Study

How Mature is Your Sales

Performance Management?
Results of Detecon‘s Sales Performance
Management Study

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 Sales Performance Management Study <

How Mature is Your Sales

Performance Management?

Results of Detecon‘s Sales Performance

Management Study

August 2010
> Study Sales Performance Management

Content

1. Executive Summary 3

2. Issue and Methodology of this Study 4

3. Results: Untapped Value Potential 6

4. How Much Value Do You Miss Out On? 12

5. The Authors 15

6. The Company 16

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1. Executive Summary
Companies can create competitive advantages for themselves by pursuing a course of strict value orientation
­within the framework of distribution channel management. They can accomplish this by allocating their tight sales
­budgets, which are usually distributed on the basis of volume, according to the sustained value of the customers,
products, and channels. Our project experience has shown that the implementation of value-based sales perfor-
mance management (VSPM) in strategic sales projects can result in increases in the return on market investment
(ROMI) by as much as 6% and lead to an improvement in the EBITDA margin of up to 15%.

Using VSPM makes it possible to assess the performance of sales organizations in their relation to the specific ­market
situation from a long-term viewpoint. For the majority of mobile network companies, this means changing over
from a volume-based sales management to an orientation aimed at profit or value.

• Profit-based sales management (medium competition intensity)

Companies in markets with medium competition intensity should focus primarily on profit when managing
their sales organization. The important performance indicators here include average revenue per user (ARPU),
subscriber acquisition/retention costs (SAC/SRC), contribution margin, and sales operating profit (SOP).

• Value-based sales management (high competition intensity)

But if competition intensity is high, concentration on value-generating customers, products, and distribution
channels is obligatory. In this case, the customer lifetime value (CLV), return on market investment (ROMI), and
customer cash flow (CCF) are the key performance indicators.

Depending on the competition intensity of the markets, the result is a path for the optimal maturity of the sales
performance management (SPM) of mobile network providers.

In this international study, Detecon examines the orientation to profit and value of the sales units in relation to the
competition intensity of their markets at more than 20 mobile network companies in the private customer segment.
Due to the sensitivity of the sales data which have been collected, the results are presented in anonymized form.

Most sales organizations miss out on the opportunity to increase corporate value which could be achieved if they
selected the sales management approach right for them. This unused potential can be determined and exploited
with the aid of value-based sales performance management.

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2. Issue and Methodology of this Study

OPEX pressure demands value-based sales performance management

The more saturated a market, the more intense the competition. Retaining customers or acquiring new ones
­becomes increasingly expensive. Network operators on the mobile network market find themselves incurring h ­ igher
and higher marketing and sales costs for these objectives. If the funds tied up for these goals are not used sensibly,
the pressure increases on operating income and corporate value. This is exacerbated by the negative effects of the
flat-rate culture. The continuing erosion of the average revenue per customer hits markets, where competition is
intense, especially hard.

OPEX Breakdown Sales & Marketing OPEX

Customer +62%
Service Other
4.396
IT
+41%

2.717
Sales & 2.424 2005
27,4% 2007
Marketing 1.715
Inter- 2009
connection

AT&T Verizon
Network
Cost Marketing & Selling Expenses [mUS$]

Source: Yankee Group Research (2010)

Figure 1: Operating Expenses (OPEX) of Mobile Network Operators: Structure and Development

This is why sales organizations on markets with medium competition intensity should concentrate on profitability.
As the competition intensity rises parallel to the greater market maturity, consideration of value-based performance
indicators becomes increasingly important. An important building block for exploiting the potential for profit and
value is VSPM.

What can companies do to successfully orient their sales organizations to strategic goals such as profitability or
­value generation? How can the web of direct and indirect distribution channels be optimized in the context of
intense competition by means of improved sales management? Answers to these questions can be found in this
Detecon study conducted in 2010.

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Countering the OPEX pressure and raising value potential – time for value-based sales performance manage-
ment

The worldwide survey asked 20 mobile network companies in markets with medium and high competition intensity
about the performance management of their sales organization. The collected data could be used to analyze the
maturity level of their sales performance management approach as a function of competition intensity. The perfor-
mance indicators examined during the course of the study reveal how the performance of the sales organization is
measured and managed. The following examples illustrate the three categories of primary performance indicators
which were considered.

• Volume-based KPIs
–– Gross adds
–– Churn rate
–– Customer migrations
–– Customer retention
• KPIs oriented to turnover and profit
–– Average revenue per user (ARPU)
–– Subscriber acquisition/retention costs (SAC/SRC)
–– Contribution margin
–– Sales operating profit (SOP)
• Value-based KPIs
–– Customer lifetime value (CLV)
–– Return on market investment (ROMI)
–– Customer cash flow (CCF)
–– Customer equity

All of the KPIs within these three categories were assessed according to four different criteria so that their applica-
tion and anchoring in the sales performance management approach of each of the examined companies could be
appraised.

• Relevance – Are the primary performance indicators in the company measured, and to what extent do they
influence strategic and operational decisions?

• Availability – At what organizational level – e.g., total company, segments, sales channels, or point of sale – are
the measured KPIs available ad hoc?

• Incentivization – How are the KPIs anchored in the commission system for sales employees and partners?

• Processes and IT – How is sales performance management supported by IT services and processes?

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3. Results: Untapped Value Potential

Depending on the specific market situation, mobile network companies can choose between two strategies for sales
management:

• Profit-based sales management (medium competition intensity)

Companies in markets with medium competition intensity should focus primarily on profit when managing
their sales organization. The important performance indicators here include average revenue per user (ARPU),
subscriber acquisition/retention costs (SAC/SRC), contribution margin, and sales operating profit (SOP).

• Value-based sales management (high competition intensity)

But if competition intensity is high, concentration on value-generating customers, products, and distribution
channels is obligatory. In this case, the customer lifetime value (CLV), return on market investment (ROMI), and
customer cash flow (CCF) are the key performance indicators.

The Detecon study reveals that only a few companies have realized a maturity level of their VSPM which is appro-
priate to the intensity of the competition they face. There are substantial differences in the form taken by sales
performance management at the studied providers. Above all, the value orientation of the sales management varies
remarkably. The study identifies four basic forms of sales performance management, differentiated according to the
competition intensity of the market, from low to high, on the one hand and the scale of the SPM maturity level of
the provider, from 0 = “non-existent” to 5 = “outstanding”, on the other.

Figure 2: Operating Expenses (OPEX) of Mobile Network Operators: Structure and Development

1. Best-in-class provider
Best-in-class providers in markets with high competition intensity display a clear orientation to value-based
sales management. As a rule, all of the relevant performance indicators are made consistently available by fully
automated processes and IT systems as real-time applications all the way to the individual points of sale.

2. Value burner
Many of the providers in highly competitive markets manage their sales using profit-based performance indi-
cators with moderate data availability from partially automated processes and IT systems. Generally speaking,
relevant sales performance indicators are limited to channel or segment levels (prepaid or postpaid) rather than
being available throughout the entire company. A clear orientation to value is not discernible in these cases, and
the spectrum of opportunities is not adequately exploited to secure competitive advantages long term.

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3. Short-sighted
Providers on markets marked by a rising level of competition generally manage their processes according to
­volume-based indicators. Furthermore, data availability, data quality, processes, and systems are often ­inadequate
to satisfy the requirements. Profit-based performance indicators should be given greater consideration during
decision-making processes, especially in view of the progressing saturation of the market and the rising level of
competition intensity.

4. Cost-burning growth blocker

A minority of the participating mobile network providers who are active on markets with a relatively low level of
competition intensity are already investing in a value-based approach and adapting their processes and systems.
This complex management approach blocks resources which are then no longer available for the development
of volume potential which should have priority in such a market situation.

SPM in markets with high competition intensity: a detailed observation

Most mobile network companies will find themselves on markets with a high level of competition intensity in
the near future, which is why the Detecon study zoomed in on the two types “value burner” and “best-in-class
­provider”.

When viewed as part of the overall picture, the differences determined in a comparison of best-in-class providers
with value burners are seemingly minor. But such a conclusion would be deceptive because there are ­substantial
differences in the emphasis placed on the four assessment criteria of “relevance for decision-making”, “data
­availability”, “incentivization”, and “processes and IT systems” used here. As a consequence, a detailed considera-
tion is required.

Sales Performance Management Maturity (Peer Group) Scores

Peer Group:High Competition Intensity
Best-in-Class 1 Value-driven: 4 to 5
Value 5  Sales Performance Management
Burner 9 Best-in-Class 2
4,18 approach based on value
3,88
generation.
Value
Burner 8 Value-oriented: 3 to 4
Best-in-Class 3
3,28  Strong focus on revenues and
1,25
profits with some value orientation.
1,82

Revenue-/Profit-driven: 2 to 3
Value 2,25 0 2,96 Value
Burner 7 Mean: 2.76 Burner 1  Revenues and profits as key
drivers for Sales Performance
2,61 2,82 Management.

Value
Volume-driven: 0 to 2
2,61 Value
2,80
Burner 6
2,69 Burner 2  Sales Performance Management
focus on sales volume.

Value Value
Burner 5 Burner 3
Value
Burner 4
Source: Detecon Sales Performance Management Maturity Study, Q2/2010

Figure 3: Sales Performance Management Maturity (High Competition Intensity)

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Assessment Criterion 1: Relevance for Decision-Making

1. Relevance in Decision-Making (Peer Group) Scores

Peer Group:High Competition Intensity
Best-in-Class 1 Value-driven: 4 to 5
Value 5  Decisions are based on value KPIs
Burner 9 4,54 Best-in-Class 2 like e.g. customer equity, lifetime
4,18 value and return-on-market-invest.
Value
Burner 8 Value-oriented: 3 to 4
Best-in-Class 3
3,92  Decisions are primarily based on
revenue and profit KPIs. To some
1,47 0,36 extent value KPIs like e.g.
Value customer lifetime value, return-on-
1,84 0 3,65 Value
Burner 7 Burner 1 market-invest and payback period
Mean: 2.94
are considered.
2,39
3,36 Revenue-/Profit-driven: 2 to 3
Value  Decisions are primarily based on
Value
Burner 6 2,87 Burner 2 revenue and profit KPIs.
3,36
3,33
Volume-driven: 0 to 2
Value Value
Burner 5 Burner 3
 Decisions are primarily based on
Value volume KPIs.
Burner 4
Source: Detecon Sales Performance Management Maturity Study, Q2/2010

Figure 4: Relevance for Decision-making

There are substantial differences among the companies, particularly with respect to the performance indicators
­relevant for decision-making. For the most part, decisions are made for the short term on the basis of performance
indicators relevant for turnover or profit. A long-term, value-based perspective is not discernible. The analyses
shows that most providers, although they do actually generate value-based performance indicators, do not yet in-
tegrate such data adequately into the relevant decision-making processes. There are some providers which do not
generate value-based performance indicators at all.

Best-in-class providers have today already begun to make their decisions on the basis of the expected growth in
value, whereby performance indicators such as customer equity, customer lifetime value, or return on market in-
vestment are the most significant parameters for making decisions.

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Assessment Criterion 2: Data Availability

2. Instant Level of Data Availability (Peer Group) Scores

Peer Group:High Competition Intensity
Best-in-Class 1 Excellent data availability: 4 to 5
Value 5  The majority of relevant sales KPIs
Burner 9 Best-in-Class 2
is instantly accessible on single
3,70
3,70
channel/PoS level.
Value
Burner 8
Best-in-Class 3
High data availability: 3 to 4
3,23
 The majority of relevant sales KPIs
1,15 is available on segment/single
1,30 channel and to some extent on
Value PoS level.
2,04 0 2,96 Value
Burner 7 Burner 1
Mean: 2.49
Moderate data availability: 2 to 3
2,18
2,66  The majority of relevant sales KPIs
is available on channel cluster and
Value 2,23
2,46 Value
segment level.
Burner 6 2,30 Burner 2
Basic data availability: 0 to 2
 The majority of relevant sales KPIs
Value Value
Burner 5 Burner 3 is available on total company and
Value
Burner 4
segment level.
Source: Detecon Sales Performance Management Maturity Study, Q2/2010

Figure 5: Data Availability

There are also major differences among providers with respect to the availability of relevant performance indicators
as the foundation for focused management. Some providers achieve adequate transparency and control instru-
ments for their sales organization solely at the total company or segment (prepaid or postpaid) levels. Moreover,
the relevant performance indicators are, as a rule, hardly or not at all available for operations.

Best-in-class providers, in contrast, make the relevant performance indicators available close to the market and
across all of the distribution channels, sometimes right up to the individual point of sale, assuring full transparency
concerning sales performance.

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Assessment Criterion 3: Incentivization

3. Staff Incentives & Partner Commissions (Peer Group) Scores

Peer Group:High Competition Intensity
Best-in-Class 1 Value-driven: 4 to 5
Value 5  Incentives and commissions are
Burner 9 Best-in-Class 2 paid according to value generation.
4,20
4,05
Value Value-oriented: 3 to 4
Burner 8
 Incentives and commissions
Best-in-Class 3 somewhat tied to profit and value
1,67
2,60 contribution.
2,00

Value 2,50
Revenue-/Profit-driven: 2 to 3
2,33 0 Value
Burner 7 Burner 1  Incentive and commission payout
Mean: 2.02
is aligned with revenues and profit
2,33 2,50 margins.

Value 2,41 2,50 Value

Volume-driven: 0 to 2
Burner 6 2,43 Burner 2  Incentives and commissions are
based on the number of closed
sales.
Value Value
Burner 5 Burner 3
Value
Burner 4
Source: Detecon Sales Performance Management Maturity Study, Q2/2010

Figure 6: Incentivization

The clearest difference between best-in-class providers and other providers surveyed in the study is found in the
incentivization of employees and sales partners.

While most of the providers display a tendency towards value orientation with respect to both decision-making
and availability of the data, the incentivization of employees and partners is based almost exclusively on turnover
or profit. In concrete terms, gross adds – the gross number of new customers – or average revenue per user (ARPU)
are the variables most commonly used for incentivization.

Best-in-class providers take an additional value component into account when compensating employees and part-
ners, whereby the customer lifetime value is becoming increasingly significant, especially for the compensation
paid to partners.

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Assessment Criterion 4: Processes and IT Systems

4. Processes & IT (Peer Group) Scores

Peer Group:High Competition Intensity
Best-in-Class 1 Excellent performance: 4 to 5
Value 5  Excellent data quality and fully
Burner 9 4,50 automated processes, possibility
Best-in-Class 2
4,40 of real-time and future-oriented
Value scenario analyses.
Burner 8
Best-in-Class 3
4,25 High performance: 3 to 4
1,75
 High data quality, sound process
2,00
automation, strategic use of sales
Value
KPIs and weekly reporting.
2,75 0 4,25 Value
Burner 7 Burner 1
Mean: 3.45
Moderate performance: 2 to 3
 Medium data quality, further
3,25
3,75 processing requires some effort
Value Value
and monthly reporting.
Burner 6 Burner 2
3,25 3,75
Basic performance: 0 to 2
3,50
 Poor data quality and little process
Value Value
Burner 5 Burner 3
automation, irregular reporting.
Value Decisions based on experience.
Burner 4
Source: Detecon Sales Performance Management Maturity Study, Q2/2010

Figure 7: Processes and IT Systems

Most providers have designed their process structure and IT systems to be in line with market conditions. Overall,
we can speak of a high market standard here. However, differences can be seen in terms of the range in which the
systems are used.

The majority of the providers have weekly sales reports available, sometimes on request as well. But the striking
difference is to be seen above all in the quality of the data. In appraising themselves, most providers see a substan-
tial need for improvement in this area. This is also true for the automation of the reporting processes and the user
friendliness.

Best-in-class providers present a positive example in that real-time data can be retrieved at any time and scenario
analyses can be prepared quickly. Sales reports of this type are generally made available by means of interactive
cockpits. The quality of the data available here is in line with market requirements.

The results of the Detecon study show that unused value potential can be exploited when the perspective changes
from volume-based to value-based sales management. A value-based distribution channel management will in
the future help to secure competitive advantages on the highly competitive markets and to assimilate quickly any
changes in market conditions.

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4. How Much Value Do You Miss Out On?

Decisions based on value-oriented distribution channel management lead to a much more advantageous control of
the channels. In the following, we will illustrate the decision-making process by showing how, as an example, the
allocation of limited funds in the sales budget to the various distribution channels affects growth value.

Determine the lost value due to wrong decisions

Whereas the distribution channels 1 and 4 in the example lead to the best results from the standpoint of traditional
KPIs, a value-based consideration comes to a different conclusion (see Figure 8).

Sales Budget Traditional KPIs Value Development

Revenue ARPU Gross Adds Delta Δ Added Value
mEUR EUR #000 % mEUR

Channel 1 200 120 - 25% -25

Sales budget allocated

Channel 2 79 40 to best revenue and - 31% 15
volume performing
channels (1 and 4)
Channel 3 90 80 - 17% 34
 negative trend
intensifies (see Δ)
Channel 4 120 90 + 10% 3.3

Value KPIs Value Development

Added Value ROMI CLV Delta Δ Added Value
mEUR % EUR % mEUR

close down /
Channel 1 -20 -15 + 100%
assess strategic relevance

Channel 2 22 160
Sales budget allocated + 36% 30
to best value performing
channels (2 and 3)
Channel 3 41 135 + 20% 49
 positive trend
intensifies (see Δ)
Channel 4 3 45 +/- 0% 3

Even though sales channels perform well in terms of acquired volumes and revenues, they might
actually destroy value. Managing channels for value helps to unveil and harness existing value potential.

Source: Detecon Projects

Figure 8: Comparison of Conventional and Value-based Sales Orientation and the Subsequent Development of
Value

If performance indicators based exclusively on profit and volume are used, the available budgetary funds are allo­
cated to distribution channels 1 and 4. Utilization of these performance indicators leads to management oriented to
the short term with little sustainability and, in the long run, to negative impact. Little attention is given to channels
2 and 3; in practice, the result is less money for acquisition and retention measures.

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But from a value-based viewpoint, the distribution channels 2 and 3 show the best performance. Their greater
­added value despite a lower figure for gross adds is explained by a higher average customer lifetime value (CLV).
This latter factor takes into account the entire duration of the customer relationship, looking at the relationship
of the revenues over the entire customer lifetime to the initial investments (SAC/SRC) and running costs (channel
OPEX). Customers acquired or retained via channels 2 and 3 display a higher CLV than customers from channels 1
and 4; they are the more important customers. In fact, the added value for distribution channel 1 is negative. When
the current value of money and the discounting of future customer revenues with respect to the observation time
are considered, it can be determined that the revenues obtained from customers acquired via this channel do not
cover the initial investments.

Managers who rely on volume-based and profit-based performance indicators will in this case push distribution
channel 1, which destroys value, and consequently endangers the company’s commercial position.

The bottom line is that management decisions based exclusively on conventional KPIs do not lead to ideal control
of the distribution channels. The tight budget for sales measures evaporates ineffectively into thin air or may even
reinforce negative developments.

Managing channels according to value – the antidote to decreasing sales margins

In contrast to the above, sales management aided by value-based performance indicators can make structured
and informed decisions. The major value-based KPIs, added value and return on market investment, compress all
of the relevant parameters into a concise performance indicator. For example, a positive added value says that the
returns generated from the customer are greater than the costs incurred for the creation and maintenance of the
customer relationship.

A reduction of the budget for distribution channel 1 immediately reduces the decline in value for the company
caused by this channel because the lower funds mean fewer customer acquisition or retention campaigns aimed at
customers with a negative added value. In the middle term, thought should be given to measures to increase the
CLV if a company wants to maintain distribution channel 1 and at the same time make a profit from the customers
acquired by these means.

In the meantime, the tight sales budgetary funds can flow into channels 2 and 3, the ones with the greatest added
value. The impact of this step is twofold: on the one hand, exploitation of revenue potential on the customer side
is optimized while, on the other hand, the company sets the signposts for greater strategic growth.

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This value-based KPI analysis, the value potential analysis, can be used to answer a number of questions related to
important groups of issues:

• Optimal distribution channels – What distribution channels or individual shops generate the greatest growth
in value, taking into account all of the income and expenditures over the entire duration of a customer relati-
onship?

• Optimal distribution structure – How can the ideal distribution channel mix from an economic viewpoint be
achieved, especially in terms of the proportions of direct and indirect distribution channels?

• Sales adaptations to the market – What distribution channels, right down to single shops, should be funded
by what budgets, and which ones should perhaps be given up completely?

• Growth in corporate value – What gain in value (see delta) can be expected from a switch to value-based
distribution channel management and the corresponding allocation of resources?

• Strategic growth – What effects do management decisions have on long-term value development when using
conventional and value-based performance indicators?

Once value potential has been identified, the question about realizing it arises.

The road to value-based sales performance management

• Maturity level analysis: Analysis of the current management logic with respect to volume, profit, and value
orientation and classification under the four VSPM variations identified above.

• Strategy workshop: Creation of an intellectual basis in the company by integrating all of the stakeholders into
the sales environment. Identification of the pressure points and solution management.

• Analysis of potential: Determine the potential for added value from the implementation of a value-based dis-
tribution channel management approach at the corporate and channel levels.

• Implementation: Scoping of contents and coordination of the implementation schedule.

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5. The Authors
Daniel Joisten is Consultant in the Sales and Distribution Group within the Strategy and Marketing Practice, where
he heads the Value-based Sales Performance Initiative. His expertise in both sales and marketing strategy projects
and financial topics such as sales controlling has been demonstrated and further developed in both national and
international projects for fixed and mobile network operators.

He can be reached at: +49 228 700 2581 or Daniel.Joisten@detecon.com

Marco Krebs is Business Analyst in the Sales and Distribution Group within the Strategy and Marketing Practice,
where he is a subject-matter expert for Value-based Sales Performance Management. He focuses on both sales
controlling systems and marketing strategy, which he has applied in several projects for mobile network operators.

He can be reached at: +49 228 700 2602 or Marco.Krebs@detecon.com

Ursula Struben is Consultant in the Sales and Distribution Group within the Strategy and Marketing Practice. She
has demonstrated her expertise in strategic and operational sales topics in ICT projects as well as in the industry
and service environment.

She can be reached at: +49 228 700 2603 or Ursula.Struben@detecon.com

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6. The Company
We make ICT strategies work

Detecon is a consulting company which unites classic management consulting with a high level of technology
expertise.

Our company history is the proof. Detecon International is the product of the merger of the management and IT
consulting company Diebold, founded in 1954, and the telecommunications consultancy Detecon, founded in
1977. Our services focus on consulting and implementation solutions which are derived from the use of information
and communications technology (ICT). Our clients in virtually every industry from all around the world benefit from
our holistic know-how in issues of strategy and organizational design and the use of state-of-the-art technologies.

Detecon’s expertise bundles the knowledge from the successful conclusion of management and ICT consulting
projects in more than 160 countries. We are represented globally by subsidiaries, affiliates, and project offices.
Detecon is a subsidiary of T-Systems International, the business account brand of Deutsche Telekom, so we profit
as consultants from an infrastructure spanning the globe and which is maintained by a major international player.

Know-how and Do-how

The rapid development of information and telecommunications technologies has an increasingly decisive influence
on the strategies of companies as well as on the processes within an organization. The adaptations which conse-
quently become necessary affect business models and corporate structures, not only technological applications.

Our services for ICT management encompass classic strategy and organization consulting as well as the planning
and implementation of highly complex, technological ICT architectures and applications. We are independent of
manufacturers and obligated solely to our clients’ success.

Detecon International GmbH

Oberkasseler Str. 2
53227 Bonn
Phone: +49 228 700 0
E-mail: info@detecon.com
Internet: www.detecon.com

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Detecon International GmbH
Oberkasseler Straße 2
53227 Bonn – Germany

info@detecon
www.detecon.com
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