Mega changes in distributor sales efforts
by Scott Benfield
New technology, new knowledge, and external motivation for change
A quarter-of-a-century experience in industrial channels gives us a long-term perspective on the slow but substantial changes in merchant wholesaling. The areas that have been slowest to change are outside and inside sales forces. In the next decade, however, we believe the traditional sales model will change substantially.
The change in sales efforts will be initiated by external factors including industry life cycle, technology, new knowledge, and the need for productivity. In essence, if you are expecting substantial and lasting change to your sales force to come from within, you may be waiting a long time. We expect external pressures to force sales force change far greater than internal changes from existing management.
Industry life cycle
Wholesale distribution is largely comprised of privately held, family businesses. Most families, however, are entering the late second or third generation. Generational change brings common experiences that significantly affect sales efforts. They include:
1) As generations transfer from the second to the third, most families will sell the business. Often, the acquirers are public companies or larger companies owned by private equity firms. These acquirers run the firm for profits, not lifestyle, and quickly squeeze out excess costs, including personnel.
2) Over the generations, most products within distribution become commodities and are well known by the user base. Our work within wholesale distribution finds, on average, 70 percent of products are commodities that don't require sales support on a per-call basis. Most sales territories are comprised of commodity products with sellers earning commissions on 100-year-old technology platforms. In the future, we expect many mature products will be sold and solicited by other, less costly, means than the outside sales force.
With changes in ownership and the commodity status of products, there is no room for bloated sales structures. End users, given the choice of full sales service at full price or minimal sales service with a low price, often choose the latter. The streamlining of the sales effort is a foregone conclusion given the generational transfer and commodity status of products.
Technology and process knowledge in sales force redesign
Five technologies will greatly impact the understanding and productivity of sales efforts in distribution. Three are IT based and two involve process knowledge. When all five are combined in a coherent solicitation strategy, the decrease in solicitation costs can be substantial.
Starting in the last decade, e-commerce capability has grown dramatically. Today, it is common to find 30 percent or more of a vertical industry with e-commerce capability. Most distributors are content to use e-commerce as a support strategy. However, it is becoming commonplace for customers to prefer transacting daily business through the Web, and pay for the sales call as they need it. Consequently, we expect e-commerce as a stand-alone solicitation effort will grow at an increasing rate as customers begin to rely on the technology.
Inside sales and telesales are aided by two burgeoning technologies. First, phone queuing systems that link disparate branches and labor forces can greatly increase the productivity of inside sales. In prior years, each branch had an inside and outside sales effort specific to their geographic footprint. As products mature and applications homogenize, the inside seller in Chicago can answer the call from a San Francisco customer equally as well as an employee based in California. Once management realizes that the cost of living in Chicago is lower than in San Francisco, it is not difficult to realize where the inside sales pool will be located. Also, most modern telephony systems come with a host of measurements that help manage the inside sales effort, including different numbers for customer assignments, time-on-call, time-in-queue, calls dropped, etc. Used well, phone technology can maximize inside sales productivity.
Secondly, outbound telesales is greatly aided by the growth of sales management and CRM software. Programs such as Salesforce.com and Microsoft Dynamics help manage the barrage of inquiries from potential customers and review which activities are value added. Of course, these software packages are only as good as the distributor's ability to populate the fields with current and meaningful data. However, more distributors are requiring outside and inside salespeople to enter inquiries into their CRM repositories.
Finally, two knowledge-based technologies can offer promise in sales force productivity enhancement. While the concept of activity costing is well known, it has often been used as a basis to identify low-profit customers and as a starting point for seller negotiation of larger transactions or supply chain services that reduce excess transactions. Recently, activity costing and activity profiling has been used to review groups of customers so they can be assigned to different solicitation models. The process, called Hybrid Marketing, uses activity profiles to match the appropriate solicitation model(s) to the needs of the customer segment. In Exhibit 1 below, we depict the use of activity profiles and hybrid marketing logic to lower solicitation costs while maintaining suitable customer service. The decision matrix uses market variables of segment size and number of accounts, and activity metrics of number of transactions, number of deliveries and technical need to determine the best-fit solicitation model(s).
Segment To Solicitation Decision Matrix
|Segment size||No. of accounts||GM%||Number of transactions||Number of deliveries||Tech. needed||Solicitation strategy|
|1 = Functional||5 = Transactional||9 = E-Commerce|
|2 = Segment||6 = Hybrid/queuing|
|3 = Consultative||7 = Telesales|
|4 = Enterprise||8 = Catalog|
For example, the first row depicts a segment with many accounts and low revenues, but high transaction, delivery and technical requirements. These segment dynamics indicate a high cost to serve and, with low gross margin percent of sales, the segment is likely activity negative or low activity profitable. Therefore, the recommended solicitation strategies include, among others, the lower-cost methods of telesales, catalogs and e-commerce. Again, when applying hybrid marketing and segment activity profiles, the results provide a strong argument for change.
Putting new technologies and new processes together to maximize sales productivity has traditionally been the challenge in distribution. Selling has been viewed as an integral and often sacrosanct function. Plus, the sales focus has been on individual technique or product differentiation. With product commoditization and generational changes afoot, selling as a value-added function will need to focus less on technique and product knowledge and more on efficiency of process. Selling costs are the most expensive part of distributor operating expenses. It is difficult to imagine how the industry will increase sagging productivity unless new technologies and knowledge are brought together in a comprehensive process.
The need for productivity
In two studies, we have chronicled the need for better sales productivity in distribution. Our findings showed that, between 1997 and 2002, sales-per-employee in durable goods distribution lagged most other U.S. economic sectors. Recently, in a separate study, only 30 percent of U.S. wholesale sectors accounted for 70 percent of merchant wholesaling's productivity growth from 2001-2005. In summation, for the years from 1997 to 2005, there appears to be low or limited growth in productivity in the majority of wholesale sectors.
Simply put, productive companies continually improve processes or shed obsolete processes and do more with less. The lack of productivity is seen in lagging investment in new technologies, falling earnings, loss of sales to more efficient channels, and a host of other undesirable business trends. Since sales costs are 30 percent to 40 percent of distributor operating expenses, new and less costly methods of solicitation and customer interaction are required if distributors are to retain their value proposition and current place in the U.S. economy.
In our book, Restructuring the Distribution Sales Effort, we establish the need for sales productivity and explain how new technologies and knowledge can increase the efficiency and effectiveness of the sales effort. The technologies and knowledge primarily come from outside the distribution industry. Based on our sales consulting experience, we also believe the drive to restructure the sales force will come from the top of the organization or from outside.
If distributors want to change their sales structure substantially and permanently, they will need considerable help from new technologies and new knowledge. They should also expect C level executives or those from the outside to drive change with the new tools. Existing sales leaders are not likely to change unless the current platform demands it. Unfortunately, the decline in the current model is glacial in pace and almost imperceptible. Therefore, change may catch many off guard and by surprise.
Hybrid Marketing is a concept first introduced in 1990 from the Harvard Business Review article of the same name. Benfield Consulting has adapted the concept for distribution markets and used common activity and marketing measures to guide the allocation of solicitation efforts. Back to story
See "Productivity and Profit Issues in Durable Goods Distribution," a white paper from Benfield Consulting at www.benfieldconsulting.com. Back to story
See "Where productivity is growing in wholesale distribution," Adam Fein, IBM, August 2006. Back to story
See Restructuring the Distribution Sales Effort, Benfield and Vurva, Brown Books Publishing, 2006 at nawpubs.org, progressivedistributor.com or benfieldconsulting.com
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Scott Benfield is a consultant for distributors and manufacturers in industrial channels. He can be reached at (630) 428-9311 or through his Web site www.benfieldconsulting.com.