When we think of the LOB we are really targeting the CEO and his or her direct reports.  The CFO, COO, and CSO/CMO are the primary targets.  New C-level titles continue to pop up all the time, but these are the big ones.  I purposefuly left the CIO off the list since I am confident that most people are comfortable or at least experienced with meeting the CIO.  The first question you have to ask yourself is from a company performance perspective, what do these people care about? What keeps them up at night?  The CEO is usually very focused on the top line revenue figure and the bottom line income figure.  They are also very sensitive to capital expenditures (CAPEX).  The CFO is one of the few people in any organization that cares about the Balance Sheet, including the cash flow cycle, inventory levels, collections, and asset utilization.  The domain of the COO is usually confined to Direct Costs or Cost of Goods Sold for manufacturers.  CSOs and CMOs rarely get fired if the company meets its top-line revenue targets, therefore this is there top concern.

The key to selling to these people is to think like they do.  Technology investments that will reduce future technology expenditures or allow old IT assets to be retired are boring to the LOB.  They want to know how your solutions address real business issues that they are facing , creating significant value for their organization.  Pretty simple stuff, right?  Just knock on the door of the CFO’s office and explain to them how your router will reduce their cash flow needs while improving their revenue to assets ratio (asset utilization).  For most sales executives, we are now out of their comfort zones.  When people get uncomfortable, they tend to fall back on history, doing what they have always done, calling the Director of IT.  So how do we break through this wall.  It starts with basic business acumen.  You need to get it.  You can’t successfully articulate your value in terms that the LOB will understand if you don’t have it.  Enable your sales teams to sell to the LOB by educating them about the concerns of the LOB which can differ greatly from one industry to another.  I only have time today to cover some of the highest and most generic concerns to give you an idea.

The CEO, CSO, and CMO are all concerned about Revenues and Growth.  How can you help companies grow?  How can they market and sell more effectively with your solutions?  Ask yourself how your solutions cut sales cycle times, grow the size of deals, and increase close ratios.  These are the primary metrics that drive growth (other than acquisition).  From a marketing perspective, a higher volume of better quality leads would certainly improve at least two of these metrics.

The COO is concerned about direct costs which consist of up to three components.  Labor can be the largest cost for some organizations.  How can you impact the cost and amount of labor necessary for them to be successful.  Materials can also be very costly.  Can you impact the cost, quality, or quantities of material needed?  The third component is overhead.  Can your offerings improve the efficiency and effectiveness of the organization?

Most technology sales people have made their living by addressing indirect costs, which is where most technology expenditures fall.  There are many other indirect costs outside of IT that you should alos be thinking about.  Maybe you can impact the cost and cycle times of new product introductions, or have an impact on one or more of the many human resources processes.  There are certainly many diverse areas to be explored here.

When we think of the balance sheet, we need to think about customer collections, inventory management, paying our suppliers, and our capital expenditures.  If your offerings can improve even one aspect of the cash cycle, they will be freeing up cash for other investments, which is a lot like giving them money!  Can you help companies maintain lower inventories, pay vendors in a more strategic manner, or collect cash more quickly?

Every company examines their options when it comes to capital expenditures.  On the one hand they are looking at the captial they have, whether produced from operations or the sale of a portion of the business, or possibly borrowed from creditors or investors.  on the other hand, they are looking at all of the requests from the LOBs (including the CIO).  They match up the needs and the resources to determine there capital spending plan.  When your offerings are competing for capital, you need to know that you are up against every other need that the company has, not just your competitors.

How many people tried to sell to Clorox last year?  I would bet the number exceeds 10,000 sales people, some of whom I am sure were successful.  Most were not.  How do I know that?  The Chairman of the Board told me so!  Well, not just me, he told the whole world in his Chairman’s letter.  He stated that the company produced more than $738 million from operations.  He went on to say that they decided to pay down debt and increase their dividend.  Most people read that and say “Oh” or “So what”.  You need to read that and say ” That means that the Board of Directors did not review any proposals that they found more valuable than “paying down debt”!  REALLY!!  No one could come up with an idea better than that.  No technology solution could deliver more value than saving the 6% interest!

Think about the Clorox example and ask yourself, if it were your account, could you have earned some of that $738 million?  Talk to me!!

-Bruce A. Brien, CEO, Stratascope Inc.

What is the situation?  Most people think that when companies report their financials to a governing body like the SEC, that the reporting is electronic and in a consistent format (known as XBRL).  Nothing could be further from the truth.   In the US alone, more than 10,000 public companies report to the SEC.  Only 300 of those companies are XBRL compliant (I found this stat on EDGARonline last week).

So what does that mean?  It means that the other 97% of filed reports must be handled manually.  Someone has to read the financial statement and code it into a data entry program, check it for errors, and then make it available to customers like Stratascope for redistribution.  It is a labor intensive process.  We have worked with several different companies including Compustat, D&B (Hoovers), and Worldvest over the years.  They all have the same problem.

Why are May and June the months where we experience the biggest delays? Companies normally can take up to 45 days to report their quarterly financial numbers.  Most companies try to report in 25 days.  The exception is the annual (Q4) filing.  They take up to 75 days to submit that with the possibility of an extension.  This means that companies themselves typically are reporting Q1 results just 4-5 weeks after they report Q4.  70% of all companies have either a December or January Year-End.  That means that from March 15th – May 15th which is just 60 days, there are over 70,000 reports to process (approx. 50,000 public companies globally report 4 times per year for a total of 200,000 reports annually).  That is more than one third of the workload for the entire year loaded up into 8 weeks, not including the March year-ends that start coming in early May as well.  It is impossible for the data suppliers to keep up.  Our customers will see a reporting delay from May 1st – July 1st every year because of this phenomenon.

What are we doing about it?  We cannot wait for XBRL since there has only been a 3% adoption rate over the last 5 years.  Unlike most companies in our space, any Stratascope customer that is experiencing a delay on a specific company, should contact us immediately.  We will manually update that company within 24 hours, often sooner.

-Bruce A. Brien, CEO, Stratascope Inc.

Salespeople volunteer for a tough job. The complexity of what they sell and the sophistication of the people they sell to increase year by year. In this environment every sales interaction and conversation is important, which is why the best salespeople spend so much time preparing for their conversations with customers and creating the materials they will use.

But salespeople are often not well served by the resources they are given to prepare for these conversations. The problem resides at two levels: the quality of sales materials is often poor and it is hard to find the right resources, even if they do exist. The concept of the sales enablement platform – a knowledge management tool for sales – has arisen as a solution to the second of these problems. This article outlines the requirements for an effective sales enablement platform and analyses the benefits.

What customers want

Customers have grown out of having products sold to them; they have even tired of solutions selling. Now they want to buy on the basis of business outcomes. The communications company doesn’t want an improved customer loyalty system; it wants customers that stay longer and spend more. The manufacturer no longer wants an improved supply chain solution; it wants lower supply costs and on time delivery. And they want to look at all the options for achieving their desired outcome.

One consequence is that customers expect salespeople to explain how they can deliver outcomes. They are looking for salespeople to share a point of view, not just ask questions. Customers want to work with salespeople who bring business knowledge from a wide range of different situations; salespeople who can contribute new business ideas.

What salespeople need

The sales cycle can be viewed as a series of interactions or conversations with the customer. Each sales interaction has a specific set of objectives: it must change a viewpoint, unearth information, resolve a concern, solve a problem or provide needed information. Knowing this, and understanding the customer’s expectations, it is apparent that the salesperson, when preparing for a sales conversation, needs to be able to marshal a wide range of information and structure it according to the context and objectives of each different situation. Salespeople need better information systems to help them do this, and the sales enablement platform has evolved to address this need.

What’s the problem?

Typically, current tools do not meet the information needs of salespeople – see below “What salespeople say they need”. These shortfalls are damaging because salespeople rely on sales resources to fuel the engine of sales conversations – no fuel, no progress.

What salespeople say they need

• One source – I don’t want to have to search through multiple, unconnected information silos, arranged arbitrarily e.g. according to product set, department, country
• The big picture – I need the high level view so I can spot related offerings and cross and up sell opportunities
• Concise and complete – I want just the resources that are relevant now, not loads of extraneous stuff. But it must be all the resources, from all departments
• Arranged for me – I don’t want to have to be an expert on the portfolio to get to the resources I need
• In my language – it must respond to the words I use
• Responding to the sales context – e.g. the stage of sale, technical vs business
• Linking me to people who can help – I want to connect to salespeople who have been here before me, and to the expert behind the resource
• Listening to me – I’d like the opportunity to comment and share information. I’d like to be updated on topics that I choose

The impact – sales efficiency

Much has been written about the impact of these problems on salesforce productivity. For example, IDC research says that on average each week a salesperson spends:

• 6.4 hours creating presentations
• 5.8 hours searching for client-related information
• 2.3 hours searching for marketing collateral

Clearly, if these processes could be speeded up sales would be more efficient. For example, for a salesforce of 500, saving one hour each week is worth over €500k each year in simple efficiency savings. That means getting more sales out of the same size salesforce or accommodating salesperson wastage without loss of sales.

Significant as this is, Solutions for Sales believes that it is the potential improvement in sales effectiveness delivered by the sales enablement platform that offers the most significant gains.

The impact – sales effectiveness

We have argued that customers expect a higher quality of interaction with their sales contacts. They want business advice; they want a balanced view; they want to focus on their desired business outcome not the salesperson’s desired sales outcome. To meet these customer expectations salespeople need to tap into a wide range of resources and quickly find all that is available to make the next sales interaction successful.

This is something salespeople are not doing well according to statistics from IDC, which show that:

• 33% of all unsuccessful deals could have been won if the seller had been better informed and had acted more client-oriented
• 57% of customers feel that salespeople are poorly prepared or not prepared at all at initial meetings
• More than 50% of customers expect salespeople to be better informed about client-specific requirements and goals

If accessing sales resources is difficult or laborious, it is our experience that the salesperson’s patience runs out long before all relevant resources have been discovered. The result is sales meetings that fall into the 57% that customers judge to be poorly prepared and sales opportunities that end up in the 33% that would have been won if the salesperson had been better informed.

The most significant benefit of a good sales enablement platform is that it improves the quality of the sales conversation, which results in more wins. When it comes to quantifying this benefit there are so many other factors at play that it is hard to provide objective figures. Readers must judge for themselves, but if it is accepted that salespeople who are better prepared for sales meetings can achieve a 1% higher win rate, then for a company with sales of €250 million the result would be an extra €1.5 – €2.5 million of sales each year. And there’s another important benefit: the salesperson that demonstrates the ability to talk outcomes with their customer gains visibility of more sales opportunities.

Marketing has needs too

Sales enablement platforms are not just for sales. Marketing has a whole range of requirements in this area. See below:

What CMOs say they need

• Drive Sales – I need to have better ways of steering Sales in the direction the company wants to go
• Satisfy Sales – I want to provide the sales resources that salespeople need. I am sick of hearing them say that Marketing is no help
• Economise on Marketing resource – I would like to know which resources are valued by sales so I can save money by stopping doing what’s not wanted
• Improve visibility – I want to see who’s using what, which resources are getting old, and what the coverage is of sales resources across the portfolio
• Develop a broader view – I’d like people to have a better understanding of the breadth of our capability and the positive synergies across our portfolio
• Exploit all our resources – I want everyone to be able to contribute to selling, including organisations like professional services and delivery
• Encourage interaction – I need to get salespeople sharing their experience and marketing people contributing their knowledge directly to sales
• Structured, uniform and global – I’m worried that the ad-hoc social networking and web tools that are springing up will just create confusion. Worse, if they aren’t maintained they will mislead

Producing the best sales resources

People all round the company have information that can help sales. Of course the main producers are Products, Marketing and Sales themselves, but there are others. In some companies Professional Services and Consulting divisions have information on the services they offer, their expertise and their processes, methods and tools. They may produce opinion pieces and white papers. This is valuable material in a complex sales process. Delivery and Operations can provide performance statistics and quality measures that are useful sales ammunition, and customers want to know about the design, implementation and support services available to them.

Products, Marketing, Sales, Professional Services, Consulting, Delivery and Operations will all have their own ways of producing and storing information – this is what created the silos in the first place. The good news is that these don’t have to change. The sales enablement platform spans all these sources, presenting sales materials from all departments as an integrated whole. As well as giving 360° visibility, the sales enablement platform helps producers by providing:

• Structure: defining the types of resource salespeople need; formats; desired content
• User feedback: comments from salespeople on how resources can be improved and what new resources are needed
• User rating: rating and usage statistics allow producers to judge how well they are doing and allow managers to identify the best producers and the most popular types of resource
• Inventory control: to highlight when resources need updating or are approaching end-of-life, and show where more resources are needed

The result is a continuous improvement cycle that leads towards better quality sales resources which are more useful to salespeople.

Sales enablement in context

The selling process can be viewed as a series of conversations between salesperson and customer, so the job of sales enablement is to make those conversations more interesting and ultimately more rewarding for both parties.

When preparing for a sales call, the salesperson needs sales resources that are appropriate to the specific conversation being planned. Successful companies make sure that high quality sales resources exist, and they make it easy for salespeople to find the right resources for the job at hand. The sales enablement platform solves the second of these problems. It gives sellers access to the right sales resources and information – the fuel that powers the engine of sales. Moreover, it helps improve the quality of sales resources by creating channels for feedback and engagement so that content producers get a better understanding of what’s needed.

Conclusions

The sales enablement platform is a strategic tool that CMOs can use to define the portfolio structure, drive sales behaviour and optimise product marketing resource. It cuts through organisational silos and allows every department to play its part in supporting sales. It fosters business networking amongst salespeople and with other departments that have a major impact on sales, such as Marketing, Operations and Professional Services. It improves the quality of sales resources by facilitating feedback and engagement between users and producers. For all these activities it provides a structure that is uniform, maintainable and scalable.

For the Sales VP, the sales enablement platform facilitates better execution in the everyday work of the salesforce, leading to lower sales costs and a higher win rate. The result is a solid business case for investment, which explains why the sales enablement platform is taking its place alongside CRM and marketing automation as a must-have business tool.

Binita Patel, Director of Marketing @ Stratascope
(binita_patel@stratascope.com)

(Thanks to Alan Willis of Solutions for Sales for allowing Stratascope to re-blog this article.   Stratascope’s core strength lies in providing actionable insight and content for sales enablement,  while Solutions for Sales provides a framework and methodology to enable a salesforce to sell a product, solution set or service offering at optimum efficiency.)

According to Tech Marketing Blog, there’s a fundamental shift happening in technology marketing around the globe today.  The formerly adversarial relationship between sales and marketing is being replaced by a new level of collaboration driven by the need to achieve shared goals.  Marketers face increasing pressure to provide sales with content that meets a specific need at a specific point in the sales cycle.  This means that marketers need to shift from supporting, to enabling the sales team.

So wouldn’t it be great to run a campaign that exhibited good brand adherence, a compelling message, was industry relevant, client specific and even role specific for every recipient?… Of course it would, but can it be done cost effectively in a timely manner without compromising our brand?… Yes It Can!!

You just have to keep 3 key things in mind:

• What do you want to say?
• To whom do you want to say it?
• Pulling it all together 

Here’s an outline of how to approach a targeted, one-to-one marketing effort that will help support sales enablement:

WHAT DO YOU WANT TO SAY?

• How can you impact a business and how will that impact translate into value? 

1. Will it help your customer to grow? (Be specific)
2. Will it help reduce costs? (Be specific)
3. Will it make more efficient use of resources? (Be specific)

• Include references where possible 

1. Who have you already helped with this?
2. Do you have different references for different industries?
3. Quotes are better than stories

TO WHOM DO YOU WANT TO SAY IT?

• Will the message work in multiple industries or geographies? 

1. Plan on multiple versions of the central message that can be applied to different industry verticals or geographies
2. Your collateral can be assembled later, but the message and the industry provide the basis for a template 

• What about roles? 

1. Would you have the same conversation with a COO or a CFO?
2. You should plan on a template version for each role within each industry

 PULLING IT ALL TOGETHER

The goal here is to create an industry relevant, client specific and even role specific marketing piece with good brand adherence and a compelling message that can be used to really support and enable the sales rep to have meaningful discussion with the prospective client.  THIS IS WHAT CUSTOMERS WANT… a meaningful discussion about how YOUR solution can HELP solve their issues. 

by: Binita Patel, Director of Marketing @ Stratascope (binita_patel@stratascope.com)

Territory planning can be thought about on two levels.  First we must think about how to best approach our assigned territories in order to maximize revenues.  We need to do this as front line sales executives as well as sales management.  We will call this level “Territory Analysis”. 

As a sales manager, I also think about how to divide up my assigned territory to drive the most revenue that I can through my team.  That last sentence applies whether you are the SVP of Worldwide Sales and you need to divide up your theatres or if you are a Regional Sales Manager that has to attack New England with four sales people.  The second thing that you should notice is that my goal in territory planning at this level (or any level for that matter) was not to divide the territory up fairly, but to maximize revenue.  We will call this level “Territory Assignment”. 

Territory Analysis

Analyzing territories is easy once you have developed your criteria.  It’s developing the criteria that is not so easy.  We can start with geography.  What is the total size of our addressable market (I like to think in terms of prospect revenues)?  What is the average percentage of our prospects’ revenues that we win, upon closing a deal.  If I can sell a $1 million deal to a $1 billion company, then my percentage is 0.1% (it only sounds bad!).  When I add up all of the revenue from all of the prospective customers in the territory and multiply that by my percentage take, I have found my addressable market.  I need to filter my market based on the following potential criteria:

1. Am I limited to specific vertical industries?
2. Am I limited to companies of a specific size (large or small)?
3. Are there any “Channel Conflict” rules that I need to apply?

After filtering my territory to accounts that can actually be called on, I need to weight the accounts.  I can do this by looking at some additional characteristics of these accounts.  I find performance characteristics to work very well in assigning territories.  What are the performance characteristics of your ideal prospects?  Are they growing? Shrinking? Profitable? Failing? Do they have excessive direct or indirect costs?  Are they lean and efficient?  Do they have long or short cash cycles? Is bigger better?  Does the number of employees matter? 

Take all of the serviceable accounts in your territory and put them in a spreadsheet along with all of the statistics that are relevant to the metrics that you have chosen. Sort the spreadsheet on each statistic and score the records from top to bottom for each one.  You can even weight the importance of each statistic.  Total the weighted scores to create an account weighting.  Multiply your account weighting by its addressable market and sort the whole spreadsheet on that total.  Your best prospects should be at the top of the list.  As a sales executive, I can begin researching my top prospects, preparing to call on them.  As a sales manager or even a Chief Sales Officer, I will also need to focus on territory assignment

Territory Assignment

All sales reps were not created equal and their territories should not be equal either.  We can apply the same type of analysis to our sales teams that we applied to our assigned territory.  We need to determine who our top resources are and make sure that they have an assigned territory appropriate to their ability.  We don’t have to get complicated.  Traditionally, we have always thought of sales executives as “A”, “B” or “C” reps, with “A” being the best.  I would look to have no more than 25% of my sales team as “C” reps and no more than 75% as “B+C” reps.  Assuming a 25-50-25 split, you might want to consider dividing up the weighted territory analysis so that the C reps (25% of your reps) get 18% of the weighted opportunities (a .72 weighting), the B reps (50% of your reps) get 42% of the weighted opportunities (a.84 weighting), and the A reps (25% of your reps) get 40% of the weighted opportunities (a 1.6 weighting).  You should plan your compensation and quotas along these lines as well.

Now that the reps and the territory are weighted and sorted, you can split your territory into 4 quartiles of equal weighted value.  Assign the percentages as described above to each class of rep within each quartile.  Each rep is then assigned an equal amount of weighted accounts from each quartile according to his class (ABC).  Which accounts they get assigned can be shifted for geographical convenience or known industry expertise.

If normal sales metrics hold and you’re a reps average 140% of quota, they will bring in 56% of your own quota, the B reps at 85% of quota will bring in 36% of your quota and the C reps at only 50% of quota will bring in the 9% of your quota to put you just over your own quota for the year.

The key to your success will be in your ability to coach your B and C reps to produce more like A and B reps, respectively.  If you do not have the metrics or expertise in house to perform this level of analysis, our team of analysts at Stratascope can help.

In my next blog post, I will really take on “Marketing Enablement” and discuss “Driving Campaign Success”.

-Bruce A. Brien, CEO, Stratascope Inc.

I tell this story because it is the process that we followed that day and the discovery that it led to that is important and not the words.  We definitely did not invent the term and I am certainly not here to take any credit for it.  We were involved in a discovery process that I continued to explore over the next 10 years.  Every time I look at the two processes together, I end up in the same place.  We, in sales, have to find better, deeper, and more impactful ways to connect with our prospects.  To be clear, our methods and mechanisms will continue to evolve with the advent of mobile technologies and social networking, but that is not where I am heading.  The real question for me is “How can I connect with my prospects?” meaning: On what grounds?  Where can we find common ground?  How can we relate?  How can we communicate?

When I look at the selling process I have to look at the seller’s point of view.  As the seller of a product or a solution, I am automatically biased by the terms that define my offerings; my opinions are shaped by the features and benefits that I can offer.  My compensation is quota driven and my motivation is pressure based.

As a CEO, I am also a buyer who can look at the buying process.  As buyer, I am focused on the needs of my organization, which are based on the business issues that we are facing.  These same issues are what drive me to find the best value that I can in a solution.  Still confused, let’s try it in table form:

Clearly we are not on the same page as our buying prospects and that is the key.  We speak different languages that must be reconciled before we can make a connection.  We have to learn to put ourselves in their position, thinking like they do.  I want to explore this a lot further because we really need to get to a connection point. 

Let’s consider their situational landscape:

1. They probably don’t know you even if they have met you or are aware of you
2. They typically don’t know your products or services very well even if they have heard of your brand (lucky you!)
3. They certainly have no idea why you are promoting specific features or benefits
4. Their directives and initiatives come from senior management and are often broad and vague
5. These vague initiatives and directives manifest themselves in the form of a variety of specific business issues that affect their everyday performance

And their personal goals:

1. Alleviate the obvious pains that effect everyday performance
2. Make measurable progress against their assigned initiatives
3. Create value for the company for which they will receive credit

Did you notice that neither their situational landscape nor their personal goals included buying a product or service from you!

In order to help our prospect buy from us, what must we do? Let’s start by looking at the world from their point of view.  How is this done?  The first step is to understand their industry and markets at a high level.  Learn the language, the trends, the players, and the economic outlook.  Next, try to understand their competitive landscape and recent performance.  Where do they have opportunities to improve?  Where are they the leader?  Identify several specific areas of opportunity.  Match these areas of opportunity to any initiatives that your research has uncovered (hint: initiatives are often found in quarterly earnings reviews on their website, or in formal filing documents for public companies.  Make your life easy, subscribe to Stratascope!).

Now that we have a list (or hopefully at least one) of initiatives, we need to get to the underlying business issues that are driving them.  Every business issue can be categorized by a set of defining attributes.  These attributes provide us with the basis for identification.  Only look at issues that have the same attributes as your prospects situation to create your shortlist.  I focus my efforts on the following attributes only, there are obviously more, but these work for me.

• Performance Impact
• Process Alignment
• Organizational Responsibility (Role)
• Industry Relevance
• My Aligned Solutions
• Operational Evidence (News, PR)

Wait a second!  How can I match my customers’ business issues to my aligned solutions when my solutions are not aligned?  Good catch.  We have reached the key to this whole messy business!  The business issue “IS” the common ground.  You or someone at your company knows which business issues your solutions address in which industries.  Your prospect knows which business issues in their industry are impacting their organization.  This is where you can build your connection in their terms, using their language, from their industry.  Connect with them on the issues that they have that you solve, not on your products or features.

Connect your solutions to the business issues that they address and then find companies that have the same issues.  You must look at every solution that you offer, not from the point of view of its features or even its benefits, but from the point of view of the business issues that it addresses.  You must then determine the attributes of each issue as previously discussed so that the issues can be easily identified based on your customer’s unique situation.  You should conduct this mapping proactively with your in-house experts and not on the fly for each opportunity.

In summary, sellers and buyers look at the world from different points of view.  As the seller, we must adapt to their way of thinking.  We must approach our opportunities based on the addressable business issues at hand.  We must present a vision of how our solutions will improve their situation with regards to the issues.  If we can do this, we will have connected to our prospects!

In my next blog post, I will take on a little bit of a “Marketing Enablement” slant and discuss “Driving Campaign Success”.

-Bruce A. Brien, CEO, Stratascope Inc.

1. Professional Services (Think accountants, lawyers, and business consultants)
2. General Services (Think repair services, industrial services, and consumer services)
3. Financial Services (Think banks and mortgage companies)
4. Public Sector (Think government agencies, non-profits, DOD)

Professional Services                                  

There are two distinct differences in the financial buckets for the professional services industries.  Since they don’t sell goods, they don’t have Cost of Goods Sold.  Instead, they call it “Cost of Services”.  The expenses associated with their billable resources usually land here.  The second change is in the area of inventory.  Since services are not inventoried, this bucket won’t be used at all.  Other than these two changes, professional services organizations should be treated just like their commercial and industrial counterparts.

General Services

There are two distinct differences in the financial buckets for the general services industries as well.  Since they don’t sell goods either, they don’t have Cost of Goods Sold.  They also call it “Cost of Services”.  The expenses associated with their billable resources usually land here.  The second change is in the area of inventory.  Services are not inventoried, but spare parts and supplies often are inventoried.  This bucket will therefore be renamed “Supplies”.  Other than these two changes, general services organizations should be treated just like their commercial and industrial counterparts.

Financial Services

This is where things start to look a little different.  The ratios themselves are no longer based on revenues, but instead, average assets.  Banks manage assets so it is good for them to understand their performance metrics in terms of the assets under management.  Instead of dividing expenses by revenues, you will divide them by the average assets for the period.  Revenues themselves are split into two distinct groups, “Interest Income” primarily from loans and “Non-Interest Income” primarily from fees.

Banks don’t have cost of goods sold but they do have an interest margin or “Spread” between their interest income and their “Cost of Interest”.  They still have expenses for selling, general , and administrative activities, but they have been renamed “Non-Interest Expenses”.

On the balance sheet, a greater focus is placed on cash.  Cash does not generate income, so you want to keep comparatively low cash balance that still meets any legal requirements for funds availability.  Banks inventory loans and not goods.  The loans generate income and should therefore be maximized. Since they bear interest, they are no longer classified as receivables.  Deposits are the least expensive way to back up loans and should also be maximized.

Public Sector

In the public sector, everything you see is treated differently.  These organizations are not selling anything and they are not trying to make a profit.  Base on what you have learned, I can translate the Income Statement (Sources and Uses of Funds) buckets as follows:

The Revenue Growth bucket becomes the “Receipts Growth” bucket.  Receipts can come from benefactors, donations, fees, and grants.  Even when a public sector organization does sell something, it is recorded under receipts growth.  Cost of Goods Sold becomes “Program Costs” which are generally characterized as all of the expenses that go to directly benefiting the constituents.  There are no selling expenses so this area is changed to be simply, “Management & General” in order to capture all of the other expenses.

The balance sheet is run similar to a commercial or general services company with only some minor name changes.  Accounts Receivable will become “Net Receivables” and Inventory will once again be referred to as “Supplies”.

Summary

Over the course of these 6 blog posts I have talked about how a typical company operates.  I showed you how basic transactions are recorded and then grouped into buckets.  I showed you how to create financial statements from scratch.  I reviewed the most common financial ratios that you will encounter in business.  I discussed how to find opportunities hidden in the numbers and today I showed you how to adapt your new knowledge to additional industries.  In my next blog post, I will get back to more direct sales topics, beginning with “Connecting with Prospects”.

-Bruce A. Brien, CEO, Stratascope Inc.

The first thing that I have to do in order to analyze an organization’s performance is to rationalize the results so that we can compare them to prior results or other organizations.  Specifically, we need to take size out of the picture.  We do this by restating our financial statements as a percentage of revenues for all of the Income Statement items and the resources needed to support each dollar of revenue for all of the Balance Sheet items.  We did this in the last lesson, but I wanted to reinforce the point here.  I like to look at both the trend and the comparison at the same time for each metric.  I think it gives me the best perspective.  That’s how I’ll cover things here as well.  I am going to cover one financial ratio for each bucket that we have looked at so far, going over the ratio, its calculation, some characteristics and some thoughts on discussing each metric.

Revenue Growth

Formula: 

Revenue Growth % = (Current Rev– Prior Rev ) / Prior Revenue

Characteristics:

• Revenue growth % shows us the growth in revenue from the prior year.
• Usually bigger is better.
• Watch for unusual growth due to business combinations or mergers.
• Watch for negative cash flow caused by working capital trends being negative or very poor. (More on this one later)

Things to Consider:

• Is growth keeping pace with prior years?
• Is revenue growth able to maintain market share in comparison to other organizations?

Operating Profit Margin

Formula:

Operating Profit Margin = (Revenue – Cost of Operations) / Revenue

Characteristics:

• Operating Profit Margin or “Profitability” shows us the % of Revenue that is left after operations.
• Cost of Operations usually includes Cost of Goods Sold, Selling, General and Administrative expenses, R&D etc. Usually all costs associated with running the business are included except for taxes, interest, and special items.
• Positive is always best. A negative profitability % is an indication that the Company is losing money.

Things to Consider:

• We mainly focus on whether or not costs are direct or indirect.  It is also important to consider whether or not they are fixed or variable.  High fixed costs can be a sign of inflexibility.  Exceptionally high variable costs may make it difficult to realize any economies of scale.
• If you are working with operating margins that fluctuate just above or below zero, you may want to switch to Operating Costs as a percentage of revenues for any trend comparisons, it will give you a truer picture.
• Also known as “Operating Income”, “Profit Margin”, “Profitability”, “Operating Income”, “Operating Income Margin” or “Operating Margin”

Cost of Goods Sold (COGS)

Formula:

Cost of Goods Sold % = Cost of Goods Sold / Revenue

Characteristics:

• This metric tells us what % of each dollar of revenue it takes to produce the product or service.
• Cost of Goods Sold includes things like raw material costs, labor, heat, light and power to run the plant and certain indirect costs like plant supervision and the cost to purchase the materials.
• Be aware that each company may not classify costs exactly as indicated above and that there may be differences in classification between companies in your comparative group. Most times if there is an obvious difference in classification in COGS the other metric being impacted will be Selling General and Administrative (SG&A) expenses.

Things to Consider:

• Watch out for companies that continue to adjust their accounting model towards and away from activity based costing.  They could be trying to muddy the waters by moving expenses from one pocket to another.  In the end, they own all of the pockets.
• When this occurs, look to the “Operating Profit Margin” instead.
• The inverse of this metric is widely known as “Gross Margin”

Selling, General, and Administrative Expenses (SGA)

Formula:

Selling General and Administrative Expenses % = Selling General and Administrative Expenses / Revenue

Characteristics:

• This metric tells us what % of each dollar of revenue it takes to cover SG&A expenses. Usually lower is better.
• SG&A consists of general expenses like office expenses and payroll, sales and marketing costs etc.
• Be aware that each company may not classify costs exactly as indicated above and that there may be differences in classification between companies in your comparative group. Most times if there is an obvious difference in classification in SG&A the other metric being impacted will be Costs of Goods Sold (COGS).

Things to Consider:

• Watch out for companies that continue to adjust their accounting model towards and away from activity based costing.  They could be trying to muddy the waters by moving expenses from one pocket to another.  In the end, they own all of the pockets.
• When this occurs, look to the “Operating Profit Margin” instead.

Liquidity Ratio and The Cash Conversion Cycle (CCC)

Formula:

Liquidity Ratio = (Cash + Collections) / Accounts Payable

Cash Conversion Cycle = Days in Inventory + Days Sales Outstanding – Days Payable Outstanding

Characteristics:

• In the treasury and cash management world, people will refer to a “Liquidity Ratio” which is a measure of a company’s ability to pay its debts.
• For the CCC, lower is better because more of the organization’s cash requirements for AR and Inventory are being financed through AP.
• The CCC ratio indicates how many days of working capital must be financed either with cash or debt.

Things to Consider:

• Watch out for negative trends here, they can quickly put a company out-of-business
• Understand the difference between a negative trend (The CCC is getting bigger) and a negative CCC (the organization is producing working capital and not consuming it).

Days Sales Outstanding (DSO)

Formula:

Days Sales Outstanding (DSO) = Accounts Receivables / (Revenue/365)

Characteristics:

• Usually lower is better – be careful to understand the peculiarities of the industry you are working in.
• Watch for large sales at year end which will impact the metric.
• Watch for the granting of extended credit terms which will have an impact.

Things to Consider:

• Comparisons are very important here because customers within specific industries tend to pay along similar patterns.  If this metric is out of sync when compared to peers, it might be a good place to start
• DSO is restricted to non-interest bearing items and therefore does not include any financing or credit card businesses

Days in Inventory (DII)

Formula:

Days in Inventory (DII) = Inventory / (Cost of Goods Sold/365)

Characteristics:

• This Metric tells you how many days of inventory the company is holding at the end of the period.
• Usually lower is better.  Be careful not to go too low and cause out of stock issues.
• Watch for major purchases of inventory at period end.
• Watch for cyclical businesses whose inventory will fluctuate at different times.
• Some people prefer inventory turns – Just divide 365 by your DII to get turns

Things to Consider:

• Good inventory control requires a balancing act that involves accurate forecasting, scheduling and execution, along with low allowances for spoilage, quality issues, and theft.
• Too much inventory is costly to maintain while too little inventory can result in unsatisfied demand.

Fixed Asset Utilization (FA)

Formula:

Fixed Asset Utilization $ = Net Fixed Assets / Revenue

Characteristics:

• Usually lower is better – that means they have less money spent on fixed assets.
• Fixed assets consist of things like plant, equipment, motor vehicles, computers etc.
• Be careful of companies who lease their facilities and equipment.
• Be careful of companies who outsource much of their production.
• Some companies require a much larger investment in fixed assets.

Things to Consider:

• Investing in fixed assets is usually an investment in the future and the value of the investment will depreciate over time (this is a good thing).
•  As investments depreciate, the return on the investment increases
• Watch for companies that may be at the beginning of an investment that they are still expecting returns from
• Also watch for companies that are showing a great return but have not invested in the future and are therefore not prepared to react to market opportunities.

Days Payables Outstanding (DPO)

Formula:

Days Payable Outstanding = Accounts Payables / ((cost of operations – depreciation) / 365)

Characteristics:

• Potential difficulties matching receipts with Purchase Orders.
• Invoice payments to vendors may not be timely- resulting in missed discounts and/or late fees.
• Possible poor visibility of third party logistics activity for inbound consigned or VMI inventory locations.
• Receivers may not be easily matched to supplier invoices

Things to Consider:

• For most organizations, this metric is set by either policy or circumstance and there is usually not much that can be affected by process change or technology. 
• The impact of improving the payables process is usually felt in SGA.

Equity and Total Value Created (TVC)

Formula:

Equity $ = Total Equity / Revenue

Total Value Created (TVC) = Net Operating Profit – Capital Charge

Characteristics:

• The Capital Charge represents a fair return to creditors and investors
• Any positive number is good, value for the owner/investors is being created
• Any negative number is not good and indicates that value is being destroyed
• The TVC trend can tell us a lot about the direction that a company is heading

Things to Consider:

• Equity refers to the portion of our assets that are not financed by our suppliers or creditors.  It includes money invested in the business as well as any retained earnings from operations that have been kept in the business.  As equity is mostly concerned with ownership and what belongs to them, the primary equity ratios are geared towards potential and current investors.
• When we look at overall performance, we try to combine both the performance and the position.  We do this by taking an additional charge on the income statement for the condition of the balance sheet.  A company that has a lot of equity or too much debt will be carrying a high capital charge.  A leaner company with less debt and fewer investments will carry a smaller capital charge.

Summary

So now how do you find the opportunities hidden in the numbers?  That’s a very good question.  Opportunities are found where a company is performing differently than their peers or where a company’s trend is in a different direction than we would expect.  When I find a difference that is destroying stakeholder value, I know that I have found the place to start asking questions.  At Stratascope, we use a bubble chart to put all of the ratios side by side so it is easy look for the low hanging fruit.  The lower the bubble is, the more room there is for improvement, the larger the bubble is, the more value there is in addressing the opportunity.  See the image below:

Performance Comparison Bubble Chart

It is important to note that while I use the terms “value” and “opportunity” and “improvement” with you, it is highly inappropriate to express our assumptions this way to our prospect.  Great! So how do you use this stuff? … It’s all in the wording.  Instead of saying “You appear to have a significant opportunity to lower your costs.” – Which, even though it is better than “You have a Cost of Goods Sold problem” it is not as good as “I can see that you are managing your direct costs differently than some of your competitors.  Can you share your perspective on the situation?”  This way, we are not assuming there is a problem, we are observing a fact and soliciting an opinion. This can be powerful stuff in a sales conversation that can lead to a serious amount of insight being disclosed by your prospect.  Use it carefully and you will be rewarded!

In my next post, I will show you how we can adapt our model to meet the needs of other specific industry types so that we can analyze and speak to the performance of any organization with which we are dealing.

-Bruce A. Brien, CEO, Stratascope Inc.

First, I can build the Income Statement which shows our performance over a period of time.  I have a simple formula that we can use.

                                Revenues – Expenses = Income (which becomes Equity)

Our Expenses are made up of our Cost of Goods Sold and our Selling, General, and Administrative Expenses.  I can expand the formula to include this information:

                Revenues – (Cost of Goods Sold + Selling, General, and Administrative) = Income (which becomes Equity)

We can even take the formula one piece at a time and use the interim result for additional analysis.  The interim number is called Gross Profit. Our fully expanded formula will look like this:

                (Revenues – Cost of Goods Sold) = Gross Profit (- Selling, General, and Administrative) = Income (which becomes Equity)

Now I just need to fill in the numbers from our table to get the results I need:

                ($630,000 – $260,000) = $370,000 (- $170,000) = $200,000

We can even make it look like a financial statement by simply reformatting the formula vertically:

If I want to compare this statement to others from prior periods or other organizations, I will need to use percentages (of revenue) in order for the comparison to work.  It will look like this:

I can use the same concepts to create the Balance Sheet which represents a picture of our position at a point in time.  This time I’ll show you the fully expanded formula right away, and instead of using percentages, we will restate our balance sheet in terms of the resources needed to produce each dollar (or euro, etc…) of revenue.  Here is the formula:

(Cash + Accounts Receivable + Inventory) = Current Assets (+ Fixed Assets) = Total Assets (- Accounts Payable and other Liabilities) = Equity (which was adjusted with our income)

I can fill it in from the buckets as follows:

($450,000 + $250,000 + $220,000) =  $920,000 (+ $500,000) = $1,420,000 (- $220,000) = $1,200,000 (The original $1,000,000 plus the income of $200,000)

And represent it as a Balance Sheet below:

Now I have a set of financial statements and some ratios (in the percentages and the resources required) that I can use to analyze the business.  It will be important in the next lesson to have built the foundation the way that we have.

In my next post, I will show you how we can analyze financial statements to identify areas of opportunity.  These are the same opportunities that you will need to understand how your own company’s offerings address.  Hopefully things are starting to come together for you.

-Bruce A. Brien, CEO, Stratascope Inc.