Strong revenue growth is a major value creation engine often overlooked by private equity investors early in the investment cycle. Businesses demonstrating such strong growth distinguish themselves in commercial excellence, says Blue Ridge Partners managing partner Jim Corey.
Reflecting on the performance of more than 400 B2B companies in North America, Europe and Asia spread across an array of sectors, the vast majority of which had private equity owners, Corey notes that high performers benefit from several shared traits. He describes what they are and where the pitfalls lie.
You say focusing on your core business is essential for growth. Why do companies drift away from it?
It’s often easier for a business to think about new paths to growth such as expanding into a new geographic market or selling to new customers. But these initiatives are high risk and might allow competitors to strengthen their foothold in your core markets. These expansions outside the core can diffuse management mindshare and spread capital and expense budgets over a greater range of topics. As a result, businesses sometime become mediocre at everything rather than really good at a few things.
But there must also be reasons to expand?
There are good reasons. Companies where, for instance, their current market is not growing, or a new competitor has leapfrogged them in terms of technology or capability, ought to think about moving beyond their core. The key question is whether there is sufficient opportunity for a company to profitably grow inside their core. If there is, they ought to stay focused there. It’s what they know. Then, their task is to execute more effectively and to periodically redirect resources from low opportunity to high opportunity areas.
Establishing a “culture of growth” across the entire business is one of your markers of high performance. How easy is that?
It’s very challenging. It’s about incentives. The sales organisation is very motivated by growth because they are on commission or a performance-based bonus plan. The legal group, that needs to review the sales contract, is not. Their priority is to make sure no mistakes are in the contract. Top performers have realised that selling is not just about the sales organisation but the whole ecosystem of departments that are involved. These businesses know the expenditure of resources from other parts of the company is meaningful and productive. They establish service level agreements with other departments to measure output and incentivise them to be responsive to the market. If the business doesn’t work together it won’t achieve its goals.
If improving sales productivity is critical, to what extent is the customer driving changes within a sales operation?
It’s profound and just beginning. Many of the habits and preferences that were developed in the B2C market, which we all experience in retail, have permeated the thinking of the next generation of buyers. They are younger and very accustomed to doing their own online product research; in some cases, these buyers would rather not interface with the sales representative when it comes to order entry; and they don’t want to meet them as often.
In response, a business must fundamentally rethink how it interfaces with its customers. How do you keep your brand and products at the forefront of the customer’s mind without being in front of them as often? The sales team must stay in contact another way and it’s likely to be through social media, email and webinars where they share knowledge capital and data of value to customers. This means a strategic shift to a company-directed model and rewriting the playbook. You can’t leave it to an individual sales rep to figure this out alone.
Typically, how effective are sales supervisors in executing the playbook?
Most are largely ineffective. It’s amazing. It’s a perfect storm of a critically important business function meeting a weak skillset without the proper training, discipline and tools. Sometimes businesses have the wrong people in this role. That’s because typically supervisors are high performing sales representatives who were promoted but never trained. Sometimes they just don’t have any tools to enforce process discipline, for example a system that generates a weekly calendar reminder to coach a sales rep that includes performance data and is linked to a learning management tool and online training modules. High-performing companies upgrade the sales supervisor skill sets and bring process discipline to the job.
It’s striking that some businesses overlook pricing as a profit driver. Why is that?
Companies need revenue and conclude that if they have to discount the price to win, then they should. Holding firm on price feels risky because they might lose business. Also, many sales incentive plans are still based on revenue rather than margin achievement. Sales people chase commission. Selling at a reduced price means at least they get something.
Companies also don’t have good competitive intelligence on pricing. They have anecdotal information and some of it is very dated. And many B2B companies lack a system to help them make pricing decisions based on recent wins and losses.
High performers solve all these problems. They have a single person, a “pricing czar” who develops pricing structures, processes, tools and performance analyses. They change commission plans to have a much greater emphasis on margin achievement. If a rep lowers the price, they lower the margin and they won’t get paid so much. Top performers have a real-time pricing system displaying wins and losses, as well as mystery shoppers and other ways to gather intelligence to ensure they are competitive on price.
SKILL VERSUS WILL
It’s astonishing that in many B2B businesses between a third and a half of sales people lack the skill or will to execute their role. Why is that?
Sometimes you see a low skill/low will evaluation because sales reps are not getting the right kind of coaching and supervision. A disciplined coaching approach is important. Too often a sales supervisor will spend inordinate time helping a sales rep reel in a big fish. When that happens, all the other sales reps receive little or no coaching or advice at all.
Most sales training programmes are actually product training and don’t encompass the more nuanced points of how to sell, such as time management, segmenting the market, listening to the customer rather than pushing products and varying the message to resonate with the buyer.
Top performers offer product training of course, but their programmes also include how to find new leads, how to configure the product offering, getting to the proposal stage, thinking about the buyer and how to deal with buying committees. Most B2B sales aren’t made to a single person anymore. There is a team of buyers and knowing who is the decision maker and who are the influencers is a learned skill.
Is it hard to find talent?
Often candidate sourcing is too narrow and screening is not very disciplined. Many B2B businesses lack thorough assessment processes for new sales people. Inevitably, in some cases they hire people that aren’t fit for the job. A sales supervisor is often reluctant to replace someone who is struggling when the alternative is an empty position and no revenue while they search for a new person.
High performers have a stream of sales candidates bubbling in the pipeline. When someone has performance problems the swap out is faster. It’s never perfect as there are ramp-up times, but at least there are candidates to consider. One high-performing business services company we worked with interviewed candidates first and then asked them to come back and pitch the business to the recruiters as if they were the customer. They were surprised by how many people they had thought were great in the first round couldn’t do it.
When designing a commercial organisation, what works best?
Most B2B companies are not highly thoughtful about how they face off against the market. There are lots of different ways to organise a sales team. Some companies have the hunter, who finds new accounts, and the farmer, who sells to existing customers, in the same person. Some have split it out. There isn’t a single right answer. But the high-performing companies have thought through whether they should separate these roles, whether they should have key account managers, customer success teams, win back teams and other role definitions. They also include capabilities like sales analytics, tools and company directed processes in their organisation design.
When you suggest businesses review their commercial organisation, do you mean they should change it?
No. Most high-performing companies do this annually as part of their strategic planning. They begin by asking: has there been a change in our market and therefore should we change something about how we go-to-market?
What’s the “give-get” approach to implementing change?
Instigating change in any group is difficult. Sales people are particularly difficult. They know what they are supposed to do, get paid on performance and want to be left alone. That runs counter to a company-directed sales process.
How do you change sales people? Forcing them doesn’t work. Smarter companies use a “give-get” approach. For example, the company employs more sales support and customer service staff to take over burdensome administrative tasks. In return for freeing up the sales team’s time, which allows them to make more money, the company asks its sales reps to regularly update the CRM system so the company can keep track of new proposals. It’s an easier way to make change happen. High performing companies have figured that out.
If you were a private equity investor, what immediate changes would you make to improve performance?
I’d focus on the core business quickly. We tripled the value of one company by working on that. Sales productivity is flawed in every B2B sales organisation I’ve ever seen. I’d address that early. When fund managers buy a B2B company, there is a very high probability that the organisational design of the sales team needs attention. I would review this in the first six months of ownership.
Fixing all of the above issues early in the ownership lifecycle can have huge pay offs. Sixty percent of all value creation over a five-year holding period comes from accelerating top-line revenue growth. Because the deal team didn’t underwrite revenue growth in the investment thesis, it gets deferred when the team gets busy with executing the value creation plan. Then they wake up two to three years into the deal and realise top-line growth isn’t moving in the direction they would like. By then they only have a year or two left in the holding period and the range of options has dramatically narrowed to issues they can fix quickly. Some of the more astute private equity managers are now actively addressing all these topics.
MISSING THE PRIZE
How do companies get better at pricing?
There are two basic components high-performing companies think about. The first is do you have pricing power, meaning a differentiated offering that allows you to charge a premium price? It might be that in certain industry segments, certain buyer profiles would pay more.
The second component is pricing capabilities related to internal execution and strategy. Who approves pricing discounts? Does the business have that automated system that lets it see win/loss pricing? Is the commission plan motivating the right kind of behaviour?
Scoring of these two components helps a business understand both the total pricing effectiveness as well as its component pieces, and where the opportunity might be for improvement. There are lots of companies that have little pricing power, so they need to focus on their pricing capability and discipline.