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CASE: E-232
DATE: 08/08/06
Mike Harkey prepared this case under the supervision of Mark
Leslie, Lecturer in Business, and James Lattin, Robert A. Magowan
Professor of Marketing, as the basis for class discussion rather
than to illustrate either effective or ineffective handling of an
administrative situation. Copyright 2006 by the Board of Trustees
of the Leland Stanford Junior University. All rights reserved. To
order copies or request permission to reproduce materials, e-mail
the Case Writing Office at: [email protected] or write: Case
Writing Office, Stanford Graduate School of Business, 518 Memorial
Way, Stanford University, Stanford, CA 94305-5015. No part of this
publication may be reproduced, stored in a retrieval system, used
in a spreadsheet, or transmitted in any form or by any means
electronic, mechanical, photocopying, recording, or otherwise
without the permission of the Stanford Graduate School of
Business.
CLEARION SOFTWARE
Truth, like gold, is to be obtained not by its growth, but by
washing away from it all that is not gold.
Leo Tolstoy
INTRODUCTION
Clearion Software developed software solutions for large
enterprises and governments. Founded in 1996, the company had
become the worldwide leader in its market segment by 2003. By
January 2006, it had clients in over 200 countries, and its
revenues were accelerating in all of its territories around the
world, with one exception: the Americas region. To Mark Jacoby,
sales VP of the Americas region, this was a cause for great
concern. He had missed his quota for the first time in his career
at Clearion. In addition, four of his five quota-carrying sales
directors had also missed theirs. He feared that he had increased
the number of people in his organization so fast that it had become
inefficient and poorly managed. He also feared that his key people
were more concerned with building empires than building profitable
and scalable businesses. He felt that it was time to make his team
accountable for its investments. Jacoby believed that in order to
improve the performance of the Americas region he would need to
reevaluate his strategies for setting quotas, allocating headcount,
and assigning territories.
COMPANY HIGHLIGHTS
Clearions primary software offering was a so-called Service
Level Automation (SLA) tool, focused on automating the management
of IT infrastructure, including hardware, operating systems,
networks, and applications. Its solutions improved the efficiency
of data center resources by monitoring and adjusting applications
and resources against pre-defined rules and business goals. For
example, in the event of a hardware failure, Clearions tools would
compute a new optimal distribution of resources and then redeploy
those resources without human intervention. Additional events that
were automatically handled by Clearions software included server
load spikes, hardware additions, and application crashes and
rollouts.
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p. 2
Clearion was the market leader in its SLA niche and faced little
direct competition. In the short-term, it was focused on serving
technology, financial services, and public sector accounts because
of the massive IT needs and budgets in those industries. Over the
long-term, its market opportunity was limited only by its ability
to scale its sales organization and move faster than a handful of
competitive upstarts. One leading research organization reported
that industry revenues could reach over $1.3 billion by 2008.
Clearions total revenues were $297 million in 2005 and $180 million
in 2004, representing an increase of 65 percent. In 2005, revenues
were comprised of software license fees (74 percent) and software
maintenance and services revenues (26 percent). The average selling
price for a license to use Clearions primary productMontagewas
$95,000 in 2005. The company planned to drive future sales growth
through the continued expansion of its sales organization. Led by
SVP of worldwide sales Colin Davitian, Clearions sales organization
had more than doubled in the previous 12 months. Three regional
sales VPs reported to Davitian: Mark Jacoby; the VP of the Europe
region, Alex Brose, and the VP of the Asia Pacific region, Jeff
Swanbeck. (See Exhibit 1 for an organization chart.) The Americas
region achieved the highest sales total of the three regions,
accounting for over 50 percent of worldwide sales in 2005. However,
it was the slowest growing region: revenues increased from $129
million in 2004 to $155 million 2005 (or 20 percent). In January
2006, when Davitian met with Jacoby to discuss the 2005 sales
totals for the Americas region, he was clearly disappointed.
Davitian said:
The performance of the Americas region did not meet my
expectations. Its year-over-year growth rate declined to 20 percent
in 2005, down from 45 percent in 2004. This was particularly
alarming because I had allocated a huge budget to the region for
the year, giving Jacoby the resources to more than double his
headcount. Without question, I was dissatisfied with the return on
my investment in the Americas. I told Jacoby that he needed to show
that he could utilize our resources more efficiently in 2006. He
had no choice; his quota was going up like everyone elses.
AMERICAS SALES ORGANIZATION
Jacoby was responsible for Clearions U.S. and Latin America
sales territories. He had 25 years of experience in various sales
organizations, including six years in Clearions rapidly growing
group. He enjoyed and participated in the phenomenal success of the
company. His responsibilities expanded from manager of a few field
sales reps in 1999 to VP of the Americas in 2003. In 2003 and 2004,
he consistently exceeded his quota by over 25 percent. Naturally,
it came as a surprise to him that his performance had faltered in
2005, missing his target for the first time at Clearion. He fell
short of his quota by only one percent, but the 48-year-old Jacoby
was highly motivated to turn things around. Five sales managers
reported to him: the director of the east region, Jerry Garton; the
director of the west region, Steve Hall; the director of the Latin
America region, Wally Cheng; the director
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of the federal group, Allison Chapas, and the director of inside
sales, Melissa Dreyer. (See Exhibit 1 for an organization chart.)
Jacoby knew that he needed to find a way to make his sales managers
more productive and efficient. Drawing on his own experience, he
decided to reevaluate his strategies for setting quotas, allocating
headcount, and assigning territories. Setting quotas was
particularly important because compensation for many employees in
his sales organization was performance-based and wide variations in
achievement were possible. Bonus compensation ranged between 80 and
200 percent of base salary. Jacoby said, Most sales managers have
the unilateral power to assign quotas to their sales employees as
they see fit. As a result, they have an absolutely massive power to
influence their employees income. In addition, most sales managers
controlled two major factors in determining the success or failure
of their quota-carrying sales employees: the number of headcount
allocated to support a territory and the territory size. To be
sure, quotas may be easier or harder to achieve given differences
in resources and territories. With this in mind, Jacoby decided to
review his strategies for setting quotas, allocating headcount, and
assigning territories.
Setting Quotas
In January and July, Jacoby received a half-year sales quota for
the Americas sales organization from Davitian. At the same time,
Jacoby would meet with each of his managers individually to review
their performance for the current period and their forecast for the
next period. Based on those discussions, Jacoby would divide his
target among his quota-carrying managers. He said:
My quota-setting process was largely subjective, and I gave each
manager a number based on my assessment of the situation.
Elsewhere, sales managers will give every sales rep the same quota.
That is a very simplistic approach, and for a certain type of
business at a certain stage of maturity, it may make sense. At
Clearion, where we have observed clear patterns of buying in
certain territories, I did not feel that approach made any
sense.
In 2005, Jacoby faced a number of challenges related to his
process for allocating quotas, including sandbagging, lobbying, and
gaming.
Sandbagging The most common problem Jacoby faced was
sandbagging, when sales employees would downplay their sales
expectations and attempt to convince him that they deserved a small
quota. He said:
Sandbagging is a natural outgrowth of a compensation system
where lower quotas can yield higher bonuses. In general, sales
employees are deeply suspicious that their quotas are based on the
sales forecasts they keep for themselves. They also believe that
the more accuracy in the information they provide to their
managers, the more they will be penalized. As a result, sales reps
would prefer to tell their managers as little as possible until
they receive their quota.
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While there are no immediate penalties associated with the
practice of sandbagging, there are certainly reputational penalties
associated with the more egregious violations. The degrees of
sandbagging range from the slight haircut to the electric shave. A
wildly self-serving forecast would certainly damage the trust
between me and a sales rep. For example, in January 2004 Garton
demanded a target that was 30 percent below the quota I had in mind
for the east region. From then on, I began to be suspicious of his
tactics.
Notwithstanding these dynamics, sandbagging persisted in the
Americas sales organization, and Jacoby felt he suffered from a
lack of transparency into his managers pipeline. For one, if a
regional manager withheld information about prospects in the
pipeline over and above her forecast, Jacoby felt he could be
missing out on investment opportunities.
Lobbying Another common problem that Jacoby faced while setting
quotas was lobbying from his sales managers. An offshoot of
sandbagging, lobbying techniques were also used to drive down
quotas. When sandbagging, managers would conceal sales
opportunities; when lobbying, they would describe factors in the
market that were adversely influencing their ability to succeed.
Jacoby said:
During quota-setting time, magic rules start popping up out of
the blue, such as sales cycles are longer in Latin America during a
World Cup year. On the surface, such assertions may appear logical.
But every manager has a dozen or so of these lobbying truisms up
her sleeve. The net effect is that none of them are very
believable. Other rules I have heard include east coast companies
will negotiate harder on price, and west coast companies are on
vacation for the month of July.
Jacoby felt that excessive lobbying eroded his trust in his
sales people and challenged his ability to effectively discern
reality. For example, one of his managers had a pattern for hyping
doomsday scenarios and Jacoby felt he had lost touch with the
territory. Consequently, he felt compelled to spend more time
trying to understand the dynamics of that particular region than he
did for other regions.
Gaming Gaming or manipulating the quota process was also quite
common. Without fail, no matter the quota system, sales employees
will endeavor to find a way to influence the outcome in their
favor. For example, Jacoby found that some salespeople would try to
close all of their deals in June and December in an attempt to make
their performance appear like a close call. Jacoby said:
Any person who has survived in the sales environment long enough
to become a manager must have learned to become very persuasive
about all things related to her quota. In fact, sandbagging,
lobbying, and gaming techniques can be rather effective. It depends
on the manager. The typical regional director is not highly
analytical. Hes often a sales guy who happened to be good enough to
become a
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manager. He sets quotas based on gut, and he is subject to
influence just like everybody else. Hall, for example, pays little
attention to spreadsheets. One of his managers once told me that he
can barely use his personal computer. So when quota-setting time
comes around, Hall will make decisions based on a few simple rules.
For instance, assuming his quota increased 10 percent, he will give
a sales rep who hit her quota an increase of 14 percent and a sales
rep who missed his an increase of only six percent. His argument is
that sales managers who over-engineer their forecasts are wasting
their time because there is typically too much uncertainty in the
sales process to bother with getting too sophisticated with
allocations.
Self-Assessment The sandbagging, lobbying, and gaming tactics
employed by Jacobys managers certainly made his task of setting
quotas a difficult one. Even more concerning, he had no way to
adequately measure his performance in setting quotas. He said:
Its not always clear when the results come in at the end of a
performance period how I have done in setting our quotas. For
example, we have had huge variations in achievement by region. At
the end of last year, one region reached only 81 percent of its
goal, and another achieved over 120 percent. I could have
interpreted those results in any number of ways. To satisfy my ego,
I could have said that my quota-setting was fine, and it was a case
of one region under-achieving and another over-achieving. On the
other hand, I could have said that my quotas were offone regions
was set too high and the other too low. In fact, its possible that
the performance of the regions was actually quite similar and that
they had done the same job with different goals. Unfortunately, the
consequences of getting quotas wrong are really enormous for the
organization. People who cannot hit their goals and yet are
over-achieving will be frustrated, and people who are hitting easy
goals will have an inflated view of their performance. Together,
poor goal-setting can create major morale problems.
Allocating Headcount
In 2005, Jacoby set quotas every six months according to
schedule. Conversely, he allocated headcount on an ad hoc basis,
and he faced two major challenges as a result. First, his managers
required more time to fill openings than he would have liked.
Typically, managers would request headcount only after quotas were
set, and then they would attempt to fill the openings before the
end of the half-year period. Jacoby concluded that the new
headcount investments were not being used to address immediate
needs and were only loosely tied to goals. The second problem he
faced was in the area of shared resources. In 2005, Jacobys
regional managers were allocated headcount in a fixed ratio of one
corporate account manager (CAM) to one territory sales manager
(TSM) and one systems engineer (SE). CAMs came with quota, whereas
TSMs and SEs did not because they were shared inside sales
resources [who reported to
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Dreyer]. Accordingly, SEs and TSMs were always in high demand.
However, Jacoby found that SEs and TSMs were being hoarded by a few
managers. He said:
Our inside sales group was being raided by the managers who were
the most adept at strong-arming people. It was often a negotiation
between different stakeholders with different titles, different pay
rates, and different levels of seniority and credibility in the
company. The pushier, more domineering managers would get the lions
share of the resources. In addition, there were no penalties in our
compensation system for excessive use of shared resources. We only
measured top-line performance. So a manager who reached her quota
of $27 million at a cost of $26 million would have achieved her
goal. On the other hand, a manager who reached only $26.5 million
at a cost of $4 million would not have made her goal. From a profit
and loss standpoint, our reward system did not make any sense. We
had spent a lot of money on new headcount just to help a team make
their number, and in most cases, they would achieve their goals. As
a result, sales totals were getting bigger and bigger each year.
More often than not, however, the return on the incremental
investment in headcount had fallen well below our expectations.
Assigning Territories
In addition to the challenges he faced in allocating headcount,
Jacoby had had his hands full in assigning territories in the past.
However, in 2005, the toughest decisions were made by his
subordinates, who were left with the unenviable tasks of increasing
quotas and shrinking territories. On the one hand, this was a
common problem among fast-growing companies: they are forced to
separately manage more and more territories as the cost of not
doing so increases. On the other hand, Garton for one did not find
it easy to subdivide his territory. But, he felt he had no choice.
He found that a number of leads in the Washington D.C., Baltimore,
MD and Charlotte, NC areas were not being pursued as aggressively
as he would have liked. His northeast manager (who was responsible
for the region north of North Carolina and Tennessee) was consumed
by opportunities in Boston, MA and New York City, NY and his
southeast manager (who was responsible for the region south of
Virginia and Kentucky) was fully absorbed in deals in Atlanta, GA
and Miami, FL. In both cases, Gartons subordinates had created
promising leads, but simply lacked the time and resources to
deliver on them. Gartons solution was to add a third regionthe
midatlantic regionwhere before he had only two regions in his
territorythe northeast and southeast regions. (See Exhibit 2 for
territory assignments.) He said:
Most sales managers want to build an empire, and they measure
themselves by the size of their territory. They would rather take
an infinitely large territory assuming they could make an infinite
amount of money. Nevertheless, theres a well understood bar where a
territory is deemed large enough to be split apart. Through past
experience, everybody knows that when a territory gets to a certain
point, its no longer efficient not to have someone directly
managing it. We had
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reached that point in my territory and that made it easier to
convince the northeast and southeast managers that it was in their
best interests to give away some of their territory. Even so, they
were left with a sour taste in their mouth about the deals they had
left on the table because the expectation in a growth company like
Clearion is that your quota is going up every period. So in both
cases, the regional managers were expecting a larger quota to come
with their reduced territories. On the other hand, the incoming
midatlantic regional manager knew that she had a richer territory
because it already had been developed by the previous managers. It
was a very tricky situation. But when a company is growing so fast,
there is no other way to fully capture the value of the various
opportunities than to increase the number of territories.
NEW PROCESSES FOR 2006
Objectives
Based on his review of his processes for setting quotas,
allocating headcount, and assigning territories, Jacoby felt he had
better appreciation for his inability to achieve quota in 2005. The
Americas region was rife with problems that were only getting worse
as the organization grew. Jacoby concluded that he needed a new
system. He was not certain that he could address all of the issues
in his previous system, but he was convinced he could at least
improve upon it. Accordingly, he set forth a few objectives to
guide his thinking, including: 1. Optimize for profitability (and
not revenue). Rationale: Jacobys mission from Davitian was clear:
he needed to become more efficient. In addition, he was concerned
with the potentially irresponsible empire building taking form in
his organization. He wanted to hold his sales managers accountable
for their consumption of resources. 2. Improve understanding of
spending allocations to make better informed investment
decisions. Rationale: Jacoby struggled to fully understand his
managers businesses for many reasons, including rampant
sandbagging, lobbying, and gaming. In addition, he lacked the
ability to be able to track the performance of an investment in
headcount. 3. Merge decisions about headcount and quota allocations
into one decision. Rationale: Making decisions about headcount and
quota allocations separately yielded a number of suboptimal
outcomes, including a lack of accountability for incremental
headcount. Jacoby said:
My belief was that if I could tie together all decisions about
headcounts and quotas, I could begin to run my sales organization
as a business, making calculated investments and holding people
accountable for those investments. In this manner, no headcount
request would be free. If a manager wanted a new
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hire, she would have to make that request at the beginning of
the compensation plan period and take on incremental quota
associated with the headcount.
4. Empower managers to participate in the decision process and
work collaboratively. Rationale: Jacoby felt that his quota-setting
process placed him in an adversarial position against his staff:
they had no incentive to share information with him. Moreover, they
had no incentive to work collaboratively with other territories. 5.
Accelerate hiring times. Rationale: Jacobys managers required more
than four months on average to fill open positions. He felt that by
compressing hiring times he could increase managers accountability
for new hires. 6. Make managers assume the cost of SEs and TSMs.
Rationale: Previously free resources, SEs and TSMs were being
hoarded by a few managers. Jacoby hoped that by holding his sales
managers accountable for their consumption of resources, he could
improve the efficiency of his organization.
New Model
Based on his plan to combine his quota-setting and headcount
allocation decisions, Jacoby developed a new toola quota and
headcount allocation modelto guide his budgeting process for the
first half of 2006. It only took a few hours to build, and its
central components were simple. First, he needed to figure out how
to assign resource consumption costs to each regional director,
when resources were compensated differently and some resources were
shared. He said:
I decided to take all of our headcount and convert them into
units. The baseline was set at one unit, and it described our entry
level staff people: TSMs and SEs. On the other hand, more
experienced and higher paid employees, like CAMs, were set at two
units. Units are a simple and easy to understand currency, whereas
salaries are diverse and overly complicated. (See Exhibit 3 for
unit conversion information.) In order to figure out what weve
already invested in a region, I added up the number of units that
were being used by that region. For example, the east region was
using about 200 units and the federal region was using about 64
units. (See Exhibit 4 for headcount by region.)
Jacobys next step was to figure out how productive each region
had been based on the number of units it utilized. He quickly
calculated each regions contribution per unit by dividing its total
revenues by its number of units. By doing so, he learned that the
federal group had been the least productive, generating $110,000 in
revenues per unit for the six-month period ending December 31,
2005, and the west region had been the most productive, generating
$190,000 in revenues per unit for the period. (See Exhibit 5 for
contribution by region.)
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Lastly, Jacoby revisited his six objectives for setting quotas
and allocating headcount and concluded that his new model helped
him to immediately address the first two of his six objectives. For
the first time, he could evaluate each regions contribution to
profits by using the proxy measure of revenues per unit. With this
new information, he felt he could optimize for profitability and
make better informed investment decisions. The next step was to
address his third objective, merge decisions about headcount and
quota allocations into one decision.
Quota and Headcount Allocations
As promised, Davitian had raised the quota for the Americas
region. Jacoby was responsible for $92.5 million in revenues for
the first half of 2006, an increase of 14 percent over the second
half of 2005. He also calculated that he had the budget to increase
his headcount by 12 percent. Now he needed to put his new model to
work and allocate the incremental headcount and quotas in one
exercise. As he began making his decisions, he wondered which
region would likely yield the most profits to the business from an
investment of headcount during the performance period.
West Region In addition to generating the most revenues per
unit, the west region had also achieved the most overall revenues,
almost $40 million in the second half of 2005. The director of the
west region, Steve Hall, was a 20-year sales veteran and an empire
builder. He was utilizing the most resources, over 210 units, many
of which were shared resources. On the one hand, Jacoby did not
feel it was appropriate to penalize Hall for his vast consumption
of resources because he was using his headcount more efficiently
than his peers were. In addition, Jacoby knew that if anyone could
take on and successfully achieve additional quota, Hall was that
person. He had exceeded his quota by an average of 30 percent for
the last three performance periods. On the other hand, Jacoby
wanted to adapt based on his past mistakes and knew he could not be
too generous with new headcount allocations. For one, it took Hall
longer to fill openings, averaging over five months per new hire.
With all of this information percolating in Jacobys mind, he
decided to raise Halls quota by 14 percent (comparable to the
increase in quota for the Americas region) and allocate him 28 new
units (also in line with the region). Under the new unit system,
Hall would have the flexibility to determine how to use those 28
units, whereas in the past, he would have been required to hire in
the fixed ratio of one CAM to one TSM and SE. He was not sure which
hiring approach Hall might take: he might stay with convention or
perhaps pursue a new distribution of resources. In any case, Jacoby
was curious what type of hiring incentives he might be instilling
with the new unit structure. Nevertheless, he expected another
hugely successful quarter for his leading regional director. (See
Exhibit 6 for quota and headcount allocations by region.)
Federal Region On the other end of the spectrum, the director of
the federal region, Allison Chapas, missed her quota for the second
half of 2005 by 19 percent. Jacoby expected sales cycles to be
longer for Chapas: she was selling to the notoriously slow-moving
federal government, whereas the east and west regions had their
pipelines filled with quick and nimble high-technology enterprise
clients. His hope was that there would be a larger benefit in the
long-term by focusing on the federal market. Even so, Jacoby was
disappointed with the shortfall in sales in 2005 because
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Chapas had more than tripled the size of her organization in the
previous 24 months. He hoped that 2006 was the year that the
federal group would realize meaningful returns. With some
hesitation, Jacoby reduced Chapas quota and allocated her
additional units for the first half of 2006.
East Region The director of the east region Jerry Garton missed
his quota for the second half of 2005 by 15 percent. Jacoby was not
entirely surprised by this outcome because he thought he had given
Garton an especially difficult goal. Garton had been sandbagging,
lobbying, and gaming more than any of the other regional directors,
imposing significant time commitments from Jacoby. In part, Jacoby
set the target for the east region so high to send Garton the
message that his tactics would not be tolerated. Unfortunately, by
January 2006, Garton had not changed his behavior. Even worse, his
productivity had fallen short of expectations, generating $30,000
less in revenues per unit than the west region. Jacoby was running
out of patience with Garton and wanted to see some results. He
wondered if there could be any explanation for the productivity
differences in the east and west regions, given the similarities in
customers they were pursuing. He increased the quota for the east
region by the largest margin (19 percent) and allocated it the
lowest percent increase in units (10 percent). He hoped that the
east could begin to close its productivity gap with the west. After
he had finished making his decisions about quota and headcount
allocations for the Latin America region, Jacoby had achieved his
third objective; his budget was set. He decided that it was time to
call a meeting with his five direct reports.
The Team Meeting
By meeting as a group, Jacoby thought he could put his new model
to the test against his fourth objective, empower managers to
participate in the decision process and work collaboratively. He
knew that this was an ambitious goal because it necessitated a
change in behavior from his managers. Typically, Jacoby met with
each of his regional directors individually, listened to their
sandbagging, lobbying, and gaming stories, and then made his
decisions about quotas alone in his office. When he assigned
quotas, his regional directors would learn only their own number
and not those of the others. But Jacoby wanted to try something
new. In the meeting, he unveiled his new system of measuring
headcount by units and presented his budget and allocations to the
whole group. He also revealed a new policy that was implicit in the
allocations: new headcount came with quota attached to it, meaning
that any director that wanted to hire additional people had to be
willing to assume incremental quota associated with that headcount.
Jacoby believed that this new policy would help to address his
fifth objective, accelerate hiring times. Jacoby hypothesized that
if new headcount carried as much quota in its first performance
period as experienced hires did, regional directors would be highly
motivated to hire the new people immediately. When Jacoby had
finished presenting the nuances of his new model, each regional
director now had access to more information about the Americas
region than ever before. They could see that the federal group had
been the least productive; the east region had a tough quota to
hit; the west
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region would be adding even more headcount, and so on. Jacoby
had not fully considered any potential risks in making quota and
headcount allocations transparent across the region. Nevertheless,
he hoped that the benefits of doing so would mitigate any
complications that might arise. He also hoped that a healthy
discussion about his various allocations would ensue. Jacoby said,
I thought that by giving them a broader perspective beyond their
own region, they would feel compelled to consider the companys
objectives beyond their individual fiefdoms. I had hoped they would
try to act like team players. But instead, the regional directors
kept fairly quiet, and he could sense that they were busy absorbing
all of the new information.
Complications
A few days later, Jacoby met with each of his managers
individually to talk about the new model and his allocations. He
was eager to hear if they thought he had been equitable and
sensible with his budget. His first meeting was with Chapas. She
told him:
To be honest, I think its a bit unfair to compare the federal
groups revenues per unit against those of the east and west
regions. And I certainly did not appreciate being confronted with
this information in front of everyone in that meeting. Everyone
knows that government contracts take more time and resources to
close. I need to jump through more hoops than everyone else; I need
to spend time securing licenses where others do not, and I need to
build a broader set of relationships.
Over the last two years when I was increasing the number of
headcount in my group at a fast clip, I felt I had your support. In
addition, we did not track or even consider revenues per unit. Why
am I being punished for behavior that you had approved all along?
Your two-dimensional spreadsheet fails to capture the subjectivity
that is required in quota-setting.
Jacoby agreed with many of her points. His model highlighted the
relatively low revenues per unit in her territory, and he could
understand why she felt uncomfortable in the meeting. Indeed,
selling to governments required longer sales cycles, and some
productivity shortfall was to be expected. On the other hand,
Jacoby was disappointed that he had not seen a satisfactory return
on his investment in her area, and he wanted her to know that. When
he met with Garton, Jacoby learned that he was also unhappy the new
model. Garton said:
Why is the east region being singled out here? No other region
is being asked to improve its revenues per unit anywhere close to
the nine percent you are demanding from me. If revenues per unit
matters so much, why is the federal group getting eight new units?
Thats almost half as many units as I am being allocated, and the
federal group is only one sixth the size and one half as productive
as the east region. It does not make any sense.
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On the other hand, Melissa Dreyer, who carried the same quota as
Jacoby, was more supportive. She said:
I do not understand why the east region is not as productive as
the west region. They are targeting more or less the same customer
profile. Yet, the east is not getting the job done, simple as that.
Consequently, I am reluctant to allocate any additional TSMs to the
east until I can see some improvement.
Wally Cheng mentioned that it did not seem fair that a new hire
would be measured at the same productivity rate as a more mature
headcount. He asked Jacoby to consider how likely it would be for a
regional director to recruit, hire, and train a new hire to be as
productive as an experienced person within a single performance
period. Jacoby acknowledged that it was not likely. On the other
hand, he asked Cheng to consider the benefits that came with the
new policy: it made managers accountable for new headcount, which
he thought could accelerate hiring times. Additionally, he asked
Cheng to feel free to propose other solutions that would achieve
similar objectives. Cheng could not think of any on the spot.
Instead, he said:
I see your point. If SEs and TSMs are free, then everyone will
fight for them. But isnt that what you want? The best salespeople
will get the resources, hit their quotas, and get bigger bonuses.
If they arent free, and I am going to have to carry quota for every
SE and TSM I hire, why would I even bother? Based on the unit
system, I have every incentive to go out and hire the most
experienced CAMs I can find. CAMs are professionals, and I know for
sure that they have hit quotas before. On the other hand, how many
SEs and TSMs even know what a quota is? The only people we can find
to fill those roles are junior and need to be trained. In my
opinion, if you give regional managers a license to spend units in
any manner they choose, you will end up with an organization with
all CAMs and no SEs and TSMs. Then how productive will we be? I
think you need a better system for allocating shared and inside
sales reps.
Cheng also questioned the logic of optimizing for profitability
in the new model, when quotas (and therefore compensation) were
based on revenues. Jacoby recognized that an indirect alignment of
goals could create complications over the long haul. For the time
being, however, he was not very concerned with the matter. He knew
it would take some time for the Americas region to adapt to his new
model. For now, his primary consideration was his allocations.
Given all of the feedback he had received from his regional
directors, he wondered how prudent and fair he had been in
assigning quotas and headcount.
LOOKING AHEAD
In June 2006, as the end of the first half-year performance
period came to a close, Jacoby knew it was time to revisit his
process for setting quotas, allocating headcount, and assigning
territories. Final revenue numbers had not yet come in, but he knew
it was going to be a decent quarter. He was sure he had achieved
his quota for the Americas region. On the other hand, at least one
of his regional directors was bound to be disappointed. Clearly, he
was anxious to see the results.
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Meanwhile, he took a few moments to consider his
accomplishments. He felt he had successfully created transparency
into the profit contributions by each region. He believed that this
information enabled him to make better investment decisions. He
also felt that he had successfully converted decisions about
headcount and quotas into one decision. Moreover, none of his
managers came to him asking for new headcount after January. In
July, he knew that requests for new units would come and that they
would come bearing incremental quota. In other words, he felt he
had achieved the first three objectives he had set for himself in
January. In addition, his managers had grown to accept the idea
that SEs and TSMs were no longer free. Nevertheless, he was not
sure how the previously free resources would be used in the future.
To his delight, he also noticed that hiring times had been reduced
to an average of less than two months per hire, which he believed
represented considerable progress against his fifth objective.
Conversely, he wondered how he would evaluate his effectiveness
against his fourth objective, empower managers to participate in
the decision process and work collaboratively. To be sure, he had
shared more information with his regional directors and included
them in the process as a team, not as individuals. Even so, he was
disappointed in the nature of his individual meetings with his
managers. Jacoby said:
It was more of the same: sandbagging, lobbying, and gaming. Only
now, the context of the debate was centered on their new scapegoat,
the new model. In a way, by giving them more information, I had
given them even more ammunition to make their sales pitch for a
lower quota. Suffice to say, I did not observe any collaboration or
teamwork. In sales, its pretty simple. Sink or swim, you are on
your own.
As he began to outline his objectives for updating and refining
his quota and headcount allocation model, Jacoby wondered what
areas of the model and his process for making allocations needed to
be adjusted.
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Exhibit 1 Organization Chart
Mark JacobyVP of Americas
Jerry GartonDirector, East Region
Wally ChengDirector, Lat. America
Allison ChapasDirector, Federal
Steve HallDirector, West Region
Colin DavitianSVP of Worldwide
Sales
Alex BroseVP of Europe
Jeff SwanbeckVP of Asia Pacific
Melissa DreyerDirector, Inside Sales
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Exhibit 2 Territory Assignments (East Region)
Before August 2005
Northeast Region Southeast RegionConnecticut AlabamaDelaware
ArkansasIndiana FloridaMaine GeorgiaMaryland KentuckyMassachusetts
MississippiMichigan North CarolinaNew Hampshire South CarolinaNew
Jersey TennesseeNew YorkOhioPennsylvaniaRhode
IslandVermontVirginiaWashington D.C.West Virginia
After August 2005
Northeast Region Midatlantic Region Southeast RegionConnecticut
Kentucky AlabamaDelaware Maryland ArkansasIndiana North Carolina
FloridaMaine Tennessee GeorgiaMassachusetts Virginia
MississippiMichigan Washington, D.C. South CarolinaNew Hampshire
West VirginiaNew JerseyNew YorkOhioPennsylvaniaRhode
IslandVermont
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Exhibit 3 Units By Position
Position Abbreviation UnitsCorporate account manager CAM
2.0Territory sales manager TSM 1.0Systems engineer SE 1.0Channel
sales manager CSM 1.5Channel systems engineer CSE 1.0Manager of
TSMs TSM Mgr 1.3Manager of SEs SE Mgr 1.5Manager of field reps
Field Mgr 2.5Other Other 1.0
Exhibit 4 Headcount by Region, as of January 1, 2006
H2 05 Exit Headcount
Region CAMs TSMs SEs CSMs CSE TSM Mgr Field Mgr SE Mgr Other
Total Headcount Total UnitsEast 38 40 38 7 5 4 8 6 0 145 200West 40
42 40 8 8 4 8 6 0 156 214Latin America 4 4 2 0 0 0 2 0 0 13
19Federal 10 12 10 4 4 1 2 2 2 47 64Totals 92 98 90 19 17 9 20 14 2
361 496
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Exhibit 5 Contribution by Region
Second Half of 2005
Achieved Quota % Shortfall H2 2005Region in H2 2005? or Revenues
Headcount Revenues/Unit
Yes or No % Surplus ($ in millions) (In Units) ($ in
millions)East No -15% 32.0 200 0.16West Yes 20% 39.6 214 0.19Latin
America No -10% 2.5 19 0.13Federal No -19% 7.0 64 0.11Totals No -1%
81.1 496 0.16
Exhibit 6 Quota and Headcount Allocations by Region
First Half of 2006
QUOTA HEADCOUNTH1 2006
Region Revenues % growth New Headcount % growth Total Headcount
Revenues/Unit % growth($ in millions) (In Units) (In Units) ($ in
millions)
East 38.2 19% 20 10% 220 0.17 9%West 45.1 14% 28 13% 242 0.19
1%Latin America 2.8 14% 5 27% 24 0.12 -10%Federal 6.3 -10% 8 13% 72
0.09 -20%Totals 92.5 14% 61 12% 557 0.17 2%