Tracking the True Cost of Sales

This week I had a conversation I’ve had many times before, on a topic near and dear to every PS organization: billable utilization. The conversation starts like this:

“Our billable utilization is not very high. But, that is because our delivery consultants do a lot of stuff to support the sales effort.  Sometimes we are doing post engagement work for free to keep a strategic customer happy. It’s all important work–no one wants us stop. But it kills our profitability in PS.”

The concept that needs to come into play during this lamenting of lost revenue is sales cost offset. How much are PS activities offsetting, or reducing, the formal cost of sales? Sales cost offset represents all of the non-billable investment required by the service organization to help secure a customer transaction.  Example Investments made by services to secure a sales transaction include:

·         Sales presentations

·         RFP responses

·         Proposal creation

·         Demo hours

·         Discounted service offerings/hours

·         Free service offerings/hours

These are all important and valuable activities, but they have a cost. This leads us to the image for this entry. TPSA benchmarks how much time delivery staff spend on pre-sales activities. For PS organizations heavily supporting product sales, the amount of pre-sales cycles can become significant. Let’s say you have a $50M business that sells a blend of product and services. Your sales costs are running you 5% of total revenue. But, the fifty PS delivery staff you have in your business spend 10% of their time supporting sales. Using average market rates for technology professional service staff, you just lost almost $2M in potential service revenues.  If you just take the cost of those delivery resources, these PS cycles represent a 2%-3% increase in your true cost of sales. The image below documents the story of sales cost offset.

 

True Cost of Sales

True Cost of Sales

 

 

 

We’ve studied this challenge of sales cost offset. There are critical decisions management teams must make to manage this phenomenon. Some of those decisions include:

1.       Will the company commit to tracking the true cost of sales?

2.       How much sales cost offset can the company afford for services to absorb?

3.       Who gets to decide how investment cycles from services are spent?

4.       What value will the company attribute to service hours invested in the sales process? Market value or internal cost?

Unbilled service activity never goes away—even in the most disciplined organizations. The question is not should service resources assist in sales —the question is how much should service resources assist in sales. To navigate that answer, the successful service organizations implement processes to track and quantify sales cost offset.  They then take a leadership role driving alignment on the questions outlined above.  After all, no one should be more motivated to address this challenge of managing sales cost offset than the service organization—it is their bottom line that is at stake.

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2 Responses to “Tracking the True Cost of Sales”

  1. Carl Isenburg Says:

    I agree with your assertion that the services team must “take a leadership role driving alignment on the questions outlined above.”
    My question is: How do you get the sales executive’s attention? If they’re not accounting for this today, then they’re effectively hiding a significant portion of their cost-of-sales under the services P&L. What motivation does the sales executive have to change the status quo?

  2. Thomas Lah Says:

    I believe the sales cost offset conversation must begin with the CFO or COO–not the head of the sales. For the very reason you highlight.

    The CFO or COO should be educated on the the impact of sales cost offset on PS profitiablity. They also need to be provided options on the best practices to track, manage, and minimize this cost.

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