SALES: plugging the loopholes
May 1, 2000 12:00 PM, Alan Kruglak
As part of living in a civilized society, we abide by a set of rules. Thetax code represents one set of those rules. Failure to follow the rules andpay your taxes is a crime that is punishable by jail time. If, however, thetax code does not address a specific income-generating activity, and we donot pay taxes on it, it is a loophole. Everyone looks for loopholes - waysaround the rules.
The same concept of rules governs sales and the selling process. Inperforming their job, your salespeople follow the rules that you haveestablished, especially when it comes to estimating the costs and price fora project. As with the tax code, salespeople look for loopholes that willenable them to generate more income, but what happens when a project comesin way over budget?
Rather than examine the rules governing the sales process, the firstresponse by management is a knee-jerk reaction, identifying sales as theevil Darth Vader. With retribution in mind, management thinks, "If thesales rep screwed up, deduct it from his commission." Although tempting,this type of impromptu change to the sales compensation plan createsanimosity between sales and the rest of the company.
Another common response by management is, "We'll pay them based on theactual rather than estimated profit." In either case, both types ofresponses ignore the rules governing the sales process and could motivateyour salespeople to manage projects actively, taking their time away fromselling.
A look at overages
If there are labor or material overages on a project, why does sales playsuch a pivotal role? As the saying goes, garbage in, garbage out. If theinitial package sold to the client has problems, they usually surfacesometime during the project, negatively impacting the bottom line.
Although your first instinct may be to blame sales, you cannot. Remember,the salespeople are simply doing what you want them to do - sell for thecompany. Unfortunately, without the proper product design and estimatingguidelines established by management - the set of rules governing theirbehavior - many of their sales will go over budget, potentially sinking thecompany.
There are many ways the sales process can adversely affect your labor andmaterial budget for a project, one of which is new products, a lack ofuniform standards. In the heat of battle to win a highly competetiveproject, there is considerable pressure to incorporate newer products andadditional manufacturers into a system design or proposal. There areseveral reasons for this behavior. First, the request for proposal (RFP)may specify a new product as part of the specification, forcing your hand.The second, more common reason is that the salesperson is trying to beinnovative, using less expensive but newer technology never seen by yourcompany.
I understand this behavior. To date, I have never met a salesrepresentative (or owner) willing to walk away from any project. I knowbecause I have been there. For most of us, winning is all that matters;that is our mission. We will do whatever it takes without violating therules. If there are no rules governing the use of new products, then thatis known as a loophole.
Unfortunately, incorporating new products in your system designs on aone-time basis to win a new project without proper consultation with theother departments can have a devastating impact on labor productivity. Thefinancial ramp-up costs to carry a new product line can hit more than$100,000. Adding new products can also place severe strains on yourtechnical infrastructure; by stretching them thin, you are limiting yourability to address field problems expediently.
Another way in which sales can affect a project budget is through salesestimation, a non repeatable process. Of all the inventions of the late20th century, one of my favorites is the electronic spreadsheet. It hasbecome a powerful tool for estimating and managing projects, but mostcompanies using spreadsheets for estimating proposals have established fewrules on their use. In many cases, when salespeople prepare new estimates,they are required to type in every line item, including material cost andlabor hours, creating the opportunity for mistakes and artisticinterpretation. For instance, the number of labor hours required to installa system is often based on a salesperson's optimism, gut feeling or desireto win. Did they include all items? Without well-defined rules, theestimation process becomes a non-repeatable, subjective tool of thesalesperson.
Moreover, there is the proposal, which is open-ended. The content andstructure of your proposal can also influence the profit from a project.The looser the rules governing the structure of your proposal, the greaterthe potential for labor and material overages.
Finally, improperly defined job approval and documentation can impact thebudget. Once a project has been sold, transferring the pertinentinformation about what is and what is not included in your proposal is adifficult task, and omissions will take their toll on labor productivity.If the salesperson writes up the project poorly, provides vaguedocumentation, or makes it difficult to read and understand, otherdepartments responsible for designing, installing and servicing the systemmay miss certain items. In some cases, your installation department couldinstall items not included in the original scope of work, missing animportant change-order opportunity.
I do not enjoy paying taxes, but it is the law, so I follow the rules andpay them. If my accountant sees a loophole, I do what every otherlaw-abiding citizen does - I take advantage of it. Your salespeople are nodifferent. If they see a loophole, they will push the envelope. It is nottheir fault; it is a failure of management. Recognize how rules affect thesales, and you will increase profitability.