Due Diligence For Sales Operations: 4 Areas of Focus

VC and PE Due Diligence is about more than the numbers

As an Angel, VC and Private Equity investor, I’ve conducted due diligence (DD) on over 100 + companies and given my skills I always examined the Sales Operations group as closely as the Financial Controls group. So why is it that almost every VC or Private Equity investor examines all facets of their target businesses with a microscope except for the sales function?

This is the full version of my thoughts.  A much shorter version of this article can be found on our LinkedIn page here

Due Diligence and Sales Operations

As part of Revenue Operations, the sales operation team is a key component in the future success of an organization.  When the sales engine is tuned up and performing well, profitable revenue is almost guaranteed.  However, during the initial due diligence process, the proficiency of the sales organization to drive future sales and the accuracy of sales projections are rarely, if at all, challenged or analyzed thoroughly.

In my due diligence work, the absence of a sales process is evident in almost every small to medium sized founder-based enterprise. These founders didn’t intentionally set out to ignore sales, they’re just so busy working IN the business, theyv’e forgotten or never really worked ON the business.  So with no metrics to guide them, there is limited accountability and a narrow or partial vision of future sales.

Dig Deep into the Data

Utilizing a metric-driven approach to a company’s entire sales operations is essential for Revenue Leaders and Investors. This part of the Revenue Operations strategy will provide the owners and investors with a complete and more accurate view of the business’ revenue-generating capabilities.  

According to the book The 4 Disciplines of Execution by Chris McChesney, Sean Covey, and Jim Huling, the authors discuss the difference between lag measures and lead measures, both of which are important metrics that are used in sales. The authors define a lag measure “is the measurement of a result you are trying to achieve”; while a lead measure “foretells the result.”  I find that many of today’s lag metrics are really just vanity metrics that have been used by teams forever. 

Don’t be Fooled by Vanity Metrics: Due Diligence is about finding drivers and leaders of revenue

An effective due diligence process needs to find the leading measures that drive performance. When executing due diligence on sales operations both lag and lead measures should be considered in the analysis. The data that comes mostly from lag measures, like the past financial performance of the company should be complemented by an analysis of the sales process that may reveal critical lead measures that are more indicative of future revenue performance. 

For example, in markets with complex sales, the sales team can’t generally control sales revenue volumes as these results or outcomes require decisions made outside of their span of control control; instead, the sales team can control their level and volume of inbound and outbound contact activities with prospective customers.  So while lag measures such as sales revenues are easily available during due diligence, leads measures such as sales activity levels are less so.

You may not know the leading indicators that drive revenues but you can find them in the data

DD Focused on 4 Areas

There are four elements of sales operations that are collectively critical factors in a company’s success. These four elements should undergo an in-depth analysis and benchmarked against other top sales organizations. These are infrastructure, organization, process, and support (collectively I call these the sales system).

1. Infrastructure

All highly-productive sales organizations should have a solid infrastructure in place. With the right infrastructure in place, your sales team can focus on the activities that will drive revenues.  In addition, with the tools and process from the infrastructure, your team will be able to execute faster with prospects.  The sales team will only reach its maximum potential and achieve consistent results if they have the infrastructure to support them.

A good sales infrastructure should include documented policies, procedures and activities related to sales performance, compensation, pipeline review, marketing collateral, payment policies and market/competitive review.  Not every sales team uses advanced technologies like local presence dialing or AI, but most, if not all, should have some core tools like CRM that are available to all team members.

2. Organization

When examining the organization you should be searching for these key elements as part of the sales culture: sales team structure, territory design, sales management, and sales personnel.

The sales team structure should be organized in such a way that will ensure maximum efficiency. The sales team structure should also be designed to look at each individual as a team member with a significant role to play, and it should be seen in the light of the rest of the organization – as an all-important cog in the machine.  This includes the sales team’s Sales Story (New Sales Simplified, Mike Weinberg) used in its messaging and methods of approaching new and existing accounts.

Territory design is not as straightforward as assigning geographical coverage to the sales team.  Apportioning territories requires an understanding of factors such as the approach to strategic accounts, competition, and expertise areas. Whatever the territory design, the main goal is always to find as much profitable business as possible.  Account-based Management has become a new “buzzword” in sales literature, but it’s just another way to discuss how accounts with multiple contact points should be managed within the organization.

Territory Design and Management is Crucial in Enterprise Sales.  Account Based Management (ABM) can help Revenue Leaders align sales teams.

An effective strategy for sales management involves setting goals for team members, providing sales support, training and monitoring the team’s results.  It also involves creating or updating the sales team culture and strategy.  Questions you should be considering include:

  • Do Account Executives (AEs) and Sales Managers have written and definable goals?  How are they held accountable?
  • How do Sales Managers interact with AEs, Sales Development (SDRs) and product specialists in aligning to the company’s vision and objectives?
  • How much time by the management team is spent “in the field” talking to customers?
  • How much time is spent on coaching, evaluating and praising team performance?
  • How are successes publicized and failures analyzed?

3. Processes

Processes that need to be evaluated include those relating to sales process, lead management, budget, customer success, and forecast management.

Building a sales process is absolutely necessary for the sales organization. Since the sales process is a set of repeatable steps, the team can easily map out each of the stages by identifying key activities at each stage. For example, at the qualifying stage, sales teams with good processes will know what information is required to determine if their prospect in is the buying window. 

A Sales Process is series of repeatable steps that helps the sales team execute the go to market strategy.

An organized and effective lead management process is designed to identify potential customers and engage them in meaningful channels and messages that resonate.  As a result, this lead management process, can ultimately contribute to more sales by creating more engaged prospect leads. A solid lead management process includes identifying and understanding needs, generating and collecting intelligence about leads, and scoring and nurturing leads.

The budget process includes all matters related to the expected volume of sales and selling expenses. A sales organization should have a certain procedure for the preparation of the sales budget. The process should include a review of past budget performance as well as the current and future factors of the marketing environment.

Customer Success is not created when a prospect gives you their credit card, signs an order form, contract or issues a purchase order.  Customer Success is created when that same customer orders again, refers you to a prospect or offers to be the subject of a case study.  This success only happens when there are documented processes that describe how the organization is going to act during the term of the relationship with that customer.  If the sales operation team doesn’t have a new and existing customer account management process, then they’re missing out on multiple revenue opportunities.

Customer Success happens when the same new prospect places another order, refers you to someone or acts as an advocate for you.  It must be built methodically and inculcated in your organization.

Lastly, good forecast management is also an essential part of sales operations.  The forecasting process allows the sales team to evaluate current market trends so that informed decisions can be made about sales operations, customer orders, delivery of goods, customer orders, budgets, and inventory.

4. Support

Support encompasses the following areas: sales operations, sales support, systems, and sales enablement. A solid support team will allow the sales team to just focus on the business of selling as they service new and existing clients.  

Some support functions include keeping track of sales targets, scheduling, monitoring customer accounts, monitoring new sales leads, and managing the correspondence between the sales force and clients.

DD RED FLAGS

While we’re always searching for the diamonds in the rough in our due diligence process, we’re likely to find some problem areas as well.  

Not suprisingly then, here are some of the red flags that I’ve found in a sales operation that imply a broken or non-existent sales system.

  1. When the sales team consistently does not achieve its desired outcomes.
  2. When sales projections are only upon the current book of business and do not consider historical data or activity
  3. When the sales pipeline is too optimistic (every deal is more than 70% of closing in the next 30 days)
  4. Despite an influx of qualified leads and prospects from marketing operations, the sales team does not seem to be able to scale
  5. When sales team members are operating with different platforms, messaging and processes.

Sales Operations is about Data AND People

It’s important for you to remember that Sales Operations is about People and Data working together towards a common objective.  When conducting DD, it’s easy to lose sight of this and just focus on the leading or lagging data.  

If you focus on both Data and People, you’ll likely open the door to opportunities for revenue growth or show that the current revenue projects are unlikely to materialize.  More importantly though, you’ll know WHY the these outcomes could occur.

The 6 Paths to Revenue Growth

This is a 7-minute read, but it’s worth it!

Most of today’s companies execute multiple methods of bringing their product to market and creating revenues.  In this post, I’ll describe the nature of those paths to revenue and the pros and cons of each.

Of course, you might be interested to know which path to revenue is best for your business and my answer will be it depends on multiple factors that are unique to your business.  In reading thoughts you’ll get a sense of my opinion, but I’ll highlight most of the key considerations at the end of this post.

Direct Sales

This approach to the market requires the creation and management of a team that interacts directly with end user customers.  As such, all elements of Revenue Operations (“RO”) are required to be running in order to achieve optimal results. That being said, the sequence of RO levers to implement can vary depending on stage of company, availability of capital and product-market fit.

The direct sales approach can achieve faster results than other revenue channels but this is entirely dependent on your team and the ability of RO to identify the key pain points of each Ideal Client Profile and have an offering to fix these problems at a price that would be easily accepted.  Most of the time though, all of these elements are unknown (ICP, ICP Pain, Offering, Pricing) and thus the speed to fully ramped revenue growth can take significant time.

This approach is best for young companies who have launched their first or second product, and are seeking market feedback on the goodness of fit to their Ideal Client Profiles.

Pros:

  1. Fastest way to achieve market feedback
  2. Capture all economic rents from transactions (ie. No middlemen)
  3. Direct feedback provides ability of product team to iterate product, leading to (theoretically) faster product-market fit
  4. Ability to test business and go to market models and markets

Cons:

  1. This method is a big flywheel that requires a lot of heavy lifting, continuous review and complete alignment of the entire organization
  2. Ramp up time to fully scaled Revenue run rate is dependent on:
    1. Product-market fit
    2. Right approach to market
    3. Sales personnel & management skills, aptitudes and compensation model
  3. Requires the key elements of RO in order to have a chance to be effective.

Channel Partner or Affiliate Sales

There are many companies operating in local markets that already service your Ideal Clients and Prospects. They generally provide services and products similar or complimentary to your offering.

Generally these partners have both the relationship access to your target prospects and the technical skills to provide local service.  And if they’ve got great internal sales processes they can provide you with significant market penetration, presence and leverage.  If your offering requires local presence (due to language, culture or product complexity) then using channel or affiliate partners may be the easiest way for you to gain access to these markets.

Pros:

  1. Quicker access to Enterprise or Complex buyers
  2. Existing technical expertise shortens technical ramp up
  3. Low capital costs or expenditures
  4. Leverage affect possible

Cons:

  1. No direct access to prospects and customers hampers ability to confirm product-market fit
  2. To create real leverage, you need to occupy the mindshare of the partner
  3. Requires same enablement and training programs and “in-house” sales personnel
  4. Won’t know if the partner or affiliate is serious about marketing your offer until many months after execution of the relationship

Private or White Label Agreements

A private label agreement is one in which you agree to provide your product to an independent third-party with some minor modifications.  These modifications are generally related to branding and/or packaging, but could also include something materially different from your existing product including code or physical modifications.  In most cases, you’re still producing the modified product in your production facility or with your development team.

Most private label arrangements are governed by a legal agreement which covers a variety of matters including, but not limited to, joint marketing efforts (who pays for what), minimum sales commitments, progress payments for modifications (NREs), Intellectual Property protections, cancellation terms, and service & support programs.

One of the key differences between private label and other indirect revenue channels is that because product owners maintain control of the production, it’s easier for them to maintain control of the IP.

Pros:

  1. Access to potentially larger market without implications to existing brand
  2. Large volume commitments from the private label partner
  3. As a secondary revenue channel, these agreements create incremental revenue and gross margin
  4. With this offering you can attract complimentary market leaders and operators
  5. One of the lowest sales and marketing costs of revenue channel options

Cons:

  1. Requires its own channel management strategy and tactics within your organization
  2. With no direct access to end user market, you gain less information about product-market fit
  3. In most cases, there is little intertemporal accountability on sales volumes beyond contractual commitments
  4. Market confusion can be created if the private label product looks similar to your branded product
  5. If you have too many agreements outstanding your offering can become commoditized

Original Equipment Manufacturers (OEM)

Imagine that a large, multi-national Fortune 1,000 company with well-established revenue channels wants to purchase some component of your offering for its own products.  No muss, no fuss, just sell them the code, API or components and they’ll just write cheques.  Sounds easy, no?  Not exactly.

While the OEM client is the holy grail of revenue for technology focused companies, OEM deals are filled with trapdoors and intricacies that need to be navigated in order for them to be effective.

In addition to the IP protections that are required (most OEMs have their own R&D groups so workaround language is important), you’ll need to ensure that your new client doesn’t use competitive products in their end user solution (which could replace yours), engage in predatory purchasing policies to drive away your margins or request abnormal co-marketing support dollars in relation to the total “whole product”.

You’ll also need to ensure that the term of the agreement is of sufficient length so that you can reap some economies from the initial work that you’re going to be doing to comply with your OEM client’s product specifications (each deal is unique).  You’ll also need to watch out for “easy” termination clauses that would allow your OEM partner to cancel the agreement without implications.

Pros:

  1. Your components are embedded with a market leader driving increased component unit sales
  2. Increased component sales volume can result in gross margin improvement as your Bill of Materials or cost of development per unit decreases (ie. You benefit from economies of scale)
  3. Allows you to focus on technology more than the go to market strategy and other revenue channels

Cons:

  1. OEM agreements can take a long time to execute (think years, not months)
  2. Depending on market, ramp up time to revenues can also be longer than expected (and you’re not in control of this)
  3. Zero control over the go to market strategy or end user visibility
  4. Your component or offering may be considered a commodity by the OEM and thus marginalized as the OEM’s strategy changes
  5. Price becomes a major factor in negotiations as the OEM attempts to keep their whole product BOM within a target range

Licensing Agreements

A licensing transaction is when a third-party agrees to purchase the rights to use your IP for their own purpose.  In most cases, buyers who choose a licensing agreement (“licensees”), build and produce the end product or component as part of their “whole product” offering.

While OEM agreements are the “holy grail” for those manufacturing product, licensing agreements are the rocket fuel that can drive and monetize Research and Development efforts if you don’t have a go to market strategy as described above.  These deals can be complex but lucrative, and share some of the components with their OEM counterparts.

Pros:

  1. Highest gross margin revenue
  2. Can create high lifetime value per end-user
  3. Based on historical R&D performance

Cons:

  1. Trust but verify – you’ll need to have appropriate audit rights to ensure that you know your IP is being used and sold
  2. Agreements need to have strong workaround language or need to be able to evolve as technology changes
  3. Agreements can take a long time to execute
  4. The number of licensees is limited to those for whom your technology has strategic importance
  5. As the number of licensees increase, this Revenue Channel will require its own manager

Joint Ventures or Revenue Sharing Agreements

These relationships require careful thought and planning as they are generally designed to be long term in nature.

Joint Ventures are generally separate legal entities incorporated in the location where the business is to take place with their own (local) corporate governance guidelines.  In contrast, Revenue Sharing arrangements are not separate legal entities but a contractual agreement between two or more parties.

The nature of each agreement is customized for their respective market but you’ll need to agree on, at least, who covers what expenses, current and future product offerings, what type and how much technical support will be provided, product transfer pricing and legal liabilities.

Joint ventures are often created when the parties are bringing a new product or technology to a new market.  Revenue Sharing agreements are usually created when there is a decent product market fit in the primary market, but the operator is seeking to expand beyond is current target market or geographic borders and doesn’t want to commit its current go to market resources to this new target market.

While both strategies have an element of reduced execution risk because there is at least an additional invested party in making the business work appropriately, don’t be fooled.  If you want to make this arrangement successful then you’ll need to work as hard or more than any other revenue channel.  This seems counterintuitive because, while your partner is “invested” in this relationship (monetarily or otherwise), they’re not going to be as emotionally invested as you.

Pros:

  1. Startup funds shared between partners reduces financial risk
  2. Local presence in market assists end-users and legal requirements (local “tenders”)
  3. Creates a legal buffer between parent company and the operating entity, thereby reducing legal liability

Cons:

  1. Requires significant investment in personnel, training and support at the outset of the relationship
  2. Senior leadership must be part of the governance, decision making and audit process as part of its daily operations taking away focus on core operations
  3. Vetting and review process – as you’re gearing up for a long term relationship, make sure you know your partners and any challenges they might have
  4. Increased administrative costs – as JVs are separate legal entities they’ll have some of their own latent administrative costs

So Which Revenue Path is Right for You?

After reading this lengthy discussion you might be left with asking this question.  My answer is that it depends on several factors including:

  1. Product & business model maturity
  2. Capabilities of your team
  3. Desire to approach new markets (industries or geographies)
  4. Current financial situation
  5. Scope and size of addressable market

Bringing it all together

Because any dollar of revenue is a worthwhile pursuit, it’s easy to understand why you’d want to concurrently pursue all paths to Revenue as you’re launching (or relaunching) your business.  As you’ve come to appreciate from the above analysis, this simply isn’t true.

The initial and ongoing effort required to achieve your first dollar on any of these Revenue channels varies and is dependent on a number of factors including your current product-market fit, your internal team’s capabilities to manage the Revenue Channel and your current financial situation.

I’ll address each of these in a separate post in the near future, stay tuned.

Blair Carey is passionate about using data to help companies meet their mission and purpose which is why he created Insidecro.com as a place where CROs can collaborate on anything they’re thinking about.

You can find him on his LinkedIn profile here.