Given the economic impact of the COVID-19 health crisis, many companies are wrestling with decisions on what to do with their sales organization. While many companies such as Salesforce.com (in March 2020) made pledges to not conduct any significant layoffs for 90 days, the longer the crisis goes on, the more companies will look at their sales investments and whether downsizing is the right thing to do.
Downsizing may sound attractive as clearly sales productivity, as measured by margin per sales employee, is down. But whether this is the right decision in the long-term depends on the shape and length of our eventual economic recovery. If we have a V-shaped recovery with rapid improvement in the economy starting later this summer, it may benefit a company to keep their sales teams intact now, so they are positioned to capitalize on the upcoming recovery. However, a longer and less rapid recovery will tend to require tough decisions on the right size of the sales force to maintain now. We anticipate that the recovery will look very different in different regions, so decisions may vary locally on whether to maintain or reduce sales headcount.
So how should a company go about making these decisions? We believe companies should vigilantly model their sales profitability by using what we call Recovery Based Sales Capacity Planning. Before we get into details on this approach, let’s review a few sales capacity fundamentals.
Sales Capacity Fundamentals
Generally, sales capacity (i.e., the amount of revenue and profits and sales organization can drive) is based on the following factors:
- Average Productivity Per Rep: The average amount of margin (revenue * product margin) that can be attained by month for each sales headcount
- The Number of Fully Ramped Sales Equivalents (FRSE) in Seats: the number of effective FTEs of sales headcount in place. This accounts for newer reps who are still onboarding, or ramping, towards full productivity.
- Fully Loaded Cost of A Sales Rep: Salary, benefits, training, bonus/commission, management cost allocation, T&E
There’s a lot that goes into calculating each of these inputs, but ultimately is a basic formula of [(Average Productivity per Rep x FRSE) ” Fully loaded cost] that gets us to the profitability of the sale..
Now, the average productivity per sales rep is clearly down in today’s environment. Fully loaded rep costs likely are reduced as well, though, as reps are not traveling, and many companies have already reduced compensation spend.
Sales Capacity in the Down Economy
Fundamentally, the question of whether to downsize boils down to this. If a company cuts now but then expects to rehire later when the economy recovers, it will save costs in the short term but reduce sales productivity in the recovery. This is because new reps who will be hired when the recovery strengthens will require hiring costs, training costs, and will be less productive as they ramp into their roles (typically it takes 6 ” 12 months to get to full productivity).
A company can model these trade-offs by running its headcount plan (including any potential downsizing) through several Economic Recovery Scenarios. This adds a layer to the calculation we shared above, which allows the average productivity per rep to fluctuate based on the economic recovery scenario. By adding a recovery factor to the calculation, companies for each month can model out their expected productivity under different scenarios (e.g., a rapid recovery that starts soon, a slow recovery that starts soon, a slow recovery that does not start until 2021). So, the new formula becomes:
[(Economic Recovery Factor) * (Average Productivity per Rep) * Number of Fully Ramp Sales Equivalents] ” Sales Costs.
Sales leaders can use this approach to show how their sales force will perform under any variety of economic recovery scenarios. As data continues to become available on the recovery, companies can quickly model out the most likely scenarios and make the best decisions on their sales force headcount.
Localizing the Model
We anticipate that many markets will respond differently and recover at different times and rates. Regions that have been less impacted by COVID-19 will reopen sooner and ramp faster, creating more sales opportunities for a company. Others may take much longer to recover.
To localize the model, economic recovery factors can be inputted by region. Using demand sensing, social listening, and predictive insights can allow companies to more quickly assess how the recovery is going in different regions, and then adjust their sales capacity plan accordingly. We view this local approach to be critical to a company being able to effectively manage through the economic recovery and have the right sales capacity in each market to drive the right results.
Sales is an area that companies will look at downsizing, given it is a high-cost function. Sales leaders can be prepared to work with their finance business partners to understand the risks and trade-offs of downsizing by adopting the localized Recovery Based Sales Capacity Planning approach. Platforms such as Anaplan can be used effectively to model tens or hundreds of scenarios rapidly, by market, to make these difficult decisions. In the end, downsizing may save some near-term costs but is not always the best course of action.
To learn more about our Recovery Based Sales Capacity Models, contact us here.
Founded in 2018, Spaulding Ridge is a top management consulting firm, dedicated to client success and helping organizations implement and adopt best-in-cloud technology to solve their most pressing challenges. We provide the office of the CFO financial clarity to Sales and Operational complexity by integrating financial and sales SaaS Platforms.
- We help:
Finance gain control ” Increasing financial effectiveness, insight and impact
Sales increase Productivity ” Hitting quota more quickly, consistently and efficiently
Operations increase Competitiveness ” Through productivity rates, customer service outcomes, and efficiency
Kevin Josephson leads the Anaplan practice for Spaulding Ridge which helps clients to develop and deploy effective business planning processes across sales, finance, supply chain, and HR using Anaplan’s connecting planning cloud technology. Kevin has 20 years of experience in sales performance management and is a frequent speaker and thought leader on driving sales productivity through better planning and execution. For more information, visit www.spauldingridge.com or contact Kevin Josephson at [email protected].