Direct v. Manufacturers’ Representative: How Best to Organize a Sales Team
Sales executives are constantly searching for the optimal structure of the sales team. Should the team be composed only of direct sales personnel? Should the team be composed only of manufacturers’ representatives? Experience shows that a hybrid sales organization, composed of a blend of direct and indirect sales employees, (manufacturers’ representatives), provides a combination of optimal performance, cost effectiveness and flexibility.
If one observes several sales organizations over an extended period of time, he’s able to observe that relatively frequently, sales executives make sweeping changes to those organizations, from all direct to all rep, and from all rep to all direct. Invariably, the observer is able to note that sales management ultimately reverses many of those sweeping changes. Sometimes sales executives are able to benefit from observing changes made by others. Unfortunately, too many sales executives develop the understanding of the benefits of a hybrid organization by making one or more poor decisions and then repairing the organization after problems surface. The most durable of sales organizations are those that employ a hybrid technique, employing a mix of both direct sales personnel and manufacturers’ representatives. Sales teams composed entirely of all direct personnel or entirely of manufacturers’ representatives are generally suboptimal.
Why “Direct Only” Sales Organizations Are Suboptimal
Many CEOs and executive teams believe that the best way to build relationships with customers is with a sales team composed only of direct employees. In this example, sales personnel cannot be distracted with unrelated business and other product lines. No one can blame the inexperienced CEO and executive team for thinking this way. One hundred percent of the direct salesman’s time is devoted to the company. Distractions are kept to a minimum. However, experienced CEOs and executive teams understand that a direct sales team is a luxury that needs to be examined thoroughly before being implemented.
Direct sales teams are quite expensive to train and maintain. The company must maintain offices in all major markets. Those offices bring along with them a collage of costs: rent, administrative support, office equipment, utilities, etc. A competent manager who can work well and represent the company without direct supervision must manage the office. That manager must be trained and occasionally upgraded.
When sales are growing, the office manager must hire and train new sales personnel. He must be trained in hiring and training techniques. He must be trained in firing techniques too, in order to avoid legal problems. As sales grow, the office must expand to meet growing demands upon the sales office. Cost of sales rises as sales grow. Sales, however, do not grow forever. Ultimately, sales flatten and roll over. Sales usually roll over earlier and more abruptly than hiring plans. Sales may dip at anytime during the year, but hiring plans are usually set at the beginning of each calendar or fiscal year. As a result, hiring is sometimes still underway when industry and office sales are falling. Such dynamics create an environment whereby cost of sales, (as measured by the total cost of running the sales office, divided by the total revenue that the office generates, expressed as a percent of sales) rises rapidly.
When a sales office has substantial sales, cost of sales can be managed and maintained at a predetermined level. If sales grow for a long period of time, the office can be managed to reduce cost of sales. The sales office can benefit from economies of scale. A sales office supporting 20 salesmen doesn’t require more copiers, fax machines and conference rooms than an office supporting only 10 salesmen. Unfortunately, sales ultimately roll over. Office costs cannot be cut immediately. The office manager must usually observe several months or quarters of declining sales before realizing that costs, including headcount, must be reduced. During this time, cost of sales rises, sometimes well above tolerated levels. The inability of the sales office manager and the company to reduce costs quickly is a chief reason that totally direct sales teams are undesirable.
Why “Rep Only” Sales Organizations Don’t Yield Peak Performance
Rep only sales organizations afford a number of benefits to the sales executive. The sales teams are already in place. Hiring and firing of salesmen is not the direct responsibility of the sales executive or his regional sales managers. Manufacturers’ representatives generally hire and fire in accordance with the level of sales available. The cost of running a rep only sales organization rise and fall directly with the level of sales. A significant benefit of the rep only sales organization is that cost drops immediately when sales drop. Cost of sales, (as a share of total revenue) can be accurately forecast. Cost can never get out of control by hiring too many salesmen, buying too many computers, or leasing too large an office.
Manufacturers’ representatives are not always the panacea for companies looking to hire or expand a sales organization. Large customers often demand to be serviced by direct sales personnel. Large customers view their largest suppliers as strategic partners, and like the ability to communicate directly with those suppliers. Communications is sometimes slower and less clear when a customer must communicate with a manufacturers’ representative, who in turn communicates with the supplier. Customers may set the style with which they deal with suppliers as part of their purchasing strategy. For example, they may decide to deal with no more than two or three suppliers on any commodity and to deal with those suppliers on a direct basis. This disallows conducting business through manufacturers’ representatives. A supplier must recognize and honor such a strategy, or be prepared to suffer undesirable consequences. A supplier must never turn a tin ear to a request from a customer to be serviced by direct sales representation.
Large suppliers view their largest customers as strategic partners, and like the ability to communicate directly with those customers. They view the delay when communicating through a manufacturers’ representative as an unnecessary burden. When large suppliers invest management time with strategic customers, they do not want to dilute that investment by sharing management time with manufacturers’ representatives. The incapacity to provide direct coverage to strategic customers is the primary reason that a sales team composed only of manufacturers’ representatives is unattractive.
First and Foremost: Do No Harm
Recognizing that something is wrong, many sales executives make bold, sweeping structural changes to their sales teams. Fire all reps and hire a direct sales team. Fire all direct salesmen and hire a network of manufacturers’ representatives. Either approach will certainly repair some problems. More than likely, however, extreme changes are very prone to creating new problems of equal or greater magnitude.
Why do so many companies replace one poor-performing sales organization with another that is destined to yield performance that is no better than the original? The two most common reasons are inexperience and weakness of the sales executive relative to the rest of the management team. Perhaps the inexperienced sales executive has risen through a single company with an all-direct or all-rep sales force. Now, managing the global sales organization, he opts for sweeping change from all-direct to all-rep, or from all-rep to all-direct sales without benefit of understanding thoroughly the benefits and problems with either a pure-rep or pure-direct organization. Alternatively, the inexperienced sales executive may have developed his management skill at a company employing an all-direct sales organization and was recently hired into an all-rep company. If he sees massive problems, he can’t be faulted for concluding that he must make a sweeping change to an all-direct sales organization. Only inexperience allows him to make a major, highly disruptive change.
Another reason companies make dramatic changes in the structure of a sales organization can be that the sales executive is weak relative to the rest of the executive team. If cost-of-sales, expressed as a percent of revenue is too high, the CEO, the rest of the executive team, or both can apply pressure on the sales executive to affect change and reduce cost. If the sales executive lacks the strength to defend his team or the structure of the sales organization, he merely becomes the messenger, not the manager.
The message to the sales executive feeling pressure to make sweeping change in a sales organization is to adhere to the Hippocratic Oath: First, do no harm. Any sweeping change imposed upon the structure of a sales team will initially be disruptive. Make sure that the disruption can be justified and be very sure that the change being implemented is not likely to be reversed. Sweeping change brings disruption, higher cost of sales and lower productivity. All of this might be worthwhile. However, if a sales organization is forced to accept sweeping change and then forced within one or two years to accept a reversal of that change, disruption from the reversal is much greater and more costly. A reversal of an organization change brings with it disruption, higher cost of sales and lower productivity just like the original change. However, an organizational reversal is demotivating to the majority of the sales personnel. Disruption, higher cost of sales and lower productivity can be repaired relatively quickly. Repair of a demotivated sales team takes much more time.
“Hybrid Sales Teams” Work Best
A supplier always looks to optimize its sales organization. If it’s forced to keep a constant focus on cost, use of manufacturers’ representatives is mandatory. The benefits of manufacturers’ representatives are too great to ignore. However, not all customers can be serviced with reps. Strategic customers demand direct interface, excluding the use of reps. The best alternative then, is to incorporate some of the best features of both a rep and a direct sales organization. Implement a direct sales team to cover the sales to all strategic customers, while simultaneously bringing about a sales team of manufacturers’ representatives to cover all other customers.
A hybrid sales team benefits from the cost effectiveness of manufacturers’ representatives. The same team can deal on a direct basis with strategic customers. The sales executive is afforded the non-disruptive flexibility when changes are made to the strategic customer list. A secondary benefit of a hybrid sales organization is bench strength. Well-seasoned, top-performing direct sales personnel represent a talent pool from which regional sales managers can be selected.
Experience shows that a hybrid sales organization, composed of a blend of direct and manufacturers’ representatives provides a combination of optimal performance, cost effectiveness and flexibility. The most durable sales organization is one that utilizes a hybrid technique. Sales teams composed entirely of all direct personnel or entirely of manufacturers’ representatives too frequently underperform.
This article first appeared at Suite101.com in April 2003. Glen Balzer is a marketing and sales consultant and involved with marketing and sales. He advises parties involved in relationships and contracts between suppliers, manufacturers’ representatives, global customers and industrial distributors. He has significant experience with integration and rationalization of merged and acquired companies. For over 30 years, he has been involved with establishing and managing marketing and sales organizations throughout North America, Europe and Asia.
Contact him through his Web site: www.neweraconsulting.com