Welcome to Inside: Sales Enablement Episode 61
In this episode we’re joined by long-time listener Erik Host-Steen who appreciates getting into the meat of some issues. Since we like introducing ideas and inviting people to participate and push back, Erik reached out to discuss business outcomes and business impact of Sales Enablement.
Erik finds that sales, marketing, and product leaders are often working at cross-purposes. One way to get alignment is through business impact measures. What are the goals of the organization? And certainly, growth is usually a part of that. And that growth is for some purpose, value creation, profitability, etc. And then if it’s a venture capital backed, firm, there’s an exit. So then we have to have an eye toward valuation. And the top typical valuation models have many other factors involved rather than the Commercial Ratio we discussed on the show.
What does the Commerical Ratio really add to the toolkit in terms of being able to solve growth problems being able to drive toward a particular valuation or profitability? Find out as we walk through the top-down view of business impact measures so you can quantify your business impact of the sales enablement function.
Welcome to the inside sales enablement podcast. Where has the profession been? Where is it now? And where is it heading? What does it mean to you, your company, other functions? The market? Find out here. Join the founding father of the sales enablement profession Scott Santucci and Trailblazer Brian Lambert, as they take you behind the scenes of the birth of an industry, the inside sales enablement podcast starts now.
Brian Lambert 00:33
I’m Scott Santucci. I’m Brian Lambert and we are the sales enablement insiders. Our podcast is for sales enablement, leaders looking to elevate their function, expand their sphere of influence, and increase the span of control within their companies.
Scott Santucci 00:48
Together, Brian, I’ve worked on over 100 different kinds of sales enablement issues. As analysts, consultants, we’re practitioners, we’ve learned the hard way, what works, and maybe was more importantly, what doesn’t. And
Brian Lambert 01:01
our focus is on you as sales enablement, leaders and orchestrators. In that role as an orchestrator, you have to blend both tactics and strategy to execute. Our goal is to help you clarify the measures of success, provide an example of what that looks like to execute, and work together across your function across your organization. And then give you confidence to engage up down and across so you can drive results. And on this podcast today, we’re just really excited. And it’s really awesome to have another insider join us. We’ve got Eric hosting with us. Hi, Eric, how you doing?
Erik Host-Steen 01:37
Great, thanks. Thanks for having me.
Brian Lambert 01:39
Absolutely. And I was, I wanted to bring you in, because you and I had both had a conversation on the heels of the Commercial Ratio webinar. And I learned a little bit about you, you’ve got you fixed sales and marketing and product problems. You’ve been with Rogers Corporation, and hoche and Red Mountain, and you’re very process driven and quality focused, and have a product marketing background in business development. And, you know, one of the things that I learned about you as you really are focused on having a dialogue, to understand but also where things maybe don’t necessarily come together for you, you want to have a discussion. And that’s what we’re doing here today. I thought, Well, you know what, instead of having the conversation between us, between you and Scott, let’s have you on the show. And you can ask Scott yourself. So thanks for joining in, tell us tell us a little bit more about yourself, Eric will do.
Erik Host-Steen 02:31
Yep, longtime listener or I’ve been listening here for for quite a while. And if the podcast is made the cut into my the ones that I always listened to. What I appreciate about it is not just sort of soft, fluffy interviews, but get into the meat of some issues and introduce some new ideas and you invite people to participate and push back. And that’s what I’m why I’m here. My practice what I do I explain it in a fun way I fix or prevent a condition that most sales enablement people have experienced, I call it round canoe syndrome. And round canoe syndrome happens when we have sales leaders, Marketing Leaders and product leaders all in around boat, each with a paddle rowing in the direction they think they need to go.
Brian Lambert 03:18
Awesome. That’s a great setup for this conversation. So tell us and tell our listeners and tell us why you’re here. And what your questions about the Commercial Ratio.
Erik Host-Steen 03:30
Yeah, I you know, so I listened to the prior podcasts that talked about Commercial Ratio and watch the webinar also. And, you know, I appreciate this idea of how do we try to drive sales and marketing efficiency and alignment. But what I’ve thinking about it, I come up with two words, incomplete and unnecessary. And that’s what I would like to explore a little bit today and try and find out from a question standpoint, what, what really is this Commercial Ratio trying to accomplish? And what does it do that other tools and methods that already are in place don’t accomplish?
Scott Santucci 04:11
Excellent. So I think let’s start with to our listeners know, we so we’ve published a podcast on the Commercial Ratio or two podcasts, we have Commercial ratio.com microsite and then we also have done a whole webinar on it. So we’ve shared a lot about that. Let’s talk about let’s let’s break down incomplete and unnecessary. Let’s first talk about incomplete what what about from from your lens? What, what is your perspective of it? What’s incomplete and what is the purpose of the ratio from from your understanding?
Erik Host-Steen 04:51
Sure. So when I think about the things that drive revenue, it’s it’s more than marketing and sales and Something that I always think about is is left out in the sort of sales and marketing alignment piece is what about the product. And that’s not captured in here. So if we’re if we’re looking at it trying to drive growth, and neglecting whether or not the product portfolio is keeping up whether product quality is where it needs to be, whether customer support is what it needs, what needs to happen. You know, one of the stories I like to add observations from my past experiences, we do a great job bringing customers in, but the rest of the organization would run them out back to our faster than we could bring them in the front.
Scott Santucci 05:39
Excellent. Okay, so then what? So you’re saying, What would be your alternative for what’s, what would make it more complete?
Erik Host-Steen 05:50
Well, I think that the bigger question is, what are the goals of the organization? Right? And certainly, growth is usually a part of that. And sometimes not, you know, sometimes you think of a lifestyle business. And growth really isn’t all that important. But the sense of the types of organizations that were usually involved with growth is usually a component. And that growth is for some purpose, value creation, right profitability. And then if it’s a venture capital backed, firm, there’s an exit, right? So then we have to have an eye toward valuation. And the top typical valuation models have many other factors involved rather than a Commercial Ratio. So you know, that’s, that’s the it gets to Well, what what does it really what does it really add to the toolkit in terms of being able to solve growth problems being able to drive toward a particular valuation or particular profitability?
Unknown Speaker 06:53
Unknown Speaker 06:55
That’s, that’s part of it. Mm hmm.
Scott Santucci 07:00
So let’s, um, let me provide some responses back in a in an ordered way, and not overwhelming way. So first and foremost, having conversations about these things are awesome. So this is what we want to have what we want to have happen. So step number one would I did? Do I disagree? That there are many factors that go into revenue? No, of course, not. As a matter of fact, the entire company’s revenue engine, everything it does, should be driving to revenue. Totally agree with there’s no disagreement there. So the question then becomes the role of the Commercial Ratio, and what what its intent is to drive balance across not, it’s not just about driving balance across sales and marketing, it’s a lens to look at the driving balance between how finance is accounting, and what investors see. So the difficulty is from an investor’s standpoint. So just as a reminder, we co created this Commercial Ratio in partnership with TCV, which is a very large, well known private equity firm. And in talking with, after having published that publish that work, we’ve now been in contact with other leading private equity firms who are all seeing a similar problem. So from their perspective, what they see again, their investors so that they’ll look at things more like the income statement. And to your point, and I’m glad you brought this up, Eric, the kinds of things that go into making the company valuable, versus the kinds of things that investors see as valuable. So we’ll cover the the valuation metrics later, are two different things. So I’m gonna pause there. Are we in alignment so far?
Erik Host-Steen 08:56
Yes, yes. And this, this accounting thing is, I think important.
Scott Santucci 09:03
Yes. And I think this, it’s really important. It’s where we, where we can get where we can get lost. So I’m going to share with you some really interesting things, I was anticipating about the incomplete part, because how exactly do you account for marketing investments that aren’t earmarked for growth, for example, or there’s all these little nuances, unfortunately, there about accounting rules. And, and, and when you’re looking at metrics from a financial standpoint, from the investors, we have to worry about the ways that things are accounted for, and also the rules of what goes into what bucket. So unfortunately, unfortunately, we can’t be theoretical at all there because there are laws that people follow. And if you look at the revenue recognition laws and rules that people follow. Each company can make different choices amongst themselves. So there’s a lot of work that needs to be done to figure out which being goes into what bucket. Right? Okay.
So that’s one of the things that’s been so challenging from the investor to the company view, about how to get clarity of what’s happening. I will tell you that over the past five years, the degree of frustration, of the return of investment that investors are seeing and sales and marketing has grown increasingly more frustrated. And maybe we have a negative consequence that a lot of these random acts of sales enablement, are coming from frustrated investors who are just telling them to go do different things. So I will definitely say that investors are part of the problem. And I think part of what we need to do is better understand where they’re coming from, and what what metrics that they’re looking at. So I’ll let you I’ll let you respond to that. Because and by the way, Eric, I’m I’m trying to do is be very step by step approach, so that we can find out where we agree, where we disagree, and then how might we amend this analysis so that we can make it more complete? And then hopefully, if we make it more complete, then we’ll see why it’s valuable or necessary, instead of being unnecessary. That’s, that’s my goal.
Erik Host-Steen 11:25
Right? So from a gap standpoint, gap standpoint, yeah. Sales and Marketing belong in SGA. And I think I picked up one of the things that creates some some of the trouble which is there are very few people on the commercial side that have a deep enough understanding of accounting. And then they hear the term cost of sales, which is just an out just a nother term for cost of goods sold. Even though it says cost of sales, it gets lost in the translation of accounting English into normal person’s English
Scott Santucci 12:05
spot on right.
Erik Host-Steen 12:08
And so, you know, they’re in and of itself creates a lot of confusion.
Scott Santucci 12:12
Whoa, glad we’re having this conversation. Keep going.
Erik Host-Steen 12:15
Yeah, we call it costs of sales. But we don’t put costs of sales in that bucket. Well, one of the phrases I have in my in my in my in my toolkit is that the beginning of alignment starts with the definition of terms. And cost of sales might be one of these great examples that causes confusion, because when you deconstruct it from an English standpoint, anyone except for an accountant would say, Well, of course, sales goes in there.
Scott Santucci 12:44
So that’s, so what we’re talking about for those of those of you who need a visual because I need a visual when I think about an income statement. Eric and I right now are talking about the definitions of an income statement. So you’ve joined this podcast, and yes, we’re actually talking about gap financial standards, and we’re talking for sales and marketing. So yes, it’s super exciting stuff that we’re getting into.
Brian Lambert 13:10
We’re just I’ll say, also, for our listeners, because sometimes I take the voice of our listeners, and I interrupt people at awkward moments. But if, if you’re wondering if you should go switch to something else, I would say do not do that. Hang in there. And if you’re not sure what’s happening, reach out to us because, as Eric just said, there are very few people in sales and marketing who actually understand this. And, and this is part of the challenge. So hang in there,
Scott Santucci 13:37
no huge part of the challenge. It’s it’s. So let’s first talk about cost of sales. So Part of , and then let’s talk about sales and marketing expense or SG&A. Right? What what they’re saying, in plain speak language is that there’s money that you spend in order to get the revenue. That’s what’s cost to sales. Sometimes it’s referred to cost a revenue. You can you can call it either one, then there’s sales and marketing expense that we would think of that is OP x or operating expense. And what the investors are looking for is, and this is where some of our sales leaders are where we’ve gotten some challenge on Commercial Ratio, Eric, from from people from the sales perspective, right? their view is 100% of the revenue coming in is related to the sales effort. If you’re looking at it from an investor’s standpoint, they’re saying even if we got rid of the Salesforce, we would still be generating 80% of our revenue anyway, and the Salesforce is very expensive. So to talk like that is an invitation to get a practical exam on what your expenses are. Right? So that’s one challenge.
So to your point, Eric, this is all about the accounting. Now the other angle, It is, what do investors think the purpose of the sales and marketing expense are. And they think it’s to drive revenue growth, not revenue, revenue growth. So that calculation is the difference between what you saw last year, what you sold this year, whatever that delta is, that’s what your contribution was. And then that’s what they want to do is hold that line item that’s on the OP x expense accountable for it. Now, the other key aha moment for me talking to these investors, so we talked to when we were working on it, we talked to so how how investors work is they put one of their portfolio people, one of their operating partners, they sit on these boards. So we talked to six of them. So basically, six people who are on boards of directors, each of three different companies. And universally, they all said that when they look at the retain revenue bucket, they expect most of that money to be paid for out of cost of revenue. So for example, your your customer support, people are going to be allocated or accounted for in that cost of revenue bucket. So just having that clarity was illuminating for me, because I was thinking, How much money do you spend to retain your customers? I thought that was a sales and marketing expense. And yes, there’s some gray area, there’s no absolutes, I’m just trying to give the rationale of where, where they’re coming from with this ratio. And part of what they’re trying to do is, of course, the investors think the only two people in the company that know anything are the CEO and CFO. Right. So that’s, that’s their bias. And the difficulty that the CFO has is how do I connect the dots between these budget expenses and these levers that our investors are driving pressure for, to the activities that sales and marketing keeps asking for more and more budget? And that’s really where the tension point rests from the top down perspective?
Erik Host-Steen 17:09
Yes, right. And there are none of these. And within the frameworks of gap, or whatever financial standards of private equity VC firm is going to use. There are there are guardrails. And there’s the cliff where you go to jail because you break the rules. Yeah, right. And there’s a lot in between, yep. And to correct. And when we start thinking about getting into the publicly traded realm, and let’s say, your portfolio manager for Goldman Sachs, or someone like that, being able to do apples to apples comparison, when there are no standards within gap on, you know, does Customer Success belong to sales, marketing? Or does Customer Success belong to cost of sales, because their job is to retain customers, using a ratio based on publicly traded publicly available information to draw broad based conclusions, I think is dangerous
Scott Santucci 18:14
to what makes that dangerous versus empowering. So I would argue, literally, for everything that you just said, I would argue the opposite perspective, and it’s actually empowering. So tell us why you think is dangerous,
Erik Host-Steen 18:27
because we don’t know what’s included in different numbers. And at the end, we have some, you know, the mathematics is very straightforward, right? I mean, revenue at the end of the period minus the revenue of the previous period divided by marketing and sales expense, like that’s pretty straightforward. And we get some number, and what’s it mean? And what’s good enough. And if you’re at, you know, 1.5 today, and you’re given a, you know, you’re not going to get your bonus next year, unless this gets up to 2.0. Is that really the right thing to start measuring and incenting on versus we want to see top line growth and top line and bottom line growth, customer retention, customer satisfaction, other other metrics that are more direct to what it is that we’re trying to achieve, which is to build and grow a valuable enterprise without muddying the water with this ratio that when we start really poking at it, we said well don’t know what’s included don’t know how to compare that and you know, another thought I had coming into this is let’s just say, but one that was developed just now. Let’s just say we fire all our sales and marketing people tomorrow.
Unless your product is that amazing revenue is going to drop.
Scott Santucci 19:53
Right will drop but will it drop? How much will it drop?
Unknown Speaker 19:59
Who wants to play that? game.
Scott Santucci 20:01
What? Well, it’s it’s it’s
Unknown Speaker 20:04
You go first
Unknown Speaker 20:06
we’ll do the experiment.
Scott Santucci 20:10
The Well, you know, A, B, I’d be happy to the here’s the counter, let me do the counter to the counter is the counter argument before, you know answering that question. The counter the counter perspective, then is who’s actually accountable for growth? for revenue growth, specifically, inside the companies accountable for it? I’m asking you here,
Erik Host-Steen 20:43
because theoretically are in practice, in
Scott Santucci 20:45
Erik Host-Steen 20:47
multiple people need to be accountable to it. I believe it’s it’s, you know, it’s a team sport, right. Drew Brees is my favorite quarterback but he can’t win the Super Bowl on his own?
Scott Santucci 20:59
If so, that’s that that was a theoretical answer to be technical about it. I don’t disagree with you. In reality, when a company is organized in silos, and you say it’s a team sport, what’s the real hat? What what happens really, so the in reality this that the head of sales might own the number, right? If you don’t own the budget, or, you know, programs for you know, may generating, generating leads or having the right messaging or any of the back office stuff on a really accountable? Do they really have a story to drive the number?
Erik Host-Steen 21:38
Right? I don’t. Right. So these are the some of the problems that create this misalignment. Right, because, you know, back to Drew Brees, he can’t win the game on his own right. And the in the in the sales leader has him or herself can’t drive the number on his or her own. Right.
Scott Santucci 21:56
Yes. So what was interesting then is, from a private equity ownership standpoint, what they see constantly is the finger pointing, even at the executive level, constantly. Marketing says this sale says that, what when you own the company, and you guys just spend $30 million of our money, and what did you get as a result? And you can’t answer that question. It exposes a big problem. Yes, number one value that the Commercial Ratio does is allows them to assign authority and accountability. When they leave the number one thing that they say to the CEO, next quarter, when we come back, we’re going to hold somebody accountable for this number. It’s not a metric to evaluate sales people. It’s a metric to evaluate management. That’s their perspective, we’re going to go away, we want you to hold somebody accountable. And we’re going to ask you guys how you’re doing. And the reason that they pick that metric is exactly what that issue is, is the lack of that authority. They agree. So I would say universally, everyone, most investors on the planet would agree. revenue generation is a team sport. The challenge is the way companies are organized, they’re not organized in a way to drive a team sport. And that creates this opportunity of being in the middle, you’re right. On the one hand, it can be dangerous if we try to apply it as an operating metric. But as a strategic metric to evaluate how we’re performing. Like day sales outstanding is a is not a metric that individual people get fired on. It’s a metric that says how well is the accounting group performing. This is the same kind of idea of that ratio. And it helps you determine what your threshold of performance should look like.
So that’s the perspective of it. Obviously, we need to keep doing a better job of articulating it, but we need people like you to help challenges and help bring it to life. The the side of looking at it from the accounting side is also a side note, is why I advise very strongly for people calling it revenue enablement. If you get into the revenue business, then you have to worry about revenue recognition rules. And now you’re definitely in the accounting world. And there’s some serious rules that you have to follow. If you want to do that. Please read the SEC regulation and definition of what revenue actually means. And then if your brain isn’t melted, we can actually have a conversation. So that’s a side note public service announcement. I don’t know what your thoughts are on that, Eric, but let’s get to the though, what would the operating metrics be? So to be very, very clear, hopefully, it’s very clear. We are not advocating that the Commercial Ratio is a metric to be to hold individual sales teams and other individual dupes groups accountable. It’s a metric to create More tops down involvement and an alignment. That’s the goal. The primary mission? Okay. I would
Erik Host-Steen 25:15
we talked a little bit about the under underlying cause of the causes of this about silos and org structure and incentives. Mm hmm. And I agree that that is a significant contributor to a lot of the problems. And what I would propose is, well, then why don’t we fix that rather than introducing a Commercial Ratio?
Scott Santucci 25:40
Well, let’s, let’s talk about that the commercial for our lens, the Commercial Ratio helps quantify the impact of that problem. If you don’t have a quantification of the impact of that alignment problem is just khumba. And it’s gonna be hard to get executive level support to drive forward.
Erik Host-Steen 25:59
Right. Ultimately, though, the, the senior leadership of an organization ought to be driving towards some common purpose that has elements of smart goals associated with that. And if it’s, let’s say, an exit in the next five years, you know, there’s a pretty good idea of what the financial package needs to look like to get there. And breaking those things down in from a three year time horizon into a one year horizon, into a quarterly horizon into a monthly horizon seems like a much more direct and influential way to communicate to the team. This is what we’re trying to accomplish. This is what winning looks like. And this is how we’re measuring it.
Scott Santucci 26:49
So you’re, when you say to the team, who is the team,
Erik Host-Steen 26:54
the entire organ, anyone on the field?
Scott Santucci 26:57
Alright, so again, the purpose of the Commercial Ratio is for tops down. So my question to you is, you said SMART goals, right? How How, how are those goals getting inspected to determine whether they’re smart or not? It’s pretty easy to put together. So having worked in management consulting, for example, right? There is no baseline to evaluate whether or not this plan that’s being produced, correct, will work or not, there’s not that kind of accountability to the plan. What the Commercial Ratio does is, say, based on these different factors, are you going to be frugal or smart with your spending instead of let’s just double the size says the Salesforce, which is a very common approach that management consultants will come in, and you jet you, you want to grow 20%, lo and behold, guess what you need to grow the size of your sales force 20%. And that creates a lot, you know, what that does is create a lot more alignment problems, we have more and more people, you have more and more variables, and you’re not addressing root cause challenges.
So that’s another reason that this ratio exists is to impose smartness on the people who are doing the plans in the first place. They don’t want to be involved in the operating metrics. And what’s what’s been interesting is they’ve recognized that they being the the investors have recognized, we’re getting way too in the weeds of telling these people what to do. In other words, they’re the ones providing the smart planning, and what are we doing, we’re actually enabling in the wrong way. We’re enabling alcoholics to not have to be smart about what they’re doing by us doing it for them, we have to get out of that business. Now they have a it’s like a three year plan to get out of telling his sales leaders what to do. The Commercial Ratio isn’t a magic wand. It’s a transformational goal. So I don’t think anybody would would disagree with you. I’m certainly not disagreeing with you that it’s smarter to the actual team. To have a smart you said the word smart. I really I circled that in my notes, a smart plan to get us to where we need to and what’s the three year plan look like? What’s the two year plan look like? What is this year plan look like? And what are our quarterly goals? Hundred percent agree with you? The question is how do we know it’s a smart plan?
Erik Host-Steen 29:27
Okay, so when I say the word smart, I’m thinking of the acronym.
Scott Santucci 29:31
You’re right. I’m playing with that too.
Erik Host-Steen 29:34
Okay, good. Right. Well, and that’s why the acronym works. Yep. Right? Because it has the dual meaning it yep. says Well, yeah, of course, I want to go that smart and then it helps people break them down in such a way that they can be specific, measurable, blah, blah, blah. Yeah. In my experience, it’s difficult to find leaders that are able to, despite the fact that this acronym has been around for a long, long time, it’s difficult to find leaders that are able to articulate goals in those terms.
Scott Santucci 30:04
So now, if let me take the flip side, can I argue your point about what’s wrong with the Commercial Ratio?
Unknown Speaker 30:11
Scott Santucci 30:12
Yeah, we’re gorgeous. So I, part of the difficulty is, the things that we’re talking about are obviously sophisticated. And to your point, the, the lack of expertise, or the lack of financial acumen that exists in sales and marketing as a whole is very low. And then also, when you want to bring in performance metrics, like smart metrics, and things like that, it’s also very low. So we have a very low financial, financial measurement bar, of where we’re starting, and sales and marketing to BJ in general. Obviously, there are exceptions. So if you if you get these things, I get it, right. We’re not talking about you. But the point is, the Commercial Ratio is very sophisticated because it its genesis is from investor. So we’re far removed from that. How do we create a mechanism to where we can actually have a conversation about what these metrics are, instead of just accepting tons of activity based metrics that everybody knows don’t work? I think maybe that’s more the conversation that we need to have, which is, we’re not trying so just be really, really clear. We’re not trying to advocate This is the B with all in with all metric. What we advocate is, we need to have a much better conversation within the sales and marketing world about what metrics drive what, and are we doing metrics to drive activity for activity sake? are we driving metrics that actually drive goals? And how do we blend these things together? Because financial metrics and operating metrics are related, but they’re very different.
Erik Host-Steen 31:54
Right, and I appreciate that the Commercial Ratio is nuanced. And in the interest of having a team aligned around things, if you can do that with simpler things, rather than send every sales and marketing person to accounting School, which
would be horrible torture
is the, for example, the SMART goal framework. More, more in grasp, more, easier to grasp and easier and easier to implement and therefore more effective.
Scott Santucci 32:32
I think that’s a great, I think that’s a great question. And I think the question is, what problem are you trying to solve? Yes. So I think, I think the problem that some some companies have is that and so let’s talk about the Commercial Ratio of what it’s used to do. It’s rarely used to to actively triage a business. So if your Commercial Ratio is below 1.0, you’re probably going to get a lot of inspection on how well you’re spending your money. 1.0 basically means you grew $10 million last year, and you spent $10 million in sales and marketing. That’s what it means it’s a net return on investment of zero. That’s all they’re asking is, can you please not lose money on sales and marketing, which I don’t know, most people would probably say is not an unreasonable request. Unfortunately, most businesses are below point five, they spend twice as much versus what they’re growing. And that’s a problem, because it puts a massive drain on on profits, it puts a massive drain on expense where you can’t fund other parts of the company. And other parts of the company have been neglected for a long time. And in many industries, like r&d, or human resources, new ways of working and things like that. So that it creates a lot of pressure in the company.
So if you are below point five, where a lot of companies are, this will be, unfortunately an issue. If you are above 1.0, then probably having a SMART goal conversation might be might be best. But really the goal is from an investor standpoint, where to look at these things. And this metric has been very helpful to triage companies and how to fix their COVID plants. That’s been the number one application of it so far. And then the second thing is to re get re re jigger what the go to market plan model should look like. Now, if we’re talking about goal setting, I think that’s a different conversation. And if we’re not setting the right goals, then I think, you know, smart or other kinds of tools are really helpful. So I think what we need to do a better job of doing is it’s called in the medical field pathology chart. How do we figure out what the What the root problems are? Yes, making better,
Erik Host-Steen 35:03
right? good, strong problem definition, good, strong root cause analysis, in my opinion is going to get you there a lot faster. And so here’s another scenario, right? So we know that we’re in a pandemic, I think I think I read it, I think I read that,
Scott Santucci 35:20
and I haven’t heard anything about it, should I be wearing my mask,
Erik Host-Steen 35:24
I’m safe on zoom.
So we’re gonna have a lot of companies whose revenue at the end of this year is going to be lower than the revenue at the end of last year. So in most cases, people’s Commercial Ratio is not only going to be less than one, it’s going to be negative. Yeah. So if we put too much credence on the value of Commercial Ratio, we’re gonna say, Oh, my God, stop spending all your marketing and sales dollars, because revenue dropped this year. And this is one of the Maxim’s right is what you measure is what you get. And you better really make sure that you want to get what you’re measuring. And when we put this Commercial Ratio, what I do appreciate about the Commercial Ratio, is that it’s a quick way to get a sense for what might be going on in the business. I think that’s cool, right? And in the world of accounting, the current ratio, right, is another example you do some quick math to get a sense of is this is this business, on a on a high level, healthy or an absolute train wreck. And this example of, you know, Commercial Ratio is fluctuating. In the case of COVID. In for, for, for absolutely, there’s absolutely not a function of the effectiveness of the marketing and sales spend. But because of very significant macro factors happening outside of the organization’s control.
Scott Santucci 37:04
That point is very well taken. The counter to that is, the people who are comfortable and like the Commercial Ratio, know how to factor that in. And the way that they tell you how to the way that they factor that in, is they say, look, here’s what our here’s what our revenue is. So basically, what they do is they take a, a model, so they, they know, here’s what we anticipate the decline in revenue to be because of these outside events. And they are metrics that they can use to isolate that actually relatively quickly. And then what they do is they discount the sales and marketing spend, and then they park it over here in a different bucket. And then what they do is they have their isolated one, what they want to what the key point is, it’s the discipline to focus on performance. And you said something that was a very key here. You said the sales and marketing spend. And the reason that the people who like to sell the Commercial Ratio are is they’re moving off of it’s not a it’s not a relationship between spend and results. It’s a relationship between spend, and on what we’re how we’re performing. What we want to do is we want to have a conversation more about what results we get from the work that we do, rather than what we’re spending. And that’s the divorce that are the divorced from looking at sales and marketing as budgets and expense items, to looking at sales and marketing as a portfolio of investments. And how you treat investments mentally and how the decisions get made are very different than if you’re trading of his expense centers. And what that does is it puts pressure on the actually the finance organization to stop treating sales and marketing as these expense silos with these rigid. How many times have you heard Eric, Oh, I got to spend the money this quarter. How do people right? And they’re trying to get away from that, but they don’t know how to do it. And that’s what this lets them do is think about it differently, which actually empowers a lot of sales leaders to actually say these are the things that we need to be working on. And this is the cause and effect relationship.
So it’s it’s just interesting that you’re right. There are ways to look at it. Your average sales operations person is not going to know how to do that discounting. But your average financial analysts or CFO knows how to do this in spades. They’re on calls all the time on how to do an adjusted analysis. They’re adjusting their earnings calls and their their marks for investors all the time. They they’re really good at that what they haven’t done. The beef that when you talk to CFOs is the level of financial acumen from the sales and marketing peers is so low. It’s just really difficult for them to better understand what all these activities are and how we can help make better decisions with that CFOs want to be in the decision making business, not the make me control your budget business, and not having some sort of mechanism to translate back and forth, it puts them at a disadvantage, unfortunately, because of COVID we do have to make adjustments. And the message around the commercial Commercial Ratio helps people identify where there’s waste, and eliminate the waste rather than cut the bone.
Erik Host-Steen 40:31
Okay, so waste is another great word, right. And in the in the world of lean manufacturing, there’s lots of ways to break this stuff out and identify that waste. Yes. And, you know, this might be my own biases, but that seems a lot more straightforward to me, then, then teaching sales and marketing nuances of valuation models, or, and that are, you know, I would argue are ultimately subjective. Right, you know, the, so when we get into economic theory on, on on valuations of companies, right, the, the value of an entity is the net present value of all future dividends, right. But we all know that when we look at the stock market, that the valuations don’t, aren’t tied to that in the in the immediate term. And ultimately, an organization is worth whatever the purse, the last person that decides they’re going to buy it, whatever they say it is. And these become emotionally driven purchase decisions that don’t, that are end up in my experience end up getting justified in arrears. Bye, bye, futzing around with the models and the in the in the ratios to say, Okay, see, we’re justified in the price that we’re paying, or that we sold it out. And so again, it gets back to the other word that I was using is unnecessary, which is, you know, there are there seemed to me to be simpler tools to drive accountability to drive cooperation. And to be able to tell the story, you know, we, hey, CFO, we want to invest X dollars on this next marketing campaign, or tech stack, or whatever. And, you know, this is the story about why we think that this is a good investment for the firm. And these are the specific, who’s the specific actions, who’s going to do what, by when that’s gonna get us there. And this is how we’re going to march forward and determine ultimately whether or not this was a good thing.
Scott Santucci 42:44
So my response on on that Eric would be, I don’t think that there’s a simpler tool, then plugging in your past revenue, your current revenue, what you’re spending on sales and marketing, to open up a conversation about accountability.
Erik Host-Steen 43:01
Scott Santucci 43:02
the prerequisite of having a conversation about what is our what is the we have to be able to, we’ve been talking about sales and marketing alignment for 20 years? And is anybody really doing anything about it? No, just let’s just call that out. And in order to make create an action, you need to create, you need to be able to help people recognize that. If If people will go back to your example, if everybody is used to rowing a circular canoe, why would they change? If they don’t know what a canoe that runs smooth looks like? Or what it’s cost them to, to? To row in a circular canoe, there’s no reason to investigate whether we have a circular canoe or not. And then all the metrics are about Whose turn is it to row in the circular canoe, I can think of three smart consultants on this podcast that might be able to straighten that out. Yeah, there you go. So but I think, Eric, that the the issue is step number one is, how do we make this an issue? Commercial Ratio helps raise that. And then the whole goal of it is to get in a conversation to start looking at those different parts. Is it a prescriptive tool? In other words, you take it and do things? No, it is not. It is never designed to be that we’re never articulating it that way. But we are advocating if you want to be a sales and marketing professional and you’re sick of the circle canoe, we think you should at least get knowledgeable about the Commercial Ratio.
So you can say in an order of magnitude, what the waste. The inefficiencies of sales and marketing are, might be costing our company. And if we fix it, here’s what the here’s what the relationship may be to our investors. And here’s what our Here’s what cost reductions we could have had. And then let’s talk there, frankly, about what we could do better. That’s the whole goal of it. From there, it’s it doesn’t say, this is what you should do. It’s not a prescriptive metric or not anything like that. Like some of the metrics that you talked about definitely are better. I just don’t like I guess you have a background in the manufacturing business. So I’ve been working with some manufacturing clients. And I think that whole value stream analysis stuff is super cool. And I think it would be way better for a sales and marketing group, if they want to get into the business of being performance driven. We should be teaching them that. But we need to be able to create the Why should we change conversation. And that’s where I think the Commercial Ratio tool is really valuable. And that’s what I’ve seen. And I’ve seen, Chief Commercial Officer sees on it as an opportunity to get more more control over their destiny, we’re seeing that we’re seeing that in spades, but we’re also seeing a lot of the friction too. And this conversation is really good to help make it make it come to life.
Erik Host-Steen 46:13
I like what you have to say, you know, so I guess that’s another key point from my critique of the of the ratio, which is, let’s just say it’s some number and we decide it’s bad. We need to start employing other tools to get things fixed. That’s right. And, you know, doing your value stream maps and doing a root cause analysis and finding the waste, being really clear about bringing some more Japanese terms, what were the mood is, you know, what, you know, where are the activities that are, you know, if our customers knew we were doing this, would they say, Well, wait a minute, you’re charging me way too much? No, that’s the stuff that has to go and appreciate that, you know, when we’re in, in the thick of the of the battle in the organization, it’s, you know, other things start to our take over, which is, you know, this is my turf. This is my budget, this is my spend. That’s right, if I if I give this up, even though it’s in the best interest of the overall organization, somehow it makes me look like a weak or poor leader. Yes, yes. And right. These are cultural things that, you know, I would say the Commercial Ratio doesn’t fix, we have to we have to get at, you know, leadership, leadership and the way, way visions are set the way way goals are put in place, the way incentive and comp plans are structured. So that we we signal to the organization, what winning looks like, people know what their roles are. And they’re rewarded when, when those things happen. Yeah.
Scott Santucci 47:48
Yep. So here’s some, some takeaways here. To summarize this podcast, first of all, Eric, I respect the heck out of you for coming on our show challenging on on us. I think this was a incredibly rich conversation. And I thank you so much for your participation, your courage to do this, the insights that you offered challenging us, I just can’t thank you enough. This is, to me, these are the kinds of conversations we need to be having a lot more of in this. In this dialogue. We’re trying to get it right. Not be right. So I appreciate how you’re showing up. Thank you so much.
Erik Host-Steen 48:30
I love talking about this stuff. I appreciate your being open and letting me flounder around and
Brian Lambert 48:39
now you didn’t flounder at all, man. No, I think this is great. And to Scott’s play stole my thunder Scott. I was gonna say it’s about you know, getting it right not being a
Scott Santucci 48:47
brat. Before we wrap up. Can I can I ask Eric? Yeah. Yeah. So Eric, here’s, here’s what I’m the mental picture that’s happening in my head. So inside our nation, if you’re participating in this conversation, I know we covered a lot of ground, we use terms like smart value stream, like there’s a whole bunch of definitions. Tell us what works.
Nick Merinkers 49:09
Send your feedback to feedback at orchestrate sales.com That was all for random acts of sales.
Scott Santucci 49:16
I think Eric, what might be valuable, is I’m imagining, I wouldn’t call it a roadmap, but some sort of diagnostic tree. If you want to figure out if you want to have a conversation about the inefficiencies, use Commercial Ratio, use it for this, but don’t use it for that. If you want to fit if you want to figure out process improvement, these are the kinds of tools that you should do. In other words, let’s create a toolkit of the different decision making tools and metrics that are out there and create more of a landscape. What I would love to do is start collaborating with you on what that would look like so we can share it out with other people, because there’s a lot of great tools out there, but If we get mixed together, or if we don’t know what their purpose is, then we can’t really use it. And it makes it hard to make everything better.
Erik Host-Steen 50:08
I agree this is what gets people paddling in the round canoe in different directions.
Scott Santucci 50:14
So would you be open to collaborating on what that tool kit could look like offline? And absolutely awesome. That’s exciting for me. Okay, Brian, take it away?
Brian Lambert 50:23
Well, as you guys know, there’s six characteristics of being an orchestrator. And I think, for me, this is really heavy on the characteristic of guiding narrative by confronting reality, right? We’re talking about the value of an organization and the value of what it means to add value to shareholders and return value to shareholders, and what’s the purpose of the Commercial Ratio? And, you know, Scott was talking about the relationship or the translation between company to investors. And Eric had a great point about, you know, it’s the outcome, and what are we looking at here, there are many variables. And when you think about it, there are many things that go into what makes a company valuable, what the investors account for, there’s different aspects of that, but this is the Commercial Ratio is about revenue growth. And to, you know, Eric’s point and confronting the reality, you know, it’s COVID time. So, you know, how is that going to be factored in.
The second piece is this idea of prioritizing the right goals at the right moments, understanding what growth is, and, and how to account for that, and also how to manage around things like COVID, and make a plan, and then plan for ahead, you know, think about what it might look like down the road, and how to come out of this even stronger, for example. The third area is driving results by design, not effort focusing on the value of the organization and, and thinking about, okay, we may have a perspective of sales or marketing or product and, and our own biases. But, you know, there’s things we have to understand, like Scott brought up a revenue recognition rules, and what’s the definition of revenue? For example, from a financial perspective, the fourth thing is focusing on the mission and the goals. Eric talked about, you know, this Commercial Ratio, is it? Is it even really valuable? Or is it necessary? And, you know, Scott countered with this idea of the balance of what finance is accounting for, and how investors see the organization. You know, marketing and sales are two sides of the same coin, for example, the fifth area is this idea of catalyzing change. And the conversation here at the end was awesome around that, like, what’s the purpose of the Commercial Ratio? And how can we get a conversation started to at least introduce this idea of, hey, what got us here in the past isn’t necessarily going to move us forward. We’ve been talking about sales and marketing alignment for years. Let’s talk about what it would look me to work together to actually drive this ratio down, what would it look like, for example, and that leads to the sixth characteristic of being an orchestrator. And that’s unlocking energy and creating momentum, this concept of driving sales and marketing alignment, it needs a crowbar to move out of the rut that it’s in, it needs something to move forward. You know, how else are you going to unlock energy and create momentum for growth? Because for every metric you have, somebody else is going to counter with a different metric. And there’s so many siloed perspectives within the organization. Can’t we all agree that revenue growth is a team sport, and let’s ask ourselves, what it might look like to work together to tackle that. So that’s going to require some sort of energy to get out of the comfort zone, the muscle memory of doing things that we’ve always been doing it to Eric’s point, you think about everybody in the round canoe, paddling very, very hard. And that thing’s just spinning around in circles like crazy. And, you know, maybe it’s time to stop paddling. So the idea of unlocking energy here is to put some thought into what it might look like from an investor perspective, and what the activities might look like to align. And yeah, that’s gonna take you outside of silos. See, that’s called a leadership challenge. And that’s what it means being an orchestrator.
So that’s the recap that I have for you guys. I know, this is a conversation as I interrupted halfway through that may have tested some others, you know, I might have found it fascinating. If you did, and you’re geeking out on this drop us a line, we want to keep this conversation going. Because what we’d like to focus on is where things are working, and where do we agree? And I all three of us would agree that this conversation needs to happen. Do we need to teach it absolutely. Everybody in the organization know, but if you’re an orchestrator, having this conversation is critical to the success of not only your you and your career, but I would even venture to say, sales and marketing and product groups, and other groups that are responsible for contributing to the growth of the organization. So on behalf of Eric and Scott, thank you so much for your time. We’ll see you on the next next podcast. As always drop us a line and give us comments, and we’ll see you next time. Thanks.
Thanks for joining us. To Become an insider and amplify your journey. Please make sure you subscribe to our show. If you have an idea of what Scott and Brian can cover in a future podcast, or have a story to share, please email them at engage at orchestrate sales.com You can also connect with them online by going to orchestrate sales.com following them on Twitter or sending them a LinkedIn connection request.