Around twice a month someone asks me about outsourcing their salesforce to a 3rd party. They want tips and recommendations. This blogpost is designed to be a way for me to not repeat myself every two weeks.
Sales outsourcing. The idea is tempting. No more calls with potential clients. No more rejection. No more that old “I suck at sales” feeling. Now we can focus on improving the product so that someone great in sales can sell it for us for commission. Seems like the next best thing since invention of sliced bread, right? Wrong. This is one of the worst ideas you can have in B2B. To understand that, you need to understand the business model behind a sales outsourcing first.
Great sales people are rare and therefore expensive
If you want to launch a sales outsourcing company, you will need a sales team. They are the product you are selling – so they have to be good. Assuming you will do it properly, you will have 10+ salespeople on payroll to pay for. That is serious cash out the door you need to have every month.
Since big bucks are coming out of pockets of the outsourcing company, to pay for expensive salespeople they can’t focus on small deals. That’s because commissions from small deals tend to be small too. But big deals tend to take time – at least 3-6 months depending on the industry. So while you are bleeding cash every month – your big paydays are coming after a delayed period of time – if you close them of course. Based on that, this is a hard business to run in terms of cash flow.
It’s hard to pay for the salesforce with outbound leads only
Now let’s look at leads. As you probably know, there are 3 categories of leads. Referrals, Outbound and Inbound. Even if you strike a deal where clients hand you all their referrals and inbound leads (and that’s a big IF), they will not be incentivised to invest heavily in lead generation and asking for referrals. Why would they? Just to pass them to you, for you to then make your huge commissions out of their hard work and investments? So the best case scenario is that you have some inbound and referral leads. The most realistic one is that you get stuck with cold calling and cold emailing on behalf of companies you work with. In companies I’ve worked with it, it seems that outbound leads tend to have longer sales cycles – around 20% longer. That puts even more problems on your cash flow as a sales outsourcing company.
You make money for 40 weeks. You spend it in 52.
A third blow to your cash flow is that clients are reluctant to pay you during summer (hey, everything slows down, so we’ll resume the relationship in September, OK?) and second half of December. Just because of those 20% of the year, a big portion of your revenue will simply not happen. Since your salespeople won’t be reluctant to make money during downtime, you will need to hit your numbers 20% harder during other months to compensate for months when you don’t make as much. That’s not easy.
Bad news: Sales outsourcing business will rely on your best salespeople
As if cash flow problems weren’t enough, you will soon find out that salespeople are not created equal and competition (even from your own clients) for your salespeople is fierce. You are an easy target for headhunters. All you hire are salespeople. All you say in your marketing is that you have great salespeople. It’s a matter of time when headhunters will start poaching your team. That will pressure you to fight in a bidding war for your best salespeople with companies with deeper pockets than yours (VC backed product companies always have more money than a service business). That’s more pressure on cash flow.
What about the client perspective?
But that’s the perspective of supplier of the service. There is one critical risk. You will delegate the responsibility for growing your sales to a separate entity. The best teams I worked with know that growing sales is a responsibility of the whole company and everyone in the company should be aligned and working towards that goal – not only sales and marketing teams. No one should care about your sales more than you and nobody will – no matter how hard you incentivise them with commissions. Once you break that, everything starts to fall apart because your product team is working on a product in a vacuum. There is just no feedback loop between product team and customers that are already in the sales process. And you want feedback not only from people that buy, but also from people that don’t. That leads to less insight into your product and management teams. And that leads to poor product outcomes.
What about environment?
All that negative arguments are basing on a good economic climate of spring 2018. Now it’s time for a prediction:
As I’m writing this, everything we’ve seen is great weather on most markets. Capital is cheap due to low interest rates, and since people are dissatisfied with returns from conservative investment opportunities, money is flowing into more risky stuff. Cryptocurrencies. Angel syndicates. VCs. There have never been so many VCs and angel investors with deep pockets to reach out to. When markets crash (and they will because they always do), all this will go away for a while. The environment will change for 12-24 months and capital won’t be abundant. That will decrease overall sales for most businesses. With decreased sales in general, companies that provide sales outsourcing services will have no choice than to increase their commissions. They won’t have a choice – to support their business (money for expensive salespeople out the door every month, remember?) they will need to do it to keep their revenues higher than costs.
That will leave their clients with two options:
A. Pay up. You don’t have a salesforce. All you know is building your product or providing your service. You know nothing about sales and marketing so you are unable to say no to the company that’s squeezing you for more money in an economic downturn – when you need cash the most. But you don’t have a leverage in the relationship and they control your pipeline for the next 6 months. You are basically a hostage with no options. So pay up.
B. Cancel the relationship and build your internal salesforce and marketing team in the middle of an economic meltdown. Sure, you can do that. Since the economy is crashing, it’s hunger games out there and the odds won’t be in your favour. You’ve cut out that specific part of your business and outsourced it to some other company. Good luck with that.
You don’t want to be in either of these positions. So do not outsource your salesforce. Build one. It’s painful, hard and expensive. But the alternative is worse.