Posted: September 08, 2009
The profit trap: cost-cutting is no magic bullet
Short-term gain can mean long-term painLarry Turner
Too many companies have relied on cost cutting to hit profit and cash flow targets in the current economy. This strategy, without efforts to grow the top line is one that will lead your company into a downward death spiral. Cost cutting can only provide short term gains, with no ability to sustain the results.
In a Wall Street Journal article on Aug. 31 titled "Can Rally Run Without Revenue?," the author notes that in second quarter reporting "47% of companies beat Wall Street earnings expectations by wide margins, but only 24% bettered revenue forecasts." The article continues to document that the reductions in SG&A (selling, general and administrative) costs is the heaviest it has been in any recession over the last 30 years.
Starting efforts to increase sales is a matter of focus and identifying the activities that will result in generating a larger sales pipeline. These efforts can be performed on a tight budget and will provide eye opening information that will help you drive your entire organization. The following areas will get you started on identifying the opportunities and implementing change in your sales teams.
Sales Pipeline: Review your sales pipeline and analyze close rates associated with your activity. The business activity that generated results in the past is not going to drive the same level of sales today. During your analysis, track the number of cold calls made by your sales staff and how many of these result in a follow up meeting. Of the follow up meetings held, how many of these result in demonstrations or deeper discovery meetings? Follow all sales activity until you get to the number of proposals generated and number of sales closed from these proposals.
It is also good to start tracking average sales size and number of sales closed by day / month / quarter. This will help you in understanding the dynamics of your sales process and allow you to focus your sales activity to generate sales needed to grow your top line. By expending the effort to understand your sales pipeline dynamics, you will be in a better position to define what level of activity is needed to operate in our new economy.
Activity: You can expect the sales activity needed today to generate the same amount of sales closed 18 to 24 months ago is going to be a multiple of two to three times your old activity levels. This means that if your sales teams had been 10 cold calls per day to generate your past revenue, then they will most likely need to be focused on 20 to 30 cold calls per day to generate the same level of revenue. Use the information from your sales pipeline analysis to direct your efforts.
You have seen the difference in today's buying cycle -- .longer sales cycle and the end result is usually a smaller sale. Companies and households are still buying, but at a much more conservative level and more caution when making a decision. Those companies that are increasing their sales activity will get in front of more decision makers and in the end will close more sales.
In addition to using your internal staff to generate activity, I have found outside resources allow you to increase your prospecting activity without the addition of sales headcount. For example, use an outside telemarketing firm to generate appointments for your sales staff. This allows you to leverage your sales team for activities that generate proposals and sales. There are a number of very good telemarketing firms that provide services in small blocks of time. I have used a firm over the past 6 years that is great at setting appointments and charges as little as $1,500 for a 50 hour block of calling time.
Get Started: Your programs do not need to be expensive, and can be as simple as redirecting the activities of your sales organization. Focus on increasing the pipeline to generate more sales activity, which will result in increased sales closed for your organization. By starting with an analysis of your current sales cycle you can understand the new business dynamics and develop a plan for your sales team. Once you have the plan and communicated your expectations, be sure to hold your sales team accountable for generating the activity needed to fill the pipeline.
There are more companies going after fewer dollars, and those that increase activity to meet the new demands of the economy will be those that win more deals. Be one of the companies that emerges from the current recession a much stronger company by building revenues along with your balanced cost cutting efforts.
Larry Turner is CEO of Roundhouse Advisors, Inc. and has over 25 years experience growing, starting up, repositioning, and revitalizing organizations. Roundhouse Advisors is a consulting practice focused on helping businesses increase enterprise value by managing pain, growth and owner exits. Larry is a consultant, public speaker, and the author of “Owner Exit Planning: Leave On Your Own Terms." For additional information visit www.RoundhouseAdvisors.com