As my client base considers moving into cloud applications either in Microsoft CRM or with the Business Productivity Online Suite (BPOS), questions regarding changing business planning, impact on marketing considerations and differing sales strategies and compensation plans always come up.
First, compensation is strategic, not tactical. You must define the strategic objectives for your organization or the practice. Once you're clear on strategic objectives, you can begin to build a sales compensation plan for your BPOS practice. The next question is whether you should have differing compensation plans for different practices. The obvious answer is: "It depends."
Many partners have moved to a managed services component along with their past services; many of our clients might offer platform services and may also be selling Microsoft CRM or online applications. Each product or service may offer differing margins and have differing objectives; compensation plans need to take all of these variables into consideration. It's our opinion that compensation plans should be simple in design but complete enough to be aligned to achieve your goals and reward performance.
Specifically, when it comes to cloud compensation, let's look at a few factors. If you were selling BPOS, you receive 12 percent the first year and 6 percent residuals for all ongoing years, plus any migration or professional services. This changes the compensation planning from a cash-flow perspective but not from a goal perspective. In effect, if the salesperson sold 3,000 seats per year of BPOS, after only three years there would be a total of $259,000 dollars of cumulative revenue. As in a managed services environment, this continuing revenue becomes a valuable asset. Our recommendations would be to validate your objectives and build a compensation plan that's not only cost-effective, but also rewards success.
Assuming a new practice and considering these examples, we would create a plan based on BPOS only with three variables. The first is a commission percentage based on net new monthly revenue that combines seats and professional services and a second monthly commission percentage that is one-fourth of the net new revenue commission percentage for all "residual" revenues that renew. These residual commissions are paid for only two years. This keeps the salesperson focused on a short-term goal with a reward for a continuing relationship with existing clients (getting the renewals), maintaining a healthy cost of sales and not building a long-term annuity for the salesperson.
The second scenario is a commission percentage based on attaining certain quarterly revenue objectives. This would include a ramped up or accelerated revenue plan and commission percentages with three break points, keeping the salesperson working toward a larger goal even if one month fell below expectations. This includes all net new sales and residuals.
The third case is a quarterly bonus of fixed dollar value that's paid if a certain percentage of the total revenue achieved included a predefined professional services revenue objective. This will keep the salesperson focused on including the proper levels of professional services. The reason you might consider a bonus/fixed value payment is limiting your cost of sales.
NEXT: Considering The AlternativesHere's another option to consider: While royalties maybe paid monthly, we like to calculate the commission based upon an annual revenue stream, then pay 50 percent of the commission upon the initial order or first payment. After six months, we would then pay the remaining 50 percent of the commission, and then at the "renewal" of the second year, we pay one final compensation payment.
As an example: If we were to pay a 12 percent commission rate, we would pay 6 percent at the time of the order, 6 percent at six months and on the renewal, we may 6 percent or a lower rate of 4 percent. This allows the salesperson to be involved in the success of the implementation, focused on the renewal and yet not create an annuity compensation plan for the salesperson to build up. It is also easier on your administration department.
Certainly every partner may have different situations depending on maturity or size of the organization, geographic opportunity and mix of current services or product offerings. Thinking through all the variables for compensating your sales team will help keep sales efforts aligned with your firm's strategic goals for the cloud.
Ken Thoreson is managing director of the Acumen Management Group Ltd., a North American consulting organization focused on improving sales management functions within growing and transitional organizations. He can be reached via Ken@AcumenMgmt.com or www.AcumenManagement.com. You could also read more on his blog: www.YourSalesManagementGuru.com.
PUBLISHED MARCH 5, 2013