The difficult economy of 2002 and 2003 continues to make enterprises think twice about spending more on technology and is leading them to evaluate new projects and extensions of existing projects according to stricter and more quantifiable measures of return. CRM continues to be a highly visible initiative at many enterprises. However, demonstrating a solid return has proven difficult, at a time when enterprises are clamoring for ROI justifications on even the most modest projects. However, companies can use hard metrics to measure the impact of technology, business process, and training to make an intelligent business decision.
This research note provides a framework for identifying which key performance indicators (KPI) are needed to build a model for tracking sales and marketing effectiveness, and identifying areas of improvement.
Good companies monitor, invest in, and change internal processes to improve leading and lagging indicators in a timely fashion. Lagging indicators tell companies how well they’re doing today, while leading indicators tell them how well they’re likely to do down the road. Financial numbers are lagging indicators that tend to serve as a rear-view mirror, quantifying the results of previous business practices. Leading indicators serve as the company’s headlights and provide an early view of likely future financial performance.
This model maps the ability to leverage leading and lagging indicators to understand the impact of a CRM decision. Leading indicators provide management with the opportunity to not only intervene early, but also affect future financial performance.
KPIs are key measures that gauge the success of the organization in a particular area, usually affecting the bottom line. These KPIs are
- Measurable today and over time
- Assessed regularly against preset corporate targets
- Tracked by decision makers throughout the organization
- Tracked across key dimensions or variables (e.g., time, product or product line, department, geographic location, sales representative)
This model begins to address the relationship between operational metrics (KPIs) that help drive change, the business impact of the metrics, and the financial result attained through improved operational performance. This model will help enterprises identify the initial KPIs they should track and provide a few examples of how to map the operational metrics to business value.
Sales-effectiveness KPIs include the following
Marketing-effectiveness KPIs include the following Marketing dollars as a percent of revenue
Average return on marketing
Total leads generated
Average response rate
Lead qualification rate
Lead close rate
Percent of marketing collateral used by sales representatives
Change in market penetration
Improvement in time-to-market
Number of feedback points
Marketing execution time
Message close rate
Building a Model for Sales Effectiveness
- Revenue per salesperson
- Average sale cycle
- Average deal size
- Sales representative turnover rate
- New rep ramp-up time
- Average administrative time per rep
- Percent of representatives that achieve quota
- Average time to close
- Average price discount
- Percent of accurate forecasted opportunities
- Average number of calls to close the deal
- Average number of presentations necessary to close the deal
- Average number of proposals needed to close the deal
- Average win rate
Follow these steps when building a model:
1. Choose the critical operational gaps and KPIs that are necessary to improve sales effectiveness.
2. Identify and map the business process necessary to achieve value.
3. Establish financial metrics using industry averages and internal company estimates. Define the benefits to the business.
4. Build a cost and benefit analysis by taking the cost of the solution and mapping the benefit stream over 1 to 4 years.
5. Determine the total value or ROI.
Exhibit 1 illustrates a model for understanding the financial value of sales effectiveness by applying KPIs.
The sales-effectiveness gap model helps businesses identify measurable business goals to assist in quantifying the business value of a technology solution, business process change, or training project. Organizations have typically not done a great job tracking leading indicators, even though these leading indicators serve as their crystal ball in determining future financial performance. It is critical that a model map the relationship among operational indicators, the expected business value, and the financial impact on the income statement.
Value and ROI are only justifiable if they are quantified against measurable business success. Using the above sales-effectiveness model, businesses can quantifiably measure CRM and sales effectiveness—which was previously unachievable. Here is just one example of how to quantify using a KPI., increased profitability from reduced sales administration time = number of reps x annual quota ($2 million) x expected reduction in administration (5 percent) time x 22 percent industry net profit margin = $22,000 per sales rep.
The Yankee Group originally published this article on 25 April 2003.