It Matters That Your CEO Doesn't Know Much About Sales

 
 
Sales appears to be getting short-changed in the C-suite, says Frank Cespedes. What’s needed are more links between top executives and the customer-facing side of the business.
 
 
by Michael Blanding
CEOs need to roll up their sleeves and learn more about the
customer-facing sides of their businesses, like sales. Source: AlexBrylov

Let’s face it: To most C-suite executives, sales processes are often an afterthought or a somewhat mysterious black box—essential for meeting quarterly revenue targets, but a tactical tool that’s rarely part of strategy formulation. Develop the best product, and let the sales department figure out the best way to get it to the customer, they think.

And many sales leaders like it that way. Perhaps that’s why there has been an explosion in recent decades of new senior executives specializing in everything except sales.

“The number of executives reporting to the CEO in the average S&P 500 company has doubled in the last 20 years,” says Frank V. Cespedes, a senior lecturer in the Entrepreneurial Management Unit at Harvard Business School. “But that increase is largely driven by more functional specialists like CIOs or CMOs, not general managers.”

“There ultimately is no such thing as effective selling that is not tied to the company’s strategic objectives”

The reason for that is business is increasingly complex, data is flowing like a fire hose, and more specialists are needed to stay up to date with functional best practices. The problem that this influx of specialists creates, Cespedes says, is that fewer senior executives are responsible for integrating activities across the multiple activities that determine customer acquisition and retention.

He discusses that gap in a recent article in the European Business Review, titled What Senior Executives Should Know About Sales. “If you look at the Fortune 500, there is currently only one CEO who came up the organization from sales: the CEO of Cisco,” says Cespedes. “But sales is one of the core activities in any business. Without a good customer acquisition process, you can’t grow.”

A professor at Harvard Business School for 11 years, Cespedes left for an equal time to run a firm, where he learned firsthand the importance of generating a steady stream of customers.

“Having to meet payroll monthly gave me a new appreciation for sales and selling,” he says. “As [Samuel] Johnson said, the prospect of hanging in the morning concentrates the mind.”

He put much of what he learned in his 2014 book, Aligning Strategy and Sales: The Choices, Systems, and Behaviors That Drive Effective Selling, from which the article draws. While there are many books about strategy and many about sales, Cespedes says he couldn’t find any that linked the two, and yet, that link is vital to a company’s success.

“There ultimately is no such thing as effective selling that is not tied to the company’s strategic objectives,” he says. “Selling divorced from the firm’s goals may be good for individual salespeople and their compensation, but it’s not good for the enterprise and its investors.”

The value of selling

MBA finance courses often emphasize four core ways to create value in a company: investing in projects that earn more than their cost of capital; increasing profits from existing capital investments; reducing assets in activities that earn less than the cost of capital; and reducing the firm’s cost of capital itself. While most CEOs understand these objectives, what they often miss is how and why sales materially affects each value component.

The main reason companies invest in new projects and infrastructure, for example, is almost always to help them acquire or retain customers, says Cespedes. “We don’t do it for its own sake, we do it for the sake of the external market. Hence, the call criteria used in sales directly impact which projects the firm invests in. Yet, how many in the C-suite understand how compensation, deployment, and other core sales management practices determine these activities daily?”

Similarly, increasing profits from existing investments requires productivity improvements. Over the past 15 years, production efficiencies have enabled an average S&P 500 company to reduce its cost of goods sold by about 250 basis points, Cespedes says, but selling expenses as a percentage of revenue have not decreased.

“CEOs have dealt with the back office and gotten more efficient in manufacturing, operations, supply chains, and shared service initiatives. But the focus of productivity improvements is shifting, because the biggest opportunity for improvements at more firms is now on the go-to-market side,” he says.

Reducing assets devoted to negative-return activities requires good links with changing market realities. On average, companies spend 10 percent of revenues on selling activities—often much more in many B2B markets, he says. But if executives don’t understand the buying process, they commit errors by overinvesting in areas that are no longer profitable or missing new areas that might yield more profits as the market changes or both.

Finally, when it comes to reducing the firm’s cost of capital, consider the basics: Financing needs are driven by the cash on hand and the working capital required to conduct and grow the business. “The single greatest driver of cash in a business is typically the selling cycle,” says Cespedes. “Accounts payable are accumulated during selling, and accounts receivable are largely determined by what’s sold, how fast, and at what price. That’s why accelerating selling cycles is a strategic as well as a sales issue.”

Planning and hiring

To reap any of these benefits companies must develop links between the C-suite and the customer-facing side of the business. In his article, Cespedes offers two examples of how this can be done: revamping strategic planning and hiring.

“In many companies it’s really a misnomer to call planning strategic,” he says. Rather, most planning is an annual affair linked to the budget process, routinely taking four or five months to complete. “But sales must respond customer by customer in market time, not internal planning time. Hence, even if the output of planning is a great strategy (a big if), the process often makes it irrelevant to what is happening in sales.”

Companies should treat strategic planning as an ongoing process rather than a one-time event, and incorporate a two-way conversation between executives and sales managers to keep current on developments in a changing market.

Says Cespedes: “Value is created or destroyed with customers, and good leaders know that interpreting market data is not just a search for truth and insights. It’s also about actionable dialogue with the people who must execute those insights. If you don’t have those links you are always going to be fighting the last war.”

As with many facets of business, establishing those links comes down to hiring the right people. Across industries, the average annual turnover in sales is 25–30 percent. “This means that in many companies the equivalent of the entire sales force must be hired and trained every four years or so,” says Cespedes. “Any talk about talent management that ignores this aspect of the business is probably just talk.”

The challenge is compounded because in contrast to hiring for engineering or finance positions, he notes, there is no easily identified resource pool for sales positions. Of the over 4,000 colleges in the United States, only about 100 have sales programs or even sales courses.

One common result is that many salespeople start their careers unprepared. On the other side of the job market, new technologies are reshaping sales tasks in many industries, but many executives hire on the basis of out-of-date generalizations.

“Sales is an area especially susceptible to glib generalizations by many people: It’s all about relationships, or salespeople are ‘coin-operated’—if you want to motivate them it’s all about compensation.”

In reality, Cespedes says that sales is one of the most contextually determined areas in business, varying dramatically across markets and industries and between companies in the same industry. And his article cites data illustrating how sales competencies that, only a decade ago, were considered essential are now lower in priority.

“Managers get paid to manage today and tomorrow, not yesterday. If you haven’t defined a job well, you don’t really know who you are looking for,” he says.

These changing sales competencies also emphasize a competitive reality: Markets have no responsibility to be nice to any firm’s strategy and legacy capabilities. It’s leadership’s responsibility to adapt.

“I’m certainly not arguing that every senior executive should be a shadow sales VP,” says Cespedes, “but all in the C-suite should truly understand how customer acquisition activities affect the enterprise across levels and functions. US companies alone spend about $900 billion on sales efforts annually. That’s more than 3 times what they spend on media advertising and about 10 times what they spend on social media and other digital efforts. Managing an investment of that magnitude strategically and effectively is a governance issue as well as a prerequisite for profitable growth.”

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About the Author

Michael Blanding is a writer based in Brookline, Massachusetts

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