Jeff Kaplan of THINKstrategies will be kicking things off, highlighting the unique requirements of the subscription in SaaS' business model, will review the end user survey results that many of you participated in.
Then Tom Wilson will take you through some of the best practices for dealing with the sales compensation issues associated with the subscription-based model.
Liz Cobb will walk you through a real-world example. We're gonna invest a significant amount of time today in dealing with your questions.
So without further ado, let's get started. I'd like to introduce Jeff Kaplan, the founder of THINKstrategies. Jeff has over 20 years of recognized expertise in IT management, managed services, utility computing, and outsourcing trends, including as a former industry analyst at IDC, Dataquest, and Medigroup.
So without further ado, we'll introduce Jeff. He's got quite an illustrious background. There is rumor of an independent candidate stepping into the race. Could that be you, Jeff?
Jeff Kaplan: It may be, but I'm not about to announce that prematurely. We'll wait to see what happens with Super Tuesday coming up. I believe that's next month, isn't it?
But thanks, Art. Thanks for having me and thank you all for listening today. It is a pleasure to be with you, and I'm very pleased to hear about the tremendous turnout that we've been able to get for this webinar event.
My goal in all of this is to maybe tell you something you already know, which is that SaaS is important in moving forward very quickly. But also, bringing it back to your real-world situations and talk about what it means to you from a sales perspective, which is, of course, the context of this event.
First and foremost, SaaS is one of those terms that means many things to many people. To all of us, I think we all would agree that what SaaS means when we define this term is the one to many software distribution approach, which allows applications to be housed, hosted, and delivered by a vendor or service provider and therefore, takes the burden off of the customers to do the deployment and maintenance for themselves.
It also means a process by which, through agile development techniques, that application can be continuously enhanced, and even expanded in a way in which it is deployed within those user accounts.
The users can acquire and receive those applications through some network - most likely, the Internet - and they can acquire and take advantage of those applications through some sort of pay-as-you-go or subscription model.
There are a variety of terms that are used to describe this phenomena. The old-world term of "application service provider" still lingers out there. The popular term of "on-demand", "hosted", and even "managed application services" are often used to describe software as a service.
What we also have been doing is looking at what's going on, in terms of the growth of this marketplace. What we see is that it's being driven by ten key drivers. Those drivers are listed here. At a very macro level, the idea of globalization, which has changed the competitive landscape, added to the issues of commoditization across almost every major industry category.
The dispersion of the workforce and the more mobile workforce that has to rely on information applications from outside the firewall. The security issues that that represents. The network reliability issues that goes along with that.
The consumer experience that we have in dealing with things like the iTunes and YouTube and other kinds of on-demand services that we take for granted every day. But it has really changed the expectations we have as we walk into our offices at the beginning of each day.
And the fact that the technology itself is evolving so quickly that there is a wide array of widgets and mash-ups that are now available that can enhance traditional applications and transform them into much more truly user-friendly kinds of capabilities.
Of course, there's this new phenomena referred to as social networking. I'm not sure about you, but I have certainly been invited to too many Facebook and MySpace friends meeting rooms to make me happy.
But it is making for some interesting new ways for organizations to permit and encourage productivity and collaboration. It will be especially important when the new generation of workers hits the workforce.
The most important in all of this is as we enter a new year where the economy's in somewhat question, the question of how you operate in a more cost-effective fashion comes into play.
Many organizations wanna do more with less and therefore, are looking at ways in which rather than outsourcing, they can out-task specific responsibilities; for instance, application deployment and management.
With that in mind, let's talk about some of the things that are going on there, as well as the enabling technologies that are helping to drive it. What I think all of you would appreciate is the fact that, well, it seems that we've come a long way in the technology realm.
The fact of the matter is that we are still, both as professionals and as end users, at the mercy of the computers and applications that we deal with on a daily basis.
For most organizations, whether they be large or small, that leads to a certain love and hate relationship. We all know in this business that the shortcomings of legacy on-premise applications are notorious, whether it has to do with the problems of deployment or ongoing operations or the economics of keeping these kinds of applications up and running.
The formula of the past in which end users were responsible for acquiring, implementing, customizing, integrating, and operating these applications is a world that many organizations would prefer to leave behind.
They no longer wanna have to deal with the costs and complexities of simply having these applications at their disposal. They'd rather be able to take advantage of the functionality so they could get their jobs done.
Many of you were well aware that a fellow by the name of Nicholas Karr began to speak to these issues at the beginning of this century.
Many of you may also be aware that he's getting ready to issue a new book called The Big Switch, which reinforces some of the points that he had made at that time, which had to do with the fact that the basic value proposition technology is definitely in question. That is, is it really serving our purposes, or are we serving it?
While Nick Karr tends to get skewered by many IT professionals who don't like the question that he asked about whether IT matters, the fact of the matter is, if you looked at his website, you'd see he is booked through the entire year of 2008, speaking to corporate executives and end-user populations who are interested and believe in what he has to say.
Because of that, many customers are demanding that the way in which they utilize technology in applications change, and the way in which they interact with their vendors, as well, be changed.
In the past, software vendors could leave their software at the back doorstep of their customers, or maybe even pass it through a distributor or , and have the and the customer deal with the hassles of getting it up and running, and having to contend with all of the bug fixes and all the rest.
It became an issue of whether or not the vendor reacted in a sufficient amount of time to solve a problem. The labor that was involved was skilled enough to figure out the issue to satisfy a customer.
Today, customers need to have their systems up and running on a 24-hour basis. They are not interested in the response times of their vendors. They're interested in the ongoing capabilities of their applications.
They're putting their vendors in a different position when it comes to accountability. They want that vendor to be able to ensure the availability and reliability of their applications on a ongoing basis, so they can get a better return on their investment from that application and systems support infrastructure.
The promise, therefore, from SaaS is that, first of all, they no longer have to deal with the up-front cost associated with the capital investment.
Second, they could pay as they go as they incrementally roll out that application, and therefore, limit the risk and accelerate the deployment of the application as they go along.
Of course, many of these applications are also designed to be more user-friendly, and therefore, require less staff support. As I mentioned earlier, the agile development capabilities which permit continuous enhancements means you can continually get more value from an application that fundamentally might cost you less.
What we've reached here is a tipping point. The fact is that the market is growing quite rapidly, and THINKstrategies believes it's going to continue to grow even more quickly in 2008.
In fact, our most recent survey results showed that well over a third of respondents to our survey in conjunction with Consortium are already using or are considering some form of software as a service. In fact, two-thirds in total are doing one of the other.
What's also happening is a change, in terms of the way in which software as a service is being adopted. It's no longer on a department by department basis, but more and more often, is being adopted on an enterprise-wide level.
And is not just about front-office applications, but also includes back office, interorganizational, and IT management kinds of applications. When the IT organization gets involved in using SaaS, that opens up the door for everyone else to sell to the business users, as well.
What we also see is it's not just about SMBs, but it's also about large enterprises who are interested in adopting SaaS either to replace or to augment their existing applications. And that there are a variety of new channel opportunities that are out there to be able to take advantage of distributing these applications to a wider array of customers.
The traditional VARs are struggling with how they're going to accommodate SaaS, but a whole new generation of e-commerce and Internet-based suppliers are going to get involved in the act.
In fact, even financial services companies, retailers, as well as web companies, are going to become channels to market for SaaS going forward.
But there are some significant issues that SaaS companies have to face. We're going to talk about the sales one in a couple of moments. Obviously, it also has a lot to do with the restructuring of revenue models and the re-architecting of the applications themselves.
This is causing an inversion in a lot of organizations. It's turning things upside-down. Where "services" was a four-letter word in the past, now the sales organizations, in fact, has to sell a service solution.
They now have to think differently about what the product is and what the value proposition is for selling it to the right member of a user organization. That means they're going to have to think also about how they're compensated to enable them to be fairly paid for the different kind of sales process that goes into software as a service.
Let me quickly wrap up and pass the baton back to Art, so he can tell you a little bit more about the research that his organization has done.
I hope I've been able to demonstrate that the SaaS movement is real and it's growing. The model is definitely changing the game and is shifting the way in which the revenue stream operates from an up-front to an incremental one. That has some significant implications from a compensation and incentive point of view.
What's gonna need to happen is just as organizations are testing their overall models for success around SaaS, they're gonna have to do the same thing when it comes to sales compensation and incentive programs, as well.
So therefore, being flexible, being able to be more transparent in your practices, and having a solution that can meet your needs because of its ease of use are gonna be essential.
I'll be around to answer some more questions, but let me pass the baton back to Art. Thank you, Art.
Art: Thanks, Jeff. Before we hand it off to Tom, I do wanna share with you some of the survey results from our online survey. We thank those of you with us today that participated in it.
The first pie chart here is quite interesting, I think. This was in answer to the question, "Please tell us about the status of your subscription-based revenue model."
Clearly, you can see there's a wide distribution here. It really shows a business model in transition, where we've got organizations that are evaluating, shifting, shifted, and doing a hybrid of all of that. It's basically split between those types of organizations and ones that have always been SaaS from inception.
We also asked a number of questions around satisfaction, including the overall effectiveness of sales compensation, and the results were quite surprising. Almost 70 percent of the respondents rated it low to moderate.
We also asked about how satisfied the sales team was. Although this is slightly higher, no one rated it a low. Almost 60 percent rated it moderate or below.
So with the owners of the compensation process not happy and the sales team happy, it doesn't look like there's a clear winner right now. So that's why many of you are here.
We also asked about the approach. How are people handling the compensation element today? This is a breakout of how many are doing it upfront versus split between paying it all upfront over the life of the subscription and those a hundred percent over the life.
What I thought was interesting here was that we just saw a few slides ago how almost 50 percent of the respondents, their organizations had always been SaaS, or subscription-based. Here, we see only - but only 19 percent of the respondents are actually paying their salespeople over the life of the subscription.
I don't know exactly what that means. I think this is a good time to introduce Tom as the expert who could probably answer all that. Before I do, I do wanna show you one more slide, which we did ask respondents about their most important sales compensation issues going into 2008.
We had a wide variety of respondents, which I won't read to you. They did fall into what we saw as three main buckets, in terms of timing of the compensation, sorta the classic problem of attracting and retaining and motivating salespeople, and the actual shift of the business model that we highlighted earlier.
So let me introduce Tom. Tom has over 25 years of in-depth experience in consulting and management, and is an international authority in the field of total rewards systems, and a frequent speaker on trends, best practices, and how to build high-performance organizations.
Tom has been quoted in a number of known publications, including Fortune, the Wall Street Journal, the Boston Globe, Financial Times, and has written a number of books on this topic that, in fact, have been translated into Chinese.
Maybe you have the foreign policy element that we need in this race. Tom?
Tom Wilson: Thank you, Art. Lets back up a sec, because I don't know if any of you saw the results of the New Hampshire primary last night, but in picking up the same theme about the political environment in which we exist, I notice that Barack Obama, a lot of his speech was picking up a theme that I think we're either on the same wavelength or he had a peek at my slides before he did his presentation.
Talked about something that's happening here. This is a Buffalo Springfield song. What it is, it's not exactly clear. Of course, the song goes on to say, "There's a man with a gun over there." I think we're not gonna go there.
Let's see if we can start with some things to perhaps give us some clarity about what to do in this whole area of sales - SaaS and the sales compensation arena.
But let me start this with looking at a situation. Imagine yourself as a salesperson - now, some of the people who are attendees are - or you're head of a sales organization. Or you want - as owner of an organization, you want people in your company to pursue a certain particular sales strategy.
Well, here's a situation. The opportunity either is to sell a $250,000.00 software installation engagement or to sell that same engagement - or a similar kind of engagement - of a $7,000.00 a month subscription business of your software over a three-year contract.
Now, some of you probably have already done the math. If you do $7,000.00 times 36 months, you end up with $252,000.00. We'll keep the dollars the same. The dilemma is, is it an upfront installation or is it a three-year?
The question becomes what do you do? What should the salesperson do? What do you want them to do? the question that says which approach here is actually easier to sell? Which is most likely to pay you more? If you're the sales rep, where are you likely to get most of your self-interests met?
Which solution does your company want? What is right, in terms of your strategy? Which would your customer prefer?
I'm gonna turn it back soon to Art and to Jeff and let them answer these questions. Let's talk about compensation, because I think that gets back to the dilemma of the core of the issues that we're dealing with here today.
So what did we find? I'm gonna recap a bit of what Jeff said, because I think it was very significant in its implications on compensation, as we think about the whole compensation plans and reward systems.
First of all, we think about from a company's point of view, a SaaS really enables you to acquire new customers. It allows you a lower price point, a longer current relationship, an easier sale and a big upfront commitment.
It can also increase your profitability, because you don't have to engage a team of field engineers to do the installation, so your implementation costs are gonna be less.
It could provide you as a business a really predictable revenue stream. As we know, from some of the market research and some of the work that I know Jeff's been involved in, is that for many investors, a predictable revenue stream provides a 10 or 20 percent premium on the market value that the external market places on companies that are in this situation.
Clearly, it's very positive from a financial point of view. Except, going back to the negatives, it really gives you lower implementation revenues. Where you used to sell $250,000.00 and expected to get that in a 2008 year, you're talking about $7,000.00.
You're gonna have to have a lot of those to make up the difference. So it's lower revenues. Also, those revenues that you're gonna be getting in the future are really based on performance. It's based on the experience of the customers. Are they actually going to continue to subscribe and to participate, and to what level?
Well, the implications to the sales professional is similar. It's been said it gives you perhaps a lower threshold in order to achieve a sale. It's a more simple implementation, because that gives you the ability to focus more on the customization. How do we make your particular customer able to better use the services that have existed, in terms of the subscription model that you've established.
It also provides you a multi-year - almost an annuity in a revenue stream. But you could look at receiving commissions over things that you establish as a sale. It provides you an ongoing revenue stream, ongoing income.
It could also, if the company's successful and they expand beyond what you've established in a contract, there could be certain incentives or certain accelerators that give you more income that's related to how successful the customer is, and you don't have to put as much effort into it.
We call this our ROE, or return on effort. Always salespeople looking for ways of maximizing their ROE.
The downside of a SaaS type sale is obviously - is lower upfront commission from a sale. To some people, that is a substantial issue. We'll talk some about that in a minute. It also says the future revenues that you get is gonna be dependent upon both the performance of that community, as well as their experience with your software. So you put a little bit of your future income at risk.
So like many things in life, what we have here is a series of trade-off decisions, a series of issues that we need to find the right answer in order to - the right optimization in order to move forward and be successful.
What this leads us to is really talking about, in a sense, how do you wanna - what do you want to pay for as a company and how you wanna engage people, in terms of their compensation.
When we talk about best practices, and we always - I keep looking for the best practice. If anybody has it out there, would you please let me know? Because I find it as an elusive concept.
But the one thing I have found, when you talk about companies that are successful, what they do have in common is they have a very close, very tight alignment between what their business model is, what their market needs, and what their sales compensation plan looks like.
So the question would be when you look at what do you wanna pay for, is do you wanna pay at the time of the contract, as you're paying for the contract value or the relationship, or do you wanna pay for the revenues as they are recognized? In other words, as they're based on the transactions? What do you wanna pay for?
The answer to this question is not found in the design of plan. The answer to this question really is dependent upon what is the strategy that you're pursuing. What are the roles that people have in sales, and how does that affect, if you will, your performance as an organization.
We would encourage you to not look at tweaking sales plans to find this answer, but to go back to some fundamentals about who you are and what you do and who's supposed to do what.
Let's take a look at some of those key determinants of this decision. And then in a few minutes, well, we turn it back to our example that we talked about earlier and see if we have some answers.
This is a somewhat complex slide, but a good consultant wouldn't be worth his salt if he didn't have some sort of matrix.
So we share this with you as a way - because we find that many of our clients that are really struggling with the strategy, in terms of defining their strategy in a way that they can translate into measures and to compensation plans.
They tend to be pursuing either a emphasis in one or a combination of these areas. If they have an installed base - if it already had an installed base of customers - and you're really seeking to introduce fast products within those existing customers, really, what you're trying to do is to potentially use that to expand your revenue, your product mix, within that customer.
You may have an installed base of customers as an established - I'll call it - if you did initially, and you're introducing SaaS as add-ons or new alternative ways of delivery greater products to that existing customer base.
In other words, you're dealing with the issue of increasing your product mix, and we all know that as a customer buys more varieties of things from a particular vendor, that their relationship and the commitment to that gets tighter and tighter and stronger and stronger.
On the other hand, we find companies that are really the current at risk, because people are approaching them to - with offerings of a SaaS type business model. So their challenge, if you will, is to convert their customers from that installed base to more of a SaaS type product mix.
So their shift is not just an expansion, but really conversion, to a company to a new way of engaging in the relationship.
If you're looking to establish new customers, acquire new customers, and SaaS is one of your existing - part of your product, then we see some companies focusing on a - seeing it as part of a solution, part of the portfolio of things that you can offer to that customer to enable them to achieve the outcome that they're looking for from your services.
That's what we call a part of your solution strategy. In a sense, what you're doing with that is to say, "We have this. We can take it in many different forms."
We also see companies who are saying, "We have installed base. That's going fine. But for us to really get into new markets or establish new customers, we need to be something that our current customer base does not know us for.
It's sometimes easier - you don't have to change your image, because now, you'll get to know people - they'll get to know you, not as your traditional installed base of products, but more as a - it's really a hotdog-type SaaS customer provider.
In this case, you're looking for customers who know you in new ways. You're doing this because you're really trying to enter new markets and acquire new customers.
What we find, in terms of a sales strategy fundamentally, is that the organization is aligned behind the kind of initiatives that you're facing. I would imagine that many of you are, as you look at this kind of chart, asking yourself, "Where are we, and what combination - what are our particular challenges?"
Because if you think, once again, the same sales organization will not be effective in all four quadrants.
That leads us to sort of talk about what the salesperson's about. One of the things I - perhaps - with all due respect to people who are selling major software sales, we see them in some ways like big game hunters.
They're out in the jungles and they find the big elephants or whatever, and their job is to bring that in, to influence that buyer, get that business.
The value proposition is really looking at the projected return on investments. They negotiate the contract. They bring the big kill. They have done a tremendous job with large contracts.
They then make sure that the product is put in place to get a product implementation team in place. They sell and they make their three or four hundred thousand dollars a year as a big game hunter selling software.
That's been, in some ways, the traditional model of what we've seen, in terms of people who are software sales.
What is it - how would you describe a - someone who sells the SaaS type product services? Clearly not big game hunters. I was looking for a concept and I thought, "Well, you know, they're kinda like the Iron Chef, or kinda like a master chef."
So what is that? A master chef finds and influences both the users and the buyers. Their value proposition is: what does the food taste like? How does it feel? It comes from the experience that people achieved.
It's a different kind of sales process. Yes, they're working at trying to establish a contract, but there are certain terms and features of that contract that reflects more of a commitment to a sale. Very different kind of a sales process.
In turn, their emphasis is how do we take this business, this what we do, and embed it into that business - into that customer? That's what they do. Your product and service, your SaaS system, if you will, becomes such an integral part of that customer's ways of doing business that there's no way they can leave you, and they become part of the way you do things.
Think about it for a minute. It's a very different type of sales process and may require a different kinda salesperson.
One of the things we pay a lot of attention to when we think of incentive plans is what you're measuring. In traditional software sales, you look at the size of the contract, the scope. You look at the implementation stages and all that, and you focus on customer satisfaction.
In SaaS, you spend things - you look at measures related to how many users? How many seats? What's the price per? What are the commitments in the contract, in terms of terminations or in terms of accelerations or in terms of does the unit price still stay the same if our volume doubles or triples? Are there certain thresholds? What kind of training commitment is the customer making?
Therefore, the fact - the thing that drives the sales is the customer's expansion. They're getting more and more - using more of what you're doing. So it's a different set of sales measures.
Why this is important is because people have often said that you guys what you measure. I would suggest that you kind of get what you measure. You really get it when there's an association by a salesperson between what they receive; i.e., the connection between the measure and the consequences.
One that we're trying to get at, since it is all about behavior and it is about getting people in the sales organization to do what you really need them to do, let's think of ways in which these measures on the right-hand side now become as important, if not more important, than traditional sales.
Well, that leads us to talk about behaviors. Now, I'm not gonna go through this list. You can see it if you see the software - see the download as well as I can.
What's important, we believe, is that really to understand the behaviors that you're looking for, what is it you need salespeople to do perhaps more of, less of, or differently, in order to achieve the kind of sales results you're looking for?
And in doing that, how does a sales compensation plan, from its measures to its mechanisms to its amounts of money that's gonna encourage people to take those particular actions?
We think that one thing that's important is that in looking at these behaviors, looking at the things that make sense, in terms of this particular sales strategy, is that there are certain salespeople who can or will perform these services, these particular actions. There are some who won't.
One of my clients is always fond of saying he saw his critical challenge was, "I either need to change the people or change the people." The implication here is that it may not be the same sales organization that you wanna pursue if you're trying to convert. It may be a different kinda model.
We also have clients who started in a SaaS model and they've established the relationship, but they really realized that their higher value-added is that you start building stronger account relationships, then move at developing sort of private-branded products or things that had to move upstream, if you will, to where they needed longer-term, more complex design.
In some ways, they started the transaction and they ended up in the opposite direction, in the sense of being really enterprise-wide sale. But they did it through - not from an enterprise down to software, but from a software service back up as they look at what they needed to do. Well, things needed to shift in terms of both behavioral requirements and, consequently, the performance, as well.
Where does that lead us, in terms of our question? Well, we look at how should commissions be paid? We have very - two simple, in a sense, alternatives. You pay them upfront. You look at what the contract's evaluated at, what the contract value is, what the agreement is, and you pay them on that point, and they get paid on that model.
The second alternative's basically getting paid over time; that is, as the services are being rendered and realized, the companies beginning to realize the revenues, people are paid.
Now, excuse my artwork here, but you think about the two graphs here, what's captured under the circle - under the graphs, rather, the green - it would be interesting if it was essentially the same, in terms of dollars that you'd be delivering.
But I think what he's trying to do is to define people graphically what the different model is around compensation and how you think - how the salesperson needs to think about their income, and how the organization needs to think about how their compensation expense is gonna be improved.
What does that mean? It says that we can reward the salesperson one alternative on at the time of the contract. Think about what that means, in terms of the implication it has. Or you can do it when - over time, as income is realized. In other words, it sorta mirrors the way the company receives revenues.
Or some hybrid that says, "Well, we'll pay you a portion at the signing of the contract and we'll pay a portion at the time as the income is realized." I'd like for us to discuss, if we get an opportunity, to say, what are some alternatives that's really worked for you? Because there are lots of very creative things that we see companies doing out there.
Let's go back to our example. Remember the situation we started with, this dilemma between the software installation or the service contract? Well, which alternative would you choose? You could take the $250,000.00 versus a two percent commission, and cut them a check for $5,000.00.
In turn, you could say, "Well, you take that same two percent, and we're gonna give you it based on the income as it's realized." The seven thousand two in a sense, well, ultimately, over a three-year period, the same income you would've received before.
Or some combination that says, "We'll pay you half of it at the contract signing, half of it based on contract revenues." Therefore, equal. But if you achieve revenues that exceed what the contract value is, do you provide them incentives for that? Do you do it in a way that is more than the one percent, more than the two percent? Is it one percent? One-half percent?
Once again, go back to understand where is the value created? Where is the kind of behaviors, kind of engagements that you want your salespeople to be involved in?
One of the things we try to summarize this in a way that tries to capture, hopefully, some of the key elements of this decision. If you're dealing with high-volume transactions, if you're dealing with things that the emphasis is on use and expand - sort of beachhead and infiltrate, if you will, sort of a virus model - then paying people as revenues are realized is, in fact, encouraging that kind of relationship.
If, on the other hand, the nature of the business is that we sign a contract, we hand it off to a service team, and they actually handle the implementation and the training and development and what I call the embedded nature of a sale.
Or you take someone who takes the contract and customizes and defines some critically important terms, as related to those terms, then you could look at paying people based on the contract value.
Because, once again, the implementation and the success in a situation of basically three or four, it's not so much what the salesperson does, but what other people do who are involved in it.
So what we're looking at here when we think about the model is an emphasis on customization. So contract value would be more of an appropriate. Utilization - that is, the revenues as it's realized, with different pay - on a pay-as-you-go model.
Or is it some sort of combination, where it's a build, get it in, and then expand and grow and, therefore, a model that may involve both of those two situations may be more appropriate.
So where does that lead us? In summary, what that leads us to say is five simple questions for you. I'll leave you with five very simple questions. One, what do you pay for? Revenues, contract value, kind of relationships, terms, et cetera. How much do you pay? X dollar, percentage, both?
How do you pay? Commissions, bonus? What is it that is the mechanism you're gonna be using? When do you pay? This is the thing that will drive the behaviors that you're really looking for. When is a very important element, and perhaps not unimportant.
In fact, some ways, a subtle and more important issue is who do you pay? In other words, who is it that's creating value in your organization?
That will lead us, in terms of answering these five simple questions, to the right answer and hopefully to the best practice.
Art: Thank you, Tom. Now I'd like to introduce Liz Cobb to walk you through a specific example. Liz has over 25 years' experience in sales compensation consulting and is a real pioneer in software automation. Thank you, Liz. Liz?
Liz Cobb: Thank you, Art. Thank you, Tom and Jeff. Great lead-in. As you know out there, we are - Makana is a software as a service company ourselves, and we are working with a variety of different businesses who are going through the plan design process.
They use our software to help them sort of play what-ifs with some of these questions that were going on and come up with a variety of scenarios and see what's gonna make the most sense to their company, to match their revenue models, and also to inspire and motivate the sales reps.
I have a real-world example, although to protect the innocent, it is a bit of an amalgam of real-world software as a service companies. But this quote is so classic, and I hear it all the time. I've definitely heard it directly from this one company. It's very hard to keep the plan simple while staying alive with how the business makes money.
That's really the crux of this whole software as a service issue. In this particular company, the challenges were that it's a multiyear contract for large volume, small transactions, which could vary dramatically, based on the client they were sold to.
No one really had the insight and ability to size the total potential revenue and booking time, because it was gonna play out based on transactions the customers did, and that was unpredictable.
The other thing that's really important, back to Tom's point, is that in terms of who's doing what when, most of the customers would renew with no intervention from the rep whatsoever. That really is quite telling that the who, the sales rep's greatest influence is at the time of booking the contract and signing that particular new piece of business.
The concern is very - they also had concerns, which are a little different than challenges, and the concerns were related to, do I change my plan or how do I change my plan?
They were very - they were already experiencing some issues, in terms of difficulty attracting new hires, because they've been using a model for compensation that was based off of the insurance industry, which really isn't the business of this business. But it's very tempting, because it's got that long-term annuity piece.
But insurance guys build a book of business based on a one-on-one relationship. They have no base salary. They're not selling anything complex. It's really not the right model, but it's so common, most of the companies that I've talk to, when I try to find out where the plan was originally designed, it was designed by some prior company where the VP of sales worked before, and they brought it forward.
So that's very typical, to see that kind of thing. But the reality is, they weren't trying to hire insurance people. They were trying to hire people who've come from the software industry who've been those big animal hunters or have been involved in enterprise kind of sales before. So there was a real concern around that.
They were concerned that if they just focused the reps on new business and didn't keep the annuity trail going on, that the reps might start to misrepresent the new business.
They did want some period of relationship - back to the master chef concept. They really did want them to make sure they were tasting the service well for a period of time before they fully handed it over to somebody else. These are some of the issues.
The original plans were really quite complex. I love this picture that Art found for the sales rep on the right, because the reality is, reading the plan was - it was a hugely complex plan, and nobody could really understand it.
I'm not really saying that your sales reps are five-year-olds, but I do think that comp plans should be very clear and direct and easy to be read and understood instantly. Their particular plans were not that way, because they were trying to model so much of the revenue model, which was unpredictable in advance.
There was no clear understanding from the rep of what their earning potential was going to be, other than a lot, over a long period of time. So it was very difficult to kind of get a sense of what was going on.
The indirect methods based on the long annuity trail was that the reps should really stick with the customer for a very long time. It turns some of their hunters into farmers, if you will, because they became much more concerned about the annuity than going out and finding new business. Because the business was trying to grow. That was really a shift of not using their talent in the right place anymore.
There was no real policy for what would happen if the customer wasn't retained. So that was kind of buried in the rate calculations, making them quite complex.
So what did they do? They did step back. They took Tom's advice. And they really thought about what those job roles should be, and split them out into basically three job roles: those who were finding the new business, and they could focus in on the new business based on a certain segmentation of the customer size. So while they couldn't totally anticipate exactly what the revenue was gonna be, they could definitely understand it, segment it by category.
They were able to have a customer service group that focused on the retention and sales to smaller customers. And then a third job role, which is business development, that led - develop and nurture some key partnerships that would then feed into the new business hunters' job roles.
So they simplified their key metrics for alignment with these three job roles, which got to be a lot simpler once they knew who was doing what. So focusing the new business sales hunters on the new customers and focusing the customer service on the retention rate, and looking at the lead development of the business development group.
They eliminated the multiyear annuity and created a simple, flat rate per new customer for the sales hunters based on market size, and pay that out over a period of time, but not as long as the whole annuity stream went on forever, but I think really more for like a one-year term.
So that, then, really lets the master chef of the sales rep work with the customer for a period of time, at which point they've turned it over to the retention and salesperson for the ongoing renewals.
They created a very clear policy for how the customer should be retained - if the customer isn't retained, how to recover the commissions if that happened. So now their plans are much simpler to use.
I wanna show you briefly a little bit about our software and how it was used in this process. First of all, Makana Motivator is highly focused on all of this upfront planning and design and is there to assist you to come up with a clearer plan.
The user can walk through and build plans, do what-if analysis, come up with the org structure, and model the cost based on all these different scenarios, and then ultimately create the plan documents.
Tom's right. The best practices are elusive, but some of the concepts we've talked about today can be found throughout the product, through the Blue Ribbon Help Consulting, at least the questions that you should be asking.
These are screenshots from our product. That was the home page. The second screenshot I'm showing you is really, I think, something that makes the plan clear and helps that little boy no longer cross his eyes as he's trying to figure out what the plan is.
Because what we show you here is what the incentives are gonna be paid out at a hundred percent or more. You can actually show your rep a variety of different scenarios of what they're gonna be paid, based on attaining the different formulas or incentives that you've laid out in the plan.
So to hover over on this first one, on the green bar, shows that the first-year booking commissions is gonna be at target. But having that simple view is really important.
The other thing that our product offers you is the ability to look at all the different job roles. So back when you're considering how you're gonna rearrange your go-to-market strategy, you feel like you do need different job roles than you did before, you might need some hybrid of them, it's really important to look at them side-by-side.
Here, I've showed the example of four job roles: the inside sales rep, who's doing lead generation; the outside sales rep, who's doing all the hunting and focused on the first-year booking, selling enough service to keep this customer using us for an ongoing period of time.
There's an account manager, who's much more focused on specific accounts over time; and then customer service. By providing incentives for all of these job roles and looking across them, you can actually see on the green line on each one - the red line represents the target at a hundred percent, and the green line shows you the leverage of that job position.
When you do have multiple roles receiving the incentives, chances are, you will have different curves for each one, based on your ultimate level of influence over that customer. But it does give you a sense of the total costs.
Our modeling portion of the product will roll up the costs of all these job roles, so you can be sure you're not overpaying your incentive budget.
And then finally, it comes out and it prints a plan document. The plan document is very clear. It's very visual. We show the rep what they're gonna be earning at each level of attainment. We show the payout by incentive.
It's automatically generated and individualized for the person, so it'll show the person's name at the top and what their territory assignments are and what their unique goals and quotas are, kind of in a quick snapshot.
So this gives you a sense of what we do at Makana. On that note, I would like to wrap up and thank you very much for participating and turn it back to Art.
Art: Also, in terms of best practices, we have scheduled our next webinar, which is featuring a study conducted by the Aberdeen Group on sales compensation management issues.
It is an end user survey, and we will be holding a webinar with the research analyst responsible for conducting that survey and generating the report, Gretchen Duhane. That will be on February 27th. You can indicate your interest in that, as well as the survey itself, which is available from makannasolutions.com today.
In addition, we have - in our best practices of our website, we have sample plans and past webinar recordings of the best practices webinars that we've held previously.
So with that, we want to take your questions. We're just looking for those. I don't see them here. While we're bringing those up, why don't we queue up a few. Tom, what is a common question that you get related to SaaS?
Tom Wilson: How do you establish what the contract value is? One of the things that - and to be honest with you, I wish I could answer this question. If I could answer this question, I probably wouldn't need to be doing or interested in doing webinars. I'd be like Jeff, right?
Because the challenge is, is that how do you establish a value when you really don't know its projection? One of the things we had found is that it's a hard question to answer in a general sense, but when you drill it down, there are ways involving your finance people, obviously your marketing people, probably tangentially your salespeople, in terms of what the role is gonna be, others who are involved and understand the delivery requirements saying an established contract value, what the term of it, how long is it, what the expectation may be.
I do think there is an embedded principle here; that is, you don't wanna pay people a commission on something that you can't establish - you don't know what that number's gonna be that is the driver of the commission rate or the dollars.
We will see companies evolving initially to something that it may sound like a bonus, but we'll call it a commission, because it's based on what we know, but we can modify it over time. But then as you get clearer about that customer and it moves from an unknown to known, then you can move more closely to a commission-type model.
So Jeff, you got some experience on that ?
Jeff Kaplan: Yeah, I was gonna interject it. We talked a little bit about this before this session began; that is, the rapid evolution of the business of SaaS.
And the fact that individual companies themselves are going through this integrated process of understanding the value propositions and the features and functions that resonate with the customers leads a lot of the SaaS companies I talk to, to integrate.
That's all part of the growth pattern of a SaaS company. Again, the reason why the kinds of solutions we've been talking about here and the kind of methodologies, as well, are important is because you have to be very adaptive, so to speak, to the environment and to these variables.
Unless you have the right tools to accommodate that, it makes it awfully difficult and time-consuming to be using the old Excel spreadsheets of the past, never mind the cumbersome kinds of formulas of the past, as well.
So what you're looking for is a flexible approach that can evolve as your business evolves, as your customers evolve, and as your product set evolves, as well.
Tom Wilson: the expectations of people you have on staff in your sales organization or are hiring about, hey, lighten up. Let's be cool. We're in this together. We're gonna make it happen. And some ways that actually continue to reinforce the point of evolution.
Art: Thanks, Tom, Jeff Before we take the next question, I just wanna point out that we are running short on time. We committed to make this webinar a 60-minute webinar. We will share with you the answers to all of the questions. We'll put them in a document that we can distribute.
So those of you that have asked a question and we don't get to it today, we will send you the answer.
Liz Cobb: Okay. I would like to pass on one of the questions to Tom. Someone wanted to know, why can't a sales rep work effectively in all four quadrants in that sales strategy?
Tom Wilson: It's kind of a question that says you can at some level. In most small companies, you actually do. You do strategic planning. You also take out the trash. The question becomes if you're having somebody to really look at how do we convert a major critical account? At the same time, you're asking them to go out and find new customers, of which we have current relationships with?
What happens, what evolves over time is that the demands of that marketplace, customer, or requirements are gonna be so complex and so heavy that people will tend to go to the things where they feel the most comfortable, where they feel the most - have been more successful at, where their unique abilities and interests are.
So you'll find somebody who tends to, therefore, embed themselves in relationships and they do a really good job, and they'll call enough new customers to keep you off their - off your back.
The other flip side of it is that those who don't hang around for very much, and you've gotta have somebody who's behind them to clean up the messes that they create, because they're off getting new customers and new clients, new prospects.
What we find is that there are certain people who have that - certain people have the flexibility to do many of those, but it's the demands. And if you're successful, that's what you want. You're gonna - you can't be pulled in both directions.
There's a point where, eventually, I like to say, the amoeba does need to divide and create two different cells in order to grow, and you'll need to have that kinda point. So you can do it for a while, but there's a point in time where it's just no longer smart.
Liz Cobb: Another question is what are your thoughts on customer , especially in a situation when it might be the product's fault and not the sales rep's fault?
Jeff Kaplan: Well, I know, Tom, you said in your own presentation that that's part of the formula that you've gotta look at, as well as the relationships you have to look at between both sales and support.
Because in a software as a service scenario, as with a traditional software product, the salesperson is, for the most part, being incented to acquire new customers. There may be some incentives in there to also grow the account, but depending on the nature of the software as a service and the volume of sales that are required in order to be successful, the biases of the salesperson will be very important, and the role, therefore, and support will also be essential.
If, in fact, the churn is predicated on the functionality and the effectiveness of the product, then product support is gonna be an important factor in that success. You'll probably have to have your salesperson out doing more selling and supporting of the customer.
Art: So churn, in some cases, is a good thing, because you're evolving out of people who are really high-maintenance customers. You wanna get in a situation where you can choose the customers you wanna work with.
If you can find ways in which you're evolving your product space, as well as your relationship, with the needs and requirements, you'll see a church. Some of it's good. Some of it's because they're just not getting enough attention, and that's not a good thing.
Liz Cobb: Okay. Another question is, is the Makana product integrated with salesforce.com? That's a really quick yes, it is. We will take the people in the organization and pull them into the product to help you kick-start that modeling and that planning process.
Jeff Kaplan: That's Exchange certified. We're on the Exchange certified integration.
Liz Cobb: Another question - and this is for Tom - is a young company. What are the best practices around the compensation strategy for multiyear deals paid annually? Relative to quota credit, commission credit, or both? That's that elusive best practice, isn't it?
Tom Wilson: It is. Well, the prayer is probably the best practice there. Seriously, I think that the - as a young company, part of what's happening, as I implied by that, is that you don't really know what the next two or three years is gonna look like.
So if you lock somebody, a salesperson, into a deal that they're gonna get X percent on every deal, that volume could go from $7,000.00 a month, using my example, to $70,000.00 a month, because of the success of that company.
Part of the things you need to think through is what is fair and right, relative to what the salesperson delivered? And so you may wanna put, if you will, like a renewable experience, renewable - I'll call it rates. There's a point where a person - as a salesperson no longer has really much affect at all, in terms of the renewals.
If you'll notice on one of my little graphs that I had, I had the line going up and then curve and went down. An implication of that was that there is a time where the company's no longer really - the company is driving the relationship and the experiences they've had with the products and services, et cetera, not really related to the salesperson.
So you wanna, in fact, discourage them continuing to get harvesting or getting cash from old customers, because you want them to move on to new customers.
I wish there was an easy answer to that. I guess the thing I would look at, where the best practice is found is in doing the math, looking at the alignment and doing the - I love the examples of what Makana has, in terms of their what-if modeling, that allows you to say, "What happens if our wildest dreams come true? What happens if they don't?"
In that, you'll find hopefully a best practice or some level of truth.
Liz Cobb: Another question is, what should the sales management compensation look like in a SaaS model?
Tom Wilson: That's a great question. I would answer it two ways, one of which is the salesperson's - the manager's, rather - the sales manager's job to handle the big accounts and to be the big closer and to be the big gun, in which case, they need to share , in terms of either overrides or things of that nature, or even maybe perhaps have their own book of clients.
But we tend to find sales managers have a mixture of roles that, as a - and you may wanna look at it this way, that says part of it relates to an override of their salespeople. Part of it may be from their own book of clients.
What you do not wanna do - I'm putting a little strong emphasis here, picking up from my tone of voice, have them cherry-pick the best customers for themselves or for certain people who they wanna do, and leave the others to fend for themselves.
I have seen that and, I'll tell you, that would undermine your relationship with the company's sales force faster than anything else. So in looking at what the role is of the sales manager around being dependent upon the success of the people that he or she supervises, that's gonna be a critical piece.
So look at that. Sometimes overrides and sometimes their own book. Sometimes they need to be seen more as management and, therefore, have a slightly different model about how you wanna set it up.
You may shift from - once again, from a revenue model to a profit model, in terms of how you wanna look at sales.
There's a lot to that question than more time we have. You should do a whole webinar just on sales management compensation.
Liz Cobb: That's a good idea. We're gonna do one last question. I'm gonna answer it, so it'll be - so I an -
Tom Wilson: [Crosstalk].
Liz Cobb: I'll try to be fast. It's actually a long - it's a question that could have a long answer. But what percent do you think should be paid out for SaaS sales and support?
I think that the reality there, it's not the percent per se by plan. I think you need to look at the company as a whole and understand the percent of revenue budget, which will then get divided out amongst the various roles.
That actual percentage is gonna be related - as Tom said, the best practices is found in the math. Well, you're gonna be giving up those percentages, and then you need to, by role, compare - benchmark it.
This is where there's compensation survey data out there. There's quite a few vendors. I will plug Culpepper, because I've used them for a year and they're very focused on software as an industry. They have all these different job roles out there, and they do understand what the competitive target total comp needs to be.
So when you're designing each particular job role, it's important that the target total comp comes out correctly, and the mix and leverage comes out correctly.
Tom Wilson: I've sometimes seen as the total cost of sales in this arena is eight to ten percent, as you think about your margins, et cetera. But a lot has to do with what margins you're getting from your software. If you're getting 50, 60, 70 percent margins on your software at a low price, then ten may be a little tight. There could be other kinda models that you wanna do.
But in a sort of standard software, we see that kind of a total comp in that .
Liz Cobb: Yeah. I've seen that too.
Tom Wilson: Okay.