When we work for a company, we always do our due diligence upfront to pinpoint a specific improvement target for the project. Well, almost always. Sometimes we estimate the potential improvement based on our experience, and to be extra cautious we use a range, rather than a specific number. We peg the expected target number in the middle of the range. This is usually a mistake.
The problem with ranges is that there is often a strong gravitational force pulling the objectives of the initiative towards the lower end of the range. The range itself suggests that anything within the range is OK, otherwise the range would be different. Psychologically, this results in the midpoint becoming the effective maximum, and the "negotiated" objective falling somewhere between the midpoint and the low end of the range. This is really not surprising, and it’s the same phenomenon that plagues budgets every year. Despite the financial incentives that are sometimes introduced to encourage people to maximize the "reach," when it comes to performance improvement it's simply not in the best interests of managers to reach too far. From the perspective of the manager tasked with getting the results, it's a good idea to manage expectations, and over-delivering is always viewed in a better light than under-delivering. As well, in this world of continuous improvement performance, gains are expected each and every year, so why wouldn't you hedge? If you throw too much into this year, it will probably just mean that next year's "reach" will disappoint.
All of which is why giving ranges is a bad idea. It's better to spend time upfront and properly assess the true value of opportunity that exists within a process or function, and then target a specific percentage of that opportunity. This provides logic and clarity in terms of what the requirement should be. Over time, the actual realized success rate of the improvement project will establish what the right percentage should be. If, for some reason, you have to use a range, it's better to keep it fairly narrow.
Sometimes we do a study that we call the "Span of Control" analysis, where we look at how many subordinates report directly to each manager in an organization. It's a more difficult study than it sounds, because the way organizational charts are drawn is not always how they really are. Reporting lines are sometimes blurry and titles can be misleading (e.g., some managers aren't really managers). The numbers alone don’t reveal the full story, but the study does help one learn a lot about the organization.
The question of how many managers an organization needs is a by-product of how many people each manager should have reporting to them. This is an important decision because it ultimately dictates the number of managers, the levels of management, number of divisions, business units and so on. Every manager, in turn, creates additional incremental costs (e.g., travel, meetings, equipment, space, reports, etc.). All these things heavily influence the fixed overhead cost base. During a recession, there is usually a general thinning of management positions (through combining departments and delayering), but this is not always a good business decision. We've seen many cases where companies stripped out managers and supervisors only to see productivity subsequently suffer as a result.
The number of managers that an organization needs is a function of the management approach and style of the organization. As such, it can vary by industry – and even by company within the industry. Many organizations use span-of-control rules of thumb to determine how many managers they need, but this approach can become ineffective as job functions and technologies change. The right number should be analytically determined, similar to any situation where you correlate activity and time. Managers do specific "management" tasks (e.g., plan, train, administrate, review) as well as general in-process work. What an organization wants its managers to do determines how many managers they actually need.
Many industries experience "shoulder periods." These are the time periods leading up to and away from the peak volumes. Figuring out how to manage these periods can be a difficult task for managers, but it’s also very important for realizing performance improvement gains.
When managers or performance-improvement teams try to "streamline" resource requirements (e.g., labor, equipment, space, etc.), they do this by figuring out what they have to do (activities); how much time it takes (time standard); and how often they have to do it (volume). Usually the biggest variable is volume. If the business has any kind of seasonality or variability, which of course many do, an average volume based on the total year could be too high one-half the time, and too low the other half. So companies build resource and production plans in order to forecast volume and determine their resource needs as they operate throughout the year.
Variability is tough to manage. If your peak volumes are in October and November, when do you add staff and when do you reduce staff? Or can you do this at all? What if the skills required are not easy to find? If you ignore the variability and carry a fixed staffing level, your productivity will be high for two months and naturally drop during the other 10 months. Will attrition take care of any of this imbalance? If you cut hours or lay off staff, will they go to competitors or get other jobs? What if you can't find enough qualified people when you need them and then miss your volumes and damage your service reputation? These are all very difficult questions that managers have to answer.
We've used "months" as a peak time period, but to make this issue even more complicated many functional areas have shoulder periods throughout the month (e.g., accounting), throughout the week (e.g., medical labs), or even throughout the day (e.g., restaurants). If you don't manage these shoulder periods carefully, it's very easy to see the productivity gained during peak periods offset by the productivity lost at other times.
Over the years, one of the things we've noticed is that each new manager tends to create new reports, for whatever purpose they have at the time. Old reports are not eliminated, so over time there are a mountain of available reports – and a mountain of performance indicators -- in the system. But like a software program with too many features, this is not necessarily helpful. Sometimes it's just confusing.
One of the hardest things about management is knowing what you should be focusing on. What specific key indicators are most important to ensure that your area of responsibility is achieving its core objectives? As consultants, we are sometimes part of the problem: we can become enamored with "drilling down" into issues and have a tendency to build too many metrics into operating reports. This can overwhelm management and fragment their focus, rather than help concentrate it.
We generally believe that people are most effective when they focus on just three things. When looking at reports and key performance indicators, use this rule as a starting point. As a manager, if there were only three indicators that you could focus on, what would they be? Culling a lengthy list of indicators down to your critical three is not only very illuminating, it can also help you figure out what reports you need or don't need.
Tell us your three indicators in the comments section of our blog!
Growing sales volume with existing accounts is sometimes referred to as "increasing your share of wallet," but it's actually not a very good description -- or even objective. We've found that companies are generally most successful increasing sales volume with existing accounts when those accounts are themselves growing, and they manage to maintain a share of that wallet.
Many companies are not great at increasing the "share of wallet" for three main reasons. The first reason is that this means taking business directly away from competitors. The harsh truth is that companies tend to think that their products’ (or service’s) advantages are more distinct than their customers do. The unfortunate result is that stealing business away from competitors often leads to lowering prices, which in turn damages profitability. The second reason is that customers often intentionally divide their purchases between alternate sources to optimize their leverage and reduce risk. The third reason is that sometimes companies try to increase their "share of wallet" by broadening their offerings, but this can confuse their customer. Unless your business is lucky enough to be some type of monopoly or oligopoly, where customers have little choice (e.g., a telecommunications company), it's difficult to get customers to believe you can be a leading provider in different, distinct categories. In the management consulting industry, for example, if you are known for operational performance improvement work, it's hard to sell strategy or IT consulting, even if you are capable of delivering it.
Despite the hurdles, the concept of growing sales volumes with existing customers is appealing because it's "friendly terrain." Your customers already know you and presumably like you. Salespeople usually prefer calling and visiting existing customers for the same reasons. To gain share from existing customers, you need very good intelligence about their requirements (e.g., a specific "inventory" of their purchases that you don't -- but could -- get), and a clear rationale for why your product or service adds value to their business.
It's possible to gain share of your customers’ wallets without just lowering your prices to "buy" the volume, but often it's a better bet to figure out which of your customers are growing -- and make sure you look after them well.
Pricing is the most powerful way to improve profit without the need for large-scale culture change. It is often said that a 1% improvement in price is worth a 10% improvement in productivity. Given that there is so much effort involved in trying to raise productivity by 10%, it's somewhat surprising that price isn't the first thing performance improvement groups focus on. But like the problem that many start-ups experience when they use similar math -- "All we need to be profitable is a 1% market share" -- getting that 1% gain can be very difficult.
Pricing is often something of a black art in many organizations. Many apply some kind of cost-plus-logic to determine their prices, but even the underlying costing methodology is a little cryptic (e.g., what costs are allocated). Many other companies set their prices based on what they believe the market can bear or based on what their competitors are charging. Actual negotiated pricing is often highly variable and can be significantly influenced by the size of the customer, what competitors do in bid situations, what procurement departments demand, the size and scale of the sale, future opportunities, etc. Prices are also influenced by personal relationships and even sales compensation plans. All of these factors result in a range in which prices for a certain product or service can vary.
Much like waste in a process, the opportunity in pricing lies in the variation. Raising prices is notoriously hard in many industries, so the key to remember is that the profit lever is average price. So focus on what we call "price optimization." The objective is to increase the average price, not to raise prices. If you can reduce any of your discounting, you can reduce the variation and improve the average price, all other things being equal.
The key question, then, is to ask and to study: Who actually controls pricing? Often, pricing control is distributed throughout an organization, and various people are allowed to discount from a benchmark. Identify where prices are discounted and try to understand what is driving that behavior. If you can tighten the parameters around who has the authority and how much can be discounted, you can reduce price variation and improve your average price. The more complex part for a project-based initiative is that the consequences are often felt at an aggregate level fairly high up in the organization, well after the price has been discounted. It's difficult to manage this gap between action and consequence.
There are only two basic ways to increase your sales volumes: find more customers and/or sell more to existing customers. There is a little more complexity when you dig into the numbers (e.g., market growth rate, customer churn, etc.), but they are basically the two ways to grow volume.
Therefore sales organizations generally require two types of salespeople, sometimes referred to as farmers and hunters. Farmers service existing accounts, doing their best to maintain or grow the base volume of business, whereas hunters have to find and sell new accounts.
Many sales initiatives are designed to increase volumes but, in practice, whether or not you are trying to find new customers or increase volumes with existing customers makes a big difference in the project approach. It's also worth noting that not many people are both farmers and hunters. They each have very different social styles, and trying to turn farmers into hunters (or vice versa) is usually not a recipe for success.
If you need to win new accounts, the key lever to focus on is lead generation. Where and how do you find the "Glengarry leads”? For those who haven’t seen the movie "Glengarry Glen Ross," these are the leads every salesperson wants, the top-prospect accounts. Many sales- improvement initiatives focus their energy on increasing the productivity of sales reps (increasing their calls per day for example), but this is not overly helpful for finding new accounts; it's actually better for the farming side of the business. We also often see a focus on the later stages of the funnel (e.g., proposal writing, handling objections, closing, etc.). All of these are important, but they tend to get attention because they are more tangible and immediate. The real leverage comes from the top end of the funnel. How can you secure quality leads and make sure they get into the hands of your best hunters?
The best way to grow new accounts is to make sure that your organization has a very clearly defined lead-generation process and to make sure those leads are carefully and deliberately managed through the sales funnel. The added benefit of this approach is that it’s also the best way to increase the productivity of your hunters (i.e., fill their schedule with quality leads). Growing volume with existing accounts requires a different focus, which we look at in the next Observation.
How to improve sales performance is a challenge for most businesses. Companies try many things to improve the average selling skills of their organization. They try training programs, special incentives, head hunters, one-on-one coaching, and sophisticated CRM systems. But year in and year out, some people just sell more than others.
Great salespeople are often difficult to find. They have certain intangibles that make it hard for them -- and hard for a manager -- to decipher what it actually is that makes them so good.
In the next few Observations, we'll share some ideas about a few things that organizations can do to improve sales. The first area we will examine is the actual sales interaction: what salespeople say or do that helps them be more successful. As a manager, how do you identify and replicate the subtle things that successful salespeople do? One useful approach is to identify your best and your worst performers, study what they do, and then look for patterns, gaps and variances.
We did this when working for a well-known retail shoe store that targeted mostly male business professionals. We first looked at the data to try to determine who the most successful salespeople were. Pure sales totals weren’t necessarily the single best indicator, because there were fairly large variances in traffic volumes, due to the "attractiveness" of various locations. So we looked a little closer to see who had the best conversion rates, i.e., the percentage of people who entered the store and then the percentage who actually bought shoes. This was not an easy task, in this case, because there was no clean "traffic" number available.
Once we identified the most successful and the least successful salespeople, we observed them closely to see if there were any tangible differences in their interaction with shoppers. It turns out there were many, in terms of when they approached a shopper, what they said, how they described shoes and what they got the customer to do. The correlation we were able to identify was an interesting one, although it sounds more obvious in hindsight. The most successful salespeople convinced shoppers to sit down and try on a pair of shoes. The "investment" of physically trying on a pair of shoes seemed to make people want to complete the transaction. This may be partly explained, in this case, by the time-oriented nature of many business professionals and their general dislike of the entire shoe-shopping process. Once they had committed the time and energy to try on shoes, they wanted to complete the process and move on.
This is a powerful insight because it gives you something to focus your training and skill development on. The real skill required in this particular environment was the salesperson's ability to convince someone to invest their time. You will still have some people who are more persuasive than others, but borrowing some of the best practices from the top salespeople for a specific outcome can broaden the organization's selling capabilities.
Performance improvement requires a change in management behavior at all levels. Changes in management behavior are the most difficult to achieve and often the hardest to sustain. With behavioral change, there is usually a high degree of elasticity, and it is very common for managers to want to revert to the way things were done before. When a performance-improvement project is underway, there is a heightened intensity and expectation that managers will change their patterns of behavior. When the project ends, there is a degree of relief at all levels, and some of the intensity naturally dissipates.
The simple truth is that it is more difficult to operate at a higher level of performance. It requires more planning and more active management. As a common adage says, "Lowering the water level exposes the rocks," meaning managers must actively problem solve as they no longer have a resource buffer.
The real responsibility for sustainability always falls on executive leadership, because of the need for continual reinforcement. Although most system and process changes directly affect front line levels, front line managers simply do not have sufficient authority to sustain the integrity of the changes. The key red flag to watch for is a systematic decline in accountability. Plans are consistently missed and poor performance is rationalized. The fact that plans are missed is not nearly as much of a concern as rationalizing poor performance. Highly competitive companies are very serious about the plans they set and go to great lengths to understand and scrutinize variances. It may be that the plans were flawed or that there were operating problems, but the key is to dig to uncover them. Organizations that grow accustomed to accepting rationalizations without uncovering the root cause of variances have a difficult time performing at increasingly competitive levels. You can observe how variances are handled by different levels of management in many common situations (e.g., through daily, weekly or monthly performance reviews).
Another critical area to watch, when reviewing management behavior, is the budgeting process. Negotiating budget levels can become more of an exercise in managing compensation expectations, rather than keeping an organization’s financial and operating worlds in sync. Budgets and operating plans can quickly lose their alignment, which throws out the integrity of the underlying management tools.
Management system changes often entail tightening up the planning standards that are used to schedule the operations, and then providing managers with tools to control, monitor and report on attainment to the plan. The efficacy of management systems depends on the integrity of the numbers placed into the system, and the use of the system information to make decisions about the business. Most system problems stem from inaccurate planning parameters, late scheduling changes of one kind or another, and the resulting tendency of management to disregard or somewhat arbitrarily modify the schedules that are produced.
The red flags we look for when reviewing how effectively changes in the management system have stayed in place include:
- Forecasts are considered inaccurate and do not directly feed the resource plan.
- Managers stop using the resource plan to determine resource levels (e.g., they disregard recommended staffing levels).
- The planning parameters within the resource plan (e.g., expected performance) no longer match the business-plan assumptions.
- New activities change the business process, but the planning standards are not updated and become obsolete.
- New managers are hired or promoted, but are not trained to manage with the system.
- Daily performance reviews do not have an agenda, become irregular or do not discuss specific performance by area and causes of variances.
- Visual performance charts are kept not up to date.
- Performance targets are not updated in operating reports and/or do not reflect the resource plan.
The management system is arguably the most important tool that executives have to hold onto improvement gains and to build on those higher levels of performance. Executives play a very important role in making sure that management systems keep their integrity. Unfortunately, they are often part of the problem, intentionally or not, as we discuss in the next Observation. Stay tuned!