“Making the Numbers”

By Stephen Allott

About Stephen Allott

Graduate of Trinity College, Cambridge University, Stephen has worked for McKinsey, Sun Microsystems and Xerox. From 1995 to 2001 he worked at Micromuse, a London-origin software company where he was President, CFO and a main board director. During this time, Micromuse grew from £1m to £140m in turnover, and from 50 to 800 people. Stephen was a Visitor at the Computer Laboratory from 2001 to 2004 and founded the Cambridge University Computer Laboratory Graduate Association. He was non-executive chairman of Applied Generics Ltd from 2005 to 2006 and is a City Fellow of Hughes Hall, Cambridge University and non-executive chairman of Tideway Systems. Joined Trinamo in January 2005

Reading UK, 6th March, 2006 – In 2003, when I was working full time at the Cambridge University Computer Lab, I got a call from a leading UK VC firm. At the time, the IT industry was in deep winter. Sales in their software portfolio were stagnant. Their large software team was depressed. Things looked bad. They requested me to come and talk to their technology team’s offsite, held in Cambridge as it happened, about my experiences in growing a software company. They wanted me to cheer them up by telling them a happy success story. I called it “Making the Numbers”.

I readily accepted. Flattered that they were interested in hearing my views, I was keen to help local software companies through them. First I asked each member of their software team to list their problems. Using this problem list, I then spent a day writing a presentation which gave advice on each of their issues and weaved in some of my war stories. This turned into a comprehensive presentation. I also planned to have a session talking through one of their portfolio company’s deals as a case example.

On the day, I rode my bike to the venue, thinking that this was the way people went to meetings in Cambridge. With about 15 people in the room, they were eager to listen and ask questions. After my allotted hour was up, we had only reached slide 3. The discussion was animated. They were really engaged. After a coffee break, they cancelled the rest of their agenda so I could carry on with “Making the Numbers”. We didn’t finish until tea time. They loved it. As I cycled back to Cambridge station I felt elated. They had clearly found it useful. I love software sales management and had enjoyed spending 6 hours discussing it with a bunch of bright people. And I had shared my experience of global software company management with investors in local companies which might help them do better.

Other people heard about this presentation and asked me to do it again. I did it twice to Full Moon, an association of Cambridge hi tech CEOs named in honour of a 19th century group of Birmingham entrepreneurs who would meet monthly on the night of the full moon when it was easier to travel at night. They were known as the Lunar Men. I delivered it as a Cambridge Enterprise Masterclass. I also delivered it to the portfolio day of a regional VC firm and to the investment executives of another leading UK VC firm. There is clearly strong demand for expertise on software sales management.

The reason is that “Making the Numbers” is important. Orders from customers prove that your product is what people want. Striving to hit quarterly targets forces management innovation and focus. Hitting the numbers in your business plan and budget vindicates your planning process and gives shareholders confidence in your leadership. “Making the Numbers” is different from building a software product and seeing how much of it you sell. Making things happen is different from seeing what happens. “Making the Numbers” is forward looking. Monthly reporting is backwards looking.

Now I am frequently asked to look at a software company and find out why the numbers are disappointing. Too often great products have disappointing sales. The good news is that many times the reasons and solutions are very simple. 3 common ones are first; bad sales force compensation plan design, second; wrong fit sales people and third; lack of telesales.

Let’s start with comp plan design. You start a software company, You win some business, If things go well, you hire your first sales person. You have to give them a comp plan. Some basic advice; the split between basic salary and variable (commission based comp) should be 50:50. Never make the salary more than the variable component of the OTE (on target earnings). Sales people with high basic salaries don’t need to work. Make the target quarterly. Don’t use annual targets. Time and again I find companies with annual targets for their reps. The influence of UK engineering and export companies is to blame here. Aircraft and powerstation sales justify annual targets. Not software. Annual targets for software are a bad idea. It takes 12 months for you to be able to say that your rep has failed. Virtually no successful companies use annual targets. Have a big bonus if your reps makes his quota. Around 40% of their target variable comp. This means their commission rate below quota is much less than the percentage which their variable comp is of the quota. I hope to get the mathematically minded of you interested here. Then give a higher rate than that, over quota. This is called an accelerator. When you are negotiating with a rep, it’s a good sign if they are most interested in the rate of the accelerator. It’s a bad sign if they negotiate on the rate below quota. It should be obvious to you why. Don’t cap their earnings. Finally, put in a condition that commission is only released when you receive cash from your customer. This has many obvious benefits. It also keeps the rep interested in customer satisfaction.

So far, I’ve assumed you have good sales reps who have a badly designed comp plan. Now I want to talk about hiring the right profile reps. Often I find that companies have great reps but they are the wrong profile. It turns out here are 2 sorts of reps in the world of software sales. Big company reps and early stage company reps. The latter are called “Sales Naturals”. VC funded software companies often use expensive headhunters to hire top quality reps into their portfolio. They do, but they hire big company reps rather than Sales Naturals. The big company reps then fail having cost you a lot of money and an expensive head hunter fee. The difference between the 2 types of reps isn’t about big company or small company practices. It’s about how they go about selling and the maturity of the company’s value proposition. In general, big companies have a clear market and value proposition. Reps push that to customers. Features and benefits and so forth. In general, early stage companies can do lots of things flexibly and innovatively. Their reps have to find customers with problems that you can solve. This is totally different from selling Oracle databases. You need to end up with a salesforce composed of Sales Naturals. You can achieve this by natural selection; i.e. hire reps, see if they make the numbers and sack the ones who don’t. This is effective but expensive. Or you can try and recruit Sales Naturals from the outset. A book called Customer Centric Selling explains this if you want to know more.

Now I’ve explained how you hire the right fit reps and how you design their comp plans. The third key thing is telesales. This is cheap and it works. Often I find companies outsource lead generation. I think this is a mistake. You miss the feedback of information about customer reaction. You miss the opportunity to identify something new you hadn’t thought of before. You also miss the opportunity to train your telesales person into your next rep. I found that former telesales (or “inside sales”) people became the best long term reps. A youth policy is the best policy. Technical founders find it hard to recruit and supervise telesales people. Don’t shy away. Get someone knowledgeable to help recruit them, design their comp plans and write their scripts. Put them in the next desk to you and supervise them for yourselves. They’ll work closely with your web site. If your software is low value, make sure you can sell it by credit card instantly. Your telesales person might pay for themselves very fast. For niche software products, using telesales to find leads, get meetings or invite suspects to a product seminar is the most productive way to build a sales pipeline.

A final word on the web. For software sales, it changes everything. Handily you can deliver software over the web to any customer anywhere. You can do it from Cambridge or London without having to travel to the customer or hire expensive sales people in America, Germany or Japan. This is a revolution. Of course, it’s been obvious to many for a long time but I still meet software companies who could use the web more. Interestingly, many software sales managers from Oracle and Siebel grew up in the pre-web world. When the VCs’ expensive headhunters place them into small software companies, they do what worked for them before, direct selling and channel sales, and don’t realise that the web can change everything. Just as Abcam (the Amazon.com of laboratory anti-bodies) discovered that you can dominate the US market from the Cambridge Science Park, float on AIM and reach a market cap of £75m without any venture capital, I am meeting more and more software companies with the same model. Sell software for cash (via credit cards) over the web using telesales to close customers. Games developers discovered this a long time ago. The music industry has now cottoned on. Dinosaur software sales directors now need to wake up to the web.

At Micromuse, we worked out how to sell direct and via channels. This is still valuable in hiring the right people for a company’s lifestage, designing their comp plans and using telesales to build a pipeline. Now I’m learning about how to use telesales and the web to run global leaders from a UK base. The main thing however is to “Make your Numbers”. Good luck!

Stephen is founder of the Ring, is executive chairman of Trinamo Ltd and past President of Micromuse, a London origin software company. Stephen is also a City Fellow of Hughes Hall, Cambridge University and is giving the 2006 Hughes Hall City Lecture on 6 March 2006. The Lecture is entitled “From Science to Growth - what exactly is the mechanism by which investment in academic research leads to economic growth?”

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