Private Equity: This could be the diligence you are not doing
Regardless of whether you are one of my partners in Private Equity performing diligence on the potential acquisition of a portfolio company or a company CEO struggling with underwhelming sales, you should be looking for some key leading indicators within the sales team. If you are not looking at key predictive metrics you could have some serious suppressed value in your sales team. How do you know how to forecast business without knowing if you are performing through the sales process? Here are three key leading indicators that are often overlooked and what they might mean for your business.
Participation Rate – This is my favorite measure of the overall health of a sales team and a very valuable metric that indicates sustainable success. Very simply, participation rate is the percentage of the sales people that are making their quota or target. If you have a sales force of 20 people and 10 people are making plan, you have a 50% participation rate. This a measure for the sales people only, remove the management from the numerator and the denominator. Obviously, if you have many front line sales managers, you can also measure their participation rate again their target, but for our purposes, we’ll focus just on individual contributor sales people. Believe it or not, a participation rate of 60% usually indicates a healthy sales organization. As a rule, I like to aim for between 60% and 70% participation rate. Any higher than this and it usually tells me that the quotas and targets are too low. Depending on compensation policy, for example, if you have multipliers or accelerators, this could indicate considerable value loss on overpaying salespeople. Lower than 60% and you are dependent upon too few sales people to get you to the overall sales goal. Consistently lower than 60% month after month is a problem. This is not a sustainable sales team and there is considerable value suppression with it. What if two of those successful sale people leave? There should be no glory in being at 100% as a sales force driven by 20% of the sales people.
Funnel Success Multiple – How healthy is your pipeline? Part 1. Does your sales function have the opportunity volume needed to be successful? Managing a scaled sales funnel means managing sales probability over time. If you know your true funnel conversation rates (see below) you can plot how many deals you need in different phases in the funnel and you can associate a defined probability of sale to the deals over that time period. Once you do this, you can measure points in the timeline (such as 60 days out and 90 days out) and assess the funnel volume by measuring the success multiple needed historically. Do you need 3x of sales opportunity in the 60 day funnel, do you need 5x, 7x? What probability (sales stage) do these deals need to be at? It’s just math and it’s typically based on historical performance with a growth expectation. This allows a sales leader to manage along the success continuum of funnel to activity standards. If the sales person doesn’t have the required funnel at all phases, with the needed volume, the sales leader MUST manage activity level directly. For Private Equity funnel health within the sales team is an essential measure in diligence. This all might sound complicated, so I like to use a graphic to explain. This is where people I have worked with will smile knowingly!
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Funnel Conversion Rate – How healthy is your pipeline? Part 2. Funnel conversation rate is an indicator deal velocity (direction and speed). It’s a measure of how well deals are flowing through your funnel as opposed to the pure volume and time measure above. Let’s assume you are using a CRM tool to manage pipeline and you might even be leveraging the Funnel Success Multiple above within that CRM. Even if you are doing that, how do you know how efficiently deals are flowing through the funnel? How do you know that deals are not stuck at a stage in the funnel just sitting there making the funnel look healthier than it is? Warning: pet peeve alert – I have witnessed sales leaders add a reporting metric in the CRM tool that stack rank deals that haven’t been updated over time. I find this very simplistic and it can create question marks around a team’s culture when a sales person is required to update a CRM field with a meaningless update just to get them off a bad list. There is nothing more damaging to a sales culture than a sales manager asking a sales person to do something superficial. Now back to the point – the funnel conversion rate measures the funnel today against where is was 30 days ago (or another timeframe appropriate for the specific sales cycle) and the difference in probability in the same timeframe. It is a very powerful measure of a team’s velocity and another key measure for a sales leader.
Of course, all of the above is dependent on a CRM with accurate information. As CRM has become more complex and has been burdened with business process automation in addition to traditional CRM, this has got more difficult. Ask me about how I can help you (in partnership with my friends at www.clearslide.com), to get your CRM back to what it was supposed to do it the first place.
By the way, did you notice that total sales attainment wasn’t listed? Do you know why? Well, that is result, not the leading indicator and you don’t need me to tell you that in diligence. We need to assess the indicators, not the results, to understand the suppressed value within the potential acquisition’s sales function. And, yes, these predictive measures are a part of the suppressed value diligence deliverable from www.salesenablementpartners.com. If you are an operator, these are the levers you should be pulling today for success tomorrow (….and, yes, sometimes it comes that quickly!).
David Aspinall is the President and Chief Sales Officer of Sales Enablement Partners LLC. Sales Enablement Partners a full-service sales effectiveness consultancy that will assess, design and build the organizational disciplines needed to start your growth engine. David engages with both Private Equity and Company CEOs and is veteran of the complex sales environment having enjoyed 20 years as sales leader, proposal manager, product manager and marketing guy. David does not like stuck deal stack ranks.