17 - Henry Camp_TOCPA_USA_21-22 March 2016

23rd International Conference of the TOC Practitioners Alliance - TOCPA www.tocpractice.com

21-22 March, 2016, Tennessee, USA

Exploiting Market Constraints (For those who use salespeople)

Henry Fitzhugh Camp, TOC Equity Partners, USA March, 2016

Henry Fitzhugh Camp Henry is an entrepreneur who started a private equity fund specifically to earn extraordinary returns using TOC. His goal is to end cyclical recessions and depressions worldwide. (Who knows what the weird orange lines mean?)

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Place for the photo of the presenter

Contact info:

[email protected] (502) 551-2359

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23rd International Conference of the TOC Practitioners Alliance - TOCPA

Market constraints

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Most companies have the capacity they need to grow sales And, if it seems they don’t, a dose of TOC expands their capacity to the point that they can sell more So, the real issue for most companies is:

How to exploit a market constraint?

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Going to market Some companies sell: • through Retail Stores • across the Web • by Word of Mouth • using Brokers

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• • • •

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by Catalog via TV by Direct Marketing through Referrals


Going to market Some companies sell: • through Retail Stores • across the Web • by Word of Mouth • using Brokers

• • • •

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by Catalog via TV by Direct Marketing through Referrals

This presentation is for companies who have answered the question “How to exploit a market constraint?”

By deploying a Direct Salesforce!

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Inertia

Even a great salesforce isn’t perfect. You sense there is a better way to exploit your market constraint.

But, you aren’t changing And, you can’t tell me why succinctly

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The normal process

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If your experience is like mine, everything seems fine at first. 1. You want more sales 2. Hire a salesperson 3. The salesperson gets some rudimentary training 4. The salesperson starts doing things that appear to be associated with making sales 5. You move on to other initiatives

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What’s the problem?

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First branch: The sales person doesn’t sell • Train some more • Ride with other sales people • Other stuff you can think of • Fire salesperson or they quit

The sales person sells • You offer praise • Congratulate yourself • Focus on other issues

This happens 2/3 of the time


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Later branch: The sales person stalls low • You ride their butt • You coach them • Focus on other issues

The sales person stalls high • You offer praise • Congratulate yourself • Focus on other issues



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What’s the problem? [CATEGO RY NAME]

Salespeople

[CATEGO RY NAME]

[CATEGO RY NAME] www.tocpractice.com



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Example Assumptions: • Distribution Company • Salespeople get commission which is of 30% of T

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Example Assumptions: • You want to grow so … • You don’t give new salespeople many existing accounts • Beginning commissions are not enough to live on • A draw against future commissions makes take-home pay reasonable • The requirement to repay draws increases the incentive to sell fast • When paying back draws, the salesperson keeps ½ of any overage

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Example Assumptions: • Since the salesperson is paid like a profit center, they must: • Do their own planning, marketing, prospecting, appointment setting, travel, presentations, proposals, quotations, sourcing, problemsolving, customer service, relationship building and, when necessary, even collections The lucky 13 Like a chain, only as strong as the weakest link

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What’s the problem? Good Salesperson: Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32

Comment Good growth tempered by having to learn the products Great growth – high confidence (not totally warranted) Good growth - focus on bigger opportunities Focus on bigger opportunities Focus on bigger opportunities Focus on bigger opportunities Some gains some losses – slight growth Balance shifts from opening new accts to maintaining Problems increase fear of loss Totally stagnant Lost a few of accounts Worked like dog to rebuild Too many customer problems to prospect much Too often in the office running issues down Losing more than winning, even though discounting Last resort price increases appear to help More losses and price decreases to save them Lower prices and refocus on big accounts Lost a big account on price Redouble efforts to replace big account Redouble efforts to replace big account Redouble efforts to replace big account Good economy Good economy Good economy Recession Recession Bad mutitasking a major issue Bad mutitasking a bigger issue Bad mutitasking the biggest inhibitor of progress Bad mutitasking the biggest inhibitor of progress Bad mutitasking the biggest inhibitor of progress

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# of Cust 25 45 55 60 64 67 69 70 68 69 66 74 72 70 65 64 61 63 62 64 68 71 73 77 79 80 84 89 93 97 100 98

Sales $500 $1,100 $1,600 $2,000 $2,300 $2,500 $2,600 $2,700 $2,600 $2,600 $2,500 $2,700 $2,600 $2,500 $2,300 $2,700 $2,500 $2,600 $2,400 $2,500 $2,600 $2,700 $2,700 $2,800 $2,800 $2,500 $2,600 $2,500 $2,400 $2,400 $2,300 $2,400

1,000s T T/Sales Comm $130 26% $39 $275 25% $83 $400 25% $120 $460 23% $138 $506 22% $152 $550 22% $165 $572 22% $172 $594 22% $178 $546 21% $164 $546 21% $164 $525 21% $158 $540 20% $162 $520 20% $156 $500 20% $150 $437 19% $131 $567 21% $170 $500 20% $150 $494 19% $148 $456 19% $137 $475 19% $143 $494 19% $148 $513 19% $154 $513 19% $154 $560 20% $168 $560 20% $168 $475 19% $143 $494 19% $148 $475 19% $143 $456 19% $137 $456 19% $137 $437 19% $131 $456 19% $137

Draw $6 ($6) $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

Pay $45 $77 $120 $138 $152 $165 $172 $178 $164 $164 $158 $162 $156 $150 $131 $170 $150 $148 $137 $143 $148 $154 $154 $168 $168 $143 $148 $143 $137 $137 $131 $137

I developed a “story” for a good (not great) salesperson over a 32 year-long career, based on my 35 years of direct experience


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What’s the problem? Good Salesperson: Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32

Comment Good growth tempered by having to learn the products Great growth – high confidence (not totally warranted) Good growth - focus on bigger opportunities Focus on bigger opportunities Focus on bigger opportunities Focus on bigger opportunities Some gains some losses – slight growth Balance shifts from opening new accts to maintaining Problems increase fear of loss Totally stagnant Lost a few of accounts Worked like dog to rebuild Too many customer problems to prospect much Too often in the office running issues down Losing more than winning, even though discounting Last resort price increases appear to help More losses and price decreases to save them Lower prices and refocus on big accounts Lost a big account on price Redouble efforts to replace big account Redouble efforts to replace big account Redouble efforts to replace big account Good economy Good economy Good economy Recession Recession Bad mutitasking a major issue Bad mutitasking a bigger issue Bad mutitasking the biggest inhibitor of progress Bad mutitasking the biggest inhibitor of progress Bad mutitasking the biggest inhibitor of progress

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# of Cust Sales 25 $500 45 $1,100 55 $1,600 60 $2,000 64 $2,300 67 $2,500 $700 69 $2,600 70 $2,700 68 $2,600 $600 69 $2,600 66 $2,500 $500 74 $2,700 72 $2,600 70 $2,500 $400 65 $2,300 64 $2,700 61 $2,500 $300 63 $2,600 62 $2,400 64 $2,500 $200 68 $2,600 71 $2,700 $100 73 $2,700 77 $2,800 79 $2,800 $0 80 $2,500 84 1$2,600 3 89 $2,500 93 $2,400 97 $2,400 100 $2,300 98 $2,400

1,000s T T/Sales Comm Draw Pay $130 26% $39 $6 $45 $275 25% $83 ($6) $77 $400 25% $120 $0 $120 $460 23% $138 $0 $138 $506 22% $152 $0 $152 $550 22% $165 $0 $165 $572 22% $172 $0 $172 $594 22% $178 $0 $178 $546 21% $164 $0 $164 $546 21% $164 $0 $164 $525 21% $158 $0 $158 $540 20% $162 $0 $162 $520 20% $156 $0 $156 $500 20% $150 $0 $150 $437 19% $131 $0 $131 $567 21% $170 $0 $170 $500 20% $150 $0 $150 $494 19% $148 $0 $148 $456 19% $137 $0 $137 $475 19% $143 $0 $143 $494 19% $148 $0 $148 $513 19% $154 $0 $154 $513 19% $154 $0 $154 $560 20% $168 $0 $168 $560 20% $168 $0 $168 $475 19% $143 $0 $143 $494 5 7 19%9 $148 11 13 $015 $148 17 19 21 $475 19% $143 $0 $143 Years on the job $456 19% $137 $0 $137 $456 19% $137 $0 $137 $437 19% $131 T $0 $131 # of Cust $456 19% $137 $0 $137

My data looks like this:

Good Salesperson 160 140 120 100 80 60 40 20 0 23

25

27

29

31


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What’s the problem? Average Salesperson: Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32

Comment Good growth tempered by having to learn the products Really good growth – still a few things to learn Good growth – pretty good confidence Focus on bigger opportunities Balance shifts from opening new accts to maintaining Problems increase fear of loss Some gains some losses – slight growth Some gains some losses – slight growth Some gains some losses – slight growth Totally stagnant Lost a couple of accounts and one big account Worked like dog to rebuild Too many customer problems to prospect much Always in the office running issues down Losing more than winning, even though discounting Panicy price increases appear to help More losses and price decreases to save them More losses and price decreases to save them Some gains some losses – slight growth Some gains some losses – no growth Some gains some losses – slight growth Big new customer Relaxes Price increases More losses and price decreases to save them Redoubled efforts Redoubled efforts Relaxes Getting tired Doesn't care, raises prices Tired Tired

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# of Cust 15 40 60 65 72 77 90 110 125 134 131 150 152 147 138 120 115 112 115 118 120 118 115 111 107 112 115 106 103 99 91 95

Sales $300 $800 $1,000 $1,400 $1,600 $1,700 $1,700 $1,700 $1,700 $2,000 $1,700 $1,900 $1,900 $1,850 $1,700 $1,600 $1,500 $1,400 $1,500 $1,500 $1,600 $2,100 $2,000 $2,100 $1,900 $2,000 $2,100 $1,900 $1,800 $1,800 $1,700 $1,600

1,000s T T/Sales Comm $78 26% $23 $192 24% $58 $230 23% $69 $308 22% $92 $336 21% $101 $340 20% $102 $340 20% $102 $340 20% $102 $340 20% $102 $380 19% $114 $323 19% $97 $342 18% $103 $342 18% $103 $333 18% $100 $289 17% $87 $304 19% $91 $270 18% $81 $238 17% $71 $270 18% $81 $255 17% $77 $288 18% $86 $357 17% $107 $340 17% $102 $378 18% $113 $323 17% $97 $340 17% $102 $357 17% $107 $323 17% $97 $306 17% $92 $342 19% $103 $323 19% $97 $304 19% $91

Draw $22 ($7) ($12) ($3) $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

Pay $45 $51 $57 $89 $101 $102 $102 $102 $102 $114 $97 $103 $103 $100 $87 $91 $81 $71 $81 $77 $86 $107 $102 $113 $97 $102 $107 $97 $92 $103 $97 $91

I did the same for an average salesperson


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What’s the problem? Average Salesperson: Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32

Comment Good growth tempered by having to learn the products Really good growth – still a few things to learn Good growth – pretty good confidence Focus on bigger opportunities Balance shifts from opening new accts to maintaining Problems increase fear of loss Some gains some losses – slight growth Some gains some losses – slight growth Some gains some losses – slight growth Totally stagnant Lost a couple of accounts and one big account Worked like dog to rebuild Too many customer problems to prospect much Always in the office running issues down Losing more than winning, even though discounting Panicy price increases appear to help More losses and price decreases to save them More losses and price decreases to save them Some gains some losses – slight growth Some gains some losses – no growth Some gains some losses – slight growth Big new customer Relaxes Price increases More losses and price decreases to save them Redoubled efforts Redoubled efforts Relaxes Getting tired Doesn't care, raises prices Tired Tired

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# of Cust 15 40 60 65 72 77 90 110 125 134 131 150 152 147 138 120 115 112 115 118 120 118 115 111 107 112 115 106 103 99 91 95

Sales $300 $800 $1,000 $1,400 $1,600 $1,700 $1,700 $1,700 $1,700 $2,000 $1,700 $1,900 $1,900 $1,850 $1,700 $1,600 $1,500 $1,400 $1,500 $1,500 $1,600 $2,100 $2,000 $2,100 $1,900 $2,000 $2,100 $1,900 $1,800 $1,800 $1,700 $1,600

1,000s T T/Sales Comm $78 26% $23 $192 24% $58 $230 23% $69 $308 22% $92 $336 21% $101 $340 20% $102 $340 20% $102 $340 20% $102 $340 20% $102 $380 19% $114 $323 19% $97 $342 18% $103 $342 18% $103 $333 18% $100 $289 17% $87 $304 19% $91 $270 18% $81 $238 17% $71 $270 18% $81 $255 17% $77 $288 18% $86 $357 17% $107 $340 17% $102 $378 18% $113 $323 17% $97 $340 17% $102 $357 17% $107 $323 17% $97 $306 17% $92 $342 19% $103 $323 19% $97 $304 19% $91

Draw $22 ($7) ($12) ($3) $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

Pay $45 $51 $57 $89 $101 $102 $102 $102 $102 $114 $97 $103 $103 $100 $87 $91 $81 $71 $81 $77 $86 $107 $102 $113 $97 $102 $107 $97 $92 $103 $97 $91

My data looks like this:


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What’s the problem? Bad Salesperson: Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32

Comment Fair start trouble learning product lines Good growth – many things still to learn Good growth – pretty good confidence Fair growth disincented by owing $37.5k in back draw Quits doesn't think paying back draw is fair

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# of Cust 12 20 30 40

Sales $200 $500 $700 $800

1,000s T T/Sales Comm $48 24% $14 $115 23% $35 $161 23% $48 $176 22% $53

Draw $31 $10 ($2) ($4)

Pay $45 $45 $47 $49

This time the person quits or gets fired but it doesn’t happen right away. A total washout might complete four years! Ouch.


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What’s the problem? Bad Salesperson: Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32

Comment Fair start trouble learning product lines Good growth – many things still to learn Good growth – pretty good confidence Fair growth disincented by owing $37.5k in back draw Quits doesn't think paying back draw is fair

# of Cust 12 20 30 40

The problem is often the same salesperson who negotiated for a draw against future earned commissions to gain a reasonable starting income feels disincented and “underpaid” while repaying these accumulated draws

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1,000s T T/Sales Comm $48 24% $14 $115 23% $35 $161 23% $48 $176 22% $53

Sales $200 $500 $700 $800

Draw $31 $10 ($2) ($4)

Pay $45 $45 $47 $49

Bad Salesperson $700

160

$600

140 120

$500

100

$400

80 $300

60

$200

40

$100

20

$0

0 1

3

5

7

9

11

13

15

17

19

21

23

25

27

29

31

Years on the job

T

# of Cust



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Comparison of Good and Average Salesperson:

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Analysis: • As the salesperson exhausts his or her capacity, their production of T tails off and even declines.

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Analysis: • As the salesperson exhausts his or her capacity, their production of T tails off and even declines. • Why would a salesperson’s capacity be exhausted? • • • • • •

They must do some work for which they are ill suited They switch between 13 different jobs due to changes in priority Customers change a salesperson’s priorities Coworkers change a salesperson’s priorities Bosses change a salesperson’s priorities Suppliers change a salesperson’s priorities

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Analysis: • As the salesperson exhausts his or her capacity, their production of T tails off and even declines. • Why would a salesperson’s capacity be exhausted? • • • • • •

They must do some work for which they are ill suited They switch between 13 different jobs due to changes in priority Customers change a salesperson’s priorities Coworkers change a salesperson’s priorities Bosses change a salesperson’s priorities Suppliers change a salesperson’s priorities

• Salespeople suffer enormously from Bad Multitasking

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Holistic analysis: I built a model from the above assumptions by rolling dice Roll 1. 2. 3. 4. 5. 6.

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Outcome Bad salesperson Bad salesperson Bad salesperson Bad salesperson Average salesperson Good salesperson



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Holistic analysis: I began with a start-up deploying 3 salespeople 1. 2. 3. 4. 5. 6. 7.

Complement Bad + Bad + Ave Bad + Good + Bad Bad + Bad + Bad Ave + Ave + Bad Good + Bad + Bad Bad + Bad + Bad Good + Ave + Bad

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Result Company failed Company failed Company failed Company failed Company failed Company failed Company survived!

Odds 7% 7% 30% 2% 7% 30% 2%



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Holistic analysis: As profits accumulated, I added salespeople Complement Result 7. Good + Ave + Bad Company survived! • In year 2, I added another salesperson Good! • In year 4, I added another salesperson Good!

Odds 2% 17% 17%

This was unbelievably lucky no wonder so many startups fail

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What’s the problem? Holistic analysis: Early Results:

Whole Company 1,000s Year 1 2 3 4 5 6

Total Sales $1,700 $2,900 $4,100 $5,700 $6,850 $7,350

T’put Sales Pay $508 $760 $983 $1,352 $1,672 $1,654

$144 $223 $280 $382 $393 $470

OE * $504 $695 $831 $1,221 $1,319 $1,506

NP %NP $4 $65 $152 $131 $353 $148

0.2% 2.2% 3.7% 2.3% 5.2% 2.0%

*OE = Budgeted in years one through three. 13% of sales in years four through six, plus a random variation of 0% to 2% of sales www.tocpractice.com



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Holistic Analysis: • I took the simulations out 50 years: • I added salespeople when I thought it financially prudent • Recalculating the spreadsheet gives different results depending on the random fluctuations of OE, 0% to 2% above that year’s base

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Holistic Analysis: • This calls into question the title of the last 25 slides • What the heck is the problem with this?

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Holistic Analysis: • Well, OE (complexity) is growing slightly faster than T • High early-life mortality rate (a large majority fail in 1st 5 yrs) • Maybe you have to live with 20 salespeople to feel it

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Direction for Solution

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Assumptions: • Since the salesperson is paid like a profit center, they must: • Do their own planning, marketing, prospecting, appointment setting, travel, presentations, proposals, quotations, sourcing, problemsolving, customer service, relationship building and, when necessary, even collections

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Direction for Solution Creative Analytical

Craftsman

Assumptions: • Since the salesperson is paid like a profit center, they must: • Do their own planning, marketing, prospecting, appointment setting, travel, presentations, proposals, quotations, sourcing, problemsolving, customer service, relationship building and, when necessary, even collections Informal Expert

Operational

13 separate jobs. Why imagine anybody could be suitable for all? www.tocpractice.com



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Assumptions: • Since the salesperson is paid like a profit center, they must: • Do their own planning, marketing, prospecting, appointment setting, travel, presentations, proposals, quotations, sourcing, problemsolving, customer service, relationship building and, when necessary, even collections

13 separate jobs. Why imagine anybody could be suitable for all? www.tocpractice.com



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the salesperson is paid like a profit center WHY? • Because my dad and his dad did it that-a-way? • Because unlimited potential pay attracts the best? • Because it wouldn’t be fair to pay them so much unless they self-manage? • Because it gives them the incentive to grow Throughput?

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the salesperson is paid like a profit center WHY? Humm?

• Because my dad and his dad did it that-a-way? • Because unlimited potential pay attracts the best? • Because it wouldn’t be fair to pay them so much unless they self-manage? • Because it gives them the incentive to grow Throughput?

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Necessary because the job is so difficult

• Because my dad and his dad did it that-a-way? • Because unlimited potential pay attracts the best? • Because it wouldn’t be fair to pay them so much unless they self-manage? • Because it gives them the incentive to grow Throughput?

www.tocpractice.com




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• Because my dad and his dad did it that-a-way? • Because unlimited potential pay attracts the best? • Because it wouldn’t be fair to pay them so much unless they self-manage? Is self-management aligned holistically? • Because it gives them the incentive to grow Throughput?

www.tocpractice.com




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• Because my dad and his dad did it that-a-way? • Because unlimited potential pay attracts the best? • Because it wouldn’t be fair to pay them so much unless they self-manage? Is self-management aligned holistically? • Because it gives them the incentive to grow Throughput? Then, why to they all stall out? www.tocpractice.com


Solution

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the salesperson is paid like a profit center Not only should salespeople not be paid as profit centers, companies should evolve away from salespeople! WHY?

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Solution

Why move away from salespeople? • • • • • •

To align the company in exploiting its constraint So the company can succeed with “ordinary” employees So folks aren’t saddled with unsuitable jobs they hate Because global purpose is more inspiring than “just me” It removes the effective glass-ceiling on T generation It facilitates T growing faster than OE

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Solution

Does this mean fire the salespeople? • No • Segregate jobs based on skill sets not functionality • Find people whose personalities fit the jobs (not vice versa) and apply people along their strengths

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Solution

Lets start with a conventional start-up company, restructure it, work forwards again in time and see if it works better

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Solution Conventional Starting Point Year 1

Year 1 Sales $1,700 T $508 Sales Exp $144 Other OE $360 NP $4

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Year 2 Sales $2,900 T $760 Sales Exp $223 Other OE $472 NP $65 + Salesperson + Service Tech + Exec Assistant

Year 3 Sales $4,100 T $983 Sales Exp $280 Other OE $551 NP $152 + Customer Serv. + A/R Clerk


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Solution Division of Labor Company Year 3

In year 3 this company earns more than the conventional one did in all 3 years!

Year 1 Sales $250 T $60 Sales Exp $75 Other OE $54 NP ($69) Working out of the President's house on the cheap

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Year 2 Sales $1,168 T $280 Sales Exp $135 Other OE $178 NP ($33) Raises for Presenter, Scheduler & President Add Implementer and Truck Driver

Year 3 Sales $6,040 T $1,450 Sales Exp $315 Other OE $852 NP $283 Per Org Chart above


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Solution Comparison after 17 years

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Managing without using $ To bribe employees

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This is a serious challenge that needs its own presentation 1. Build Trust (listen and act on what you heard) 2. Enjoying the Job 3. Autonomy (align authority with responsibility) 4. Mastery (allow people to become true experts) 5. Purpose (help employees know how they contribute to the global picture)

6. Pay fairly (plus a little bit more, when you can afford it)

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Material to investigate:

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Material to investigate:

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17 - Henry Camp_TOCPA_USA_21-22 March 2016

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