Ep61 Quantifying SE Contribution with Erik Host-Steen

Inside: Sales Enablement

Welcome to Inside: Sales Enablement Episode 61

In this episode we're joined by long-time listener Erik Host-Steen who appreciates getting into the meat of some issues. Since we like introducing ideas and inviting people to participate and push back, Erik reached out to discuss business outcomes and business impact of Sales Enablement.

Erik finds that sales, marketing, and product leaders are often working at cross-purposes. One way to get alignment is through business impact measures. What are the goals of the organization? And certainly, growth is usually a part of that. And that growth is for some purpose, value creation, profitability, etc. And then if it's a venture capital backed, firm, there's an exit. So then we have to have an eye toward valuation. And the top typical valuation models have many other factors involved rather than the Commercial Ratio we discussed on the show.

What does the Commerical Ratio really add to the toolkit in terms of being able to solve growth problems being able to drive toward a particular valuation or profitability? Find out as we walk through the top-down view of business impact measures so you can quantify your business impact of the sales enablement function.

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.

Brian Lambert 00:33

I'm Scott Santucci. 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, I've worked on over 100 different kinds of sales enablement issues. As analysts, consultants, we're practitioners, we've learned the hard way, what works, and maybe was more importantly, what doesn't. And

Brian Lambert 01:01

our focus is on you as sales enablement, leaders and orchestrators. In that role as an orchestrator, you have to blend both tactics and strategy to execute. Our goal is to help you clarify the measures of success, provide an example of what that looks like to execute, and work together across your function across your organization. And then give you confidence to engage up down and across so you can drive results. And on this podcast today, we're just really excited. And it's really awesome to have another insider join us. We've got Eric hosting with us. Hi, Eric, how you doing?

Erik Host-Steen 01:37

Great, thanks. Thanks for having me.

Brian Lambert 01:39

Absolutely. And I was, I wanted to bring you in, because you and I had both had a conversation on the heels of the Commercial Ratio webinar. And I learned a little bit about you, you've got you fixed sales and marketing and product problems. You've been with Rogers Corporation, and hoche and Red Mountain, and you're very process driven and quality focused, and have a product marketing background in business development. And, you know, one of the things that I learned about you as you really are focused on having a dialogue, to understand but also where things maybe don't necessarily come together for you, you want to have a discussion. And that's what we're doing here today. I thought, Well, you know what, instead of having the conversation between us, between you and Scott, let's have you on the show. And you can ask Scott yourself. So thanks for joining in, tell us tell us a little bit more about yourself, Eric will do.

Erik Host-Steen 02:31

Yep, longtime listener or I've been listening here for for quite a while. And if the podcast is made the cut into my the ones that I always listened to. What I appreciate about it is not just sort of soft, fluffy interviews, but get into the meat of some issues and introduce some new ideas and you invite people to participate and push back. And that's what I'm why I'm here. My practice what I do I explain it in a fun way I fix or prevent a condition that most sales enablement people have experienced, I call it round canoe syndrome. And round canoe syndrome happens when we have sales leaders, Marketing Leaders and product leaders all in around boat, each with a paddle rowing in the direction they think they need to go.

Brian Lambert 03:18

Awesome. That's a great setup for this conversation. So tell us and tell our listeners and tell us why you're here. And what your questions about the Commercial Ratio.

Erik Host-Steen 03:30

Yeah, I you know, so I listened to the prior podcasts that talked about Commercial Ratio and watch the webinar also. And, you know, I appreciate this idea of how do we try to drive sales and marketing efficiency and alignment. But what I've thinking about it, I come up with two words, incomplete and unnecessary. And that's what I would like to explore a little bit today and try and find out from a question standpoint, what, what really is this Commercial Ratio trying to accomplish? And what does it do that other tools and methods that already are in place don't accomplish?

Scott Santucci 04:11

Excellent. So I think let's start with to our listeners know, we so we've published a podcast on the Commercial Ratio or two podcasts, we have Commercial ratio.com microsite and then we also have done a whole webinar on it. So we've shared a lot about that. Let's talk about let's let's break down incomplete and unnecessary. Let's first talk about incomplete what what about from from your lens? What, what is your perspective of it? What's incomplete and what is the purpose of the ratio from from your understanding?

Erik Host-Steen 04:51

Sure. So when I think about the things that drive revenue, it's it's more than marketing and sales and Something that I always think about is is left out in the sort of sales and marketing alignment piece is what about the product. And that's not captured in here. So if we're if we're looking at it trying to drive growth, and neglecting whether or not the product portfolio is keeping up whether product quality is where it needs to be, whether customer support is what it needs, what needs to happen. You know, one of the stories I like to add observations from my past experiences, we do a great job bringing customers in, but the rest of the organization would run them out back to our faster than we could bring them in the front.

Scott Santucci 05:39

Excellent. Okay, so then what? So you're saying, What would be your alternative for what's, what would make it more complete?

Erik Host-Steen 05:50

Well, I think that the bigger question is, what are the goals of the organization? Right? And certainly, growth is usually a part of that. And sometimes not, you know, sometimes you think of a lifestyle business. And growth really isn't all that important. But the sense of the types of organizations that were usually involved with growth is usually a component. And that growth is for some purpose, value creation, right profitability. And then if it's a venture capital backed, firm, there's an exit, right? So then we have to have an eye toward valuation. And the top typical valuation models have many other factors involved rather than a Commercial Ratio. So you know, that's, that's the it gets to Well, what what does it really what does it really add to the toolkit in terms of being able to solve growth problems being able to drive toward a particular valuation or particular profitability?

Unknown Speaker 06:53

outcome?

Unknown Speaker 06:55

That's, that's part of it. Mm hmm.

Scott Santucci 07:00

So let's, um, let me provide some responses back in a in an ordered way, and not overwhelming way. So first and foremost, having conversations about these things are awesome. So this is what we want to have what we want to have happen. So step number one would I did? Do I disagree? That there are many factors that go into revenue? No, of course, not. As a matter of fact, the entire company's revenue engine, everything it does, should be driving to revenue. Totally agree with there's no disagreement there. So the question then becomes the role of the Commercial Ratio, and what what its intent is to drive balance across not, it's not just about driving balance across sales and marketing, it's a lens to look at the driving balance between how finance is accounting, and what investors see. So the difficulty is from an investor's standpoint. So just as a reminder, we co created this Commercial Ratio in partnership with TCV, which is a very large, well known private equity firm. And in talking with, after having published that publish that work, we've now been in contact with other leading private equity firms who are all seeing a similar problem. So from their perspective, what they see again, their investors so that they'll look at things more like the income statement. And to your point, and I'm glad you brought this up, Eric, the kinds of things that go into making the company valuable, versus the kinds of things that investors see as valuable. So we'll cover the the valuation metrics later, are two different things. So I'm gonna pause there. Are we in alignment so far?

Erik Host-Steen 08:56

Yes, yes. And this, this accounting thing is, I think important.

Scott Santucci 09:03

Yes. And I think this, it's really important. It's where we, where we can get where we can get lost. So I'm going to share with you some really interesting things, I was anticipating about the incomplete part, because how exactly do you account for marketing investments that aren't earmarked for growth, for example, or there's all these little nuances, unfortunately, there about accounting rules. And, and, and when you're looking at metrics from a financial standpoint, from the investors, we have to worry about the ways that things are accounted for, and also the rules of what goes into what bucket. So unfortunately, unfortunately, we can't be theoretical at all there because there are laws that people follow. And if you look at the revenue recognition laws and rules that people follow. Each company can make different choices amongst themselves. So there's a lot of work that needs to be done to figure out which being goes into what bucket. Right? Okay.

So that's one of the things that's been so challenging from the investor to the company view, about how to get clarity of what's happening. I will tell you that over the past five years, the degree of frustration, of the return of investment that investors are seeing and sales and marketing has grown increasingly more frustrated. And maybe we have a negative consequence that a lot of these random acts of sales enablement, are coming from frustrated investors who are just telling them to go do different things. So I will definitely say that investors are part of the problem. And I think part of what we need to do is better understand where they're coming from, and what what metrics that they're looking at. So I'll let you I'll let you respond to that. Because and by the way, Eric, I'm I'm trying to do is be very step by step approach, so that we can find out where we agree, where we disagree, and then how might we amend this analysis so that we can make it more complete? And then hopefully, if we make it more complete, then we'll see why it's valuable or necessary, instead of being unnecessary. That's, that's my goal.

Erik Host-Steen 11:25

Right? So from a gap standpoint, gap standpoint, yeah. Sales and Marketing belong in SGA. And I think I picked up one of the things that creates some some of the trouble which is there are very few people on the commercial side that have a deep enough understanding of accounting. And then they hear the term cost of sales, which is just an out just a nother term for cost of goods sold. Even though it says cost of sales, it gets lost in the translation of accounting English into normal person's English

Scott Santucci 12:05

spot on right.

Erik Host-Steen 12:08

And so, you know, they're in and of itself creates a lot of confusion.

Scott Santucci 12:12

Whoa, glad we're having this conversation. Keep going.

Erik Host-Steen 12:15

Yeah, we call it costs of sales. But we don't put costs of sales in that bucket. Well, one of the phrases I have in my in my in my in my toolkit is that the beginning of alignment starts with the definition of terms. And cost of sales might be one of these great examples that causes confusion, because when you deconstruct it from an English standpoint, anyone except for an accountant would say, Well, of course, sales goes in there.

Scott Santucci 12:44

So that's, so what we're talking about for those of those of you who need a visual because I need a visual when I think about an income statement. Eric and I right now are talking about the definitions of an income statement. So you've joined this podcast, and yes, we're actually talking about gap financial standards, and we're talking for sales and marketing. So yes, it's super exciting stuff that we're getting into.

Brian Lambert 13:10

We're just I'll say, also, for our listeners, because sometimes I take the voice of our listeners, and I interrupt people at awkward moments. But if, if you're wondering if you should go switch to something else, I would say do not do that. Hang in there. And if you're not sure what's happening, reach out to us because, as Eric just said, there are very few people in sales and marketing who actually understand this. And, and this is part of the challenge. So hang in there,

Scott Santucci 13:37

no huge part of the challenge. It's it's. So let's first talk about cost of sales. So Part of , and then let's talk about sales and marketing expense or SG&A. Right? What what they're saying, in plain speak language is that there's money that you spend in order to get the revenue. That's what's cost to sales. Sometimes it's referred to cost a revenue. You can you can call it either one, then there's sales and marketing expense that we would think of that is OP x or operating expense. And what the investors are looking for is, and this is where some of our sales leaders are where we've gotten some challenge on Commercial Ratio, Eric, from from people from the sales perspective, right? their view is 100% of the revenue coming in is related to the sales effort. If you're looking at it from an investor's standpoint, they're saying even if we got rid of the Salesforce, we would still be generating 80% of our revenue anyway, and the Salesforce is very expensive. So to talk like that is an invitation to get a practical exam on what your expenses are. Right? So that's one challenge.

So to your point, Eric, this is all about the accounting. Now the other angle, It is, what do investors think the purpose of the sales and marketing expense are. And they think it's to drive revenue growth, not revenue, revenue growth. So that calculation is the difference between what you saw last year, what you sold this year, whatever that delta is, that's what your contribution was. And then that's what they want to do is hold that line item that's on the OP x expense accountable for it. Now, the other key aha moment for me talking to these investors, so we talked to when we were working on it, we talked to so how how investors work is they put one of their portfolio people, one of their operating partners, they sit on these boards. So we talked to six of them. So basically, six people who are on boards of directors, each of three different companies. And universally, they all said that when they look at the retain revenue bucket, they expect most of that money to be paid for out of cost of revenue. So for example, your your customer support, people are going to be allocated or accounted for in that cost of revenue bucket. So just having that clarity was illuminating for me, because I was thinking, How much money do you spend to retain your customers? I thought that was a sales and marketing expense. And yes, there's some gray area, there's no absolutes, I'm just trying to give the rationale of where, where they're coming from with this ratio. And part of what they're trying to do is, of course, the investors think the only two people in the company that know anything are the CEO and CFO. Right. So that's, that's their bias. And the difficulty that the CFO has is how do I connect the dots between these budget expenses and these levers that our investors are driving pressure for, to the activities that sales and marketing keeps asking for more and more budget? And that's really where the tension point rests from the top down perspective?

Erik Host-Steen 17:09

Yes, right. And there are none of these. And within the frameworks of gap, or whatever financial standards of private equity VC firm is going to use. There are there are guardrails. And there's the cliff where you go to jail because you break the rules. Yeah, right. And there's a lot in between, yep. And to correct. And when we start thinking about getting into the publicly traded realm, and let's say, your portfolio manager for Goldman Sachs, or someone like that, being able to do apples to apples comparison, when there are no standards within gap on, you know, does Customer Success belong to sales, marketing? Or does Customer Success belong to cost of sales, because their job is to retain customers, using a ratio based on publicly traded publicly available information to draw broad based conclusions, I think is dangerous

Scott Santucci 18:14

to what makes that dangerous versus empowering. So I would argue, literally, for everything that you just said, I would argue the opposite perspective, and it's actually empowering. So tell us why you think is dangerous,

Erik Host-Steen 18:27

because we don't know what's included in different numbers. And at the end, we have some, you know, the mathematics is very straightforward, right? I mean, revenue at the end of the period minus the revenue of the previous period divided by marketing and sales expense, like that's pretty straightforward. And we get some number, and what's it mean? And what's good enough. And if you're at, you know, 1.5 today, and you're given a, you know, you're not going to get your bonus next year, unless this gets up to 2.0. Is that really the right thing to start measuring and incenting on versus we want to see top line growth and top line and bottom line growth, customer retention, customer satisfaction, other other metrics that are more direct to what it is that we're trying to achieve, which is to build and grow a valuable...