May 6, 2003

Sales and marketing alignment: Why should you care?

by Scott Santucci, BluePrint Marketing

You've heard it before — the seemingly endless "he said, she said" debate between sales and marketing. Many CEOs feel like they are counselors and could write John Gray's next relationship advice book: "Sales is from Mars, marketing is from Venus."

Clearly, the counseling approach isn't working, as the "divorce rate" between software companies and their marketing leadership is extremely high — 75% of enterprise software firms replaced their VPs of marketing between 2002 and 2003.

If you were to interview other CEOs and ask them how they are dealing with the situation, the most common responses you'll get include:

• "My alignment problem is the result of the specific personalities of my sales and marketing leaders, and there is nothing I can do about it."
• "Sales and marketing will always be at odds, and I am not about to spend money on some relationship-building exercise to get these two groups to work together."
• "I am overseeing marketing's expenditures and personally approve every expense item to make sure we spend our money wisely."
  "We replaced our last VP of marketing and hope our new one will be a better fit for our company."
• "We decided we couldn't measure marketing, so we eliminated the entire department."

While these are all common reactions to the problem, many CEOs also believe this issue will correct itself once the market rebounds and Global 2000 organizations begin spending money on technology again.

Given this perspective, and the pressures facing most executives today — sales are hard to come by, accounting scrutiny, executive compensation pressures, etc. — it is understandable that CEOs are not investing time to examine the sales and marketing alignment problem.

However, this is a big issue, one that will not be miraculously cured once the economy rebounds. Your revenue engine may be fundamentally broken due to mistaken assumptions that drive your sales and marketing decision-making.

This is the first article of a two-part series that is targeted at helping you better understand the depth and damage of your sales and marketing disconnect, provide you with some insight into the causes of this inefficiency, and present a view for what your revenue engine could look like. The second piece will drill into practical and specific prescriptive tactics you can execute to increase your performance.

How can you quickly assess how much this issue is costing your company?
As a results-oriented executive, you want to invest your time and energy into fixing problems that will have the greatest impact on your bottom line. Your first step is to get a quick and simple measure that will help you indicate the magnitude of the problem and decide how much energy you want to devote to fixing it.

Sales and marketing expenses are investments your company makes to drive profitable revenue. These expenditures are consolidated as a single expense category on your income statement. For software companies, sales and marketing investments are, by far, the largest expense category. Therefore, the biggest impact you can have on your operating margin is to increase the return from those expenditures.

For a simple analysis of how efficiently you are utilizing your revenue generation resources, start by determining your sales and marketing return on investment (SMROI). This is calculated by taking your total revenues for a given period (annual or quarterly), subtracting from that your total sales and marketing expense, and dividing the remaining amount by your total sales and marketing expense.

For example, OTG (a former publicly-traded software company that was acquired by Legato, reported $64.9 million in revenue for 2001. During that same period, their sales and marketing expenses were $29.8 million. For this time period, OTG's SMROI was 118%.

Like all metrics, without something to compare to, this information is nearly meaningless. During 2001, the average SMROI of enterprise software companies was 153%.

We've created a simple Excel spreadsheet you can use to calculate your own SMROI; to get the file, click here.

1. So, what does this tell us about OTG? Two things:
   If their sales and marketing organizations were operating at industry average efficiency, and they invested the same amount of money on sales and marketing, they would have produced $10.5 million dollars more revenue during 2001.
2. Or — perhaps more likely given the economic climate — they could have achieved the same revenues by spending $4.1 million dollars less.

How much of an impact would adding $4.1 million dollars to the operating margin have on a $65 million dollar company? Pretty substantial, we think.

If you've done the calculation and your SMROI is under the industry average, you are probably asking the following questions:

1. What are the root problems we need to address to improve our sales and marketing effectiveness?
2. What are some specific reasons that cause inefficiency?
3. What are the cost drivers that influence inefficiency?
4. How can I examine the effectiveness of my current sales and marketing investments?
5. Why have my past investments in sales productivity failed to produce the results I expected?
6. What does sales effectiveness look like?
7. Who should be responsible for addressing this issue?

Question #1: What are the root problems we need to address to improve our sales and marketing effectiveness?
Simply put, the way we are trying to sell to IT buyers is out of alignment with their objectives. In the early days of the IT industry, having a technical conversation was extremely important as engineers and developers dominated buying decisions.

During the late 1990s, business executives became increasingly involved in buying decisions, because they realized technology could help them reduce costs by automating processes or increase sales by communicating more directly with customers. During this time, old-school CIOs who were promoted through the ranks of data processing were replaced in droves as they lacked the ability to translate technical jargon to meaningful terms business executives could understand.

Even though most IT executives now hail from a business background, aligning IT to the business objectives of the firm remains a critical issue keeping CIOs up at night. While all of this change is taking place within Global 2000 organizations, IT vendors still relay on a feature-oriented, product-centric approach to demonstrating their capabilities — forcing buyers to figure out how the technology being offered can be translated into tangible business outcomes.

Coupled with the growing content chasm, IT vendors are also applying marketing models better suited for other industries than the technology market. When the economy was going gangbusters, branding and exposure were the two biggest topics discussed. During this period, marketing was something that every company had to excel in and no real thought was given to the role marketing was to play.

CEOs hired the best marketers they knew: People from consumer-oriented companies like Coca-Cola or Procter & Gamble to help build brands. However, we quickly learned that with a highly complex product, sales people really become the deliverers of a brand, and that selling Tide is a lot different than selling enterprise software.

Now that most CEOs have been burned by bad experiences with marketing, the pendulum is swinging to the other end of the spectrum where companies are now at risk of under-investing in the discipline.

Question #2: What are some specific reasons that cause inefficiency?
First, most vendor organizations do not understand the steps their customers must go through to make a buying decision. Selling an enterprise solution requires:

• Involvement from many different stakeholders
• A clearly-defined problem the client is trying to address
• A well-understood and agreed-upon approach to addressing that problem
• An economic justification
• The client's understanding of how to start the project

Often times, IT buyers struggle to learn the best approach to tackle the problem; at the same time, this information is rarely provided by software vendors, because they look past or forget the fact each of their clients will be addressing the problem for the first time.

Customers' informational requirements change from stage to stage. Sales people try to assist their prospects, but typically spend a huge amount of their time collecting this information, as the content provided by marketing is either too generic or unfocused to be useful with a particular client. This explains why as much as 90% of the collateral produced by marketing departments is never used by sales.

The second key driver of inefficiency is the conceptual misalignment between marketing and sales. Marketing is typically focused on macro level issues such as competitive and market positioning, whereas sales is more focused on individual account level issues: How to get a meeting with the CIO, identifying sources of budget, etc.

These differences result in the now common debate in which marketing accuses sales of not knowing what the company sells, and sales protesting that marketing is irrelevant to their in-the-field task.

Lead generation is a good example of this problem: Marketing will launch a campaign and claim hundreds of "qualified" leads. Yet, when a sales person receives a lead they either have no idea how to engage the prospect in a dialog, or the contact is likely to be a tire-kicker interested in learning about technology at your expense. These are a few reasons why up to 80% of the leads generated by marketing are never acted upon by sales.

Question #3: What are the costs drivers that influence inefficiency?
The average enterprise software firm spends $119,000 in sales and marketing expense each year for every one of their clients. These same companies are spending $477,000 annually in sales and marketing to acquire each new account.
What drives this cost? Most organizations do not relate variable sales expenses to the sales process and are therefore unaware of the daily activities that drive costs.

For example, some activities that are rarely monitored that drive internal costs include: a sales person visiting a client location five times when only two visits are necessary; investing too much time pursuing low-probability accounts; building custom demos as the key sales mechanism; poor and ineffective training programs; and lost sales time due to poor internal processes.

From a marketing perspective, the costs are more obvious. When you look at various marketing categories, two in particular stand out: lead-generating investments (direct marketing, advertising, trade shows, etc.), and sales support (collateral, printing, and creative).

If you factor in the fact that 80% of the leads generated and 90% of collateral produced are never utilized by sales, you can easily see the opportunity for productivity gains.

Finally, because most of the decisions require internal buy-in, how is your solution being sold internally within an account when your sales people have left? Up to 80% of the sales process happens behind closed doors, yet software vendors are relying on internal sponsors — typically a lower level technical person — to sell their solutions on their behalf. Even if your champion is excited about your offering, how well are they going to be able to articulate the various business reasons you should be selected throughout their organization?

Question #4: How can I examine the effectiveness of my current sales and marketing investments?
As an enterprise software firm with a direct sales organization, all of your sales and marketing activities should be focused on moving opportunities through the buying process. Therefore, you should develop internal reporting processes that track opportunities throughout various stages: from accounts whom you've never had contact with to final close.

This will achieve two things. First, it will help make marketing more visibly accountable. Second, it will provide a practical, clearly understood basis for the executive team to discuss potential investments and their impact on revenue generation.

To help track this activity, you should monitor three key metrics: close rate, sales cycle time, and average revenue per transaction.

You should monitor close rate and sales cycle time at an aggregate level — from first contact to close — and also track them from stage to stage. This will help your sales and marketing organization focus its activities on achieving success in a specific buying-cycle stage, rather than continuing to have unfocused circular conversations about what needs to be produced.

[Editor's note: To calculate your current efficiency and the potential impact of improvements in your organization, visit SoftwareCEO's Downloads Library; there's a "Sales and Marketing Effectiveness Model" in the Sales and Distribution section.]

Question #5: Why have my past investments in sales productivity failed to produce the results I expected?
Investments in sales force automation, lead generation programs, or sales training methodologies are all wise decisions. However, they often fail to deliver the results promised by the vendor, or meet your expectations.

Sales productivity investments are all part of a larger ecosystem and are interrelated. For example, if you've recently had your car tuned, but your battery dies, your car will not start. The same concept applies here: A sales force automation system without a sales process to automate is not very valuable. Sales process training without content specific to your company will only realize marginal gains.

There are five major disciplines that comprise the sales effectiveness ecosystem, and all must be mastered for success: sales skills, market dynamics, intimate customer knowledge, business driver knowledge, and financial justification knowledge. Your sales infrastructure — sales force automation system, organizational structure, etc. — should help distribute and encourage best practices for each of the disciplines.

To achieve sales effectiveness excellence, you must develop a way to seamlessly integrate and streamline your various investments in each of these domains, and develop a repeatable framework to create and deliver content to the sales organization.

Question #6: What does sales effectiveness look like?
A well-functioning sales and marketing organization will have the following characteristics:

1. Linkage between marketing and sales pipelines. Most organizations look at the number of leads (or top of the funnel) and the forecast (bottom of the funnel), but spend little time tracking the stages in between.
   Interestingly enough, this is where there are the greatest opportunities for improvement. You should create a business development pipeline that tracks the progression of key accounts throughout all stages of the sales process — from a targeted account that has not yet been contacted to a closed opportunity.
2. Micro-marketing focus. By breaking out and tracking discrete conversion rates from stage to stage, you can focus on developing and measuring specific programs targeted to improve results for each phase. Due to the varying informational needs throughout each stage of the buying process, and the unique perspectives of each stakeholder that sales people will encounter, the content required to facilitate the buying process will increase dramatically. Marketing should focus on delivering highly specialized tools that help sales people address specific customer problems — tools that can be used by champions to sell internally on your behalf.
3. A customer-focused framework. Due to the magnitude of the content required, an organizing structure must be developed to streamline communications between customers, sales, and marketing. This framework should be based on the customer's decision-making process and related to the business development pipeline-tracking system.
4. Marketing program portfolios. All marketing programs should be organized by their relationship to moving opportunities through the business development pipeline, rather than on traditional categories (advertising, trade shows, PR, analyst relations, etc.)
5. Well-defined pipeline process. If sales pipelines are populated by "gut feel," then the information contained will be meaningless. Strict criteria must be established for each pipeline stage and each entry must be audible.
6. Objective and credible measurement. Relating sales and marketing investments to the financial performance of the firm is extremely important. With an effective pipeline process, a marketing program portfolio, and a business development process, you can create extremely insightful measurement programs. These should be linked so they can be prepared at the territory, product, vertical market, or corporate level.

Question #7: Who should be responsible for addressing this issue?
If you believe that marketing's responsibility is to reduce the friction in the sales process, then that organization should have ultimate responsibility for sales effectiveness programs.

Marketers given this task must:

1. Establish credibility with sales. Any initiative will fail unless you have the support of sale people in the field, not just their managers.
2. Be inclusive of other groups. Including others — development, sales, professional services, etc. — will help improve the content, and will also increase internal adoption.
3. Communicate openly, honestly, objectively, and frequently. Selling internally is extremely important, but you have to be transparent and factual while managing expectations.
4. Create a test program and make sure it is successful. Ideas are great, but results are even better. Select a well-targeted area to focus on, make a few sales people extremely successful, and promote their success internally.
5. Establish credibility with executive leadership. Make marketing accountable by working with the finance department on a measurement program that relates performance to sales results.
6. Be 100% customer centric. When considering a new program, determine your customers' informational needs first and work backwards from there.
7. Become service oriented. Develop thick skin. Aggressively solicit the tough criticism, prioritize that feedback, and rapidly address the problems raised.

Summary
Sales and marketing alignment is not a "touchy feely" relationship problem, nor is it something that should be viewed as a standard result of different personality types. It is an efficiency problem caused by software companies' inability to provide their prospects with the right information, for the right person, in their context, at the right time.

Developing the relevant content and creating a repeatable framework to organize, distribute, and measure this information is a prerequisite first step to achieving sales effectiveness excellence.

What's next?
Where do you start? How can you fix the plane while it's flying? Next week, we'll take a detailed look at how you begin addressing this problem and what specific tactics you can employ to begin increasing your sales and marketing efficiency.