Category Archives: Revenue Risk Management

Filthy Money: When Selling Creates Moral Conflict

“Have you ever encountered an ethical dilemma and how did you handle the situation?”

I’ve been asked to answer that question next week as a presenter at a Virginia science and tech high school as part of Ethics Day. My colleagues come from a breadth of professions, and each of us has been allotted 20 minutes. For me, the greatest difficulty is knowing where to begin.

One topic I will cover: are there situations when – morally and ethically – revenue is not worth having? As I answer this question and others, I expect that these savvy students will find my inconsistencies huge, like a full moon in Autumn. As author David Quammen wrote, “not every crisp line represents a triumph of ethical clarity.”

But most high school students have not had to meet a demanding revenue target or “make quota.” They can afford to be idealistic. And I hope they are. This is a good age, and a safe place, to learn and explore “what is the right thing to do?”

I plan to share a poignant example: In 2011, Marine Medal of Honor recipient Sgt. Dakota Meyer was conflicted over selling his company’s product, a sophisticated rifle scope, to the Pakistani military. “We are taking the best gear, the best technology on the market to date and giving it to guys known to stab us in the back . . . These are the same people killing our guys,” he explained.

If you followed this story, Meyer worked for BAE Systems when he refused to pursue the deal with the Pakistanis. BAE fired him, and Meyer sued the company. In December, 2011, BAE announced that the parties had settled the dispute out of court.

I will follow that story with two examples of my own ambivalence in professional selling:

1. Cigarette manufacturing

Cigarette manufacturing is a huge part of Virginia’s economy. The Philip Morris Richmond Manufacturing Center alone occupies 200 acres, with six connected buildings totaling 1.6 million square feet. An outsider cannot appreciate the size of the US tobacco industry until he or she drives on I-95 through Richmond, and smells ambient tobacco leaf particles flowing into the car’s air ducts. The huge network of suppliers—from production machinery to carton printers to filter manufacturers to warehousing—have similar logistics challenges to other manufacturers.

For years, the technology I sold to companies in the tobacco value chain helped them manufacture and distribute a legal-lethal product better, faster, and cheaper. Not a rapport builder in the health-care vertical. “My marquis customer? Sure . . . are you familiar with Marlboro cigarettes? . . .” I overcame my dissonance because I rationalized that cigarette smoking is voluntary. But that required suspending another scientific fact – that nicotine is non-addictive and that cigarette manufacturers don’t malevolently tinker with its concentration in their end products.

Had I stood on principal and refused to help cigarette manufacturers, my competitors would have gladly filled the void. Could I subtract tobacco-related revenue from my account portfolio and still make quota? Answer: no – not in Virginia.

2. Firearm manufacturing

One of my prospects was a large handgun manufacturer with a single-location factory in my sales territory. I decided not to call on the company. Unlike the first example, I wanted the revenue, but I didn’t need it to make quota. While I recognize that it’s perfectly legal to manufacture and distribute firearms in the US, my objection – again – was the lethal thing. For me, it would have been indescribably strange to walk the production floor, looking at bins of forged parts and watching Quality Control test bays, knowing the use of the finished product. I imagined speaking with the same detached operational terms for other my other manufacturing customers, but not being able to escape knowing the ultimate purpose of the precision and quality was to deliver bullets better. Just writing about it still makes me queasy. Call me a wimp. I can handle it.

Was my idealism fair to my employer? Probably not. I referred the gun manufacturer to a third-party reseller who didn’t share my compunction.

In less than 10 years, many of the students in my session will face similar quandaries. How will they respond, for example, when an employer asks them to sell products to people with impaired decision-making abilities, as described in an August, 2015 Washington Post article, How Companies Make Millions off Lead Poisoned, Poor Blacks? The practice is borderline illegal, with the emphasis on borderline. Laws have not fully caught up with an obvious moral wrong, underscoring why ethics matters, and why it’s so important that discussions about ethical choices in one’s career begin in high school – or earlier. The biggest mistake people make about ethics is denying that conflicts can occur.

When quotas and revenue goals are on the line, having the courage to be selective about the intended purpose for one’s products and services can be difficult. These vignettes illustrate how complicated the choices can be, and twenty minutes hardly leaves time to dig beneath the surface.

Still, I will carve out time for students to question the answers.

How Risky Is Your Revenue Plan?

The English language needs a new word. A word that combines the meanings of hope and stupidity. Hopeidity sounds right. A versatile noun I can use when someone exclaims, “Hey y’all, watch this!”

I searched for this phrase online, and began an adventure to the boundaries of risk taking. Among the gems I uncovered:

• spud gun with propane and oxygen (“dangerous, NOT RECOMMENDED !!!”)
• the 25 most death-defying stunts ever
• “we try to pull down a 30 foot tree with a Hunt V and its wench. We fail.”
• The longest motorcycle ride through a tunnel of fire

These specimens are among the few I can call cerebral. The rest? Sheer hopeidity. Which opens deep questions: what motivates people to accept risks? Why do some BASE jump, or willingly leap from high bridges with a bungee cord strapped to their ankles? Why do men and women descend into coal mines 175 stories deep in the earth to earn a paycheck? Why do entrepreneurs invest their entire savings to start companies, when others say, “no freaking way!”

I accept that I will not come close to solving this bafflement. It joins a collection of other perplexities: how infants transform from joyously happy to shrill meltdown in a mere instant. Why GM ever produced the Pontiac Aztec. But I see a bright side to my willful ignorance. Disparities in risk perception drive capitalist economies, of which I am a part. Ignorance as a patriotic duty? That’s a discussion I will take up later. Today, I will not talk politics.

If every individual had an identical view on risk, commerce would grind to a halt. Financial exchanges and commodities markets would not exist. Money would not be loaned or invested. And that means no farming, no livestock, no food production. Everyone would be forced to subsist on wild mushrooms and berries. Microwave ovens would be cannibalized to provide scrap metal for roofing.

I offer a simple, though imperfect, explanation for why I won’t voluntarily don a wingsuit, and sprint from a sheer, rocky cliff, arms and fingers extended, with experimental clothing and air pressure differential as my only means to support a safe descent: I can’t tolerate the risk. And, for sure, I lack capacity to deal with a failed outcome.

Risk tolerance is a mushy concept. It’s hard to quantify, and difficult to explain. I’ll just say that risk tolerance relates to feelings and attitudes about uncertainty in the context of attaining a goal. Besides, I’ve promised to keep this article short, and Sigmund Freud, I’m not.

What I do know is that for wingsuit flying, the possible outcomes are binary. I can either live to talk about a thrilling experience that few others have the viscera to try, or through an unfortunate landing, I can become sustenance for coyotes and vultures. My thoughtful decision: nein! Here, my risk tolerance relegates me to watching someone else fly, while I’m solidly plunked in a folding chair, eighty feet from the precipice, cold IPA in hand, faithful hound at my side. I’m OK with that. I can still get an adrenaline rush without needing to be asked whether I have updated and signed my will.

I’ll leave risk tolerance to be dissected in touchy-feely psychology journals. But risk capacity? – well, that’s quantifiable, and it fits nicely in my wheelhouse. Give me a number, and straightaway, I’ll crunch it into a ratio or performance indicator. In business, I can’t easily gauge risk tolerance, but I can certainly calculate whether people or companies have the assets and cash flow to sustain a failed outcome.

“Hey, y’all! Watch this!” I can spot versions of this bravado from a mile away. For example, “One year after its inception, IMSWorkX Inc. expects to grow 300 percent in 2014 because of a key personnel addition and recently introduced production.” A feat that requires spunk, and boundless hope. The company’s president, Shannon Chevier, added, “We started off with a little bit of an installed base, but we’ve increased that dramatically this year and we have huge plans for the coming year.” In this vicinity, I expected her to mention customer and future demand. But no. I had to settle for installed base. Hopeidity. We need this word.

Customers create revenue. So executing huge revenue plans requires more than making tangential references to them. It also requires financial muscle to cover the risk of failure. Something that can’t be assumed, as Richard Harris, CEO of AddThis explained at the Mid-Atlantic Venture Association’s June, 2015 TechBuzz event in Virginia. Harris described a company he worked with which had an operating plan that “relied on one big deal” closing. Hail, Mary! “And what if that doesn’t happen?” Harris asked the company’s senior executive. “We run out of cash at the end of the year.” At least the executive was honest, and didn’t waste time dancing around the answer. The company lost the deal, and suffered a hard landing. High Risk Tolerance with Low Capacity for Failure. This story needs a shorter, less-jargoned title. How about, Hey y’all! Watch This!

Massive layoffs and bankruptcies. These are conspicuous artifacts of incongruity between risk tolerance and risk capacity. Yet, companies often ignore the canary in the coal mine: repeated revenue shortfalls. Which underscores why CXO’s need to soil their A. Testoni shoes, and wade into the sales weeds.

When I asked a related question on several LinkedIn forums recently (“Does your company’s CFO provide input, governance, or guidance over sales lead qualification?”), I received one lonely response: “Please clarify why a CFO would need to provide input, governance, or guidance over sales lead qualification. Do they have any experience in any of those fields?”

Had I substituted the F in CFO for an M, my inbox would have been inundated with adamant opinion and pointed advice. Serendipitously, the solitary answer I received illuminated an important concern: few recognize the connection between financial planning and selling risks.

In fact, the two are intertwined. In 2010, an in-house blog for Rubicon Project, Inc. stated that the company “generates over $100 million in revenue annually” through advertising volume. Beneath the headline MAKING IT RAIN, the company forecast that revenue would “grow to $200 million in 2011.” But in January, 2014, the company’s IPO prospectus “showed just $37.1 million in revenue for 2011 and a net loss of $15.4 million,” according to The Wall Street Journal (Tech Startups Play Numbers Game, June 10 2015). The company’s revenue “surged [in 2014] to $125.3 million, but that was still far below the $200 million number announced by Rubicon in 2010. Rubicon had a net loss of $18.7 million last year.” “Hey y’all! Watch This!” This revenue estimate collided with a rock.

Such disparities create shock and awe. Rubicon Project missed its revenue goal by 82% – an epic planning failure. But I’m not surprised. Marketing and sales executives hoard many crucial decisions that influence revenue risk: How to qualify leads, which pipeline multiplier to use, how much revenue to sell through channel partners, how to guide social media conversations, which sales process to use, how to develop and train the sales force. When shortfalls hit the fan, CXO’s scratch their heads, wondering why so many of their spreadsheet cells are populated with red numbers.

Decisions about how to achieve profits, market share, revenue growth, customer loyalty, and high shareholder returns are rarely compatible. Nor are personal attitudes about risk, which vary from “hey y’all watch this!” to “no freaking way!” So companies must establish a risk appetite framework for revenue operations that guides the nature, types, and levels of risk that the organization is willing to assume. That gives decision makers guidance for discriminating between which risks to accept, and which to reject.

The Wall Street Journal describes a risk appetite framework as “a structured approach to governance, management, measurement, monitoring and control of risk.” (The Benefits of Implementing a Risk Appetite Framework). There are three tiers – risk capacity, risk appetite, and risk limits – represented as an inverted triangle, with risk capacity at the top and risk limits at the bottom. The inferences are clear: a company’s risk appetite should never exceed its capacity to absorb failure. And its self-imposed limits shouldn’t exceed its appetite.

According to the article,

Risk capacity: management’s assessment of the maximum amount of risk that the firm can assume, given factors such as its capital base, liquidity, borrowing capacity and regulatory standing.

Risk appetite: the level and type of risk a firm is able and willing to assume in its exposures and business activities, given its business objectives and obligations to stakeholders.

Risk limits: amounts of acceptable risk—measures and thresholds—related to specific risks, or to specific departments or processes.

Evidence of a company’s risk appetite is found in its culture. Some companies instill a culture of knock-kneed fear. They perennially take cautious baby steps with new initiatives, and flagrantly penalize employees for failing. Others have high risk appetite, encouraging employees to try things that have uncertain outcomes. Most are utterly inconsistent. One company I worked for had a policy of putting any salesperson who made less than 85% of goal on a Performance Improvement Plan (read: in three months, you will be fired). Meanwhile, executives in other departments kept their jobs as they speculatively tinkered with products and programs, and squandered millions of dollars.

In Defining Your Appetite for Risk (Corporate Risk Canada, Spring 2012), Rob Quail provides a low-to-high scale for risk appetite – averse, minimalist, cautious, flexible, and open. Companies can adopt these levels enterprise-wide, departmentally, or for a specific process. The point is, establish a policy. Don’t leave risk acceptance to personal whim.

Quail shares four questions for determining appetite:

1) What is the organization’s overall philosophy toward the achievement of the [revenue] objective?
2) How much uncertainty or volatility is acceptable?
3) When faced with choices, how willing is the organization to select something that puts the objective at risk?
4) How willing is the company to trade off achieving this objective for other objectives?

Richard Barfield of PriceWaterhouseCoopers outlines three measures for risk in an article, Risk Appetite – How Hungry Are You?

Quantitative measures. Companies must connect business plans to risk measurement processes. For example, “appetite for earnings volatility.” These “describe the type and [quantity] of risk the business wants to and is willing to take.”

Qualitative measures. “Recognize that not all risk is measurable but can affect business performance. For example, appetite for business activities outside core competencies.”

Zero tolerance risks: A subset of qualitative measures. Identify the categories of risk to eliminate. For example, regulatory non-compliance or ethics violations.

Keys for success.

1. Risk appetite must support present and future strategy. A company that accepts too little risk will fail as surely as one that accepts too much.

2. To ensure that the right revenue risks are accepted, senior management must be involved in the decisions that are considered most consequential to achieving plan.

3. Risk appetite statements must include clear guidance for discriminating between acceptable and unacceptable risk.

I haven’t met any successful business developers who don’t enjoy an occasional shot of adrenaline. The pang of excitement that comes from the opportunity to master uncertainty. “Hey y’all, watch this!” I’m with you! But please, if you’re wingsuit flying with your revenue plan, get everyone at your company aboard, and make sure you can absorb a hard landing.

This article was part of Navigating Revenue Uncertainty, featured on CustomerThink. To view the original article, please click here.

Teach Your Sales Force Well: Learning from Pay for Performance

As Americans breathlessly awaited release of the Wells Report concerning the New England Patriots football deflation scandal, another one was unfolding. A scandal that didn’t feature star athletes and lascivious double entendres, but one that was more heinous. USA Today reported that “the city of Los Angeles filed a civil lawsuit [May 5th, 2015] against Wells Fargo, alleging that the bank has been looking the other way as its sales people take advantage of customers, including Mexican immigrants, by opening accounts and issuing credit cards without their permission.”

Those aggressive, money-hungry salespeople! They have no scruples!

So easy to point fingers. But if you’re looking for a root cause, search upstream. In the direction of power breakfasts, bespoke suits, and C-Suite MBA’s. There, on the shiny boardroom table, you will find the smoking gun. The alleged chicanery originates from the Wells Fargo business model, aided and abetted by the sales culture and the sales rep pay plan.

According to a press release from LA City Attorney, Mike Feuer, “. . . Wells Fargo’s business model imposed unrealistic sales quotas that, among other things, have driven employees to engage in unlawful activity including opening fee-generating customer accounts and adding unwanted secondary accounts to primary accounts without permission. These practices allegedly have led to significant hardship and financial loss to consumers, including having money withdrawn from customer’s authorized accounts to pay for fees assessed by Wells Fargo on unauthorized accounts and derogatory notes on credit reports when unauthorized fees went unpaid, causing some customers to purchase identity theft protection. Furthermore, the complaint alleges that Wells Fargo failed to properly inform customers of misuse of their personal information and failed to refund unauthorized fees.”

The inspirational chant, sell, sell, sell! just took on an appallingly noxious odor. “The result is that Wells Fargo has generated a virtual fee-generating machine, through which its customers are harmed, its employees take the blame, and Wells Fargo reaps the profit,” according to the lawsuit. A wearily-familiar story line: executives at a monolithic corporation become enriched at the expense of customers and employees. Theft, on an efficient assembly line where the workers have white collars. Rube Goldberg, if he were alive today, would have struggled to draw an amusing caricature.

Wells Fargo blamed the bad tactics on a few rogue employees, and claimed the offenders were fired or disciplined. But a former Wells Fargo rep, Rita Murillo, tells a different story: “We were constantly told we would end up working for McDonald’s . . . If we did not make the sales quotas, we had to stay for what felt like after-school detention, or report to a call session on Saturdays.” Ms. Murillo, a Florida branch manager, resigned from the company.

For just a moment, set aside hype from companies espousing their keen commitment to doing the right things for their customers. Ms. Murillo’s comments paint a seamier, often unnoticed picture. We’re reminded that employers can use performance pay plans to enforce practices that are anything but customer-centric. Arm wrenching communication, delivered via the paycheck. For example, “Above all, we expect you to make your number!” Go ahead – try to find nine words that inject more risk into the customer experience, with the possible exception of please hold, your call is very important to us.

Take a manic focus on revenue or market-share growth, add a hefty portion of variable comp into the sales pay-package, and the result compares to tossing battery acid on customer relationships. Back in 2013, Scott Reckard, reporter for the Los Angeles Times, wrote a prescient article, Wells Fargo’s Pressure Cooker Sales Culture Comes at a Cost. “To meet quotas, [Wells Fargo] employees have opened unneeded accounts for customers, ordered credit cards without customers’ permission and forged client signatures on paperwork. Some employees begged family members to open ghost accounts.” Show me repeated sales misbehavior, and I’ll show you a pay plan that influenced and rewarded it.

On the flip side of the Wells Fargo case is Best Buy, which in 1989, famously unleashed a novel pay plan for its sales staff that helped crush archrival Circuit City. Acting on research that revealed consumer distaste for high pressure sales techniques, Best Buy eliminated revenue-based commissions. The Wall Street Journal reported in 2009 (Best Buy Confronts Newer Nemesis) that Best Buy CEO-designate Brian Dunn “opposed [Best Buy’s] 1989 decision to do away with commissioned sales in favor of salaried staff, which was widely opposed by sales workers who feared losing income. He now concedes it was the most important shift in company history, lowering worker costs, and changing the core model of electronics retailing. Best Buy expanded across the US, and Circuit City eventually followed by eliminating sales commissions.”

Two retail companies with two points of view for motivating, managing, and paying the sales force. And the disparity in outcomes could not be any starker: one company suffering an indelible stain on its reputation and brand, the other vanquishing a formidable competitor and achieving strategic success.

Sales compensation rarely makes it to annals of business history, but it has provided powerful muscle for executing strategy. One reason that many companies routinely tinker with sales rep pay plans. “85% of companies will change their sales compensation plan this year,” wrote Andris Zoltners, a pioneer in sales force analytics, in a Harvard Business Review article, Getting Beyond Show Me the Money (April, 2015). “Though it’s only one driver, changing a compensation plan is relatively easy, and it can get quick results. It’s also an area where there’s always room for improvement – it’s hard to get right. When you create a plan, it’s almost impossible not to overpay some people and underpay others.” The rep at your former company who never worked very hard, but was consistently crowned “top producer?” Overpaid. You don’t need to mention any names.

Most sales workers today are paid for performance, with revenue attainment nearly ubiquitous in calculating compensation. Some reps receive full commission, others receive a blend of salary plus commission. Put another way, for the majority of salespeople, a component of income is at risk. In sales organizations, the practice has endured for three reasons: 1) output from salespeople is easy to tally, 2) many sales reps work with scant supervision, and variable pay gives managers control over results, and 3) the sales profession attracts people who have a greater tolerance for risk compared to other fields. So, despite Best Buy’s successful groundbreaking pay strategy, pay-for-performance remains solidly anchored in selling.

As Cornell Professor Rob Bloomfield explains in an eBook, What Counts and What Gets Counted – Seeing Organizations through an Accountant’s Eyes, there are four purposes for providing performance-based pay to salespeople and other workers:

1) Motivation. Effective pay-for-performance programs are designed to provide incentives for working harder and working smarter.

2) Communication. The activities and outcomes that are paid for determine where the employee’s effort goes.

3) Risk sharing. When outcomes are not guaranteed, companies can afford to pay when the desired result has been achieved.

4) Screening. Pay structures determine who will apply for a position. A risk-averse individual would not likely consider a position with a high proportion of variable pay.

Done right, pay-for-performance aligns the interests of the employer and employee. But Professor Bloomfield describes the limitations and pitfalls. Performance pay is a simplification of reality, and employers must “decide how much distortion is allowable,” he says. Achieving a revenue goal doesn’t necessarily comport with working harder, working smarter, or even being honest, and ethical. And it doesn’t dependably translate to high customer satisfaction or customer loyalty. Bloomfield cautions that no pay-for-performance system is perfect, and that employers must “choose their poison:” low motivation, high pay, or costly reporting. Improving or optimizing one element sacrifices the others.

Risks lurking in pay-for-performance

1. Misunderstanding the controllability principal. Many of the problems associated with pay-for-performance result from tying employee pay to risks they cannot control. This problem is particularly acute in business development. Salespeople do not influence many significant conditions for quota attainment: product quality, pricing, delivery schedules, economic conditions, information quality, hiring practices. There’s a long, long list. Yet, year after year, millions of reps are asked to “commit to a number.” In 2013, 58% of sales reps achieved quota, according to CSO Insights.

2. Misalignment of incentive intensity. Incentive pay should be proportionate to the control that salespeople have over outcomes. In other words, the greater the risks salespeople assume, the greater the pay reward for achieving desired results. The converse is also true, as Andris Zoltners describes: “In many product categories, if you sell something one year, there’s a high probability you’ll make residual sales the next year without any effort. If a salesperson is paid a commission or bonus for free sales, we call that a ‘hidden salary’,’ since it’s an incentive paid for something that’s nearly automatic.”

3. Unintended consequences. Also known as The Cobra Effect. Companies want to establish and maintain high-value customer relationships. But very often, they measure and reward other outcomes, particularly those that improve short-term results. Presumably, Wells Fargo did not originally intend to exploit and deceive its customers, but their pay system created those results. Ideally, companies should strive for harmony between wanted results, and what employees are paid to achieve.

4. Moral hazard. Imperfect measurements create opacity where the employer cannot distinguish whether a positive outcome results from hard work, skill, luck, or fraud. Whether it’s Wells Fargo, the Atlanta Public Schools, or other organizations, incentive pay also motivates employees to distort measurements – especially when incentive intensity is high (see #2 above).

5. Bad assumptions, including:

• Paying an employee motivates him or her to care about an outcome. In fact, extrinsic rewards such as pay-for-performance can be demotivating. One example comes from an effort to improve reading skills in which school children were offered a Pizza Hut voucher for every book read. The incentive backfired, creating “fat kids who hate to read.”

• Measuring effort improves performance. The person who works 80 hours a week might not serve her clients any better than one works 50 hours a week. An apropos example comes from a Seinfeld episode, in which George Costanza devises a scheme to get a promotion by leaving his car in the parking lot at Yankee Stadium, where he works. He receives the promotion because his boss thinks he is getting to work earlier and staying later than his co-workers, but his plan fails when his incompetency is exposed.

6. Flawed proxies. “Does what gets counted count?” asks Professor Bloomfield. For example, in education, grade point average (GPA) serves as a proxy for subject mastery and knowledge retention. There are gobs of examples in customer service and business development. Those mistaken causal links between output (e.g. number of service calls handled) and outcome (e.g. customer satisfaction scores). Or in sales, prospecting calls made (output), and quota attainment (outcome). “If you’re not measuring it, you’re not managing it!” So, companies start measuring away, forgetting that, in many instances, the data they collect has weak, or non-existent, connection to what matters.

“I don’t care how you make your number, as long as you make it.” Verbatim, from my District Sales Manager in the mid-‘90’s. His straightforward statement belies the difficult conundrum many companies face when paying salespeople on performance. When you can’t easily measure how hard or smart people are working, you must calculate pay on outcomes such as revenue achievement. That confusion costs companies through higher commission payouts, and in sales force churn when income doesn’t pan out as expected.

Pay-for-performance provides a carrot and a stick. The Wells Fargo lawsuit illustrates just how dysfunctional sales behavior becomes when executives are misinformed or misguided on how to use the tools, and when corporate governance has fallen asleep at the controls, or chooses to look the other way. Two questions must continually be asked and answered: how will pay-for-performance programs work for achieving strategy, and how will employees and customers respond?

This article is part of my monthly column, Navigating Revenue Uncertainty, on CustomerThink. To read the original article, please click here.

The Lucrative Black Market for Customer Trust

“Free travel.”

A combination of words that grabs my attention, and stirs my soul. When? . . . How? . . . I’m thinking Machu Pichu! The Galapagos! High adventure, or a cheap way to satisfy an obligatory visit to a friend or relative. Sign me up!

A Fly Delta Facebook Event promises two free tickets on Delta by joining a fan page. All you have to do is invite 300 people, add a comment on the fan page, and click a box labeled “confirm tickets.” Alas, at 173 Friends, my community of Facebook acquaintances is so paltry, it will be difficult to capture this coveted prize. Not without me having to get a whole lot friendlier. Fat chance! Besides, the final statement in the offer makes me skittish: “After successful participation of an offer, your download will begin automatically.”

If that enigmatic sentence doesn’t pique your fraud antennae, maybe the name of the fan page will: Delta Air. All part of a choreographed online scam, according to the website Hoax-slayer.

In March, 2015, a similar Facebook scam took off, this one riding on the Qantas Airlines brand:

Today we at Qantas Australia are proud that we have seated over 3 Million passengers since January 1, 2015! So to celebrate this record setting accomplishment we will be giving out FREE first class flights for the rest of this year! That’s an entire year of FREE flights! To win, simply complete the step’s below. [sic]

A persuasive ploy that my finicky high school English teacher, Mrs. Gimmelblatz, would have immediately dismissed. “A grammatical catastrophe!” as she often exclaimed. But in less than 24 hours, this shoddy ruse hijacked over 130,000 Facebook Likes, and more than 153,000 shares – a runaway success by any marketing measure. If only it weren’t fraudulent. The imposter pages were shut down, but not before damage was done.

Expect to see more imposters. “The intention of these scammer like-farmers is to increase the value of the bogus Facebook pages they create so that they can be sold on the black market to other scammers and/or used to market dubious products and services, and distribute further scams. The more likes a page has, the more resale and marketing value it commands,” said Fraudsters know that customer trust is highly fungible, and the black market is thriving.

Many scammers assume that consumers don’t pay close attention to the intricate branding and product details that designers, marketers and trademark attorneys obsess over. Delta Air Lines uses Delta as its official name, not Delta Air. Qantas doesn’t embellish its brand name with the company’s country of origin. A kangaroo, the proud centerpiece of its red logo, provides graphic confirmation. “One of the ways firms signal their integrity is branding; it makes little sense to invest vast sums in building a distinct reputation only to allow that reputation to be besmirched by fraud,” William K. Black wrote in an article, How Trust is Abused in Free Markets: Enron’s Crooked ‘E’.

Today, fraud can be astonishingly easy to pull off. Why commit messier crimes when you can just cut and paste a logo, or, if you’re working from inside, just use the one printed on your business card? And nailing the impostors is like a legal version of whack-a-mole. One manufacturer, Saddleback Bags, went the other way on fraud protection, taking a novel if-you-can’t-beat-them-join-them approach. The company’s YouTube video has the ostensible purpose of teaching people how to produce a knock-off of one of its leather bags.

Fraud techniques are often learned from others, and they are easily shared. An insight that Edwin H. Sutherland gave the world in 1939, when he coined the term “white collar crime.” He deserves credit for bravery. At the time, the notion that wealthy aristocrats could be criminally corrupt was as heretic as Galileo’s heliocentricism. And today, there’s no better channel for incubating and spreading white-collar fraud than social media. Whether committed externally or internally, fraud has five characteristics:

1. It works by mimicking an existing signal (e.g. brand name, product design, marketing message, or other communication)
2. It exploits trust
3. It relies on an imbalance of information that favors the party committing the fraud
4. It provides the perpetrator a direct or indirect financial benefit
5. It erodes the value of corporate brand assets, and present and future revenue streams

So while companies vigorously play whack-a-mole to thwart outside brand imposters, many are less aggressive about protecting against internal fraud. “Insiders cause the vast majority of theft losses,” according to Black. And, in a recent review of regulatory filings The Wall Street Journal conducted, “more than 300 companies, with a combined market value of more than $450 billion [maintain] internal-control guidelines that were written more than two decades ago.” In fact, The Wall Street Journal reported that “more than 180 companies disclosed ‘material weaknesses’ in their internal controls in 2013 – the latest year for which data were available – an 11% increase from the prior year, according to data tracker Audit Analytics.” (For further information on this topic, please see the updated 2013 COSO framework for fraud risk assessments.)

Absent adequate corporate governance, inside fraud makes travel fakery and similar scams seem like chump change. In March, 2015, over 200,000 protesters took to the streets of Sao Paolo, Brazil to protest billions of dollars that the national energy company, BNP Paribas, stole from consumers, and funneled to corrupt government officials. That’s about the same number of people involved in the historic August 28, 1963 civil rights march on Washington.

Fraud doesn’t spontaneously ignite. Companies must first understand the combination of circumstances that creates fraud before they can effectively fight it. The Fraud Triangle, described by Donald Cressey in a paper titled, Other People’s Money: A Study in the Social Psychology of Embezzlement provides three contributing forces:

1. Financial pressure, or other motivation to steal
2. Opportunity to engage in deceit
3. Rationalization for why it’s acceptable

While companies often can’t control or reduce motivation to commit fraud, they can reduce their risks by decreasing opportunities for abuse, and by monitoring its symptoms:

1. Accounting anomalies – including irregular or missing invoices, an unusually high number of voided transactions, GL journal entries without any supporting documentation, account details that don’t reconcile to the General Ledger, back-dated or post-dated transactions, unexplained variances between tax returns and the General Ledger, excessive number of late payment penalties from vendors

2. Weak internal controls – including missing documentation, no separation between accounting and audit functions, evidence of frequent overrides of transaction procedures, lack of authorization for transactions, lack of integration between accounting and information systems, lack of accounting oversight on departmental transactions, lack of internal conformity on records retention, inadequate protection for valuable assets such as intellectual property and product designs

3. Analytical anomalies – including ratios that are suddenly inconsistent with historical patterns, (e.g. increases in inventory accompanied by a decrease in Payables and/or carrying costs, increases in receivables accompanied by a decrease in bad debt expense), ratios that don’t make sense, excessive Accounts Payable late charges, excessive credit card charges

4. Lifestyle and behavior – an employee who has unusually expensive jewelry, clothing or cars, an employee who rarely uses direct eye contact. In a 2003 scandal at the Washington, DC Teacher’s Union, prosecutors said that union funds were used for “to buy tickets to sporting and entertainment events, plus luxury items including clothing, electronics and art.”

Many executives in smaller companies believe they are immune the risks of stolen trust. “We’re not a very compelling a target,” some tell me. But then I remind them that everyday email fraud flourishes through the same techniques. Who hasn’t received at least one email with a friend or colleague’s name as the “sender,” that contains a short, cryptic message like “You gotta see this!!!” followed by a squirrely-looking weblink? Trust in someone’s good name, exploited through social media. It’s been going on ever since the ‘90’s.

“A generation or two ago, strategic risks were largely confined to anticipating competitors’ next moves and focusing on solutions that could beat them at the same game. Financial risks were hinged on the strength of the US economy and banks’ credit capacity. There were no cyber-threats, no data breaches, fewer regulatory impediments and very short supply chains,” wrote Russ Banham in an article, Emerging Risk: Managing Threats in an Evolving Business World.

All true. And it was a lot less common – and less rewarding – to steal an asset like customer trust, and sell it on the black market.

Can Your Sales Contracts Withstand Misfortune, Mishandling and Mistake?

By Andrew Rudin and Aileen A. Pisciotta, Esq.

For many sales practitioners, Legal has earned a reputation as the Sales Prevention Department. “Look – to close this deal, the last thing we want to do is get lawyers involved . . .”

As you will see, it should be the first thing.

The mere mention of “Legal” causes business developers to break into a cold, clammy sweat. Images of lengthy contracts and forms, chock full of fine print. Paragraphs saturated with intimidating words like indemnities, liquidated damages, limitations of liability and force majeure. Recollections of prospects on the delicate cusp of buying, becoming irreversibly baffled and skittish. Purchase delays, followed by more delays. Oh, the agony!

The Legal Department plays a crucial role in making B2B sales transactions successful. As fanatical as you or your company are when it comes to ensuring quality or having a state-of-the-art product, as meticulous as you are about being transparent and following through on promises, there are still many uncertainties. Things go wrong between vendors and customers. [Stuff] happens. Misunderstandings occur. Products don’t work according to specification. Occasionally, customers believe they have been misled. Same for vendors. When these situations happen, the problems can escalate into contentious litigation – even when they might seem minor or trivial. “But I thought . . .” – an ominous phrase that frequently occurs at the leading edge of customer relationship catastrophes. A preamble that most of us would rather not hear.

Salespeople have a significant stake in every transaction, called compensation at risk. And that stake can be protected by legal review. But the animus Sales often directs toward Legal adds to the risk by inviting customer relationship complications that can spiral out of control. So, before anyone signs on the dotted line, remember that legal review can be a life saver, or at least a commission saver.

When legal mistakes are big, careers are jeopardized. You may have to pack up your desk. Or your entire company. Here’s the problem: how can you ensure that a deal closes on terms that preserve the expected revenue and profit? Put another way, how can you prevent transactions from unraveling, and discovering that revenue and commissions you thought you had in the bank have, instead, evaporated?

Each of the following examples illustrate how a seemingly-profitable deal can be undone by sloppy contracting:

1. A sales representative for a telecommunications company used his customer’s purchase order template when executing a large order, not realizing that it incorporated the customer’s contract terms. Those terms obligated his company to compensate the customer, a financial services company, for lost revenue and profits (otherwise referred to as indirect or consequential damages) in the event of a service interruption. The terms and conditions that the two parties had painstakingly negotiated prior to purchase limited the vendor’s liability to a credit of the monthly recurring charges for the period of the interruption. But the customer’s terms embedded in the purchase order template included an “Entire Agreement” clause, precluding evidence of any agreements outside of those terms. Subsequently, a bug in the vendor’s software caused a catastrophic failure of the telecommunications system. The telecommunications company will owe its customer consequential damages for the failure.

Misfortune: The customer’s terms embedded in the purchase order template control the transaction, and the separately negotiated limitation of liability is irrelevant. Consequently, the telecommunications company will not only lose the recurring charges for the three days of interrupted service, but will be liable for the customer’s consequential damages for its loss of financial services revenue over the same period.

2. Carlos Quinones, a sales rep for MegaCorp, needed a $200,000 order to make his quarterly bonus level. On the last day of the quarter, Carlos emailed his largest customer an offer for the sale of his company’s widgets at a price that would put him over the top. His email specified that the widgets would be delivered FOB Origin (making the customer is responsible for all transport and insurance costs). The customer responded by email accepting the products and price, but countering with delivery FOB Destination, which made MegaCorp responsible. Anxious to make his bonus, Carlos hurriedly entered the order for same day shipment, but failed to specify the modified shipping terms, assuming that he and his customer would “work out the details” later.

Misunderstanding: Unaware that he had actually “accepted” the counter-offer delivery terms, Carlos committed his company to terms of the contract that were not what he intended. He exposed his company to greater risk and himself to a loss of commissions in the event his company cannot take the risk, or otherwise breaches the enforceable terms of the agreement.

3. Disruptacorp sold a CRM system to Company X. Disruptacorp made no explicit promises about the results Company X would achieve, but in the meetings leading up to the purchase, the sales rep repeatedly claimed that Company X would “improve its effectiveness.” Disruptacorp’s standard contract did not include an exclusion of implied warranties, including warranties of fitness for a particular purpose. After just three months, Company X became disappointed with the product, pulled the plug on the project, and sued for damages. Company X argued that Disruptacorp breached its implied obligation to ensure that the CRM system was suited to Company X’s specific requirements.

Mistake: Legal review would have ensured that implied warranties were excluded. Without the exclusion, Disruptacorp is liable for promises they did not realize they had made.

These cases illustrate legal issues that every sales executive needs to know: are the sales subject to an enforceable contract? If so, are you certain that all of the terms of that contract best serve your interests, or have you actually agreed to terms that better serve the other party’s interests? Have you successfully included all terms necessary to protect your interests within the “four corners,” or confines, of the contract, or can the other party produce evidence of preliminary discussions or implied terms that expose you to substantial liability? Finally, does the contract give you the recourse you need to collect from a customer that doesn’t pay, or that terminates early?

Each of these issues bears on a most important consideration for any company: cash flow. When trading partners have contractual difficulties, payments are commonly delayed, shunting receivables off into distant aging periods. Over-aged receivables eventually must be written off as bad debts. As any CFO will attest, when cash flow problems are especially large, the results can be strategically catastrophic.

Anytime a customer defaults on payment, the seller may be between a rock and a hard place, having to choose between foregoing payments, or incurring substantial legal fees to litigate the claim. In addition, when invoices are unpaid, CFO’s have little alternative to reversing revenue transactions, and asking sales management claw back commissions. When resolving these issues, it’s never good for sales morale when you’re continually stuck vetting the “least-worst” choice.

As with sports, the best defense is a good offense. That means training your sales force to get more finicky about sales terms, and to appreciate that close attention to contractual legal issues up front is the most effective way to lock in revenue from the sales that everyone worked so hard to close. “We won the Jackson account! We’re celebrating this Friday in the main conference room!” But without good contracts with effective recourse, sales revenue can evaporate. To ensure your bacchanal doesn’t turn into a post-mortem, make time to have legal counsel help cover the following with everyone on your business development team:

1. Have an enforceable contract.

  • Be sure there has been clear offer and acceptance of specific commercial terms.
  • Include an “Entire Agreement” clause to confine the agreement to the “4 corners” of the written contract, and preclude the other party from relying upon prior notes, phone calls or emails to contradict the terms of the written contract.
  • Be sure the person who signs the contract (signatory) has authority to bind his or her company to a promise.
  • If you rely exclusively upon terms and conditions posted on your website, be sure to require the other party to “click through” and accept, or provide evidence of affirmative assent, otherwise the digital terms may not be binding.

2. Have the right contract.

  • If the other party’s document is used, make sure you have thoroughly reviewed it and understand the terms you are agreeing to.
  • Be sure all important terms are addressed, otherwise, the law may provide “implied” terms, including facts required for a deal to be reasonable such as rates, timeframes or specific preconditions; or terms implied by law such as warranties of fitness for a particular purpose, reasonable notice requirements or duties of cooperation.
  • If purchase orders or other ordering documents refer to terms and conditions in another document or posted on a website, be sure to review them because they may be binding on you – even if you believe you have negotiated other terms.

3. Limit your liabilities.

  • Clearly circumscribe your warranties and effectively exclude any implied warranties that you don’t intend to provide. Be especially careful about implied warranties of non-infringement of intellectual property and, where possible, provide alternative remedies for infringement such as the right to substitute a non-infringing product.
  • Limit the possible ways in which the other party can argue that you have breached the contract. Include adequate periods for notice of any breach and the opportunity to cure the breach before the other party can terminate the agreement or sue for damages.
  • If possible, include a dollar limit for direct damages or include a liquidated damages clause for specific breaches. Be sure to exclude or limit both parties’ rights to claim consequential damages.
  • Limit indemnities to narrowly defined third party claims and avoid indemnities for direct claims by the other party.
  • Be careful to pass through to your customer any penalties that you have to pay to your underlying suppliers.
  • Include a “force majeure” clause to excuse non-performance or delay in the event of disasters beyond your reasonable control.

4. Have adequate recourse if the other party breaches.

  • Be sure that you have the right to mitigate your damages by such actions as suspending or terminating service, recovering possession of goods, or off-setting your costs against amounts you may owe to the other party.,
  • Include effective penalties for non-payment such as requiring pre-payments or deposits, late payment penalties and the right to recover collection costs and legal fees.

5. Provide for least-cost dispute resolution procedures.

  • I nclude your choice of law and venue and waiver of jury trial if appropriate, and consider requiring mediation before litigation or arbitration. Make provisions to require that claims that fit within “small claims” limits can be resolved in the most expeditious proceedings
  • Be aware that many jurisdictions will not award attorneys’ fees in litigation unless the contract is crystal clear about the parties’ agreement on the subject.

Consulting your in-house counsel or trusted legal advisor, maintaining a good set of contracts, and ensuring that your sales force is informed about your legal obligations and responsibilities are indispensable for protecting your revenue stream. These steps will help prevent transactions you thought you had in the bag from going sour, and will give you effective recourse if they do.

This article was co-written by Aileen A. Pisciotta, Esq. of Executive Counsel PLC. She can be contacted at apisciotta (at) exec-counsel (dot) com.

Note: This article is offered only for general informational and educational purposes. It is not offered as a comprehensive review of the issues, and does not constitute legal advice or a legal opinion. In any specific contractual or commercial transactional issues you should seek the advice of a qualified attorney.

This article was first published on CustomerThink. To view the original article, please click here.

This article first published on CustomerThink. To view the original article, please click here.

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