Category Archives: Sales strategy

Should Inmates Run the Biz-Dev Asylum? The Case for Stronger Sales Governance

“I don’t care how you make your number, as long as you make it,” my district sales manager told me many years ago. Nobody accomplished a Big Hairy Audacious Goal while stressing over boundaries. I know how the West was won.

But my manager should have cared. Achieving a revenue target entangles many different behaviors. Some are laudable, like agility, tenacity, assertiveness, customer focus, and good personal hygiene. But others can be manipulative, unethical, or illegal. When conditions are ripe, bad behaviors spawn and fester. Occasionally, they are exposed, like a colony of voracious termites found under a fallen tree trunk that just rolled from its dark, earthy foundation. In June, 2016, Volkswagen agreed to pay $14.7 billion to settle claims resulting from its sales deceit. A mondo penalty for not caring how a number is made.

Volkswagen’s dishonesty was propagated through modern software technology, using flowcharts, decision boxes, algorithms, code, and computer chips. But other techniques for juicing the top line have existed since the invention of accounting records. As Karen Berman and Joe Knight wrote in their book, Financial Intelligence, “Revenue recognition is a common arena for financial fraud . . . the most common source of accounting fraud has been and probably always will be in that top line: Sales.” Channel stuffing and bill-and-hold. These crafty techniques have vaulted thousands of sales reps and managers into bonus-land. You won’t learn about them on Etsy.

I can’t fault my boss for being laissez faire. His attitude reflected that of his boss, his boss’s boss, and every boss all the way to the C-Suite, where information technology converts biz-dev complexity into integers. A process that cleanly extracts ethical messiness and other biz-dev slop, leaving executives room to “focus on the numbers.” Message to sales force: as long as revenue meets expectation, what happens in Sales can stay in Sales. “If I told you all that went down It would burn off both your ears.” No thanks. I’ll stick to analyzing my spreadsheets.

Corporate boards, beware. “The responsibility of the board to prevent scandals is more important than the responsibility to clean up the mess once it has emerged. Here most boards are still at the starting gate,” wrote Kirk O. Hanson in a 2014 article, Five Ethical Responsibilities of Corporate Boards.

It’s a global problem. In June, 2016, IndianExpress reported that “poor customer service practices of [Indian] banks have come under fire from the Reserve Bank of India (RBI). Despite the banking regulator putting in place Codes of Conduct and Charter of Customer Rights, the RBI has found that banks observed the code ‘more in breach than in practice,’ raising the possibility of a regulatory intervention.”

“We have taken cognizance of the fact that there has been mis-selling in third party products. We are going to take it very seriously. The banks should review how it is being done and be very careful that 75-year-old people should not be sold wrong products simply because salesmen require bonuses or compensation. It is something that we will undertake careful review of and if necessary take action wherever warranted,” said RBI Governor Raghuram Rajan in June, 2016. He could not have expressed this ugly reality in a more genteel way.

His statement points to an even darker story. Too often, companies don’t bother to govern the internal machinery that drives their revenue, leaving it up to the inmates to run the asylum. “You made goal this quarter. Keep doing what you’re doing.” Sales and selling has traditionally been a black box to the rest of a corporation, and many senior executives prefer to remain unknowing about what happens within the guts of its raucous machinery, and what goes on outside, where prospects are “engaged” deals are “closed.”

Ethical principles frequently clash with demands for quota attainment, and in the absence of governance, it’s not always clear or predictable which actions and outcomes will prevail. One thing is certain: when others don’t examine the black box’s innards, the likelihood of harming employees, customers, suppliers and shareholders increases substantially. As Mr. Rajan knows, bad sales ethics break customer trust, poison a company’s brand, undermine shareholder value, and corrode economies. Sounds like a governance problem to me.

What is governance? Corporate governance provides “the structure for determining organizational objectives and monitoring performance to ensure that objectives are attained,” according to the Organization for Economic Cooperation and Development’s 1999 publication, OECD Principles for Corporate Governance. “The OECD emphasized that ‘there is no single model of good corporate governance,’ but it noted that in many countries corporate governance is vested in a supervisory board that is responsible for protecting the rights of shareholders and other stakeholders (employees, customers, creditors, and so on). The board, in turn, works with a senior management team to implement governance principles that ensure the effectiveness of organizational processes,” wrote Peter Weill and Jeanne Ross in their book, IT Governance. Their ideas apply equally to governing sales.

A 2008 CapGemini Survey shared that “all sales executives stated that Sales Governance will become more important in the future. In addition, 86% of the Sales Executives anticipate their group management to put more focus on questions related to Sales Governance the coming three years.” The study covered 42 companies in Norway, Sweden, and Finland, and defines sales governance as “the method used by management to drive the sales organization towards effectiveness and high performance and to promote a desired sales behavior.” The study’s authors represent sales performance in context – specifically, in relation to influence from competitors, customers, organizational culture, corporate strategy. So far, so good.

The study explains that “Sales Management is the core element of the Sales Governance Framework. It entails both a strategic and an operational level. At the strategic level of Sales Management, the sales strategy is aligned with the corporate strategy and short¬-term and long¬-term business objectives are defined. At the operational level, the activity plan is implemented and managed as required. Cross-functional co¬operation is a pre-requisite for achieving internal strategy alignment and operational efficiency. . . Sales Governance enables best practice identification and implementation, and ensures an adequate sales behavior.”

Given CapGemini’s inclusion of a method used by management in its definition of governance, there’s little surprise that “Sales Executives saw driving sales productivity and reducing non¬-value adding time” among the major benefits achieved from undertaking the program. Unfortunately, promoting adequate sales behavior (whatever that means) and driving sales productivity do nothing to protect companies and their customers from unethical and illegal activity, or its consequences. In fact, they might exacerbate the problems. When juxtaposed to the OECD’s governance standard of protecting the rights of shareholders, employees, customers, and creditors, I call CapGemini Governance-lite.

Although CapGemini addresses one important component of corporate risk, sales readiness, its governance model falls pathetically short for deeper risks. Using this model, the unethical practices in 2015 of GM, VW, Takata, Peanut Corporation of America, Wells Fargo, Medtronic, and many others would not have been thwarted. Sales organizations can be highly productive and efficient while institutionalizing seamy practices. “The dashboards look peachy! Keep doing what you’re doing . . .”

The case for board-level involvement in sales governance. Today, selling abuses make international headlines, and the case for board involvement in sales governance could not be stronger. “Boards must think about risk and strategy,” said Erica Salmon Byrne, Executive Vice President, Governance and Compliance of the Ethisphere Institute, in a webinar titled, Enabling Ethical Leadership: Equipping Your Board to Govern Companies with Integrity.

Ethisphere, which conducts an honoree program for the World’s Most Ethical Companies (WMECs), reported that 90% of its 2016 corporate honorees offer employees its board or a board committee as a conduit for reporting misconduct or raising concerns. “Boards are increasingly interested in measuring and cultivating an ethical corporate culture; 86% of WMECs update the Board on such efforts . . . Not only do WMECs more frequently evaluate their [Ethics and Compliance] programs (61% of honorees conduct annual reviews vs. 27% of non-honorees who annually review), but honorees tend to evaluate their program very broadly,” Ethisphere said in its 2015 report.

The duty of board-level sales governance. The line between board oversight for sales governance and management’s responsibilities can be thin and fuzzy. Board-level sales governance addresses strategic risks extending beyond salesforce productivity and efficiency. Primarily,

1. To ensure sales goals are balanced, and support corporate strategy

2. To ensure business development policies and practices are consistently legal, ethical and fair

3. To protect the customer’s best interests

4. To ensure effective mechanisms exist for identifying and reporting activities or events that threaten the above

Hanson’s Five Ethical Responsibilities of Corporate Boards provides useful guidelines for what boards must know or examine. He wrote:

1. Knowing the health of the company’s ethical culture. Most boards or their audit committees hear pro forma reports on ethics violations and lists of calls to their hotlines. Few know anything about the culture in which these violations arise. Do these behaviors reflect widespread acceptance of improper behavior — or a few bad apples?

2. Evaluating the ethics of the business strategy. Business models and strategies are being junked and reformulated everywhere in our modern economy. New sources of revenue are being sought; radical transformations of manufacturing and delivery systems are being implemented. Sadly, some boards are swept along by management proposals to change the nature of the business without asking critical ethics questions about the strategies.

Most boards have learned to ask whether the company is ready to monitor a China-based supply chain to insure worker safety. But few boards have discussed the ethics of tax inversions, big data mining strategies, or staffing strategies which make family life difficult.

3. Monitoring the real ethics risks in the organization. Every organization manages financial risks, and boards pay close attention to the level of that risk. Few senior managements and even fewer boards evaluate the ethical risk of entering new markets, extending the supply chain to new regions, or putting extreme performance pressure on a sales force that is prone to shortcuts . . . Boards are charged with oversight over the adequacy of this ethics risk assessment.

4. Monitoring the ethical behavior of the leadership team. No decisions are more complex than hiring and firing top executives. It is tough enough to find a prospect who has the skills needed to execute the company’s strategy for the next five years.

5. Verifying that the elements of the ethics and compliance system are strong. The Federal Sentencing Guidelines list seven to 10 elements of an ‘adequate’ ethics and compliance management system.

For sales governance, Boards should have access to, and regularly review the following:

• Sales Code of Conduct
• Corporate compliance and ethics policies
• Ethics training program or curriculum
• Misconduct reporting system
• The investigation process

In addition, boards should ensure that employees who report misconduct understand their legal rights, and have appropriate protection. Few people will want to report misconduct when companies exert draconian penalties on those who have voiced concerns.

“Make your number any way you can!” Right now, millions of sales reps operate under this heavy, boundary-free instruction. How will they behave? Which strategies and tactics will they use on their prospects and customers? What outcomes will occur? Corporate boards should care, and get involved.

How to Make Invisible Value Visible

And now for my next act . . .  in just nine words, I will transform a sack of brown beans into an aspiration.

“It’s not a cup of coffee, it’s a lifestyle.”

Go me! Try that with artificial intelligence! Over centuries of trade, we marketers have not only mastered principles of supply and demand, but how to craft a killer product pitch. “This obsidian buffalo hide scraper is unlike any hide scraper you’ve ever used!” No doubt a speil familiar to our ancient ancestors.

Our cleverness aims at avoiding a persistent fate that has existed since the dawn of commerce: getting dragged into the Abyss of Sameness. An omnipresent danger, even today. My perfunctory online research provides a glimpse into our fear: Products are becoming commodities receives 2,320 search results. Twenty percent more than I forgot my wife’s birthday, which gets 1,830. Business executives stress over commoditization, and its undesirable accompaniments: low margins, knock-offs, customer churn – and, if you’re a vendor, the dread of hearing, “yeah, everybody sells pretty much the same thing . . .” Please, no!

What’s in the Can? In 1980, I began a job managing IT for Graphic Fine Color (GFC), a printing ink manufacturer. If you’re not bowled over with intrigue, you’re not alone. But you also have insight about GFC’s marketing problem: ink is pretty blah. What could be more banal than a gloppy liquid that few people see before printing presses spread it onto business forms, brochures, product labels? I’ve tried explaining the product to friends. I’ve broached the subject with strangers. Same result: nobody notices ink, or cares much about it. But, if you’re willing to endure my passionate soliloquy on the topic, you will know by the end there’s nothing ordinary about this ubiquitous substance, or its manufacture.

GFC had a wonderfully interesting story to tell its customers. So in 1982, it created a low-budget marketing piece that I keep on my desk. An 8-page booklet titled, What’s in the Can? End-to-end, the booklet contains about 100 words and about 50 black-and-white photos, and takes less time to read than Goodnight Moon. But given its brevity, What’s in the Can? releases a flood of pent-up value.

Each picture shows employees performing different jobs. Weighing, mixing, milling, labeling, shipping, quality assurance, product development, accounting, and on-site customer support. Even sales! What’s in the Can? doesn’t include chemical formulas. You won’t find any explanatory captions, hype, self-assigned praise or customer testimonials. None are needed. Pride oozes from every photo. Since I left GFC, I have never looked at a five-pound can of Pantone 188 red the same way.

Problem solved. What’s in the Can? made invisible value visible – a plucky achievement for a small, hole-in-the-wall industrial manufacturer back in the marketing stone ages – the time before social media and big data made CMO’s into IT demigods. Fast forward 30 years to 2012, and we hear Facebook’s VP of Engineering, Jay Parikh, opine a similar challenge about value. In a few months, he said, “no one will care that you have 100 petabytes of data in your warehouse.” I know that feel, bro. But don’t worry. If you can make invisible value visible for printing ink, you can do it for anything.

Here are four valuable things that could be concealed inside your product, along with ways some companies have made them visible to customers:

Data and Information: “CIOs, CFOs and, increasingly, CMOs know data has value. The key is figuring out how much value,” wrote Nicole Laskowski in an article, Infonomics Treats Data as a Business Asset. “More than 80% of business executives surveyed by Gartner believe data is on the balance sheet, tucked under other intangible assets.” In fact, this is not true, according to Gartner Analyst Doug Laney. Even companies like Facebook, Google, and Nielsen do not monetize their data anywhere on their financial statements. This is odd, considering that it meets the accounting definition of an asset: a) it can be exchanged for cash, b) it can be owned by an entity, c) it generates probable future benefits (Gartner).

Companies are finding ways to release the value of data through providing it to customers. General Electric offers customers insight about probable failures through embedded sensors in equipment, and advanced analytics. “Even a seemingly low-tech company like John West, a U.K. canned-seafood manufacturer, is figuring out how to use data to enhance the customer experience. To provide visibility into its sustainability practices, the company tags the fish it catches, gathers data on where its fish are caught and then makes that data available to consumers. The consumer may not be purchasing company data outright, but the data is helping sell the product,” according to TechTarget.

On the other hand, the aftermath of the Apple-FBI case has created new caution for application developers, who are “racing to employ a variety of tools that would place customer information beyond the reach of a government-ordered search,” according to a May 25, 2016 Washington Post article, A Shift Away from Big Data. “The trend is a striking reversal of a long-standing article of faith in the data-hungry tech industry, where companies including Google and the latest start-ups have predicated success on the ability to hoover up as much information as possible about consumers . . . The sea change is also becoming evident among early-stage companies that see holding so much data as more of a liability than an asset, given the risk that cybercriminals or government investigators might come knocking.”

Product durability and quality. How many prospective customers think about – let alone know about – components that churn deep within a product? Mostly, buyers just want their purchase to work right out of the box, and they pay fleeting attention to a product’s innards.

Manufacturers have responded through improved engineering quality and materials. Those not only benefit consumer experiences, they save manufacturers significant expense for warranty service and product returns. Some products have become so dependable that consumers are no longer delighted. That creates a sales issue: how to get customers excited when a product simply turns on, runs, moves, behaves, or performs exactly as expected.

Auto makers, for example, have practically eliminated body rust and transmission breakdowns. But today’s buyers aren’t wowed. They’ve moved on, craving amenities like spacious cup holders plentifully scattered throughout the vehicle, Bluetooth connectivity, and nifty interior lighting. By 2025, consumers will even yawn at gas mileage ratings. “Who cares? Every car gets over 54.5.”

Car companies solved this selling issue by repackaging the value of product durability into something that consumers can appreciate without having to pop the hood or crawl underneath a car: plump warranty extensions. Subaru now gives warranties of 5 years or 60,000 miles covering “the engine block and all internal parts, cylinder heads and valve trains, oil pump, oil pan, timing belts or gears and cover, water pump, flywheel, intake and exhaust manifolds, oil seals and gaskets.” The average buyer won’t invest time learning what a flywheel does, where it is, what it looks like, or what it’s made of. They won’t memorize a list of components they won’t likely ever see. But they will latch onto “5 years, 60,000 miles. No extra charge!”

Employee loyalty and rapport with customers. These valuable characteristics are not always immediately visible to prospects. But a software company I worked for leveraged this strength through a seemingly-generous contract term: in the first 12 months of implementation, customers could receive a full refund for the software – which could cost up to $500,000 – if they were dissatisfied for any reason. In fact, company’s risks were ridiculously low. The trick – if you want to call it that – was that in over 10 years, no customer had ever requested a refund.

Large software implementations can be infamous for glitches, gotcha’s hiccups, fits, starts, and bugs. A dollar for every time a newly-installed customer began a conversation with, “But I thought . . .” would buy my family a nice dinner out and theatre tickets. The software company’s ability to bring qualified staff to customer projects – and to retain that staff over full implementations – enabled rapport and trust that customers were loath to break. Prospects loved the satisfaction-or-your-money-back assurance before accepting the uncertainties of a massive project implementation, and it was easy to provide.

Corporate Social Responsibility, honesty, and ethical sourcing. Head to the website of Oboz – short for Outside Bozeman (Montana) – and you will read: “When you buy a pair of Oboz [footwear], we plant one more tree.”

Visit Organic Valley’s website, and you’ll see a lovely photo of wind turbines, adjacent the message: “As farmers, we work closely with the Earth and Mother Nature—and we need to take care of the soil that feeds us. It’s our mission to reach a fully sustainable operation, from our farms to our offices, and through every step of our supply chain.”

Apparel maker Patagonia touts its products as Fair Trade Certified, and shares its commitment to paying its employees a living wage.

Until recently, few cared whether purchases had direct connections to environmental sustainability, employee well-being, or labor practices in a faraway continent. But today, those things matter. In many instances, Corporate Social Responsibility (CSR) has become so intertwined with products, the two can’t be teased apart.

Awareness of CSR skyrocketed in 2013, following two horrific events. First, in April, a factory in Bangladesh suffered a building collapse that killed over 1,100 workers. Americans learned that Walmart had been a major customer for the factory’s output, even though Walmart stated that it was “unaware that their apparel was being made in such factories,” according to an article in The New York Times . Then, Apple faced allegations of child labor, forced overtime, and illegal 66-hour working weeks at factories that were producing its beloved iPhones.

Overnight, knowledge about human suffering made it less fun to diddle on iPhones, or to crow about bargains on kids clothes. People faced a new conundrum, happily absent when supply chains were more opaque: if we choose to be ignorant of the misery others incur to make the things we might want to buy, what does that say about our humanity?

So, it’s not surprising that for some companies, ethical conscientiousness has emerged from its hiding place in the executive suite, and moved into the forefront of sales and marketing. This is a positive development, as it has led executives to voice unequivocal stands on important social issues that matter to employees, customers, and communities.

What’s unclear is how a company’s well-intentioned ethics sway customer buying decisions. For example, a 2012 survey by Perception Research Services International reported that while 76% of consumers indicated that they would be more likely to buy a product bearing a Made in USA label, but “just 21% said they would definitely pay slightly higher prices to buy American-made products.”

The Abyss of Sameness. Commoditization. The perception that products lack differentiation. These conditions represent failure to find and expose hidden value. If executives want to avoid these circumstances, and create value for customers, they will find opportunity by examining “what’s in the can,” and innovating ways to release it.

Six Sales Strategy Mistakes to Avoid in 2016

All sales failures result from executing the wrong strategy, or from executing the right strategy the wrong way.

Companies typically reward success, but along the way, stuff happens. Everyone makes mistakes. Little mistakes are OK—we’ll recover. But big, fat, strategic mistakes—the kind that cost millions, or billions of dollars? No thanks. I’d rather not repeat an error.

For those whose 2016 selling strategies are still percolating, here are some mistakes to avoid:

1. Focus on best practices while waiting to see what the market’s going to do. Remember the proprietary advantages that made you successful in 2015? They will be leapfrogged. While you’re busy best-practicing, your competitors are creating nifty proprietary advantages, and they will use the best ones at every opportunity to win new sales, and keep you off balance.

2. Inhibit organizational learning. I don’t like to hear salespeople whine any more than you do, but a bring-me-solutions-not-problems culture will cause any sales strategy to fail.  Ask salespeople what customers are saying, and what’s working strategy-wise—and what’s not. They’ll tell you. Listen, and take notes. Then share the knowledge.

3. Reward your sales force for producing revenue—but nothing else. A compensation plan based on revenue achievement alone will create unintended results—some of which could undermine customer loyalty. The sales force provides more value to a company than just revenue production – solid customer relationships and competitive intelligence are among them. Whatever you expect and value from your sales force, make sure it’s recognized and rewarded.

4. Accept assumptions without questioning them first. Assumptions are a component of any strategy, but don’t overlook your greatest revenue risks. Ask “which assumptions, if false, will prevent our organization from achieving our strategic goals?” If the worst scenario is also the most likely, consider a new strategy.

5. Disregard your trade-offs. Profit margin versus revenue growth. Proprietary versus open-source. Every strategy requires trading off other ones. Trade-offs are nascent competitive weaknesses. Ask “how will competitors or newcomers to our market exploit the path we didn’t choose?”

6. Design your sales process with your organization at the center. Put your company at the center of your sales process, and nobody will beat a path to your door. Even the most thoughtfully-designed sales process will under-achieve if it doesn’t connect to a buying effort.

Executing the right sales strategy the right way requires accepting the right risks and avoiding others. Mistakes are inevitable. At the end of 2016, you’ll know you’ve been successful if you can say “the mistakes we made were worth it.”

Big Governance Will Thwart the Next Corporate Ethics Disaster

Imagine you are at an airport bar waiting for a long-delayed connecting flight. A villain sidles up to you and offers to buy your next drink. How would you react?

I don’t mean a fictional villain like Norman Bates, Hannibal Lecter, or Nurse Ratched. I mean a real-life corporate scoundrel, dressed for success, jetting his way to Somewhere Important. A Shigehisa Takada, Martin Winterkorn, Ray DeGiorgio, or Michael Pearson.

If identifying white collar villains sends you reaching for the nearest facial recognition app, that’s the point. Unlike popular villains from movies and literature, corporate villains are pretty ordinary. No weird tics, quirks, or evil laughs. Mainly, they’re paunchy and middle-aged. Quintessential bureaucrats, who blend discretely with the polished wood and carpet at the United Club. I can visualize any of these men standing at a conference room lectern, droning about revenue projections, while confidently twirling a laser pointer in a haphazard circle around some inscrutable pie chart. “Questions? No? Well, then – let’s call it a wrap. I’m late for my next meeting.”

Ordinariness partly explains how companies lose their ethical way. Business-as-usual provides a vital smokescreen for unethical shenanigans. The many VW functionaries whose efforts unleashed 11 million CO2-belching vehicles onto the planet’s roadways unwittingly performed this travesty while enduring countless dull operations meetings, prosaic management requests, and bland internal emails. In essence, crafted code words and Euphemisms kept the devious sales machinery humming. Someone should compile a dictionary for 2016. I’ll supply the first entry: “defeat device.”

Still, I’m an optimist. I believe commercial enterprises generally begin life without corruption baked into the strategic plan. So how does corporate deceit begin and become systemic? What makes some organizations fecund for scandals, while others consistently maintain the ethical high road? There are three conditions, but they are not always apparent: High motivation to attain a financial reward, opportunities to cheat, and an individual’s ability rationalize his or her deceit. Elements that Donald Cressey labeled The Fraud Triangle (see Other People’s Money: a Study in the Social Psychology of Embezzlement.)

The first two conditions are near-ubiquitous in the workplace, and I don’t know any human over the age of two incapable of rationalizing a lie. Yet, most employees don’t deliberately drag their companies into scandals. What else? I thought hard about this conundrum, and realized the need to conjure additional reasons. It didn’t take long to find two suspects: unicorns and lack of governance.

Unicorns. In a December, 2015 article, The Creed of Speed, The Economist describes the pressures that Unicorns – startups on steroids – create. “Unicorns can win billion-dollar valuations within a year or two of coming into being. In a few years, they can erode the profits of industries that took many decades to build. Like dorks in awe of the cool kids, the rest of America’s business establishment chastises itself for being too slow.” Yikes! The revenue rug ripped out from under your feet not over years or months, but over crazy-short time frames. As we have learned, “Get creative about driving revenue!” now carries sinister meaning. Around the world right now, Takada automotive airbags, sold with known defects, continue to explode, killing and maiming vehicle occupants.

“If you ask the boss of any big American company what is changing his business, odds are he’ll say speed. Firms are born and die faster, it is widely claimed. Ideas move around the world more quickly. Supply chains bristle to the instant commands of big-data feeds. Customers’ grumbles on Facebook are met with real-time tweaks to products. Some firms are so fast that they can travel into the future: Amazon plans to do ‘anticipatory’ shipping before orders are placed,” according to The Economist. “We are putting a premium on speed,” GE CEO Jeff Immelt wrote in his letter to shareholders. IBM CEO Ginny Rometty, echoed his sentiment. “People ask, ‘Is there a silver bullet?’ The silver bullet, you might say is speed, this idea of speed.”

Revenue flows to the nimble and quick. Slow movers are losers. No doubt that deposed VW CEO Martin Winterkorn would adamantly agree – if anyone sought his opinion. Facing rapid upheaval in the automotive market, Winterkorn and his management team discovered an opportunity to juice sales that was too fantastic to ignore. Instead of investing hundreds of millions of Euros in diesel engine development over a long lead time, they could spend a pittance to modify some closeted software, and sell today’s production sehr schnell. Duh! The ROI numbers in Wolfsburg must have soared off the charts faster than a departing Lufthansa jetliner. At the time, the multi-billion dollar costs of government penalties, class-action lawsuits, and widespread customer backlash didn’t make it onto spreadsheets. Oops. “Cheating? No. It’s Event-Induced-Sensor-Reconfiguration. That’s longish, so for marketing purposes, we’re calling it Clean Diesel.”

Lack of governance. When inmates run the asylum, [stuff] happens. Shortly after news of the scandal broke in 2015, Volkswagen CFO Hans Dieter Poetsch told reporters “We are not talking about a one-off mistake, but a whole chain of mistakes that was not interrupted at any point along the line.” Interim Chief Executive Matthias Mueller gave a different spin, saying the investigation had revealed that “information was not shared, it stayed within a small circle of people who were engineers.” Those damn engineers. What do they know about designing systems with integrity? But I like Poetsch’s version, which I’ll rephrase: “No one in authority said, ‘That’s wrong. We will not do that. Period.’” The absence of anyone at VW to stand tough and pull the plug on cheating cost billions of dollars, thousands of jobs, and continues sicken and kill people suffering from respiratory disease. That’s a price no society can afford to pay. And Poetsch’s statement applies not just to VW, but to every high-profile ethics debacle.

Enter, Big Governance. Ethics cases demonstrate that rogue employee behavior presents significant risks for companies. Conduct risk, “the risk that arises as a result of how businesses and employees conduct themselves, particularly in relation to their clients and competitors,” now ranks #2 of the Top 10 largest fears for operational risk practitioners at financial services firms, according to Risk.net, an industry website. That’s ahead of terrorism (#9), IT failure (#8), and regulation (#3). Wow.

When scandals surface, people often ask, “why didn’t anyone speak up?” That’s part of the issue. In many cases, people did speak up. Loudly. But their concerns were crushed. The better question to ask is “why didn’t the company have mechanisms to expose and prevent the problem?” That matter deeply concerns corporate boards across many industries. Governance provides the mechanisms to mitigate ethical risk, by specifying management responsibilities, auditing and oversight, reporting, decision rights and accountability.

Governance doesn’t have to be big, but its rewards almost always are. The purpose of governance is to encourage ethical behavior. Some say that smacks of weak parenting. In today’s get-it-done business environment, encourage seems tepid. But here, it’s the right word. Ensure and guarantee don’t belong. We’re talking about people, not algorithms.

“In most instances, reputational damage is triggered by some other business or operational risks, including risks relating to the quality or safety of the company’s products or services, or illegal, unethical or questionable corporate conduct of which the public was not aware. How boards respond to these risks is critical, particularly with the increased scrutiny being placed on boards by regulators, shareholders and the media,” according to the website of Akin Gump, a law firm.

With governance, boards are the right place to start, but they face knotty challenges. Effective governance must harmonize opposing business demands: ethics, enterprise strategy, business performance goals, regulatory compliance, and the governance mechanisms themselves. That takes time, thick skin, and compromise. Things that are uncommon in the C-Suite – in combination or individually. Governance inevitably requires trade-offs.

Governance oversees decisions consequential to revenue. Decisions that affect a company’s customers, brand or market integrity, competitors, and legal situation. Effective governance requires understanding which objectives oppose one another – e.g. time-to-market versus regulatory compliance, profit margin versus product or service quality, short-term revenue versus long-term customer loyalty – and then to determine how to resolve them. These issues won’t be reconciled overnight. But absent governance, reconciliation gets shoved aside, and the risk of making catastrophic choices skyrockets. Without governance, deviant choices enter the decision space, and roam freely. Except they’re not called deviant, just choices. And sometimes, not even that.

World’s Most Ethical Companies® (WMEC’s). The Ethisphere Institute has developed a rating system to identify and honor companies that excel in: “(1) promoting ethical business standards and practices internally, (2) enabling managers and employees to make good choices, and (3) shaping future industry standards by introducing tomorrow’s best practices today . . . The information collected is not intended to cover all aspects of corporate governance, risk, sustainability, social responsibility, compliance or ethics, but rather it is a comprehensive sampling of definitive criteria of core competencies,” the Ethisphere Institute website states.

Ethisphere’s scoring system considers five factors, and assigns a weight:

Ethics and compliance program 35%
Corporate Citizenship and Responsibility 20%
Culture of Ethics 20%
Governance 15%
Leadership, Innovation, and Reputation 10%

Recently, Ethisphere discovered striking similarities in the ethics practices of the WMEC’s. High percentages of honorees used the following resources:

Code of conduct 95%
Compliance and Ethics Policies 95%
Misconduct reporting system 92%
Communication program 90%
Training curriculum or program 88%
Investigation process 88%
Organizational culture of ethics 82%
Risk assessment process 82%

Most telling, 61% of the WMEC honorees conduct annual reviews of these practices, versus 27% of non-honorees.

Clearly, not every company finds it worthwhile to invest in governance. Objections include:

1. Governance sounds too much like Government.
Rebuttal: none. This is a fair point.

2. Revenue killjoys remind them of the bratty kid who constantly tattled in elementary school.
Rebuttal: For sure. But every tattletale has, at least once, kept a prank from spinning hellishly out of control.

3. Governance can’t be achieved as a one-and-done – it’s ongoing.
Rebuttal: If you adhere to a management-by-magazine approach, this won’t be your thing.

4. There’s no “value add” for customers.
Rebuttal: Ask a VW owner if he or she agrees. “Without that expected fuel efficiency, VW owners of “clean diesel” vehicles will incur lost resale value as high as $5,000 per vehicle. Adding up all the cars affected, that puts the potential loss in the neighborhood of $55 billion.”

Dave Cote, Chairman and CEO of Honeywell, a 2013 WMEC Honoree, said there are three questions he never wants any Honeywell employee to have to face when discussing Honeywell with their family and friends: “Is it true?,” “Did you know?,” and “Have you ever done that?”

Those questions might be the ideal conversational opening for the average-looking person who offered to buy you a drink at the United Club. “Well . . . it’s a long story. But I’ve got time. My flight doesn’t leave for another nine hours . . .”

Are Salespeople Making Good Bets for Your Revenue Pipeline?

Many years ago, New England Life Insurance, now part of MetLife, developed a series of cartoon ads that was witty and terrifying.

Each ad had a formulaic depiction of a person saying the caption, “My life insurance company? New England Life, of course. Why?” The situations varied, but the brilliance was that the reader could see always see an inevitable calamity about to befall the utterly oblivious central character. “Scare the living [bleep] out of people,” someone must have advised the creative director at the agency, “but in a jovial way.” Ha ha.

The vignette I remember best portrays a well-dressed executive in a sleek, all-glass corner office near the top of a skyscraper. He’s seated in a swivel chair chatting on the phone, his feet propped on his desk. Meanwhile, in plain view behind him, an errant half-ton wrecking ball attached to a crane is about to crash through his window. “My life insurance company? New England Life, of course. Why?” Somebody, please! Warn this man!

That visage represents the planning perils that CFO’s and other senior executives face. CFO’s feel confident when projected revenue aligns with targets. But too often, the risks are opaque. Watch out for that wrecking ball! Revenue projections are cleansed of the many uncertainties that lurk throughout the sales funnel. When I recently asked on several LinkedIn forums about whether anyone worked with a CFO who had influence over sales lead qualification practices, a reader question ricocheted back immediately: “Why would a CFO need to be involved in this?” His was the only response.

But it corroborated an observation: In most organizations, CFO’s do not guide the routine revenue bets that salespeople make. How confident can CFO’s be about the efficacy of sales force decisions? How do they know that the risks salespeople accept are ones the company can absorb? For example, one salesperson might have few scruples when accepting new leads: “Hey, if this deal closes, I make a boatload of commission. If not – adios! I was on my way out the door, anyway.” Her colleague might hew to a different risk viewpoint, unwilling to prospect new opportunities in favor of tending his cash cows. The moment those cows cease being reliably productive, he too will probably move on. Other reps, browbeaten by management’s obsession with hitting pipeline targets, might doggedly seek large, but highly uncertain, long-term deals. The pay bonus the company provides them for fattening the revenue pipeline cements the behavior.

Such risks seep covertly into cash planning worksheets, and CFO’s, feet propped on their desks, are sitting on all of it. “Projected Q4 Revenue, Northeast Region.” All the CFO sees is a single-integer aggregation, combining oodles of sales judgements. Smatterings of learned experience and buckets of wild hope – it’s all in the number.

Too much risk in the sales pipeline can create cash planning disasters. So can too little. How do companies manage this yin-yang? How should the most revenue-focused parts of the organization – Finance and Sales – collaborate on managing uncertainty and risk? I asked CFO-novelist Patrick Kelly, an experienced tech executive who has managed several IPO’s, for his thoughts. “Cash flow projections are the CFO’s responsibility,” he told me. In general, “a CFO needs to be involved in the mechanics of a sales funnel, but not in the details of qualification.” In other words, CFO’s need to understand how sales cycles work, how long it takes to close deals, and the percentages of leads that progress through each stage of the sales process, but they don’t need to be involved in the minutia of scoring leads and developing qualifying questions.

Kelly explained why knowledge about sales funnel mechanics is so crucial. “When Sales reports revenue projections to Finance,” he said, “Sales is going to say ‘everything looks great,’ but it’s the CFO’s job to have his own point-of-view,” and to use that perspective for making adjustments. “It’s not uncommon for a CFO to reduce the revenue forecast he or she reports to the board,” he told me. For example, Sales might forecast revenue to a Nigerian subsidiary of a multi-national corporation for the current quarter, but Finance might not include the opportunity for cash planning because the effect of low oil prices on the Nigerian economy could likely cause a purchase delay, or could scuttle the sale altogether. In essence, a CFO can translate what might have been an unanticipated wrecking ball to a cash flow plan into a recognized force against revenue. A force that he or she can possibly manage, especially when it’s anticipated early enough.

But what happens when Finance and Sales work in thick, impenetrable silos, and don’t regularly exchange meaningful information about revenue uncertainty? For example, when I mentioned the disparate criteria that reps within the same company use for accepting sales leads, Kelly acknowledged that a lack of risk standards could be problematic for cash flow planning. But he said that at smaller companies, silos are flimsier, and CFO’s tend to know useful details about individual revenue opportunities. At large companies, however, CFO’s cannot easily monitor the risk profiles for hundreds, or thousands, of pipeline opportunities. While low- and high-risk conditions among a large set of deals generally offset, that doesn’t mean the “average” risk among that group falls within an acceptable range for a CFO planning her company’s revenue flows.

This condition damaged a software company I worked for. The sales pipeline was fat, but customer buying cycles were painfully long, and opportunities did not convert quickly enough to satisfy the company’s ravenous hunger for cash. Finance was starving for money, but the CFO was oblivious to the pipeline risks. All she saw was a plump number on a spreadsheet representing next quarter’s revenue. Based on its cash position, the company had low risk capacity, and it would have been better off motivating the sales force to close lower-revenue deals with shorter cycles.

Sales never got the message. Instead, managers urged reps to hunt for revenue opportunities in the tangled thicket of big, bureaucratic Fortune 500 customers. A perilous high-risk, high-reward strategy for many companies, but disastrous for ones that can’t sustain the investment. In the end, the company laid off most of its sales force, canned its president, and reorganized the remaining management team. The terse press release did not mention anything about pipeline risks, just “Revenue did not meet expectations.” There’s always a back story.

Some companies commit to slogging through long buyer journeys and procurement cycles through maintaining the right capitalization and cost structures. Federal contractors, for example, regularly invest millions of dollars pursuing government sales opportunities that can require many months – even years – to close. If they close. When the stakes are that high, opportunities must undergo a thorough internal risk review before managers can decide whether to compete. One criteria: can the company afford to lose? Without a shared view of risk between Finance and Sales, more CXO’s would unwittingly bet the company. Many do.

Spreadhseet-facing Finance, and Customer-facing Sales – an odd organizational coupling, prone to bickering and personality conflicts. Yet, they must cooperate, because Finance and Sales grapple with the same uncertainties. Notably, how much will customers spend? When will they spend? and how likely are the answers to these two questions? The shared challenge of managing the risks should bring these two entities closer together. But that’s not always easy.

“Companies that embrace enterprise-wide risk management face the daunting task of instilling a risk awareness in a corporate culture focused on other objectives,” Barton, Shenkir, and Walker wrote in their book, Making Enterprise Risk Management Pay Off: How Leading Companies Implement Risk Management. An idea that some executives have put into practice. “To me, running a business is all about managing risk and managing returns, whether on the financial side or the balance sheet side, or running a field operation,” said Unocal CFO Tim Ling. Others agree. “Managers have to make a lot of day-to-day decisions without consulting the higher-ups. If they understand the financial parameters they’re working under, those decisions can be made more quickly and effectively. The company’s performance will be that much stronger,” Karen Berman and Joe Knight wrote in their book, Financial Intelligence.

Risk harmony between Finance and Sales means

1. Communicating the organization’s capacity (appetite) for risk. The CFO establishes this, and he or she is responsible for communicating to Sales which risks are acceptable, and which ones are not. Sales needs this information for its strategic and tactical planning.

2. Identifying and ranking revenue uncertainties based on frequency, probability, and consequence – a collaborative knowledge-sharing effort.

3. Developing strategies and tactics to support cash-flow requirements. Finance and sales must share knowledge about pipeline processes and velocity, sales compensation and incentives, lead qualification practices, and ethical sales governance.

4. Correcting inconsistencies. Companies get into trouble when Sales accepts more risk than the company can absorb, or avoids risks that the company requires to achieve its strategic goals. Similarly, Finance must develop risk mitigation strategies suited for the markets in which the company competes. Put another way, if you can’t run with the big dogs, stay on the porch.

Revenue volatility, the arch-enemy of cash flow planning, comes from risks that have come home to roost. CFO’s see the evidence in actual sales lines spiking and plummeting violently around their more graceful counterparts, planned revenue curves. Closer collaboration between Finance and Sales won’t eliminate the gaps, but it can reduce the area between planned and actual.

Most important, risk collaboration between Finance and Sales will help CFO’s better understand how close wrecking balls are to the cash flow plan, and which direction they are heading.