by Kevin Vaughan-Smith, Joint MD, Mutual Value
I was recently speaking to a client who was thinking about whether or not they should invest in improving the relationship building skills in their team. While they felt that the skills of the team were leading to good transactions he didn’t feel that they had deep capability in relationship development, but he couldn’t explicitly say why. “So how much is this going to cost me?” he asked.
From my perspective he was asking the wrong question. Changing the behaviours of his sales team was not trivial. It was going to require them to value relationship building and the results it would create over and above the way they were currently working. The question really was is it going to be worthwhile to make this investment? What is the likely return on investment?
We started to explore together a number of the key indicators that might tell him whether they were succeeding but I made this statement upfront.
“Unless you can identify a return on investment of at least 20: 1, then I strongly suggest you find other things to pay attention to. It’s only if you really believe you can make this kind of change and this kind of return that you and your business development team will really get behind the changes that are going to be necessary.
So where might you find the key measures and indicators of that 20:1 return?
The 4 Key Relationship Indicators (KRIs)
There are key indicators of whether or not you have quality relationship building skills, and these deliver the 20:1 RoI. Here are the four which get to the heart of the matter.
Expansion versus new wins
In so many businesses I find that all the kudos goes to new wins. Expansion in current plans is considered far less worthy of note. We even give the sales teams perjorative names ‘Hunters’ and ‘Farmers’.
On examination it turns out that the expansion business, the ‘Farming’ of relationships, is almost always more profitable in delivery margin compared to that in new wins. On top of this we haven’t had to experience all the cost of failures that happened before we achieved a new win.
An exceptional new business win rate is 1 in 4 and a typical win rate can be anything between1 in 8 and 1 in 12, and yet we don’t consider this cost appropriately.
Our best people create client relationships that provide us with a steady stream of opportunities for our broadest range of services from the same client without the massive selling costs associated with new business.
So my first question is always: ‘what percentage of your growth this year has come from new business and what percentage lets come from expanding in your current clients?’
My second question is this: ‘what is your average margin in delivery between new clients and existing clients?’
My third: ‘what is the average cost to bid?’
Fourth: ‘ what is your real win rate on bids?’
Do the maths for your business, and you can start to see that it is far more profitable to switch to expansion as a focus and relationship building as your process for expansion. But it only works if you have the skills in your team to do it.
But, you ask, what about the new business I need to fuel further growth? That’s a good question which can be quickly answered: it too is all about relationships. Focusing on building relationships with potential clients rather than flooding the market with bids will in itself change win rates, and you will have a very large number of satisfied clients who have broad experience of your capabilities and who trust you. That means they will not only introduce you to others in the marketplace but will act as great referees when you want to win more business.
How’s Your Pipeline?
My next step is to get clients to look at their pipeline as a great indicator for potential revenue. I’m often surprised at how unsubtle pipeline management is. Too often businesses focus on the sheer number in the pipeline and forget to look at the key indicators.
To me the most important thing is studying pipeline at an individual opportunity level. What is often true is that the best will have not necessary the biggest pipeline volume at the top of the funnel but they have the best conversion rates from one stage in the sales process to another. It’s uncanny how they seem to have the ability to take first meetings and drive them into second meetings, proposals and deals at a higher percentage rate.
When you do the maths it becomes clear that very small marginal improvements at each level make a huge difference in terms of results.
For example, with a simple pipeline model with only 4 stages in it: leads, opportunities, bids and wins. In this model, a tiny 1% improvement at each level equates to a big 12% improvement in success through the multipler effect.
So, it’s important to understand why the best do far better than simple 1% improvements over the average. And what’s always clear when you talk to the best is that the depth and breadth of their relationships are far greater. The trust and access they have to stakeholders is deeper and therefore their knowledge of how to satisfy client needs is far greater than the competition
This answers the question as to why their pipeline at the top of the pipeline isn’t always the biggest . They are not focusing on talking to thousands of people. They are focusing on building relationships with the right people.
Post Win Margin Management
Another key measure to understand whether changing behaviours around relationships can create a return of 20 :1 or not is in the area of project delivery margin management.
Old fashioned but very popular transactional relationships, together with selling too often, result in antagonistic behaviours post-award. Bidders who have cut both their offer and the price to the bone in order to win, seek to level the playing field by scope change, change orders, disputes and the like in order to protect or improve their margins and revenues. Buyers seek to maximise the value without allowing the cost to change. Conflict is built into the process.
Having real clarity at the margin level of the loss that’s being endured, the upside being neglected while the relationship is being destroyed is often enough of a return to make the investment in relationship-building skills worthwhile on its own.
You may need to do some research – but, once again, do the maths. What margin did you bid at and what margin are you delivering on projects? What is the gap worth to you? Even if there isn’t a gap, how much time and effort are you and your team putting into protecting your position? And finally, and this is perhaps a difficult one to put a figure on but worth considering, how many opportunities have you missed in that client because you’ve got a damaged relationship?
With the right relationships in place and a strong sense of collaboration and mutual value it’s possible to not only agree a sensible commercial margin up front, it’s also possible to have the client support you in protecting that margin, while building a relationship, and finding new opportunities to work with them. These relationship skills are all eminently teachable.
What to do: Move the Middle 60
One way of trying to bring some of these factors together to get a handle on the potential is a process called Move the Middle 60, a process pioneered by the global consulting firm, FranklinCovey. In my many years of working with business development teams the common factor has always been simply this: the best people have the best relationships.
What I suggest is this. Divide your Salesforce into 3 areas:
- typically the Top 20% – your stars
- the middle 60% – doing OK but clearly missing a number of the attributes at the Top 20% but could adopt them if they understood and adopted them
- and finally, the bottom 20% who probably won’t be able to adopt the new and better behaviours.
Here’s the maths:
- Take the average revenue the Top 20% generate
- Subtract from it the average revenue from the middle 60
- Multiply that number by the number of people in the middle 60>
This equates to the top-level value you could create if everybody was equally good.
Now let’s get real.
- Divide that number by half, because we’ll only get half the people to move, and then
- Divide by half again because we only expect to move them half way along the path.
Example: a sales team of 40
- £2.8m – £1.7m = £1.1m
- 24 x £1.1m = £26.4m
- £26.4m/2 = £13.2m
- £12.2m/2 = £6.6m
In this example, the minimum return on Moving the Middle 60 = £6.6m per annum.
In every business development or salesforce I have worked with of any size, this exercise always indicates numbers in the multi-millions of potential. And as I’ve said before, the analysis demonstrates it’s all about the way people manage relationships.
Looking back on what I said earlier these people in the Top 20% typically have a larger wallet share of their clients and sell more services than the average, they have the best conversion rate through a pipeline and they have the best project delivery margins. So that means this extra revenue will also be more profitable – and we could do the maths above to show how this transforms the overall RoR. I have done this in the accompanying working model which you can find here.
Do the maths: the Return on Relationship is real
As I said earlier to my client, changing culture and behaviours and getting people to focus on relationship building isn’t trivial. With the right process and expertise it can be done and if you’ve gone through the maths above and demonstrated to yourself that with every £ spent there’s a potential to generate 20, there are good reasons to do so . In the example above, an investment of 5% to achieve an annual uplift of £6.6m (ie a 20:1 return) would be £330,000.
If you would like to discuss with us any of your numbers our start point is to run a structured workshop to pin down whether or not there is a potential return to your business. We can share with you how we go about creating sustained behavioural change and culture that makes growth far more predictable, sustainable and profitable.