Dr. Tom's Tips-June

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 Last time we focused on how difficult it is to find good sales people. From the responses I received, this topic from my upcoming book Square Pegs, is one that is important to you and you want to hear more.

Our topic this time: The cost of sales and the cost of no sales.

Making a bad hire in sales can be brutally expensive. All jobs are valuable and a bad hire in any position—from the board room to loading dock—can diminish a company’s profitability and productivity. But sales people have a direct impact on the top line. If they don’t hit their numbers, the company won’t, either.

In The War for Talent, based on a McKinsey and Company study, the authors found that a top performer in a sales organization will make 50 to 100 percent greater contribution to the firm’s revenue than an average performer. A top tier sales person on average increases revenue for his or her company by 52 percent, while the average performer averages just 4 percent revenue growth.

Even if we just look at it from the mundane standpoint of what it costs to hire and fire a nonperforming sales rep, the costs are high. To calculate them, try to answer these questions:

How much did it cost to recruit the person?
How much salary and benefits did the person get?
How much did it cost in time and resources to get the person up to speed?
How much management time was spent in coaching and “motivating” the underperforming rep?
How much did it cost for HR (and possibly legal) to take the steps necessary to terminate the person?

It all adds up. In fact, my friend Ed Ryan often speaks with CEOs and other business leaders about these costs. Ed has developed a rule of thumb—a bad hire in sales costs a minimum of three times the sales person’s salary. Time and time again, in seminars and consulting engagements, the leaders he talks with simply shake their head and mutter, “Too low. Way too low.” These senior executives know that the management and administrative costs associated with a bad hire in sales compound quickly.

What about the potential impact of squandering opportunities, wasting leads, and damaging goodwill among customers? After all, no one measures the financial value of sales people to the company by looking at their salary. We measure their value by looking at their quota and whether they achieved it or exceeded it. If a sales person has a salary and benefits package that amounts to $125,000 a year and an annual sales quota of a million dollars, failing to sell anything at all would result in an opportunity cost eight times greater than the cost of the salary and benefits. Sales people aren’t expected merely to generate enough revenue to cover their own salaries and benefits. We expect them to generate five or ten times that much, revenue that’s needed to pay other salaries, fund product development, cover the costs of marketing, R&D, and operations, pay shareholder dividends. When a sales rep fails to make quota, he or she is cheating the rest of the company’s employees out of the money they need to do their jobs.

Oddly enough, even though the costs of a bad hire are enormous, many sales managers hang on to underperforming sales reps. It seems counterintuitive until you look at it in terms of “sunk costs”.

Economists and psychologists know that human beings often behave irrationally. If someone buys a stock at $75 and watches it spiral down to $30, the stockholder may actually buy more of it. If someone has spent five years of active involvement in a cult, that person will perform complex mental gymnastics to refute evidence that the cult leader is a fraud. In fact, even if the leader admits to being a fraud, many believers will refuse to believe the confession just so they can stay consistent with their beliefs. Governments that pursue a policy only to have that policy produce disastrous results—you might think here of Mao’s five year plans or of Bush’s invasion of Iraq—will stubbornly cling to the policy, ignoring critics and perhaps even attempting to silence them.

Think about this from the standpoint of an individual sales manager who has hired someone who’s not working out. The temptation for the manager is to escalate his or her commitment to that hire by investing more money (in the form of training, software, or support) or time (coaching, mentoring) to make it work. Even if the person continues to underperform, the hiring manager may find ways to rationalize keeping that individual on board. It’s irrational but it’s quite human.

Psychologists have documented the phenomenon of escalating commitment in numerous contexts and the fact that it leads to poor decision making. How often have we seen a player pour more coins into a slot machine because “I’ve already put too much in to give up now”? How often have we seen a battered wife give the jerk “one more chance because we have so much history together”? Barry Staw, a professor at the Haas School of Business at Berkeley, studied the way general managers of NBA teams handle their first-round draft picks. He found that the higher the pick, the more likely that player was to stay on a team roster and get playing time—even if the player was not performing! When you think of it those contexts, a manager’s reluctance to give up on a nonperforming sales rep is less surprising. (It also throws a new light on Jack Welch’s famous mandate to fire the bottom ten percent across the board every year at GE.)

What about you? Do you think that with enough training, the right coaching, and inspiration, a nonperforming sales person can be turned around? Or do you think it’s better to pull the plug quickly? And how quickly should that be? Send me a note tsant@hydeparkpartnerscal.com and I’ll share your feedback next time.

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