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Ep47 Unlocking Value with Commercial Ratio
Episode 4723rd July 2020 • Inside: Sales Enablement • Scott Santucci, Brian Lambert
00:00:00 00:55:36

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Welcome to the Inside: Sales Enablement Podcast Episode 47

In this episode, the guys are joined by Tom Pisello, the ROI Guy who shares his thoughts on the commercial ratio.

To calculate the commercial ratio of your organization (www.commercialratio.com):

  1. Take your current annual revenue 
  2. Subtract it from the annual revenue of the previous year 
  3. Divide it by the total sales and marketing spending 

The guys talk about :

  • Why value is so important to understand in sales
  • Why value is critical to sales enablement programs
  • How sales and marketing are viewed as "growth programs" by investors
  • The relationship between strategy and tactics in creating ongoing programs to improve value communication with a portfolio of sales teams
  • The fundamentals of calculating the commercial ratio
  • How the commercial ratio is used by investors and executives
  • The role of Sales Enablement in moving the needle on the commercial ratio

Join us at https://www.OrchestrateSales.com/podcast/ to collaborate with peers, join Insider Nation, participate in the conversation and be part of the continued elevation of the profession.

EPISODE TRANSCRIPT:

Intro 00:02  

Welcome to the inside sales enablement podcast. Where has the profession been? Where is it now? And where is it heading? What does it mean to you, your company, other functions? The market? Find out here. Join the founding father of the sales enablement profession Scott Santucci and Trailblazer Brian Lambert, as they take you behind the scenes of the birth of an industry, the inside sales enablement podcast starts now.


Scott Santucci 00:33  

I'm Scott Santucci.


Brian Lambert 00:35  

I'm Brian Lambert and we are the sales enablement insiders. Our podcast is for sales enablement, leaders looking to elevate their function, expand their sphere of influence, and increase the span of control within their companies.


Scott Santucci 00:48  

Together, Brian and I have worked on over 100 different kinds of sales enablement, issues as analysts, consultants or practitioners, we've learned the hard way, what works, and maybe what's even more important, what doesn't.


Brian Lambert 01:01  

And our focus on this podcast is we are in season two is on sales enablement, leaders and orchestrators. And as you know, companies are often structured in hierarchical silos. And the topics that we're covering affect not only sales enablement, leaders in talent or pipeline or Message Enablement, but also in commercial enablement. And that's what we're going to talk about today. Because when you look at operating in the space between strategy and execution, and having to bring those together, and that's a big challenge that you're facing, because it involves the concept and the discussion with the executive leaders around, Hey, you know what, give me give me more, give me more remit, I'm going to give you more impact. You're going to spend less money and get more from it. And that's a tough concept to land as an Orchestrator. So Scott, why don't you set us up here on the podcast and share who our special guest is?


Scott Santucci 01:55  

Sure. Look forward to a Brian and insider nation. Let me just sort of summarize a couple things of where we've been. We've done probably the most research about post COVID, around sales enablement, then anybody, whether it be Gartner Forrest or anybody else. And we've been expressing that in terms of a series of webinars that we're doing through my company growth enablement. So the first one that we had was about sales and a was at a crossroads, where we first introduced this Orchestrator concept. Brian's really seized the reins on that. So we've had a lot of webinars around Orchestrator. Well, part of the difficulty then is how do we communicate the business value of Orchestration. And the last webinar that we had was around Commercial Ratio. And knowing the Commercial Ratio is so challenging knowing that it's really difficult to put your head arms around this, this fuzzy notion of the value proposition to a CEO saying, hey, you should invest in a sales enablement department. And the more investment that you give me, I'll give you less stuff. And in return, I'll get you'll get more.

So how do we make that come to life. So that's really where Commercial Ratio comes in. So as if you've been participating in the webinar, if you didn't participate in the webinar, Brian will make it available. We have a micro site called Commercial ratio.com is we need to make these concepts more accessible. And as we were leading up to it, I reached out to my friend, Tom, the ROI guy, because I thought, you know, this is this is a person who's going to really resonate with it. So by by introduction, Tom, you and I have known each other for a long time, I'll let you give you some context about how much we've known each other. One of the things that Tom's done, so we started, I was the ROI guy, he built a business that was focused on visualization and simplifying ROI for salespeople. So he's been doing this for lots of companies for a long time. So much so he wrote a book on it. And he wrote a book on it called frugal nomics. And I don't know what I don't know if you've ever heard this before, Tom, but for whatever reason, I just associated with Fraggle Rock. I don't know why that pops into my head. I'm excited. Little Muppet scones. Yeah, exactly. Right. Little Muppets, and maybe we need to do that because the little Muppets will help us make talking about this stuff. simpler, right. Maybe we need to maybe do that.

So I'm really excited to have Tom on here. And we've asked Tom, hey, you wrote this frugal nomics book or I asked Tom, you wrote this frugal anomic books, you know, based on the last great recession. We're in a completely new world here. What if we update it? So as part of that part of that process, I've invited him to be an ambassador around Commercial Ratio. So we're, we're having Tom join us. So Tom, would you give us a little bit, give our audience a little more background and color about yourself and you know, your involvement and the history of ROI and metrics and all that good stuff.


Tom 04:55  

Yeah. Scott and Brian, thank you so much for inviting me to the Join the nation and to be an ambassador for the Commercial Ratio. I've been in the value measurement business for a long time for about 25 years. And why the Commercial Ratio and I've had I've got such an affinity for it back in the day when I was working at Gartner. And just after I left Gartner, I partnered with a gentleman called Paul strassman. And Paul had done just some incredible articles and books and had dedicated his life to finding what he called it productivity. And it was something called the it productivity paradox that he had discovered through his research. And in this research, he crunched the numbers for hundreds and hundreds of commercial organizations, these were all public companies, and what he was trying to do, being a research scientist, and he had been basically the CIO for the Pentagon. So incredible credentials, and he was the data guy at heart and analyst at heart. And he was looking for that productivity, where was the productivity and all of these it benefits manifesting themselves in organizations. And what he found founded was, most organizations were investing a lot of money in information technology, substantial amounts of their revenue was being invested in it. And most organizations, it was not showing up in the corporate financials, it was not showing up in the income statement, it was not showing up in stock value, any and it was being squandered, somehow, along the way. And this led to a book by Nicholas Carr. And it featured Paul and myself our research and our findings in that book. And for those who remember, that was the book that really started the cloud and software as a service revolution. What was the book, it was called, it doesn't matter. And it came from an article he wrote in Harvard Business Review. And then he wrote a book about it. And it was really a changing point in the whole it landscape.

It was with that book that folks began to realize, look, we're squandering a lot of these it benefits. And we can't find them in where we'd expect to find it's not creating additional shareholder value, which is what most companies are beholden to, from their value standpoint, it wasn't showing up in massive amounts of cost savings, because what they were saving and productivity or saving and cost avoidance in one area was somehow being spent on it and development it. What it turned out to be was that companies shouldn't be spending as much on this, because it's probably isn't their core competency. And they should be outsourcing it to the cloud, and software as a service. But there was a productivity paradox there that I thought was really profound. And it led to that revolution to where it today doesn't look anything like it looked 20 years ago, or even 10 years ago, right. And when you Scott and Brian introduced the Commercial Ratio to me for the first time and I saw it, I wrote down and I'm looking at the piece of paper because I kept it on my desk, and I wrote down sales and marketing productivity paradox. I wrote that down right away, because once I saw what you were doing, where you were looking at sales growth, as the output, and sales and marketing investment as the input, and the ratio of those those things, it reminded me so much of that work with Paul, and with Nick Carr. And where we looked at, you know, here's the it spending as the denominator. And then we were hunting for what what was that numeral, what was the numerator, and that there was a paradox there. And what your ratio was showing is that when most companies take a look at the input, the investment in sales and marketing investment versus the output, the growth in the company that's being experienced, that there are ratios that are really not sustainable. And I'm like, yeah, this is really hitting on something very similar.

The better thing about the Commercial Ratio, then what we struggled with was the numerator and the denominator, I think, are very well understood for the Commercial Ratio. You know, you could look at sales growth, and it's measurable. It's measurable in the corporate financials, you can look at the sales and marketing investment. It's in the corporate financials, your CFO has access to both of these metrics, whereas in the IT world, it was a little bit harder. But similarly, and why I use the word paradox is, I do think that we're at this time where we're spending so much in sales and marketing, and how much of that is being squandered? How much of that is being wasted? How much is not sustainable? And that's what really hit me was, when I started to, all of a sudden I saw the ratio, I'm like, Okay, let me run this company through it. And I'm working with let me run this company that I'm advising on, let me run this. All of a sudden, I'm looking at These ratios, Scott, and they were not good. Yeah, exactly. You know, and I'm looking at it like, Oh, now I know why technology crossover ventures why TCV is using this now with their portfolio companies. I'm going to talk about that a lot more, I'm sure.

But it became obvious to me that, that they need this because they're creating businesses that are not sustainable. And we, when we hit a crisis, like what we're hitting right now, you need that sustainability. It's not billions or bust, right? It's not billions or broke, it's, you know, we've got to have growth, right, because all of these companies that TCP and some of the companies I advise are more earlier stage companies are are involved with, they've got to grow. So you know, you're going to be spending not completely efficiently or effectively, but the amount of inefficiency and the amount of effectiveness. That's the paradox. And I love that that's what the Commercial Ratio is trying to get at.


Scott Santucci 10:58  

So I love your story. Well, I want to go back to the it part. So I want to connect the dots for our listeners. So the IT organization over the history of, you know, over its history, it used to report into finance, right as today's a controlled cost center, somewhere between, you know, the late 90s, maybe after the post y2k debacle right in the post y2k stuff, it started shifting to where it was no longer a technical person running him but a business leader. Mm hmm. Because executives were so frustrated that people would show up and I want to give that paradox some color. When I was a salesperson at Mehta group, so you say Gartner group, I think great Satan. That's the way we were we had a chip on our shoulder at Mehta group about you guys competing against the Gartner budget was difficult. So you learn, let's not make it about the Gartner budget. That's that thing, go. And so you try to find new budget sources. So one of the things that we would do, or I would do, I remember specifically working with the CIO of Hearst.

So hertz is a German chemical company, they had moved their headquarters to New Jersey, which was my territory. And the CIO, was very frustrated, because all of these business unit heads, which we're now located, whom he added to support, we're just pounding on it, like so frustrated, and he wanted to show he kept showing me Look at all this benchmark data, he he had hired IBM, or any of the other people, you know, go through the laundry list. And he said, Look at all these nines, look at all these nines of performance. Look at, you know, any key he wanted to do, he wanted to ask me about, maybe we could do a benchmark study. And I said, I said that his name was Frank, I said, Frank, we could keep doing the same thing over and over again, but they don't understand these nines, what these nines of availability mean, because this is a metric that's important to you. It's not a metric important to that. And for us to solve this, we'd have to have a completely different conversation, which is more like a customer experience study. And let's figure out what the what those measures are. Well, he just couldn't get his head around that. So I said, Okay, well, I'm not going to sell you a benchmark, because that's only going to make it worse. And you know, lo and behold, six months later, he was fired, replaced with a business person who loved the whole idea of a customer's right appearance. And, you know, I sold a lot of business from that.

Now, the reason I bring that up is because that's a paradox. Hmm. You know, I think, very well stated, I think all these individual metrics are really, really, really important because I have to do it to run my technical department. And if we're not running our technical department correctly, we have to be able to, you know, and we want to show how efficient we are. But that's not what the business cared about at all. So the more he was digging down on these secondary metrics, the more he was alien himself from the business people. Now, let's fast forward to where we are in 2020. And then I'll like, yeah, and


Unknown Speaker 14:18  

Scott, let me just chime in on that real quick. So the the downtime figures of the availability figures are important to deliver the customer experience, but it's the customer experience that the board cared about. And I think there's an important, you know, emphasis there that you're making. You know, you do have to measure that availability. And you do have to make sure that you're you know, that you have that measure, but ultimately, that's there to drive that experience. And you could, it's not like we're saying don't measure the nines, but go in measure the thing that's important at the board level. Yeah, the other metric that we


Scott Santucci 14:56  

don't, I don't share all the nines with the practical Maybe they don't care, maybe you find out because what you know, here's an example, when we went and talked to some of the business leaders, particularly the guy responsible for sales, he was super frustrated with email. So basically what this guy did is he set a massive standard for email, because he was trying to control cost storage, and then lock down the email. But guess what, when the documents that these guys are sending, the salespeople are sending, at the end of the quarter, by the way, at the end of the quarter, there's a massive amount of these documents that they're sending, they're getting email it, they're getting alerts to the sales organization, this is shut off their set saving, what five cents, versus the risk of salespeople. So these are the examples that


Unknown Speaker 15:44  

and that was the other thing at Gartner. And how I got to Gartner was with total cost of ownership, right and, and you know, you're measuring the, the input figure, which is the investment in it. But if you just did that, and you didn't focus at all on the output, you were also making a mistake. So it's not just about the cost. And it's not about these detailed metrics that are giving you the direction of where you're going, you gotta elevate up to something that's going to be meaningful to your stakeholders and your leadership, that's going to kind of get you a place at the big table.


Scott Santucci 16:23  

Yep. So to highlight this, let me kind of just transition here to our next phase. So the hopefully, you can see the connection point, the connection point being, hey, look, the IT department was in a state of immaturity, you know, back in, you know, the early part of this, this century, and it's evolved a lot. And where are we in sales and marketing? Well, we're treating them as two different things. And you know, for if you look backwards, from an investor standpoint, there's a line item on any income statement, depending on which income state you can look at it, it's either gonna say s GMA, or increasingly sales and marketing. So on that line item, all that spending is is all lumped together as one thing. Now, whether or not you choose to decide sales and marketing are different things to investors, and to your CFO, they are not different. And that's what we want to transition to is that that's the goal, the Commercial Ratio. So obviously, Tom and I can geek out about these metrics and the history of metrics at ways to Sunday, what we heard a lot of feedback from the Commercial Ratio pitch, or webinar is, hey, next time you do something like that, give me a heads up so I can bring a calculator. So what we're going to do is we're going to have a way to sort of make it more relatable. So we're have Brian, lead you through and just walk you through and say what are your reactions to the Commercial Ratio? What were the key parts and sort of get your your get your take on what the conversation was like to make it more relatable to our listeners? So Brian, would you like to eat, you know, introduce that and lead us through that discussion?


Brian Lambert 18:03  

Yeah, absolutely. And I think a great segue is this, this paradigm paradox you guys are talking about? And, and also the, if you think about it back then versus it now that's, that's really good. And I want to hook into that. And, Scott, one of the things that you said in the webinar when you when he talked about the...