As company executives and board members strategize to achieve maximum results, they often base their strategies on summarized or filtered information. Given the amount of information available nowadays, this might seem normal if not necessary; but understanding how information is filtered is critical for developing effective strategies.
Here is a case in point: A successful, well established communications services provider developed a strategy that would pay less commission to sales reps who sold its products outside of their designated territories. Why would such a strategy exist? On the one hand, the company wanted to encourage the sales reps to sell within their assigned territories in order to ensure desired market penetration. On the other hand, the company recognized that referrals were a valuable part of its sales revenues and didn’t want to overlook sales simply because a referral targeted a customer that resided outside of a particular sales territory.
The strategy was to reduce the “out-of-territory sales” commission by a certain percent. This was justified by the realization that sales resulting from referrals required less effort. Since it is common knowledge that sales forces commonly follow the path of least resistance, the company knew it was critical to its long-term success that its sales reps were adequately motivated to sell within the areas they were assigned, and not simply pursue low hanging fruit. In order to manage this strategy, given its large volume of sales, the company created a small department, whose sole function was to review every sales order to determine if the sale had occurred within a rep’s assigned territory. The initial review of the process revealed that far more “out-of-territory” sales were being made than was desired. After the implementation of the new strategy, however, subsequent reviews revealed that “out-of-territory” sales continually declined while “in-territory” sales increased. That means the strategy worked, right?
Wrong. But before explaining why the strategy wasn’t working and the consequences of its failure, let’s first examine some of the hidden components of the strategy. What was the overall objective of the strategy? Was it to reduce the number of “out-of-territory” sales while increasing “in-territory sales”? Was it to increase long-term revenues? Was the objective to motivate the sales force to contact every potential customer in every territory? Or, was the actual objective to increase profits? As you know, activity without profit means little to the success of a company.
So, simply shifting sales from “out-of-territory” to “in-territory” couldn’t be the ultimate objective. There is also little value in contacting every potential customer if only a small portion of them purchase your product or service. If the objective was to increase long-term revenues, it might be possible that referrals produced more loyal customers and should have been pursued regardless of their locations. That would indicate that the underlying premise behind the strategy was flawed. Assuming that “out-of-territory” sales caused a sales staff to be less productive and therefore impact profitability, it might be reasonable to assume that the objective justified the strategy.
The question remains, however, was profitability the quantifiable measurement being used to evaluate the strategy? When we investigate this case further, we learn that other mitigating circumstances and motives make that question moot.
Let’s begin with the company’s decision to devote a new department to monitor this specific activity of its sales force. Given the costs of adding additional multiple resources to review each sale, would the strategy actually increase profits, cost more money, or simply result in a wash? If the employee’s loaded costs were greater than the commission reduction she detected, one could question the strategy’s validity. For the sake of argument, however, let’s assume that the commission savings were greater than the cost associated with detecting the status of each sale. The next question to surface becomes the most salient of all. What motivation did the company provide to the new department’s manager to fulfill her responsibility?
The employee’s responsibility was to report on the success of the strategy. Her job security may rest on its success. So, how confident can the proponents of the strategy be that the information they receive, regarding the strategy’s results, is accurate? In this case, any confidence they might have felt was totally unjustified. During an analysis of the commission process by an external entity, it was discovered that approximately eighty percent of the sales staff’s commission payments were inaccurate due to sales that were determined to have been made outside of assigned territories. The analysis further revealed that due to the high volume of sales, and the employee’s perception that in-territory sales were desired, she instructed her team to give the sales reps the “benefit of the doubt” rather than review each sale.
What were the consequences of the strategy? First, commission payments were higher than what the strategy dictated. Second, additional costs were incurred by deploying it. Third, the sales force saw through the company’s inability to enforce the strategy and did not change its behavior. As disconcerting as these consequences were, however, they paled in comparison to the ripple effect caused by other strategies being based on the misinformation created by the erroneous data generated by the original strategy. At least on this aspect of the business, reality was fantasy; and the realm of fantasy fed upon itself.