The Cost of Chaos – Part II

Yet the knowledge of how to maintain a healthy weight isn’t a mystery. We know what to do and we know what we shouldn’t do. And even with all the science and evidence to the contrary, we keep trying the latest fads, buying the books and pills and programs that promise the silver bullet.

Guess what … there’s no silver bullet. The answer, the experts tell us, is to change our habits one small step at a time. Enjoy one glass of wine, not of two. Dressing on the side. Whole wheat for white. Take a walk. Simple, habit forming, and cumulative.

Reducing “The Cost of Chaos”

The same concept applies to fixing what we call the Cost of ChaosTM – the penalty for not aligning a principle-based revenue strategy throughout your organization.

What exactly do we mean? Well, “revenue generation” is one of the highest expenses on the income statement. And guess what – there’s enormous waste in that figure.

Companies try this new marketing program. Hire that hotshot sales rep. Add a new twist to the customer offer. Design a new logo and attend the big name trade show. In other words, companies are constantly searching for a silver bullet and, while conducting that search, pour money down the drain at an alarming rate.

This is such a critical concept in the generation of revenue that we’ve divided this article into three sections.  In February we wrote about the negative effects the Cost of Chaos has on the people inside an organization. This month, part II focuses on how to identify chaos points. Then next month, we’ll discuss how to solve the typical chaos points.

To gauge your progress, find the metrics!

If you want to know whether you’re losing weight, you need a scale to link your daily activities to the results. The same principle is true in revenue generation.  To identify points of chaos, you first need to measure key indicators that point to chaos.
So this month’s action plan is all about identifying those chaos points in your organization.

Action plan to identify chaos

1. Start tracking your revenue roadmap.

The revenue generation process differs for every company, but the basic steps are the same. The roadmap starts with investigating suspects and ends with delivery:

Investigate   >>   early qualify >>  late qualify   >>   solidify   >>   deliver

In each step, there are measurable metrics which – if improved – will reduce the Cost of Chaos.  For example:

•    Length of sales cycle
•    Number of suspects that convert to leads
•    Number of leads that convert to clients
•    Profit per deal
•    Repeat orders from existing clients
•    Referrals from clients

Pick a measurement from this list (or substitute one of your own) that will have the greatest revenue impact or is fastest / easiest to improve.  Then measure your current state and set an improvement goal that, if realized, will have a measurable impact on annual revenue and cash flow. For example, you may realize that your current average “length of sales cycle” is 6 weeks.  Based on your estimate of the financial impact, you could set a goal to reduce it to four weeks.  Then implement plans and measurements to track your progress … just like a scale.

Tip: Don’t attack everything at once – it would probably require massive change.  Instead, pick one step that is doable, habit-forming, financially rewarding, and has a degree of visibility that can be celebrated in your organization.

2. Know your cost per sales hour

When you hire an attorney or CPA, you use their hourly rate to decide which projects are worth the expense.  But do you know what your sales reps cost per selling hour and what it costs for downtime?   Here’s a simple but eye-opening way to do the calculation.

First, calculate the direct & indirect costs for each rep:
Base salary: 75,ooo
Commission: 37,500
Travel & entertainment: 15,000
Internal support: 20,800
Fringe benefits: 15,000
TOTAL: 163,300

Next, estimate how many hours a week your reps spend selling (moving a deal forward when no one else can do it better or cheaper). Hint: best of class is only 8-10 hours per week; average is just 1-4 hours per week!  But these abysmal figures don’t mean your reps aren’t working hard – they’re just not moving deals forward. Thus, you must think about what they’re doing that can be eliminated or delegated to a less costly resource.

Now calculate the cost per sales hour = Total cost per rep / (Hours per week selling * total weeks worked per year). In this case, your cost per sales hour is 163,300 / (2 * 48) = $1,701.

Now you can really quantify the cost of those sales meetings, expense reports, and unproductive activities. What would it mean for your revenue and sales expense if you could increase the numbers of hours sold by even one hour a week?

Keep sales reps SELLING!

3. What does it cost to have multiple offers that lack clarity?

Is everyone in the organization clear about the offers being made to the customer?  By “offer” we mean a detailed description of the product/service provided along with HOW that product/service is provided.  A printing company may sell printed brochures AND they also sell design services.  That company has two separate offers delivered in two different ways to satisfy two different problems.

Does your company have defined offers to a specific market niche that are consistent with a clear revenue strategy? If not, salespeople will naturally sell whatever they need to sell to make commission and chaos will reign.  Their lunch conversations will sound like this:

•    “We need to find a way to deliver this.”
•    “The client wasn’t expecting that.”
•    “Let’s just do it for less this time by eliminating this part.”
•    “I didn’t know we included that!”
•    “Why did we do it that way?”
•    “When did that change?”

Lack of clarity and consistency in offers wastes untold dollars that show up in areas like unhappy and lost customers, extra staff, re-work, lost time, additional inventory, increased sales cycle, decreased margins and squandered resources.

4. What’s the ROI for every marketing program?

Marketing programs are frequently tried and discarded based on passing fads, the latest best-selling book, or a competitor’s tactic. With the exception of building brand awareness (which is extremely difficult to measure for small companies or B2B firms), every marketing program needs to have an ROI goal.

In order to measure ROI, two important definitions need to be in place.

1. What is a qualified lead, and is the definition clear to everyone in the organization? Tracking leads frequently leads to a great deal of chaos. But focusing on QUALIFIED leads focuses your efforts and quantifies results.
2. What is the lifetime value of a client? Without knowing the value of a client to the firm, it is impossible to gauge the true return from a marketing program. In order to calculate the CLV, you’ll need the following data:

•    The number of purchases the client will make during the lifetime with your company
•    Average revenue per purchase
•    Gross profit margin for the type of revenue generated by this client

Create an ROI measurement prior to investing in any marketing programs such as trade shows, web initiatives, direct mail, ads, PR and so forth. This way you not only can track success, but you can also improve on what’s working.

5. Are you investing in RFPs?

The RFP process, by its nature, is designed to benefit the purchasing company. As a result, it creates an enormous breeding ground for Cost of Chaos among selling companies. There are a number of strategic questions surrounding the decision to even participate in the process. However, before analyzing those issues, collect the metrics that will provide decision-making criteria.

How much does it really cost to respond to a RFP?
•    How much time does an RFP take?  Start from the moment you learn about the opportunity and end at the time you complete the project and compare it to your normal business.
•    What is the organization’s % of wins?
•    What is the average margin (gross & net) associated with an RFP?
•    What is the cost of supporting an RFP-based project?
•    If you weren’t doing RFPs, would your staffing change?

CONCLUSION

It’s difficult to over-estimate the cost that results from not aligning a principles-based revenue strategy throughout the organization. In fact, estimates range from 5-25%!

With such a large nut to crack, many firms choose to ignore the problem and hope that a silver bullet will show up. Instead of falling into that trap of wishful thinking, think small. Start taking a few steps that you believe will either a) have the most significant impact on your organization or b) are easy ones to fix. Then, with the baseline established, start implementing small changes and habits that will ultimately lead to a significantly more profitable bottom line and release the top line for growth.
As you identify the points where chaos creates cost and loss of revenue, ask yourself what you can do differently once the chaos ends. In other words, how do you use new available resources to advance your strategy? Next month we’ll discuss ways to solve some of these points of chaos and then you can start applying the found time and money to the next revenue stage.

At The Revenue Game we’re passionate about working with leaders who are committed to developing a revenue generation focus in their organization.  If you would like to learn more about The Revenue Game and the services we provide click here. (www.therevenuegame.com – link for the click through)

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