We are close to a month after the end of the majority of company’s fiscal quarter in June. Sales is off celebrating, updating their pipeline, or polishing the LinkedIn profile. But what about finance? What's going on in the CFO's mind during quarter end? The office of the CFO is still piecing together the financial implications of the various deals that sales pushed through legal to bring in the numbers.
Discounted rates for future years, special considerations in support, bundled services, and add-on products at zero charge. From this mess we find a controller staring bleary-eyed at the screen trying to determine how to accrue for the revenue, where to allocate the costs, wondering which products are even profitable in this mess of agreements, and finally analyzing the payout of any bonuses, SPIFs, commissions and other incentives.
So how do we start cleaning up this mess? The root of the problem is the negotiation that is going on at the last minute between sales and the prospect. This is not a traditional give/get negotiation as each side has very different interests, and what is seen as a trade-off might actually be a completely different creature.
It is important to list out all of the factors in advance, discuss them with your sales team along with the relative importance of each one BEFORE they go into the final negotiation.
Factors to Consider Before Quarter End
Price & Profit
The #1 component – how much, and where does that fall in the company pricing matrix. There are entire books on this subject, and this is usually the only thing that gets the deep examination. This is typically tied directly to the commission (assuming a % of deal value is the primary measure).
When cash flow is king, getting money up-front matters. However, this can also be a sticking point for prospects – and is often a form of guarantee used by prospects to ensure that the offer is as good as presented. Giving up on WHEN in exchange for HOW MUCH can be part of the plan, depending on how that impacts the rep. The rep will give in on this depending on how that impacts the timing of their commission.
When do you need to book the revenue, versus when does the prospect need to book the cost? This can be the difference between a June 30th deal and one that is officially signed on July 1st. This is when having a broad and deep pipeline across the sales force can make a difference for the company. If you push too much on the timing, the rep will be inclined to take a lower price to bring the deal in during this quarter.
How important is your full portfolio? Do you want your reps bundling more for less and hoping for up-sells later? Or, are you instead under pressure to prove the viability of new product lines by showing high attachment rates of the latest offerings?
When measured purely on total deal value, the rep will move numbers around to help close the deal. They might drop secondary products during price negotiations, or just add them in for “free” to help sweeten the deal. This becomes more of an issue when you have one primary product that carries the bulk of the deal value, and everything else is a small add-on or up-sell.
Expecting a rep to spend the same time fighting for an add-on as they spend on the larger component that is driving their commission is going to lead you to disappointment.
Implementation or Delivery Terms
Do you have an installation team that works overtime at the end of every period due to last-minute deals? How much is that overtime charge eating into your profits? If you had an incentive to bring the deal in earlier, so that you could handle the work during regular hours – would it pay for itself in saved overtime?
What is support costing you, and how tightly is support correlated with future up-sells and customer retention? You need to know this so that you can determine whether you should be pushing (i.e. incenting) your sales team to ensure that higher-level support contracts are sold.
The Bane of Quarter-End
One area to watch-out for is the dreaded “let’s toss this in for free.” When that happens, finance, and the company as a whole lose in multiple ways. The first is that whatever is given away is automatically devalued in the eyes of the customer AND the sales rep.
Once that model of giving it away is in a rep’s head, they will do it again and again if allowed. The next problem is how do you run an ROI model on a product or service that is regularly bundled at zero itemized cost to the customer? Once you have the list built-out, review your incentive plan.
Odds are (here I am, gambling again) you will find that very few of these strategic goals are reflected in the incentive plan – the plan is not aligned with the corporate goals. Instead you have a basic incentive plan wrapped around revenue with maybe a margin component. Sales teams do what they are paid to do, but that might not be what you want them to do.