use a search engine to poll their options, they typically key-in words in terms of the problem they want answers to, and rarely the jargon suppliers use to describe their products.

This creates a major disconnect with the mandate for demand creation, and reveals a clue as to why sales leads are commonly described as anemic. Most marketing departments simply do not have a stream for creating new demand where it didn’t exist before. One reason is they’re not taught it. The other is that it’s difficult to do. 

Sellers have the option to wait for Marketing to adapt, or to apply their own discretionary budgets to build territory-based lead engines for each salesperson, carefully filtering lists of new names so they fit a “prospect’s ideal profile” (PIP), then marketing to these with the intent of waking them up to the existence of problems in their company which the seller can solve.

Assigning a minimum score for the required level of interaction, scoring their fit against the PIP, and granting the leads time to mature and become “concept educated”, are key steps for producing sales-ready leads. In the absence of thought leadership from Marketing departments, we expect to see a rise in sales skunkworks running their own “problem-based campaigns” for the foreseeable future. 

One sales director applying this very approach explained how they started with their revenue target, calculated the average sale value, then worked backwards to learn how many closed deals they needed every month to achieve their quota. They then examined their historical sales funnel to learn (even if by rule-of-thumb) how many days it takes for opportunities to move from each stage of the sale, from contact to contract. 

Fast, average and slow velocities, and the distribution of deals into each group is the result of this analysis. Finally, they identified how many direct mailouts or emails led to a clickthrough, how many of these turned into phone calls, to meetings, to proposals, to contracts, to deliveries. Knowing how many statistically fail to progress from one step to the next is deemed important for keeping the pipeline honest. 

"We want to keep it real,” we were told, “and you can’t do that when you create pressure to keep deals in the funnel to make your pipeline look good for Corporate. The funnel is really a sieve. Spotting the stalled and dead leads so you don’t waste resource on them is the only realistic approach. So we set targets and rewarded people for culling dead leads instead of keeping them. Of course you need a steady supply coming in the top of the funnel for this to make sense, but where this is absent, you get reps holding on to every lead to create the illusion of industry.” 

With the different dimensions of the funnel modeled, the director was able to calculate how many new names to add to the marketing hopper monthly, in the knowledge that some would travel fast, others slow; some would progress all the way to a deal, others would leak at each stage. Working out these metrics and managing to them allows companies to set revenue targets then build the demand engine to deliver. 

Because the approach is an ongoing, rhythmic process, pipelines don’t get plundered at the end of each quarter, and each year gets stocked with adequate leads and close rates because it’s an all-the-time process instead of a spurt of effort at the start of each quarter.

The director continues: "I know it will take an average 128 days for a new name that never heard of us to be ready for a phone call. From there it takes 84 days for a sale to be made and another 36 days before we start the work.

I know that every month I need to add 1,800 new names into the top of my team’s funnel to account for leakage the previous month. I know 40 times more opportunities will leak out than will go to a sale on the first pass. 

"When we manage this like clockwork, we hit our number, and next year is already primed with sales at each stage of the funnel. Once we systematized it, we could set revenue goals three years into the future and work back to the present day to see what our growth plan really looks like. This includes knowing when we need to bring on new staff and investment to support the growth.

With the mechanics of demand solved, we’re much more in control, and our focus turns to tuning the process, with the ability to model the cause and effect of certain choices before we make them. There’s really no excuse for guesswork when this type of approach is possible using a little logic and some simple tools.”

The results can be jarring. Just a 5% improvement in effectiveness at each stage of the sales cycle can double a company’s revenue. Placing the leads that leak from each stage into a nurturing program can drive order-of-magnitude gains.

Implications for Executives

76% of CEOs say they plan to improve their organization’s sales performance effectiveness in 2017. But 63% cannot define the steps and dependencies of their existing sales process, and of the remaining 37%, a little more than half had confused sales training or CRM with the sales process itself, and so learned they didn’t have a process in place at all.

These statistics confirm that while executives are aware the old world is gone and sales performance needs a reboot, the questions of what and how have not been thought through with anywhere near the level of rigor required. Part of the problem stems from too many junior or mid-level staff with limited sales acumen being placed in roles where they make decisions about the tools, training and steps that salespeople will use on the job. 

A final source is that too often, companies abdicate the sovereignty they deserve to map their own sales process, because they hand it over to a piece of software or training vendor they’re buying from, whose methodology or tool becomes a defacto business process in the absence of the company designing one itself. 

However, there is hope. Evidence exists that a paradigm shift is underway on what constitutes competitive advantage, with clear implications for the sales process.

Until recently, competitive advantage was thought of in terms of Porter’s model; an amalgam of innovation, labor, product, pricing, routes to market and barriers to entry. In other words, the ‘what'. Today, it’s shifting to the ‘how', and with that CEOs are more interested in having business processes transparent enough to be inspected, improved and sustained. Top-line growth is the new frontier for value creation.

Understanding the end-to-end sales process allows board executives to cut through the veil of mystique, hearsay and false assumptions that too often shroud the sales department, and obtain clarity about what is working and what is not. 

Armed with these insights, executives can know which levers to pull, in which direction, and which activities to discard altogether. But they can only do so when they map sales as a mission critical business process and not something that only happens below decks.

BIBLIOGRAPHY

[1] “Selling to the C-Suite” by Read & Bistritz, (McGraw-Hill, 2009)

[2] “Human Performance Index” by Johnson & Johnson (Wellness & Prevention Inc, 2010)

[3] “Building Solutions-Ready Sales Managers”. (Sales Executive Council, 2005)