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!
Implementing change requires reconfiguring processes - and modifying the management systems and behaviors that need to accompany them. But as anyone who has ever tried to instill change knows, maintaining those gains can be very difficult. There is always a natural tendency to revert to the way things were. After the completion of a project, we go back to the organization and review how well the changes have sustained. We've learned that there are some signals that can indicate that improvements are starting to erode. We call these signals "red flags."
It is critical to watch for red flags, because performance improvements are always made up of many small changes, not just one large change. If you let the small changes gradually fall away, a cascading affect can gradually erase the overall gains that were achieved. In the next few Observations, we highlight some of the tell-tale signs we look for when reviewing the sustainability of changes.
Process changes refer to some type of modification of how work is processed from input to an output. Examples include changing the sequence of the process, removing steps that are deemed unnecessary, combining work functions, changing equipment or modifying speeds. The more concrete the process change, the easier it is to sustain. For example, physically changing the layout of equipment (and order of operations) is something of an all-or-nothing proposition. Once in place, it is likely to sustain because of the difficulty of reverting back to old methods. The more complex and difficult process changes to sustain are the ones that require management intervention.
Many process changes require monitoring and compliance, e.g., increasing speeds on a line operation, or staggering shift starts or working through breaks. These types of changes require management follow up to ensure they remain in place. The red flags associated with these kinds of changes are usually simple noncompliance.
In the case of the examples above, red flags would be:
- Speeds begin to return to former levels
- Shift starts slowly lose their staggering
- Machines are shut down more frequently during breaks
It's fairly easy to see these red flags after the fact, but sometimes the seepage is gradual and more difficult to notice than you might think. One of the difficulties is that there are always good reasons why process changes gradually erode. It takes perseverance to "stay the course” and it often requires active problem solving.
It's not easy for any operation to go through a performance improvement change. Consultants love to say that people should: "Work smarter, not harder," but that can be a false dichotomy. We aren't big fans of the expression because we think it subtly implies that you can get something for nothing. Sometimes working smarter does mean working harder. It certainly means you're working differently.
Take the analogy of losing weight to explain performance improvement. Part of the equation for losing weight is to stop eating foods that aren't healthy for you (that’s the “work smarter” part), but another key is to be more active and get some exercise, so you burn more calories than you take in (that’s the “work harder” part). If you streamline a process by removing recurring daily obstacles, it can be misleading to suggest that working harder isn't also sometimes necessary. If a process constantly breaks down leaving a person with little to do, fixing the problem may result in that person working more. The majority of people we observe have no objection to putting in a fair day's work for a fair day's pay; it's the recurring problems that frustrate them and that make work tedious. Fixing those problems creates a better environment and may also help foster more employee engagement.
"Working smarter" for a front line manager often means becoming more involved in the scheduling of work and following up on the process. It may be a matter of semantics whether or not this is technically "harder" than previous behaviors. In our experience it usually means a more focused committed diligence is required. To return to the weight-loss analogy, it usually takes more discipline to stick to a healthier regimen. At least initially, managers may find these new requirements "harder" because they aren't familiar with them and because they change their patterns of behavior. The object is to be a healthier, lean organization, but it's a mistake to underestimate the actual change required for many people.
A better expression might be: "Work smarter to be more productive." It's just not very catchy.
We've written frequently about the need to look at operating problems from three vantage points: the actual process of how things get done; the management system that is used to control the process; and actual management behaviors (what people do to control the process). So if you're presenting your findings to an executive group, where do you actually start? What is the right order or sequence to make your points?
There are different schools of thought on this. Historically we’ve always started with a detailed study of the process, showing where problems manifest. Executives tend to find this very interesting because it depicts reality -- and deeply resonates with anyone who’s worked within the process before. Following this, we’ve presented a study of what managers were doing while these problems were occurring. Finally we’ve recapped by illustrating the gaps in the management system that helped create the management behaviors we observed.
A more recent school of thought is that you should start with the management system, because it is effectively the intelligence of the operation. If the management system is broken or "disconnected," as we often find, it's virtually impossible for a manager to actually manage a process. All they can do is follow up and provide oversight or some type of after-the-fact quality control. They can't identify when a process is off-plan in real time. Therefore problems like rework and "workarounds" can become the norm and eventually become part of the actual process. So, from this angle, it becomes clear that the management system allows problems to reside in the process and gives no support or direction to guide management behavior.
The two camps remain somewhat divided. Process studies are generally more interesting, whereas management system studies tend to be a little more academic. Both camps will advise, however, that whatever order you settle on, the first study you discuss needs to grab people's attention -- or you may spend the rest of the meeting watching people checking their email.
Being analytical by nature, we sometimes struggle to get a handle on the fuzzy logic behind planned sales growth. One of the things we often find lacking (and sometimes missing entirely) is the logic as to why sales will improve. No, not the forecasts and budgets, broken down by customer and region -- there’s often no shortage of those. What's lacking are the changes in actual sales activity that will create the increased volumes.
Sales growth comes from some very specific sources (e.g., price increases, new customers or distributors, new products or markets, increased volumes from existing customers, better retention of base customers). But P&L statements -- or even sales reports for that matter -- are rarely explicit about the source of growth. They tend to highlight markets or customers or product types, so they link to the original budget forecasts. But planned sales growth implies specific activity required on the part of the sales organization related to where the growth is intended to come from. For example, new customer growth would imply new leads and conversion rates on the part of salespeople. New distributor growth would similarly require a specific series of actions to achieve.
But if the planned sources of growth are not made explicit, you can't translate anticipated volume into the required sales activities. If the required sales activity is not explicit, it's very hard for a sales manager to provide any meaningful direction, beyond basic coaching. The fate of the growth plan reverts mostly to the sales force, who also may not know which specific actions are required to achieve the plan put forward. Achieving the sales plan becomes driven by fate and market conditions.
Sales is one of those areas that’s really part science and part art. As consultants, we tend to overplay the science part, while sales professionals have a tendency to overplay the art aspect. But there needs to be some movement toward the middle ground if a company wants to actually manage its growth.
Jim Collins’ belief that "good is the enemy of great" is a brilliant insight, and it applies to pretty much everything. Essentially, he means that if people get in the habit of accepting things as "good enough," it inevitably leads to marginalization and mediocrity. He’s observed that a common trait of great companies is that they hold themselves to very high standards. We believe he is right – and that a key distinction between the good and the great companies we work for is their disciplined insistence on excellence. But we also have come to recognize a practical reality, which is that you simply can't be great at everything. There are not enough hours in the day, and companies would come to a grinding halt if they managed entirely by this edict. So how do you apply Collins’ mantra?
The really good companies we work for are skilled at choosing where they should focus and where they shouldn't. They consciously select what they need to be great at, and then aggressively focus on those items. That's a lot harder than it sounds. It requires an obsession for simplicity, which most companies don't have. Most companies become more complicated over time, and if they aren't very careful the complexity feeds on itself (we argue internally that we repeatedly fall into this same trap). Complexity spreads through organizations like a cancer. Each new management level adds information filters; each new manager adds reports and distribution lists and meetings each new market or product variation adds requirements throughout the supply chain; and on it goes. Success may seem to breed success, but often it just creates an appetite for more complexity.
We gain some insight on how well a company is focused by looking at C-level reporting and having executives explain to us what is most important, what issues they commonly drill down on, and how they manage others. At the mid-level, we also look at management reporting and meetings. Meetings are a surprisingly rich source of insight on complexity. Frequency of meetings, stated purpose, who attends and what actually gets accomplished can speak volumes about the culture of an organization. Complexity is insidious. To keep it in check requires leaders to be relentless in making sure the organization stays focused on where it needs to be great.