How to set the right incentive schemes in professional services
You spend time reviewing and tweaking your business strategy. But when was the last time you reviewed your sales incentive schemes to ensure that they are aligned with your business goals? In my experience the old adage that ‘compensation drives behavior’ holds true in a Professional Services firm. Yet, too many firms don’t have aligned and well-tuned schemes. Worse still some even have schemes that inadvertently encourage behavior at odds with their business plan.
A typical business development model in a small to medium-sized professional services firm is to have dedicated salespeople supported by consultants with good commercial skills (e.g. Solution Architects, Business Analysts or Project Managers). The salesperson is expected to focus on generating and winning new business opportunities rather than managing existing client engagements. The consultant(s) work with the salesperson in pre-sales and build a rapport with the prospective customer giving them confidence of the firms ability to successfully complete the requirement. The perceived role of the consultant means that they are trusted more closely by the customer than the salesperson. However nice a person the salesperson is they will rarely enjoy such a close relationship with their customer. Their primary role is to obtain the best possible commercial deal for their firm, which is the opposite of what the customer wants! Once the business is won the consultant(s) are responsible for ensuring the successful delivery of the engagement as well as identifying additional requirements (such as follow on work and change controls).
This approach works well as once the contract terms are negotiated by the salesperson (rate card, milestone payments etc), many clients prefer to be managed on a day-to-day basis by project managers rather than the salespeople. This is where the problem can come. Many professional services firms pay their salespeople on the amount they invoice to the clients they win each month, sometimes even the margin they achieve during delivery. The behavior this drives is to encourage the salesperson to remain close to the won project, to get involved in detailed project related matters, try and help with resourcing and review the invoices to make sure he knows what he will be compensated. There is little incentive to sell longer-term assignments as they are only paid for invoiced work. In addition, as the salesperson is not responsible for the resourcing of projects and the setting of consultant salaries they are not in a position to control project margin. This leads not only to duplication of some of the work of the consultant managing the project but also reduces the time available for the salesperson to identify and win more new business at another client.
An alternative approach is to incentivize the salesperson on the overall value of the deal that he closes with the client, what I term the ‘booked’ amount. The salesperson is paid not on what his firm invoices to the customer each month but instead on the value of the upfront contractual commitment. The sales person is thus rewarded for behavior that results in the client committing up-front, to a larger volume of work. Rather than settle for small pieces of work and/or of short duration (which is gradually expanded over time in a piecemeal fashion) they look at ways of encouraging the client to increase their commitment whether this be in length of contract or overall value. Secure in the knowledge that they will be paid on overall value of the deal they leave the project manager to deliver the engagement. This leaves time to focus on developing new opportunities.
The main question I get asked when I suggest this approach is “what one should do if the salesperson gets the client to agree to an extremely large project on the last day of my financial year?” My simple response is “go and celebrate”! The nirvana for services firms is to have predictable revenue streams and larger and longer-term projects are a pre-requisite for this.
You can go further and start looking at other aspects of your business. For example, if you want to increase the length of your support contracts then try incentivizing your salespeople on the length of time before the first break clause in the agreement rather than simply on the first year of support. Consider compensating your project managers on the additional work that they generate after the initial engagement closed by the salesperson. If you want to bring a new service offering to market (one for which you don’t have a track record and so will be more difficult to sell) offer the salesperson a higher incentive to sell this than existing service lines. From my experience, you will be surprised how effective such simple changes can make.
Of course you do need to careful that the individual can actual influence the measures you put in place in the incentive schemes. For example, in the case of firms that pay their salespeople on delivered project margin and yet they are not responsible for resourcing the individuals onto the projects or setting salaries. In some cases as a firm you may wish to offer discounted rates (maybe because you have too many available resources or you wish to win an engagement which you consider has a strategic profile). If the salesperson is paid on margin then they are penalized for following company strategy. An alternative approach would be to pay the salesperson on the revenue value of the engagement and the person who manages the resources (e.g. practice or business unit manager) on the overall margin of the engagement resourced by members of his team. This drives complementary behavior. The resource owner offers a minimum price to the salesperson for use of that resource to achieve their target. The salesperson is then incentivized to exceed this margin if he can by asking for a high daily rate. This leads to a win/win for both parties individually and supports the strategic goal of the company.
Many schemes have been derived from the product sales world with little or no modification. Whilst sales techniques, methods and process are very similar incentive schemes need to be aligned to the business goals. Consider what is important to your business at any point in time (cash flow, revenue growth, margin, building a new service line, new geographies, etc) and align your schemes accordingly. Finally, whatever you decide on remember, the simpler the better.