EPISODE 350: Harvard’s Frank Cespedes Explains Why Sales Leaders Must Be Financially Literate to Have Any Chance of Future Success

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[EDITOR’S NOTE: This is a replay of the Creativity in Sales Webinar sponsored by the Institute for Excellence in Sales on March 21, 2021. It featured Harvard Business School Professor Frank Cespedes discussing his new book Sales Management That Works.]

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FRANK’S TIP FOR EMERGING SALES LEADERS: “The requirements for financial literacy in sales are increasing dramatically. You better be up to speed with those finance issues because those are the questions you’re increasingly getting. What you need is what I call managerial finance which is making sure you understand how balance sheets and income statements really work. I also think it is going to be increasingly important to separate signal from noise with data. Right now, what is going on in many sales organizations is this huge proliferation of data that the rep gets lost in, and that the managers tend to focus on what I call interesting but marginal factoids. And increasingly the job of the sales manager is to understand what is that handful of things.”


Fred Diamond: Welcome to the Friday Creativity in Sales webcast. Frank, I’m thrilled to have you here. Of course, the new book, Sales Management That Works, I’ve read it, it’s fantastic, we’re going to get deep on this. I know you have a little bit of a history with Cox Media in the beginning of your career. Ladies and Gentlemen, Frank just came out with the book, he teaches at the Harvard Business School. This is your sixth book, Frank?

Frank Cespedes: Yes, that’s right. I’m afraid I’m guilty.

Fred Diamond: Congratulations. I actually almost finished my book, I’m reading one right now. You’ve also created successful businesses, of course, you teach at Harvard Business school and we’re thrilled. I want to thank the people at Harvard Business Review Press as well for sending us the upfront copy.

Frank Cespedes: Thank you, Fred, it is my pleasure to be here. Both because of the audience that the Institute for Excellence in Sales attracts for its podcasts. Also, I didn’t realize Cox Media was the sponsor. Many years ago, when I was brand new at Harvard Business School, one of my very first case studies was about Cox.

This was then they were in the cable business and cable at the time was actually sold door to door selling. The good news is that case became one of the big best-sellers used in business schools around the world. The bad news is in researching the case, I actually spent two days in New Orleans in August, 100 degrees and humid, going door to door with a Cox rep. I remember that very well.

As Fred mentioned, I’m going to spend about 20 minutes giving you an overview of this new book. It is yet another book about sales, and I phrase it that way for the following reason. If you go to Amazon, go to the books section, click on sales, out will come over 80,000 items. The only management topic that generates more SKUs in Amazon is “leadership”. There you get about 90,000.

Sales is a close second. You may be familiar with the old aphorism, no single drop of rain ever feels responsible for the flood. Let me explain why I decided to add to that monsoon, basically two reasons. The first is that if you think about all the various functions in business, sales is the most context-specific. It differs by product.

Selling software is different from selling professional services, different than selling durables, selling enterprise software is different than selling software as a service. It also differs depending upon to whom and where you’re selling, it’s very culturally dependent. Selling in North America is different than selling in South America, in Asia, etc.

Yet sales is also that topic where people and pundits feel most comfortable making these huge generalizations that are usually unsupported by any data or most often, what in academia we would call N=1 data. “When I worked at Google, we did it this way.” That kind of thing.

My first motivation is basically a professional motivation. As someone who’s done a fair amount of research and has been a practitioner for over 30 years, here’s what research does and doesn’t tell you about this core activity in business. My second motivation is I think it’s a particularly good time for a book like this for a couple of reasons.

One is there is no doubt that digital and online technologies and the sustained data revolution, which will continue throughout our lifetimes, those things are clearly having an impact on buying and selling. But my reading of what’s said about that is that the managerial implications of those developments are often misunderstood. And I think the pandemic raises the stakes for getting this right. If you don’t, it will hurt not only your company but as I’ll explain in a bit, if you’re in sales, it can hurt your career as well.

Let me give you a quick example of this. What I’ve got at the top of this slide is what I think you would agree is a very common current assertion about selling. I don’t know about you, but I’m now literally getting three to five emails a week that are essentially preaching some version of this. The assertion is that e-commerce digital means the downsizing, very often illumination, or as we now say, disintermediation of the salesperson. And that the pandemic makes this a so-called permanent new normal, I think a very common assertion.

Here’s the data. e-commerce is not new, the internet is not new, it’s been around for over 30 years and e-commerce has been part of the internet since its start as a commercial medium. Books.com was already selling books online nationally while Jeff Bezos was still working on Wall Street. Yet after three decades essentially free from sales taxes, e-commerce has a percentage of total US retail sales just before the pandemic. In 2019 was about 11.5%.

When I ask MBA students, and for that matter, executives, “What do you think that number was?” I typically get estimates from 30% to 60%. In other words, people are not just a little bit off, they’re orders of magnitude off from the reality.

Now let’s also look at this during the pandemic, the 2020 data. I want you to focus on the second quarter of 2020, focus there because that is the time period thus far – let’s cross our fingers.  But the second quarter of 2020 was maximum lockdown conditions so far in the United States.

Obviously, or at least it seems obvious to me, when stores are closed, when the stores that are open are limited to 20% to 50% of capacity, when people legitimately feel that if they go into a store, they may catch a virus and die, obviously there’s going to be more buying and selling done online. But even in those maximum lockdown conditions, look at the percentage. It only went up less than 5% and as you can see in Q3, Q4 and by the way, so far in 2021, it’s been trending down.

The reality is that the number of salespeople in the United States has steadily increased in the 21st Century while online media are increasingly cluttered, distrusted, cybersecurity issues. A classic example of what economists called diminishing returns.

Now, just a quick sidebar, it’s a little off our topic. I want to give the audience, Fred, something to think about. I strongly feel that most of the assertions you’re getting about so-called new normals are nonsense. They are simplistic, straight-line extrapolations of buying and selling in lockdown conditions.

The best thing by far that I have read about this is by a historian in England, a fellow named Steven Davies, he’s got a monograph on the history of economics of pandemics. Davies’ conclusion, and he supports this with a lot of evidence, is that a major pandemic does not introduce something truly novel. He’ll explain the economics for why that’s so, but it does magnify trends and processes that were already underway. The data on the top part of this slide tells you a bit about what was already underway.

Why does this matter? I sit on boards, I work with companies, in my view, this is what managers ultimately get paid for. They get paid to allocate resources as well as they can, and if you don’t separate fact from hype then inevitably, in any competitive market, a couple of bad things will happen. You will make bad or at least sub-optimal decisions about priorities. You can initiate what some people call competency traps, getting better and better at activities that customers value less and less.

One that I think makes a strong argument, that a lot of so-called digital marketing and social media marketing is a classic example of competency traps. You can worry all you want about disruption, but at the end of the day, in business, you need a relevant go-to-market model to do something about that. Then ultimately, in a competitive market, you will fall victim to those who can separate fact from hype and manage the implications.

Now, what is changing and why in sales? The most important thing about selling in any market is the buyer – not the seller, the buyer. Who buys, why and how. That is where these technologies are having their biggest impact. I’m going to get academic with you for a moment, but bear with me.

At the basis of most frameworks for buying and therefore selling is what academics called a hierarchy of effects model. The job of the salesperson in that frame becomes to move the prospects from awareness to interest to desire to action. AIDA, as in the Verde opera. In fact, that’s at the heart of virtually every CRM model that’s out there and it’s why you hear so much in sales the dominant vocabularies about funnels, pipelines, etc. That sequential process.

But that is decreasingly the reality about buying in the third decade of the 21st century. Buyers are both online and offline now, in most markets simultaneously, throughout their buying journeys. That’s a big deal, it does not mean the elimination or disintermediation of the salesperson, I’ve already shown you the data. But it does change significantly sales tasks and what’s required to manage sales effectively.

A couple of things. It places more emphasis on the value added of the rep when they do interact with customers. I’m going to phrase this bluntly, the days of the salesperson essentially being an organic walking, talking version of direct mail are over. Because in most markets, especially B2B markets, the buyers already have product information, product comparisons, price comparisons.

The game is being upped for reps when they do interact with customers. This kind of buying means more cross-functional interactions in selling. The buyer touches the vendor at multiple points and this defects the salesperson for what I’m going to call the ghostbusters reason. I don’t know how many of you remember that wonderful film years ago, Ghostbusters. Remember the tag line? “Who you gonna call?”

What research tells us is that when the buyer has an issue with a product or service, they tend to call the person who sold it to them. It therefore becomes the job of the salesperson to go into their company and deal with the issue across functions. If you’ve ever run a firm, you know that that’s not easy for people to do, but that’s increasingly a selling and management requirement.

Thirdly, as I mentioned, sales is undergoing a sustained data revolution and this has multiple impacts. I’m going to call out one for this session. What’s going on as the data proliferates about sales is that what was a black box in many companies is now more transparent. In particular, in most companies, finance now gets that data. For example, if you look at SaaS models in Silicon Valley and look at the sales operations function – which is one of the fastest-growing functions in those sales models – more than half of those people have never worked in sales, the people in sales ops, and they don’t report to sales, they report up through finance.

When finance gets this data, two things tend to happen. The first is finance goes, “We really had no idea on a fully-burdened basis how much money our company was actually spending on sales.” Then finance people are annoying, once they get data, they tend to ask questions of the sales leaders. “How do you spend this money? Tell me more about your customer acquisition costs per segment. Tell me more about cost to serve different accounts. We’re interested on return on invested capital, not just topline motion.”

The point I want to make is that the requirements for financial literacy in sales are increasing dramatically. If you’re going to make a career there, it’s different than it was even 10 years ago. You better be up to speed with those finance issues because those are the questions you’re increasingly getting.

Couple of things. Some of the implications for some core areas of sales management and then I’m going to turn things back over to Fred to moderate any questions. These changes I’ve sketched affect some core people issues, not the least of which is hiring.

There have always been inherent challenges in sales hiring that simply do not exist to the same extent in other functions. For example, if you need to hire an engineer, you can go to an engineering school and it’s a bit like walking into a buffet. What are you interested in? Electrical engineering? Chemical engineering? Mechanical engineering? By the way, would you like it with ice cream? They all minor in environmental engineering.

If you’re looking to hire someone for finance or accounting, you can find people who major in those subjects, the same is true for coders for computer programs. But of the nearly 5,000 colleges and universities in America, the last time I looked, which was about 18 months ago when I wrote this book, less than 200 even had a sales course, let alone a sales program. This is an area of business with a vast majority of people going to the function knowing virtually nothing about what they’re going to get paid for.

That leads to the next bit of data. You see, companies already spend a ton of money in this area, they already spend 20% more per capita on sales training versus any other function. But the return on investment on sales training is notoriously disappointing and there are systemic reasons for that that we can discuss, if you like. As I mentioned earlier, many sales models are based on obsolete assumptions about buying and I think that the increased data analytics, and for that matter, the pandemic is revealing this.

I’ll give you an example. I think one of the things that the pandemic has revealed – and I don’t think this is going to go away after the pandemic – it’s revealed that many companies were in effect overpaying for some tasks in their sales models. In particular, lead generations, demos, you can do a number of demos online, and many meetings that don’t have to be in person. Some of those things can be done virtually, or with less expensive people, or for that matter, sometimes with an algorithm. Again, I don’t think that’s going to go away.

I also think what this is revealing is that many sales processes need rethinking to, among other things, increase selling time. The data I’m about to cite to you varies by industry and company. But in the aggregate, overall, if you look at how much time the average salesperson spends in contact with customers and prospects – and by time with customer contact, I don’t simply mean making a pitch, either in person or online. I mean email, online, etc., if you add all that up, the average is about 30%.

Think about the impact in most businesses if you can make that 35%, 40%, 45%. That’s not only a very big productivity improvement, in most businesses it also will increase the total addressable market for the business. Because as you increase that selling time, segments that were uneconomic to reach now become economic to reach. This is a big deal.

Partners. It’s an omnichannel buying world and the reality for most firms is that requires a multi-channel response, but that’s a significant change for sales. Most salespeople are individual contributors and in fact, they like that. One of the reasons that many of them went into sales, they like the autonomy of the function. But when you now have channel as well as selling responsibilities, the individual contributor must also manage. That’s one of the tougher transitions in most areas, but especially in sales.

Pricing. I think what data analytics are doing is actually increasing opportunities for value pricing versus cost-plus, I direct you to the examples in my book. But even more importantly, there are now more tools available for price testing but there’s very high inertia at firms around this area. And again, in a world where price is increasingly transparent and price comparisons are a click away, this is an area where companies should be testing and should be more proactive.

Finally, productivity. I won’t go into this in depth. There’s a Harvard Business Review article in the current issue of Harvard Business Review I wrote that does go into this in more depth. But think about this, why has a pandemic been an economic catastrophe? 80% of RGDP in the United States is in services, it’s a service-dominated economy. By the way, that is true in virtually any other industrialized nation except China.

In economies like that, sales which is the classic service activity, sales productivity is not only something you do in order to maximize profits, which I think is a good thing to do. But it’s also a social issue, it affects not the lives of those tens of millions of people in sales, it affects other things in society as well.

On that note, I’m going to stop. Any questions, comments or disagreements? I’ll leave this slide up on the screen so that you can remember how to buy hundreds and hundreds of copies of this book after our session. Fred, I’m going to turn things back over to you to guide us through the time that we have remaining.

Fred Diamond: Frank Cespedes, thank you so much. A lot of people like to send me books, you don’t need to send me one because I already have it, I’ve already read it. All right, let’s get to some of these questions here and thanks again, Frank, for the wealth of information here. We got a number of questions coming in here, let’s get started. Some of these you might have touched on, but maybe you can get a little bit deeper.

We got a question here that comes in from Joseph and I know Joseph, he’s actually a sales director with a large tech firm. He says, “What will the ideal sales professional look like post COVID?” Let’s talk about that a little bit. You talked about KPIs and financial knowledge and those kinds of things.

But a lot of people listening, Frank, to the Sales Game Changers podcast are hiring. As a matter of fact, Cox Media, our sponsor is hiring. What does the ideal sales professional in the B2B space look like coming in post COVID?

Frank Cespedes: Well, a couple of things but I want to get back to ground zero about this. First thing I said, sales is a very, very contact-specific activity. Tech, that’s a great phrase. What the heck does tech mean? Even within tech, there’s a tremendous amount of heterogeneity and even within the company. As your product line expands, as buyers tend to get smarter about what they do and don’t want with features in your category, that changes sales as well.

So I would be very weary of asking for ideals. You’re not in the business of fulfilling ideals, you’re in the business of moving the meter for your company with your products in your markets today and tomorrow, make sure you understand what’s going on there.

Having said that, let me jump to generalities. I think there are a couple of things that sales leaders who survive and thrive, let’s put it that way rather than ideal, are going to need to get better at. One, as I already said, is financial literacy.

I’m going to give you an anecdote. This is an anecdote that as a board member I have experienced four times in my career. Sales leader needs to make a presentation to the board or, depending on your firm, maybe the venture capital investors. The board then goes into executive session and people talk. Basically, what someone says is, “I’m not sure that he or she, the sales leader, really understood the question. I’m not sure they understand the financials in our firm and how cash in and cash out works, but Charley makes his numbers every quarter, let’s leave him alone.” Those days are quickly disappearing because of the data revolution.

Again, the requirements for financial literacy in sales are growing. My advice to sales leaders is make sure you get educated about that. By the way, business schools are not exactly where you need to go for this because they teach what I call investment banking finance, that’s not what you need. You’re not going to lead your company going public. What you need is what I call managerial finance making sure you understand how balance sheets and income statements really work.

The second thing I think is going to be increasingly important is the ability to separate signal from noise with data. Right now, what is going on in many sales organizations is this huge proliferation of data that the rep gets lost in, and that the managers tend to focus on what I call interesting but marginal factoids. And increasingly the job of the sales manager is to understand what is that handful of things, and it is typically a handful.

What is that handful of things that we really need to focus on as opposed to an unfocused checklist of data factoids? By the way, it is important that sales managers do this. Finance people understand data, but they do not understand sales. The third thing I would say is the core people management aspects of sales remain as important as they ever were. That would be my answer to that question.

Fred Diamond: We have a question coming in from Jeremy, “How does marketing play in the future of sales management?” Of course, a lot of times people who watch the Sales Game Changers podcast know that I refer to the classic 2004 Harvard Business Review article, When Will We End the War Between Sales and Marketing? Written by my idol, Neil Rackham and the great Phil Kotler. Talk about that for a second or two.

Most of my career, Frank, FYI before I started the Institute was as a marketing leader at companies like Apple and Compaq and some software companies and it was pretty much siloed for the most part because of the data that you’re talking about. Is it getting fuzzy for the sales leaders? We don’t have many marketing leaders listening. But for the sales leaders listening, talk about how they should be thinking and interacting with the marketing function.

Frank Cespedes: Excellent question and a question that is getting even more important for companies. Couple of perspectives on this. With all due respect to Neil Rackham whom I also think is one of the giants, I wrote a book 10 years before Neil and Phil Kutler’s article about this, a book called Concurrent Marketing. What you’ll see if you look at that book, it was about the marketing sales service relationship, you’ll see that these silos between marketing and sales go back to the 19th century, people complaining about this in the 1870s.

The first thing whenever you see an issue that has remained an issue for over 150 years, you’ve got to have a little humility. When that much money and that much talent has been thrown at an issue, there are probably systemic reasons why that issue persists. One of them, I think is that marketing and sales are fundamentally different jobs.

Marketers get paid to think in terms of segments, groups, markets. Salespeople when they’re earning their keep should know everything there is to know about buying and buyers at their specific accounts. There’s different information that they rely on, they’re working according to different rhythms and usually, it attracts different personalities. That, I think remains true.

Comment #2, what is going on in technology is a very big driver of this. Marketing and sales which have always been different but interdependent activities are now getting more and more interdependent. Think about subscription models, if you think about SaaS subscription models, how do we generate leads? We generate leads through things like the email list, content marketing, search engine optimization, etc.

Here’s what technology’s doing, and this is a big deal. As recently as a decade ago, those lead gen activities, to use the current jargon, those top-of-funnel activities would clearly have been marketing’s responsibility. But what technology’s doing is increasingly making this something that sales does.

For example, if you look at inbound marketing, the kind of thing that HubSpot has popularized, you’ll see that a lot of that is conducted by sales, not marketing. As a general rule, it’s sales that’s gaining that leverage. The issue – and this is the way I would cap my message to your audience, Fred – is make sure that sales knows what the heck they’re doing when they take on those marketing activities.

Fred Diamond: Frank, we could probably talk for five hours here on getting deep, double-clicking, as one of our past guests likes to say. I’m just going to take one final question before we ask you for your final action step. We’ll take this question from Dino and Dino’s up not too far from you, he’s in Connecticut. Dino says, “Can Frank talk about the people side of sales management? Especially with all the turmoil from the past year.”

Again, we’ve done not just the COVID but things like inclusion, social issues. You touched on it in one of your answers here a second or two ago. Talk for a second or two on not just the data side, but the people side. What does an effective sales manager look like today and how should he or she be thinking about interacting with his people with all the stuff we’ve gone through over the last year?

Frank Cespedes: Again, huge topic but a couple of headline comments and answers to the question, Fred. One is obviously whenever you’ve got the situation that we have been living through and need to live through, whatever you want to call it, people skills, leadership, those things become more important. I also predict they will become increasingly important and here’s why, another bit of data for you.

Turnover in sales tends to vary across industries from 20% to 30% annually. It is less when economic conditions are bad. During a pandemic, most salespeople are going to stay where they are. But it is higher when economic conditions are good and talent has more options. Let’s think about what that’s likely to look like over the next year making the management, the people issues even more important.

The last comment I’d make is in recovering from the pandemic, and notice that the pandemic has not been an equal opportunity plague. There are some businesses, tech businesses where this has actually been good news for the business. They got lucky, they’ve been in the right place at the right time.

There are other businesses, and here I’ll use the gangster terminology, that have been whacked. But when it’s not an equal opportunity plague, that’s going to affect sales cycles and sales cycles are the single biggest drivers of cash in and cash out in virtually every business. There are some sectors that are going to take a lot longer to recover.

That’s a big people and sales management task because at the end of the day, those decisions are not made by senior executives in a room talking about the market, that’s what I call brainstorming. Those decisions are made by the aggregate call patterns in the salesforce, and sales managers need to be in closer touch with their people to manage that core sales strategy and financial activity effectively.

Fred Diamond: As we prepare for Frank’s final action step, we have some comments coming in. Jordie says, “I just bought the book” so congratulations, you got one of a hundred out. Martin who just gave us a question before says this is excellent. Josephine says thank you so much.

Frank, you may not know this but you’ve impacted so many business owners and sales leaders with your writing and your teaching over the years and your articles. You’ve been on a radar screen for a number of years even before this book came out to have you on the Sales Game Changers podcast. So I want to acknowledge you for the impact that you’ve had on so many not just sales leaders, but business leaders and business owners, and of course, students that have learned from you at the Harvard Business School. Congratulations on all the impact that you made.

You’ve given us so many ideas, give us one action step that people watching today’s webinar or listening to today’s podcast should take to take their sales career to the next level.

Frank Cespedes: First of all, thank you very much, Fred, for those comments. I’m not sure I actually deserve all of them, but I appreciate it. My final action step, let me get back to the previous question. In recovering from a crisis, the most important data in any company is again about the buyer, who buys, why and how. In most organizations, much of that information is not in the CRM system, it’s basically in the head of the individual rep.

What is the implication for our audience, sales leaders, sales managers? That’s where performance reviews become very vital. Because what a good performance review does is it unlocks that data and allows us to make important decisions. When sales managers do sloppy or drive-by reviews, they’re not only perpetuating a culture of underperformance. They are inhibiting the flow of vital information in the organization.

My one action step, Fred, make sure that you and your people take performance reviews seriously. By the way, this is not metaphysics, this is a trainable skill. The business I ran, I waited five years before I made sure people got serious about these performance reviews, that was five years too long. That would be my one action step.

Fred, if you don’t mind, I’m just going to say thank you to you, to everybody who’s invested a time in this particular session. I want to wish you all the best for success. And as an executive said in one of my classes earlier this year, while we’re waiting for the vaccine, stay positive and test negative. Thank you.

Transcribed by Mariana Badillo

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