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On My Honor as a Salesperson. A New Look at Why Sales Ethics Matter

Which risk poses the greatest threat to a company’s market value – Pandemics and natural disasters? Terrorism? Product defects? Patent infringement? Theft of intellectual property? Lack of moral boundaries?

If you answered anything but the last choice, think again. The decimation of market value at Tyco, Worldcom, and Enron – three of the most prominent ethical meltdowns of our time – illustrates what can occur when a company lacks ethical footing. According to Public Citizen’s Congress Watch, the cumulative decline in market capitalization resulting from fraud at these three companies was $136 billion.

The financial impact of Covid-19 on the global stock market may never be fully known. But one thing stands out: unlike most risks, companies have ultimate control over their moral conduct.

Many corporate scandals are hatched in the executive suite and metastasize into the organization. The sales operation is a fecund spot for seeding schemes because it is directly connected with the most watched measurement a company maintains and shares: revenue.

Sales is also the linchpin for the trust between a company and its customers. For example, the Wells Fargo consumer credit card scandal was the consequence of stock-price bonus incentives granted to then-CEO John Stumpf and a cadre of senior executives. To enrich themselves, they usurped customer trust and exploited employees by encumbering them with onerous performance quotas, and followed through by browbeating them into hitting targets that would be attractive to investment analysts. The rationale was that when thresholds were met, analysts would make buy recommendations for Wells Fargo stock, elevating its price. The scheme worked for a while before the business media uncovered the story. In the end, Stumpf was fired over the scandal and his bonuses clawed back or terminated.

Bad ethics can take root elsewhere in the hierarchy. When governance and audit controls are ineffective, they can easily spread, infecting employees, suppliers, channel partners, and customers. In 1998, ethical violations at Prudential Insurance Company’s sales organization became so pervasive that the company’s management eventually estimated its liability from the pending class-action lawsuit at $2 billion. Among the voluminous courtroom testimony from the case was this statement from a Prudential sales rep: “Your judgment gets clouded out in the field when you are pressured to sell, sell, sell.” More than two decades later, sales reps face the same difficulty.

How can harm from unethical behavior be prevented? First, accept that no company is immune from facing ethical dilemmas, and second, understand that there are no guarantees that ethical decisions will somehow prevail. This is especially true for companies proclaiming themselves “customer-focused” or “customer-centric.”

Companies must purposefully and actively reduce the opportunities for unethical behavior to enter an organization. Taking key steps such as developing and communicating a corporate code of conduct, modeling ethical behavior in the C-Suite, implementing strong governance and accountability, and making it safe for employees to speak up without fear of retaliation are vital. Importantly, companies must take prompt and decisive action when incidents are reported.

Still, when it comes to acknowledging the possibility of malfeasance in their organization, many senior executives are dismissive. I often hear, “that type of thing could never happen here,” quickly followed by “we don’t hire those kinds of people,” as if “those kinds of people” are easy to spot in the interview. In fact, in companies large and small in any industry, the potential for making unethical choices always exists. If the risks aren’t acknowledged, understood, and managed, stakeholder harm becomes not only probable, but certain.

One “sales-driven” company I worked for felt immune to ethical risks, and their hubris cost them more than $1 million from a scam that began with one rogue sales employee, “Travis Doe.” Travis was a reseller account manager. He was tall, charismatic, confident. He was good at golf. At sales meetings, Travis could always be found in the center of a group of colleagues, sharing a bawdy new joke, or regaling them with something useful he learned over his long career in computer sales.

Travis’s compensation plan earned him a comfortable six-figure income. But he figured out a way to augment that. Travis began his scheme with a transaction my employer made routine: he established a new reseller account. In this case, Travis gave this one a bogus name, bogus address, and bogus line-of-business. Bogus everything. He even anointed himself CEO – a move that came back to haunt him.

The cleverness of Travis’s scheme came from the fact that resellers received 40% discounts for all IT hardware. When customers and prospects sent requests for quotes or placed orders, Travis circumvented them to his bogus company. In this way, Travis pocketed a healthy margin on every order his bogus company processed. There’s more. In addition to that revenue stream, my employer also paid Travis commission on his “reseller’s” sales because, of course, the bogus company was in Travis’s portfolio.

It took an alert order administrator who spotted a part number anomaly to unravel Travis’s scheme. When she called the “reseller” to explain the problem, she was told, “Our president, Travis Doe, will call you back.” The order administrator reported Travis, and he was quietly fired about a week later.

Travis’s scheme created only losers. A characteristic common to all ethical breakdowns. If Travis’s immediate boss knew about his dishonesty, why didn’t he stop him? If he didn’t know, what excuse could he offer for being ignorant about a scam happening in his own office? You know it’s a bad day when any answer you provide isn’t a good one.

In their desire to move on, many executives at the company looked no further than blaming Travis. “You’re always going to have a ‘bad apple,’ or two,” senior managers somberly told me. A convenient rationalization, but very misleading. Other people, from the CEO down, were culpable. Sales Administration allowed account managers to establish reseller accounts without any oversight. Internal audit didn’t see a glaring opportunity for fraud in the order entry process. Contracts administration had no vetting rigor beyond “can you fog a mirror?” Flush with sales orders, the company blithely looked askance despite ongoing grumbling from staff that large dollar orders were routinely being processed through a “reseller” whose qualifications were murky, at best.

This incident happened before social media platforms became ubiquitous. The total direct cost from Travis’s scheme totaled more than $1 million. But that’s without adding the incalculable cost of broken morale and corroded trust. The company issued no press releases or public explanations. No trade journal carried the story. The cost of this scam got paved flatter than a pancake into company’s Income Statement.

Any discussion of ethics involves drawing boundaries. But drawing boundaries for sales ethics is much easier said than done:

“I’ll sell an early version of my software that isn’t fully tested, but I won’t sell anything that I know doesn’t work.”

“I won’t bring up the fact that I’m missing a key feature, but I won’t lie about its absence.”

“At the end of the quarter, I will commit resources I don’t control so I can win the sale, but I won’t promise my prospective customer anything I know cannot be delivered.”

“I won’t overcharge anyone, but I won’t sell at the lowest possible price, either.”

“I’ll look out for my client’s best interests but only if doing so doesn’t jeopardize my business.”

As author David Quammen writes in Wild Thoughts From Wild Places, “Not every crisp line represents a triumph of ethical clarity.” An individual’s ethical interpretations are rarely constant. Rather, they’re a combination of of a person’s current emotions, situation, values, experience, logic and personality. What makes a practice ethical or not can be difficult to define.

This is why evaluating what’s ethical, what’s the right thing to do, or how to get the right thing done requires having conversations about dilemmas. Unfortunately, that idea is heretic in many sales cultures today, where perceiving things as black or white is often considered a badge of honor. “Never lie!” and “A half-truth is the same as a lie,” were among the opinions readers posted when I asked about resolving ethical dilemmas on LinkedIn sales forum. The problem is, judging actions as “right” and “wrong” discourages conversations about ethics in the first place. Most situations business development professionals encounter are not that clear.

Mitigating ethical risk is a vexing challenge for organizations – particularly those with global operations – because ethical standards must first be defined, documented, communicated and followed. In addition, companies must remember that their employees don’t enter the workplace a tabula rasa. Corporate expectations for ethical conduct will always be interpreted through an individual’s awareness of his or her own values.  Even then, we can only be protected when people have the motivation and resolve to act accordingly.

Companies should embrace ethical dilemmas by fostering a culture for open, candid discussion about them. That means  encouraging salespeople and marketing personnel to identify issues, confront them, and take action before they spiral out of control.

Malfeasance thrives in the eye of the perfect storm 1) high financial incentives for fraud, 2) lax audit controls and governance, and 3) non-integrated processes. We need a tocsin to sound in the boardroom and executive suite. Ethical lapses can destroy the best business plans, corporate and personal reputations, and brand integrity. There are too many opportunistic Travises in the world, and too much value at risk, to ignore the warning signs

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.

CFO-Turned-Writer Patrick Kelly Talks Openly about Technology Start-ups, Sales, and His First Novel, Hill Country Greed

What do you get when you combine a tech startup, a management team ravenously fixated on a goal, an IPO, and a mysterious murder? Well, I won’t spoil things by giving up the answer. You’ll have to read Hill Country Greed, the debut novel by CFO-turned-writer Patrick Kelly. I will offer only one hint: the outcome is not what you think.

Kelly has deep experience in the technology and airline industries. He has served as interim CEO of a $750 million airline, director on two public company boards, and CFO five times for public and private companies. He imaginatively weaves his experiences into the novel, which takes place in Austin, Texas during the high-tech boom between 1999 and 2000.

I caught up with Patrick Kelly this week, and asked him about the characters and situations that inspired his novel, and how CFO’s view marketing and sales:

AR: At the beginning of Hill Country Greed, CFO Joe Robbins, and the head of Marketing, Gwen Raleigh, initially have a rocky working relationship. A vignette involves a rancorous staff meeting in which the two argue about whether the company is wasting its marketing investment, and it’s clear that Gwen isn’t accustomed to having her feet held to the fire. What are the biggest sources of conflict between CFO’s and Sales and Marketing?

Patrick Kelly: Joe is from a button-down old-line company where every dollar is scrutinized. Gwen grew up in a start-up environment where speed is valued more highly than solid controls. Eventually, Joe and Gwen settle their differences and establish a solid working relationship. This should always be the case with the CFO and the Sales and Marketing organization. A good CFO realizes that strong sales are essential to growth and that you have to spend money to make money. At the same time, the head of Sales and Marketing must understand that the sales group is accountable for generating an acceptable return for each dollar of spending. By recognizing each other’s contributions, the CFO and head of Sales and Marketing can establish a winning relationship.

AR: How do you make sure project risk—whether IT, business development, or anything else—matches what the company can absorb financially? In other words, how do CFO’s address the problem of business risks spiraling out of control?

Patrick Kelly: Every business has risk, and to create a truly disruptive business with high growth potential it is essential to assume risk. The biggest mistake I see small companies make is to bet too big on unproven concepts. The innovators of a company sometimes fall in love with their own inventions and become blinded to downside risk. They may be tempted to “bet big” on a new product or service before it has been proven in the marketplace. If the initial test fails this can lead to cash flow problems and an early demise for the business. A strong CFO can help the team decide to manage cash conservatively during the market test phase so that when the product IS finally ready, there are sufficient resources to finance growth.

AR: In your book, head of sales Jack O’Shea tells Joe Robbins, “a good CFO knows that all salespeople are coin operated.” But isn’t everyone, to some degree? And, aren’t millenials and younger salespeople motivated by more than just high income?

Patrick Kelly: I suppose everyone is coin operated to some degree, but it is the sales team, with their fine-tuned sensitivity to what the customer needs, that the company depends on to bring in the revenue. The combination of a good product, a well-designed commission plan, and a strong sales force will result in solid growth for the company. I can’t speak for millenials, but I certainly hope younger salespeople are still motivated by the promise of making money.

AR: I don’t want to give away the plot, but I’ll mention that insider fraud is part of the story. How prevalent do you think fraud is at tech companies, what are the warning signs, and what precautions should executives take to avoid fraud?

Patrick Kelly: Fraud occurs at every company, including tech companies, and most of it goes unnoticed. The most important step executives can take to avoid fraud is to set the right “tone at the top.” The CEO and the rest of the senior team will prevent most fraud from ever occurring by clearly communicating that fraud of any kind is unacceptable and by setting a strong example with their own actions. In addition, the CFO, with strong support from the CEO, must design and implement an effective set of controls to make the commission of fraud more difficult.

AR: Many generalizations have been made about what CFOs think—much of it written by people who aren’t CFOs. Is it possible to generalize? Is there such a thing as a “CFO mindset”?

Patrick Kelly: Yes. In my view adopting a “CFO mindset” means looking at the business in terms of the key drivers of success. For example, some software companies make little or no profit from selling the initial product but generate tons of profit from the maintenance and support services that follow the initial sale. The astute executive team will understand those drivers and ensure that the quality of the maintenance and support services is so high that customers never leave.

AR: Are CFO’s really driven by math and “hard numbers” when vetting business development projects? Or, is it really something else?

Patrick Kelly: CFO’s should carefully evaluate the numbers when vetting business development projects. If they don’t, chances are no one will. However, that doesn’t mean there shouldn’t be dreamers in the company. The R&D team must take into account where the market is headed and create new products that are ahead of those trends. That takes vision and dreams. But by the time the dreams have been fine-tuned into development plans there should be market analysis that supports the investment of capital required to make the dreams a reality.

AR: When prospective vendors pitch to CFO’s, what makes a positive impression—and what doesn’t? Are there any top “deal killers” people should know about?

Patrick Kelly: A lot of vendors pitch me with a product or service that sounds like the “idea of the day.” I immediately reject those pitches. I also dislike miracle cures. Never start a pitch with a line that sounds like, “Wouldn’t you like to double your profit in the next three months?” To impress me, a sale representative must understand my problems. Bring me a product or service that solves a real problem in a unique way, or lowers the cost of the business in a meaningful way, and I’ll take the meeting.

AR: Hill Country Greed takes place in Austin. What do you think of the city as a future tech hub or startup incubator? Will it overtake Silicon Valley?

Patrick Kelly: With its rolling hills, evergreens, and lakes, Austin is a great place to set a murder mystery and a great place for a high-tech company to base its operations. Technology companies have been in Austin for decades, even before Michael Dell began his start-up in the mid-eighties. With affordable housing, zero state income tax, and an abundance of recreational activities, Austin is a magnet for young professionals. In terms of size, we may never overtake Silicon Valley, but then again, Silicon Valley will never boast that it is the Live Music Capital of the World.

As author Tim O’Brien wrote, “A lie, sometimes, can be truer than the truth, which is why fiction gets written.” Whether you’re seeking a fabulous mystery, or an excellent “case study” about technology startups, you’ll find something to like in Hill Country Greed. Try out the first five chapters, free!


Revenue Risk Management Part 2: How a Risk Audit Can Help You Achieve Your Sales Goal

By now, you know your revenue target for 2014. Let’s cut to the chase: will you make it?

If you’re feeling uncertain, you’re not alone. Risks are swirling everywhere, some known, some not. When revenue risks are identified, they’re often labeled pipeline or funnel problems, and shunted off to Sales and Marketing, where they can be managed.

In truth, once revenue risks reach the high-energy, caffeinated world of business development, they’re often handled differently from other risks. Instead of getting managed, revenue risks are just re-distributed. Sales executives accomplish this feat by embedding them into quotas and productivity targets. Then, those are plopped onto the waiting shoulders of the sales and marketing team members. “Risk flows downhill,” to paraphrase a more popular adage.

When actual revenue doesn’t meet goal, management ratchets up the numerical targets for lead generation, “customer touches,” outbound sales calls, and booked appointments. This tactic works until it doesn’t. The many causes for failure can be consolidated into a single term: burn out – a state reached when an employee experiences an epiphany like, “Gee. I could work just as hard somewhere else for way more coin.”

For many companies, dealing with revenue risk channels bucket-loads of corporate spending into bleeding-edge marketing automation, new sales methodologies, and myriad other short-term projects that contain the words social, collaborative, and content. The benefits of all this spending has always been a little mysterious. “Where’s the ROI?”, people love to ask.

When there’s vague understanding of risk, the outcome is a hodge-podge of loosely-joined marketing assets, promotional campaigns, customer data, and software applications.  “We’ve got social media pretty much covered!”, some executives tell me. Sorry, but without comprehensive revenue risk management, a company’s online presence appears more like a biz-dev Maginot line.

More marketing leads won’t help achieve goal if the sales staff is not competent in getting a first meeting with a prospective client. Investing in marketing automation is useless when there’s dysfunctional sales leadership. Honing a lucrative sales compensation plan doesn’t matter if the company can’t get a quality product out the door. Award-winning loyalty programs and creative marketing content won’t excite any COO if customers can’t pay their invoices. And fancy webinars won’t convert prospects if current customers hate the company’s service.

You can see the evidence of disjointed risk management in the revenue results for almost any organization. The fallacy is in not viewing revenue risk as a strategic business challenge, one that involves every department—not just sales and marketing. A revenue risk audit enables risk management by exposing all risks that are consequential in disrupting sales. It’s a planning tool for deciding which projects to undertake and determining how to invest in them. At the end of the audit, you can expect to have a clearer view of the risk potholes you’re likely to encounter, along with knowing which ones are cavernous. Here are some tips:

1. Include the whole company. Don’t limit the audit to sales and marketing.
2. Don’t confuse risk management with risk avoidance. They are not the same.
3. Embed risk analysis into all of your operational planning. In addition, use it for sales coaching and account reviews.
4. Expect that some risks will be common across departments. Not all risks fit neatly into a single category.
5. Link every significant risk to one or more specific internal controls.

For audit and planning purposes, revenue risks can be separated into categories. (Note: though I have used Sales throughout the many of the audit questions, they apply equally to marketing and other business development functions.)

Internal risks

Strategic risk.
1. Has the sales strategy in place been proven successful at the company, or elsewhere?
2. Are customer needs and buying habits known?
3. Are customer needs and buying habits volatile?
4. Do the company’s revenue generation channels (direct/indirect/online/bricks-and-mortar) enable strategic and tactical flexibility?
5. Does the company’s management clearly understand the steps its customers use in making buying decisions?
6. Does marketing and sales management monitor future industry trends?
7. Does the company maintain a multi-layer sales organization (e.g. territory/district/region)?
8. Do sales compensation policies conflict with any of the company’s strategic objectives?

Marketing alignment risk.
1. Do the company’s brands have a positive reputation?
2. Does the company’s pricing strategy support its cash flow requirements?
3. Are the company’s social media assets fully integrated into its marketing automation and sales systems?
4. Do Marketing and Sales operate using the same business definitions and taxonomies?
5. Do the company’s marketing automation tools use a single data repository, shared by all departments?
6. Do the marketing and sales teams view each other as mutually valuable and supportive?
7. Are the company’s goals for marketing sales congruent with each other?

Sales enablement risk.
1. Does management use proven, effective techniques for ensuring consistent, positive customer experiences?
2. Are there adequate administrative support resources for marketing and sales?
3. Are effective Customer Relationship Management (CRM) and Sales Force Automation (SFA) tools in place and being used?
4. Has the company successfully deployed tools to measure and manage marketing and sales productivity?
5. Has the company demonstrated repeated competency in executing effective marketing campaigns?
6. Does the sales team have adequate knowledge to hold face-to-face conversations with prospects and customers?
7. Do sales team members have adequate situational awareness for every opportunity?
8. Do sales team members use consistent, effective communications that buyers consider valuable?

Sales-force effectiveness risk.
1. Has sales leadership been proven capable?
2. Do they inspire confidence?
3. Do they instill a positive, challenging culture that includes encouraging intelligent risk taking?
4. Do they have demonstrated skills for effective coaching and mentoring?
5. Are sales team members self-motivated?
6. Are sales team members passionate about what they are selling?
7. Are sales team members strictly money-motivated?
8. Does the sales organization use a repeatable process that matches how customers buy?
9. Does the sales team have a formal process for knowledge capture, knowledge sharing, and organizational learning?

Information risk.
1. Is the data used for CRM/SFA, and other marketing automation, accurate and timely?
2. Can data be captured efficiently?
3. Is there significant latency between the time data is collected to the time information is made available to staff?
4. Do different departments within the company use the separate, non-integrated customer data repositories?
5. Have the causes of all past IT security breaches been mitigated?
6. Are IT security procedures in place to ensure that information is not available to unauthorized persons?
7. Does the company maintain privacy standards for customer information?
8. Does the company have strong governance over IT security?

Talent risk.
1. Does the company know which competencies customers value in its employees?
2. Does the company use hiring practices to cull which candidates are likeliest to have those competencies?
3. Is the company unable to fill positions due to shortages in the talent pool?
4. Does the company offer employees flexible work arrangements?
5. Could the company sustain the loss of key personnel without operational interruption?
6. Does the company have an ongoing program for professional development for all customer-facing staff?
7. Does the company experience higher-than-average turnover customer-facing staff?
8. Has the company recently experienced turnover in senior management?
9. Does the company’s compensation plan enable employee income at or above market rates?

Product risk.
1. Are the company’s products easy to counterfeit?
2. Are the company’s products unprotected by patents and trademarks?
3. Is the company’s product line segmented into different pricing tiers?
4. Does the company have a reputation high-quality, reliable products?
5. Does the company’s competitive advantage rely on rapid product innovation?
6. Are the company’s product life cycles shortening?
7. Is it easy for customers to find substitutes for the company’s products?
8. Are there low switching costs?
9. Are the company’s products subject to sudden changes in demand?
10. Does the company maintain an adequate innovation pipeline for new product development?

Operational risk.
1. Is the company’s supply chain subject to frequent disruptions?
2. Does the company experience frequent product quality or delivery issues?
3. Does the company consistently meet its order fulfillment targets?
4. Does the company have significant excess, obsolete, or slow-moving inventory?
5. Does the company have old, unsupportable production equipment or IT infrastructure?
6. Do the company’s profits and operating costs compare favorably with industry averages?
7. Does the company conform to industry best-practices for project management?
8. Does the company have a high number of unresolved customer complaints?
9. Are the company’s customers dependent on customer support in order to use the company’s products or services?

Legal risk.
1. Are the company’s intellectual properties protected with enforceable contracts?
2. Does the company regularly review sales proposals and customer contracts for liability risk?
3. Does the company enforce violations of its sales agreements?
4. Does the company experience frequent legal disputes with customers or employees?
5. Are the company’s products and intellectual property protected in every country where it operates?
6. Does the company maintain and provide written guidelines for its social media policies?
7. Are the company’s sales and business development practices compliant with the Foreign Corrupt Practices Act?

Ethical risk.
1. Do senior corporate leaders consistently model ethical behavior?
2. Does the company have a reputation for unethical sales practices?
3. Is the company transparent to its stakeholders about its sales strategies and tactics?
4. Does the company have guidelines for Corporate Social Responsibility?
5. Are employees offered high financial incentives for meeting revenue goals?
6. Does the company have strong internal audit controls?
7. Does the company exercise tight internal governance over business practices, particularly in marketing, sales, and procurement?

Financial risk.
1. Does the company have adequate financial capacity for its risk exposure?
2. Does the company have adequate cash flow to provide on-time payment for suppliers and employees?
3. Does the company have sufficient liquidity to sustain its operations?
4. Does the company consider cash flow needs when making project decisions?
5. Does the company have adequate controls over cash receipts and disbursements?
6. Does Sales provide Accounting with forecasts that are valuable for planning purposes?
7. Do customers consistently pay invoices within the specified terms?

Internal/External (Mixed) risks

Customer risk.
1. Does the company have diversified base of clients?
2. Do the company’s channel partners offer access to valuable markets that are difficult for the direct sales channel to enter?
3. Do the company’s customers face high technological or cost hurdles when switching suppliers?
4. Does the company have deep, highly collaborative ties and connections in customer accounts?
5. Does the company have higher-than-average customer churn?
6. Do customers perceive the company’s products as highly differentiated from other offerings?
7. Has the company recently experienced high attrition in its customer base?
8. Has the company recently lost one or more large customers?

Supplier risk.
1. Are the company’s sources of supply consistent and reliable?
2. Do the company’s suppliers adhere to standards for Corporate Social Responsibility?
3. Are the company’s suppliers engaged in labor or environmental practices that are banned in the developed world?
4. Does the company have a diversified base of suppliers for key components?
5. Do the company’s suppliers have a history of providing high-quality, reliable materials?
6. Are the prices of the company’s supplies or raw materials stable?
7. Does the company source critical components from countries that are undergoing trade sanctions?

External risks:

Economic risk.
1. Are the company’s operations significantly impacted by general economic conditions?
2. Are the company’s sales dependent on low interest rates and the easy availability of investment capital?
3. Does the company depend on revenue from areas of the world that are experiencing economic instability?
4. Do the company’s trading partners operate in countries that have volatile exchange rates?
5. Are the company’s customers prone to radical changes in demand based on general economic conditions?

Competitive risk.
1. Does the company operate in a highly competitive environment?
2. Are the company’s competitors considered the innovation leaders in the market?
3. Can the business development team articulate and explain the company’s competitive advantage?
4. Are competitors able to offer similar products at consistently lower prices?
5. Do competitors offer superior products?
6. Do competitors have superior financial strength or other significant advantages?
7. Does the company lack insights into competitors’ strategies, products, or pricing?
8. Does the company operate in an industry with low or few barriers to entry?
9. Are substitute products threatening the company’s core products and services?
10. Is the company unusually vulnerable to foreign competition?

Regulatory and compliance risk.
1. Does the company have significant government contracts?
2. Is the company currently under investigation for non-compliance?
3. Is the company subject to pending governmental regulation that could significantly change its daily operations?
4. Does the company fail to comply with regulatory requirements, including OSHA?
5. Does the company’s internal governance monitor regulatory compliance?

Political and social risk.
1. Is the company vulnerable to changes in demand based on political or social conditions?
2. Does the company or its management have a poor public image or receive negative publicity?
3. Does the company have significant operations in foreign countries that are experiencing social unrest?
4. Is employee safety, work/life balance, and social welfare unimportant to the company?

Industry risk.
1. Does the company sell its products in an industry that is declining, unstable, or distressed?
2. Does the company sell its products in an industry that is prone to business cycles?
3. Does the company sell its products into an industry with a poor public image?

This list is not intended to be exhaustive. There are additional questions that need to be asked. And not every category of questions will matter equally for every company. Some best practices to follow for your company’s audit:

  • Focus the purpose of the audit on planning and control.
  • Structure questions to yield a “yes” or “no” answer.
  • Be objective. Don’t inject bias or vendettas into the audit.
  • Perform risk audits regularly to expose trends.
  • Prioritize the risks that should be managed.
  • Track business development costs carefully to understand how effectively risks are covered.

Know your risks, make your number. As the saying goes, if it were easy, everyone could do it.

For Part I of this series, How Menacing Is Your RAR – Revenue at Risk?, click here.

Author’s note: Most bloggers encounter writer’s block, and many of us have adopted techniques to avoid the problem. For many years, my dog, Fido, has faithfully and kindly provided me a gentle diversion to clear my mind when I’ve become entangled with too many thoughts, ideas, words, and sentences. By giving Fido a hug, a pat on the head, or a prolonged scratch behind his ears, I have been able to overcome many confounding moments when the words I wrote didn’t match what I wanted to say. Since I began posting blogs in 2007, this is the first one I have completed without him, and I dedicate it to honor his memory.

Honor Thy Customer Before He Or She Leaves – Not After

Originally published 02/28/08

In three years, I’ve never felt as loved as I do now by the cable service I just dropped, Cox Communications. Why? Because at the end of March, Verizon Fios will be the new communications provider at my home. And I feel heartsick for Cox—I’m not leaving Cox because I love Verizon more, but only because the Verizon package costs much, much less than my unbundled services.

Now the jilted Cox is communicating—with a vengeance. They have called me several times in the last two weeks to tell me how much they will miss my business. Today’s call was from Vivian “calling on behalf of Cox.” Picking up on her semantic hint, I asked her what company she was with. “Timberline,” she reported, and without pausing, she continued, “We understand you want to go with another provider, and we’re calling to offer you a discount on your cable service if you continue with Cox.”

The irony of all this was too much to bear, so I asked Vivian why Cox would wait until I’ve decided to terminate my service to have an outsourced salesperson call to tell me how much I’m appreciated by offering me a discount when they were perfectly happy to bill me at the premium rate up to this time. The unflappable Vivian didn’t have an answer for me, but she told me she noted my concern and she wished me a good day.

I was disappointed that Vivian couldn’t shed light on my question. I realize that logic often gets in my way. Is there anyone who can help me understand why Cox might wait until a customer has decided to leave to apply significant resources toward customer retention, rather than loving a customer while he or she is a customer? Is there a compelling conversion factor or KPI that I’m unaware of that makes Cox’s late plea economically astute?

In the end, it seems sad that Cox has such poor Customer Relationship Management execution that it could only muster a price-play on this “hail Mary” telemarketing call. Cox’s customers deserve better—and so does Vivian.

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