Arck Systems

Case
Case Analysis
About ARCK Systems

 Rob Chatterji, CEO of Arck systems

 Arck system was a medium sized manufacturer of enterprise servers

 Customers used the servers purchased from Arck to run proprietary enterprise software applications

 Decision was taken to purchase Lux Software at 50% above its market capitalization which will help them

better integrate their hardware to the software applications

 Powerful for network computers used in corporations to manage data

 Enterprise software market was growing more than the hardware market

 Decided to purchase Lux Software which was leading provider of middleware

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Merger/ Acquisitions

Contained provisions that provided incentives for engineers and software developers to stay with Arck

Chris Snyder Rob Chatterji Bryan Mynor

Lux Software’s He was a 30 year

EVP of sales, Chairman and CEO veteran of
announced that of Arck enterprise
he will leave the hardware sales
company
He joined as the
Rob Chatterji called head of sales
Snyder took Bryan Mynor to operations where
most of his sales manage Lux he managed sales
management Software’s sales quota and territory
with his team force assignments,
compensation plan

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Similarities in both the companies

Both the companies assigns sales people to dedicated customer territories based on geography and customer industry

Sales organization hierarchy of two companies are broadly same

Individual salesperson reported to District Managers-> Regional Managers-> Country Head-> EVP

Both companies had relatively wide discretion to set net sales prices for customers

Discounts averaged about 30-40% points off a list price which was similar to Arck’s average

Large discounts had to be approved by sales managers

Lux Software and Arck have similar sales dynamics and sales cycle

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Sales Compensations plans

Large differences between the sales

compensation plans Lux Software and Arck

Top Guns which were the ‘sales club’ for the salespeople
in the top 10% of overall sales

Lux Compensation plan included accelerators which

increased a percentage commission a salesperson
could earn
Mynor noticed that Top Guns make 30 times more than
the averaged salesperson
Salesperson at Arck make only 4-5 times than
the average

A salesperson could potentially earn 24%

commission
Arck’s compensation package was the standard 9 %
base commission paid after the quota was met

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Sales Compensations plans

z
 Bryan realized that salespeople were providing high discounts in order to reach accelerator targets

 Senior management started receiving hundreds of approval forms which gave them very little time to do
anything else
 To ease the pressure, Mynor decided that deals upto $200,000 had only to be approved by the relevant District
Manager
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New Structure

 6 months after instituting the $200,000 rule, the approval requests number returned to normal
 A financial analyst found out that Lamar Snow made a deal having list price $63mn deal on 85% discount,
costing the company over $25mn

New Compensation Structure

 11% base commission

 0.5x accelerator over $1.5mn and no other accelerators
 Overall effect of this would be that average salesman pay would
increase while the pay of top performers would decrease

 However, Mynor was shocked to see that not just the top performers, 25% of performers in 5th decile left. Even
performers in 7th and 8th decile had started leaving the organization

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