Business Developers – The Value of Rings
Reprinted with permission from Professional Marketing
I know many partners who are seriously conflicted about whether to include business developers in their firm’s present and future. Yet in corporate America, can you imagine firing an entire sales force? Okay, products and services can’t speak for themselves, so perhaps there isn’t much choice. And maybe that’s the problem. We have a choice. Your professionals can speak for themselves. Unfortunately, the vast majority are not persuasive communicators, or have never had any sales training. Inconsistent practice growth is often the result.
One of the most problematic issues in incorporating business developers into your culture has to do with compensation. The market value for good business developers is high – often higher that what professionals are earning. The egos of professionals simply can’t take the reality that a business developer could make more than them. Also, they are relatively unregulated in being paid for performance. However, if you can get past these ego-centric considerations, good business developers can drive thousands or millions of dollars for your firm, with a leveraged “model” that leaves the billable hour model in the dust. Stay with me while I take you through a compensation strategy that can help knock down barriers and perhaps even establish some respect.
It’s a Values Thing
The essential tug-of-war, is between how much business developers should be compensated and their value in the marketplace. Total compensation for business developers can be considerably higher than what firms are willing to pay – and what partners receive. Accounting and law firms I counsel are often stuck in the mentality of, “Let’s see how little we can get away with paying them.” Contrast this with consulting organizations and large corporations where the propensity is to deliver maximum reward for driving maximum revenue. Top business developers are driven by financial reward. If they perceive that the firm leaders are increasingly concerned about how much they are making, even while they are driving huge amounts of revenue, they will likely go where they are appreciated for driving revenue.
The Nature of the Beast
Let’s explore why these attitudes toward compensation prevail. Partners are raised in an environment that reinforces the notion that those who deliver professional services are more valuable than those who sell such services. A technically competent, highly compensated partner has worked hard to get to the top of the heap and sees little reason why that comfy perch should be invaded, or even shared. Especially with someone who sells for a living…someone who likely did not attend law school or pass the CPA exam!
But what partners fail to understand is what business developers are good at – what makes them valuable and worthy of respect and compensation. By dint of nature and experience, business developers are motivated by a pay-for-performance structure. “The more I sell, the more I can make” is their modus operandi. They are accustomed to selling large-dollar opportunities and spending a commensurate amount of time on the effort. And because they are not billing by the hour, they do not see limits on what their return could be.
These are big-game hunters who drive revenues by stalking large pieces of business and leverage their time selling them on a percentage basis. A deal that’s 10 times larger than another deal may or may not take 10 times more work, but that’s just the way it works. Compare that to the professional services mindset, which is enslaved to the billable hour. For lawyers and CPAs, a high billable rate is the tool to drive revenue and productivity, which spins off additional billable hours for others to deliver.
The business developer is a specialist in his or her own right, with skills and competencies different from, but not lesser than, those of technical experts and in-firm rainmakers. Determining a client’s real needs, which may be different from those the client initially expresses, is a demanding task that requires knowledge and experience. Working in a team environment to determine solutions, and positioning with persuasive communications that helps earn confidence and win the business, are equally challenging.
Most important, what business developers do best is what clients want most. According to a Ross McManus survey of 1,200 executives in 220 companies, the top five buying criteria of larger clients are:
- Business understanding – including decision-making & culture
- Responsiveness, and
In its own right, business development is not only a sophisticated skill set, but is a business art form that requires years of experience to perfect. The talent of the best technicians in the world can go unrecognized without a professional salesperson to understand it, see how it meets’ clients needs and negotiate its delivery.
Where We Get into Trouble
Unfortunately, many partners never take the time to acknowledge these differences. Thus they can never see why Mars (them) and Saturn (business developers) both belong in their universe. Here’s what often happens: A firm’s partners agree to seek and hire a business developer. Because they are used to attracting “the best and the brightest” they find a strong candidate.
The individual applies pedal to metal, and after a year or so, closes some impressive deals. In the business developer’s mind, he or she is succeeding. But behind the scenes (and not so far behind) partners are beginning to grumble. They’ve made some educated guesses and calculated that the biz developer may be out-earning them! The bad vibe, to say nothing for more overt grumbling, eventually gets to the business developer who wonders, “What do I need this for?!” and leaves the firm.
Get Over It
My recommendation to partners who risk running talented business developers out of town is “check your ego at the door.” Spend time with your business developer – get to know him or her and the challenges involved in bringing home the bacon. Break through those common, and confining ego barriers in order to get comfortable with the realities of how revenue is driven in today’s professional-service environment. Allan Koltin, consultant to many professional services firms, shares with audiences a chart showing NFL earnings by position. The quarterback’s earnings are vastly different from running backs, wide receivers and linemen. The market is setting the value of the positions.
Bottom line: Understand market realities, quit whining and share in the windfall!
Yes, But How?
It’s one thing to tell you to “get over it,” you’re thinking to yourself. But how do you structure a compensation package that minimizes disparity and maximizes collegiality and respect? Keep reading!
Like any aspect of your business, developing and implementing a business-developer compensation plan requires professional management. Seek outside counsel if you don’t have the internal knowledge to design and implement the plan.
Start by calculating base and total compensation according to the realities of your marketplace. In other words, start with targeted earnings and work backward. Analyze these calculations to determine how much revenue the business developer must generate in order to pay for himself or herself. In this way, you can start to get comfortable with the investment you would be making before bringing someone on board.
Consider a formula that resembles this one: The break-even revenue for a business developer equals base plus commission percentage, multiplied by the break-even revenue divided by your gross margin. Let’s say your business developer is hired with a base of $125,000 and a 10% commission. If your firm’s gross margin is 40%, the break-even revenue figure (the amount that covers the business developer’s base and commission) is $417,000. In this model, the individual brings in $417,000 in business, earns $167,000, and he or she is “paid for.” Once they reach this annual revenue level, they start contributing more than they are costing.
As you refine this calculation, you will need to account for various types of occurring and nonrecurring revenue, such as annual annuitized revenue for audits, one-time project fees, etc. But this basic calculation should get you on the right track, delivering a reliable formula for what you will need to invest.
In my experience, you can expect to wait a year or so for a solid business developer to reach that break-even point. Starting in year two, you start realizing revenue from his or her efforts and, over five+ years, this individual can have a significant impact on your firm’s revenue and profits. That’s a chief reason why bringing someone in and chasing them away in short order is such a wasteful and destructive practice. Once you get someone else in, you must re-invest in his or her startup period, a costly step to repeat.
Change It Up
Another best practice in business-developer compensation strategy is creating multiple base and commission structures that accomplish both high and low-leverage plans. For example $125,000 with 10%…$100,000 with 15%…and $75,000 with 20%. Typically, business developers with considerable experience are brought in at the higher base rate, with less-experienced people starting at a lower base. You and the business developer share the risk and you provide something of a cushion while allowing them the time to prove themselves in your firm.
A higher base is representative of the vast experience of seasoned professionals, plus it signals the seriousness of your intent, your belief in this individual, and your willingness to share risk.
Once they’re in your employ, you may wish to offer them a choice in plans based on the degree of risk tolerance with which they’re comfortable. Some will eventually want the lower base and higher earning power. This approach is known as “compensation leverage”.
You can also structure base and compensation according to territory. If the business developer is expected to take over a territory made up of many large accounts, he or she might start off with a higher base than someone hired to be a “hunter.” Established accounts have longer sell-cycles and sometimes more predictability than hunting, which often contains more risk and upside reward. However, compensation strategy should also include consideration for territory difficulty and firm philosophy. At IBM, our large account people often earned the most. At MCI, it was our major accounts people, who were expected to bring in new, larger accounts.
Whose Is It?
Another aspect of compensation that must be defined up front is what opportunities a business developer will be compensated for. It’s easy to imagine a scenario in which a partner, responding to news that a business developer has been working with a certain client, says, “Bob Jones?! I’ve known that guy for ten years and I talked with him just last month!”
Certainly, it’s to everyone’s benefit that the business developer becomes integrated into the work of the firm and widely engaged. You want them motivated to work on and close opportunities with partners. But the only way to avoid confusion and greediness from taking hold is to develop “rules of engagement”. There are many ways to do this. My personal favorite is to have 2 different commission “buckets”. From the first bucket, the business developer is paid commission for all opportunities within the firm-wide or location-wide pipeline (which should be opportunities over a certain dollar amount). The second bucket are “preregistered” leads which the business developer takes primary responsibility for, and the partners know this before he/she invests significant time in the lead. The above approach encourages the partners to utilize the business developer and not feel financially penalized for doing so. It encourages the business developer to work on opportunities in the pipeline which are larger and higher-odds. It also encourages the business developer to find new leads. This is exactly the behavior you want to motivate.
Channels of Distribution
When it comes down to it, managing and compensating business developers has a great deal to do with solid growth strategy. Driving revenue is about 3 things – providing solid offerings, correctly targeting potential buyers of these offerings, and utilizing the most powerful channels of distribution. The business developer is an alternative “channel of distribution” to your existing partner “channel of distribution”.
Developing the capacity to effectively bring to market what your prospects and clients want is what it’s all about. And doing so without creating resentment and dissatisfaction is as much a marketing coup as any brochure or publicity campaign you’ll undertake! Saturn? Mars? It takes a harmonious constellation of players from all parts of your solar system to leverage and grow your firm into a world-class one.
Understand whom you’re dealing with. Experienced business developers’ skills and attributes.
- They create and develop relationships into revenue-producing scenarios.
- They are masters of persuasive communication.
- They uncover deeper, hidden client needs both professional and personal.
- They develop creative and unique value propositions.
- They are experienced large-opportunity strategy and resource managers.