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9 Sep, 2010 By: Gary Halperin, FPL Reports imageSource


Not many of us have had the opportunity to work through the entire process of either taking a company public or through a high end refinance project. These transactions are piloted by investment bankers and venture capitalists. They know they are not industry experts so therefore their first priority is to learn as much as they can as fast as they can. When these “big boys” get involved they are highly focused on uncovering the exact drivers of a business, the sensitivity around each of these drivers, and what the potential revenue and profit is from each operating element of the entity. These transactions become amazingly detailed and thorough.

The process these bankers and venture capitalist use to “get knowledgeable” on what makes (your) or these business tick for in-depth analysis, is to build a business model.  When they are finished, the working model is an exact replica of how your company operates and has levers for every driver and decision. These experts can then do the “what if” scenario for you to better manage getting the maximum results out of your investments. So, if outsiders use a tool like this to examine all of the moving parts, why aren’t the business owners who operate these companies doing the same thing?

If you use your internal resources or have assistance outside of the company to build a business planning tool or model for your business, you might have the same level of ability to analyze and plan as many professionals have.  You would have a tool to help you visualize what you have planned and an evaluation tool to show you the impact of each decision. 

What have we learned in running scenarios with a robust business planning model? 

 The area that has showed the greatest impact on profitability is all of the decisions surrounding rep hiring, rep turnover rate, and the ramp up speed for new hires. It is quite astonishing to watch how sensitive the model is to these factors and how it responds to small changes. Consider:

  • Ramp Rate:  How long does it take to train a newly hired rep and manage them up to expected levels of productivity? Most business models use a gradual increase in effectiveness over approximately six months. Can this time be shortened with enhanced training and great sales management?
  • Turnover:  What is your turnover rate?  If you typically have three reps but lose one each year, then it’s 33%. The industry average for companies with larger staff can be as high as 50%. 
  • Hiring Plan:  The effects of the first two drivers have great impact on the bottom line.  What is your staffing plan to meet your revenue and profit goals?  Have you factored in how long it takes to begin recruiting and the entire interviewing process?

When you have rep turnover, your territory underperforms for at least six months before it’s effectively managed and producing again. When you factor in the time that it ran ineffectively before you turned over the non-producing rep, you have significant revenue shortfalls. Added to that lost revenue opportunity are the sunk costs of supporting the non-producing rep before they left, and the new non-producing rep as they ramp up.

What can you do about this? 

The goal is to keep good reps productive so that they don’t leave. If they do leave, have a plan to get the new hires as productive as possible, as fast as you can. Lastly, have the proper headcount to meet the goals of the company.

  • Hire and demand exceptional sales management: Your job as a business owner is to train and manage the sales manager, not the reps. A great sales manager settles for nothing less than creating and supporting great producing sales reps.
  • Have a product that a good sales rep can win with in the marketplace: You must stand for something in your territory. Once you do, ensure that your product offering; gear, service and pricing, are in line for your reps to have something to build a compelling story around.
  • Have a competitive compensation plan that rewards the right behaviors: Reps will not leave if all of these are in balance.
  • Training: Continually add credible training for your managers and your reps.

If business owners would take the costs that they have lost as a result of poorly executed sales management, and the ineffective sales strategies and convoluted compensation plans, then utilize those same dollars up front in training and great leadership, they would gain significant top and bottom line performance.

The second largest impact and driver that affects the bottom line as a result of running scenarios in the model is: base attrition. Attrition is defined as your upgrades as well as your straight customer losses.  We all know that “net new adds” is what drives growth. We also are aware that if we don’t have a well-envisioned upgrade program that our competitors will.  Upgrades are a significant piece of a sales strategy!

Attrition rates are probably in the 25% range; meaning that 25% of our base turns over each year. Assuming a base of 1,000 machines, losses from competitors and upgrades are at about 250 machines per year; or 20 per month. If you have five reps each selling four boxes per month and their upgrade rate is 75%, the reps are upgrading 15 boxes while losing 20.  They’re adding five new boxes to replace the losses. So at best you are marching in place. When you add in factors such as lower S&S revenue from the new boxes, you may actually be losing ground. This is where the model again demonstrates its value. This would not be nearly as visible in the normal course of management. If your intention was to grow your revenues, inputting the five existing headcount into the model with no additional hiring would yield diminishing results as the year progressed. Therefore, you have to go back to your business planning tool and plan for additional hiring and ramp time. Now, add your turnover rate and your ramp time to get the new hire up to speed and you will likely discover that simply replacing that one rep will still have you running behind your plan.

In summary, what did the professionals learn from the model and performing “what ifs”?  That the two largest areas that impact the profitability of an Office Products Dealership are: effective leadership in reducing turnover, and fully managing all of the issues around base attrition.

An even greater moral to the story is, to continually succeed you should have a truly effective management process. Do your qualitative planning with all of your key decision makers routinely.  Take all of the decisions and plug them into a fully configured business planning tool that mirrors your company’s operations. Then ask, "Did we get the financial results that we were expecting as a result of our planning sessions?” If not, analyze where and what the issues are. Go back to the table with the group and revise the qualitative plan inputting the new decisions into the tool; continuing until you get the desired financial goals out of your business model.  The last element to succeed is to hold each other accountable for the execution of their commitment.  That’s how you achieve success.

Gary Halperin is a long time Office Products Industry financial leader and has built financial models and planning tools for this industry.  He was CFO for IKON in Seattle, CFO of Print, inc. and a Consultant for eAutomate.  For information visit www.FPLReports.com

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