I promised some weeks ago to write a blog about effective sales (and marketing) KPIs. Fact is, I made a detour with a review of Kenichi Ohmae’s “The Mind of the Strategist”, to some extent driven by a reluctance to address an established area in management science in which everybody might claim to be an expert, and in which novel and stark insights are hard to come by.
However, it is 2015 and time to get to work. I will start with the observation that most organizations have sales KPIs in place, but they are not used effectively, namely to drive short-term and longer-term order intake, and many sales KPI programs are outright failures.
Let us first set the context: Sales KPIs generally come in four flavors: i) activity-related KPIs (like calls per day, meetings per day, lead generation); ii) performance-related KPIs (like lead-to-opportunity conversion probability, win probability, opportunity velocity, average deal size, and customer attrition); iii) pipe-related KPIs (opportunity inflow, incl. net / gross pipe, and pipe growth); and iv) outcome-related KPIs (like order book, order intake, revenue, and growth). All these KPIs can be split along a number of dimensions, including person, team, product, territory, and channel. All these KPIs are neatly connected through the Sales Manager’s Law: sales = win probability x gross pipe x pipe velocity (= sales period / average sales cycle) x opportunity visibility horizon correction (= sales period / opportunity visibility horizon).
Let us then explore why sales KPI programs fail. From my experience as senior line manager and strategy advisor to technology companies, such programs typically fail for one or more of the following reasons:
- Lack of organizational agreement as to reasons for introducing the KPIs: Do you want to use sales KPIs to increase organizational learning, to guide operational decision-making, or to jettison under-performing individuals, product groups, or divisions? Unless you have a clear perspective on these issues from the outset, it is unlikely that your sales KPI program will succeed.
- Inappropriate or irrelevant specification of KPIs: Are you in a resource-constrained situation, in which a limited number of individuals select and pursue opportunities from an infinite pool of opportunities? Or are you in opportunity-constrained situations with purchasing-driven processes (think for example the defense industry)? Failure to appreciate that different industries require different KPIs may seriously hamper the effectiveness of your KPI program.
- Too many, too few, too high level, too low level: With too many, you risk information overload; with too few, you risk poor decision making and opportunistic behavior. With too high level, you risk lagging indicators; with too low level, you get bogged down in operational details.
- Lack of well-defined targets for KPIs: Some people say: the higher, the better, and that’s it. Wrong, in my opinion. Right answer is that you should a) ensure consistency between KPI targets and other targets in the company, e.g., revenue budgets; b) compare KPIs with internal or external benchmarks; and c) follow KPIs over time.
- Manual and / or delayed and / or infrequent calculation of KPIs: I guess most of us have seen for real: a request from the Board to the CEO about getting a system for sales KPIs in place, and the CEO responding by reporting some more or less accurate numbers, manually calculated, to the Board 4-6 times a year, and never to be seen again.
- No systematic process for driving learning and performance: A set of sales KPIs may of course be introduced solely to measure performance, and weed out under-performers. This is however rarely the case, and most organizations adhere at least in principle to the idea that sales KPIs should be used for organizational learning and improved decision making. Why are then many of the same organizations not putting in place processes for driving such learning and performance, for example in the form of formalized coaching of sales staff?
- Misalignment with the incentive system: Most sales execs are compensated based exclusively on order intake (plus base), which is generally just one of many typical sales KPIs. A focus on improving these other sales KPIs is then a losing proposition for the individual sales execs, while a useful endeavor at an organizational level. Compensating sales execs based on a larger set of KPIs is of course possible, but such approach introduces a range of other complexities.
- Stimulation of unintended or unwanted behaviors: This issue is from my experience less of a problem with sales KPIs than with certain other types of KPIs, as most sales execs have hardwired the focus on order intake into their brain, and order intake is really the ultimate objective of any sales organization. That said, sales execs are competitive folks, and some sales KPIs can be manipulated at various organizational levels.
In sum, if you want to implement sales KPIs in your organization, here is how to do it:
- Agree internally on your reasons for implementing such KPI program.
- Identify relevant KPIs, and find ways to calculate them. (And do a full-scale dry run, just to ensure that you the have necessary system support in place.)
- Set targets per KPI.
- (Partially) automate the calculation of sales KPIs, and get your hands dirty by not insisting on statistical significance.
- Calculate and disseminate sales KPIs on a period basis, typically weekly or monthly, in some real-time organizations daily. Extract learnings from same, in management meetings and sales staff meetings (and complement with coaching and case studies, for example in the form of win reviews and loss reviews).
- Align sales KPIs with bonus schemes, across the organization. Also, monitor unintended consequences and unwanted behaviors.
- On an annual basis and in synchronization with the budgeting cycle, go to (2) or (3).
A final comment: Some organizations claim to have sales KPIs in place without a proper CRM system in place. In my opinion, this is delusional thinking; it is very difficult to envision an organization with the ability to calculate and make effective use of sales KPIs without the necessary system support in place.