How to Set the Right Incentive Schemes in Professional Services
If you’re a business leader in the professional services industry, you probably spend a good deal of your time reviewing and tweaking your business strategy. But when was the last time you reviewed your sales incentive schemes to ensure they’re aligned with your business goals?
The old adage that “compensation drives behavior” holds true in a professional services organization. In spite of this, too many firms don’t have effective incentive schemes. Worse still, some even have schemes that inadvertently encourage behavior that is at odds with their business plan. By ensuring that your incentive schemes drive the right behaviors in your professional services organization, you can have a motivated team that is persistently driving in the direction you need them to go.
The Issue With Focusing On Closed Sales
A typical business development model in a small- to medium-sized professional services firm is to have dedicated salespeople supported by consultants with good commercial skills (e.g. Solution Architects, Business Analysts, or Project Managers). The salesperson is expected to focus on generating and winning new business opportunities rather than managing existing customer engagements. The consultant works with the salesperson in pre-sales and builds a rapport with the prospective customer, giving them confidence in the firm’s ability to successfully complete the requirements. The perceived role of the consultant means that they are trusted more closely by the customer than the salesperson. The salesperson’s primary role is to obtain the best possible commercial deal for their firm, which tends to be the opposite of what the customer wants. Once the business is won, the consultant is responsible for ensuring the successful delivery of the engagement as well as identifying additional requirements (such as follow-on work and change controls).
This approach works well, as once the contract terms are negotiated by the salesperson (rate card, milestone payments, etc), many customers prefer to be managed on a day-to-day basis by project managers rather than account managers in sales. But this is where a problem can emerge. Many professional services firms pay their salespeople based on the amount they invoice to the clients they win each month, sometimes even based on the profit margin the business achieves during services delivery. The behavior this drives is to encourage the salesperson to remain close to the won project, to get involved in detailed project-related matters, to try and help with resourcing, and to review invoices to make sure they know what they will be compensated. There is little incentive to sell longer-term assignments as they are only paid for invoiced work. In addition, as the salesperson is not responsible for the resourcing of projects and the setting of consultant salaries, they are not in a position to control project margin. This leads not only to duplication of the work being done by the consultant managing the project, but also reduces the time available for the salesperson to identify and win more new business at another customer.
This accidental incentive scheme causes salespeople to prioritize profits from completed sales instead of closing the next potential sale in what is essentially a scarcity mindset.
How To Incentivize Overall Sales Value
An alternative approach is to incentivize a salesperson on the overall value of the deal that they close with the client: the “booked” amount.
In this incentive scheme, a salesperson is paid not on what their firm invoices to the customer each month, but instead on the value of the upfront contractual commitment. The salesperson is thus rewarded for behavior that results in the client committing up-front to a larger volume of work. Rather than settle for small pieces of work and/or work with a short duration (which is gradually expanded over time in a piecemeal fashion), they look at ways of encouraging the client to increase their commitment through the length of contract or overall value. Secure in the knowledge that they will be paid on overall value of the deal, salespeople will leave the project manager to deliver the engagement. This leaves time to focus on developing new opportunities.
The question that often emerges around incentives is “what should we do if our salesperson gets their client to agree to an extremely large project on the last day of my financial year?” In most cases, the answer is “go and celebrate!”
Yes, the salesperson will receive a large payout, but nirvana for services firms is to have predictable revenue streams. Larger and longer-term projects are a pre-requisite for this. The salesperson has helped make this reality, and the business is now more stable because of their work.
Beyond a salesperson’s relationship to projects, there are several other dynamics that can incentivize behavior focused on longer, more robust projects. For example, if you want to increase the length of your support contracts, try incentivizing your salespeople on the length of time before the first break clause in the agreement rather than simply on the first year of support. Consider compensating your project managers based on the additional work they generate after the initial engagement closed by the salesperson. If you want to bring a new service offering to market that needs to be established by your company, offer the salesperson a higher incentive to sell this than existing service lines.
Of course, you do need to be careful that your team members can actually influence the measures you put in place in incentive schemes. For example, firms that pay sales teams based on delivered project margin may not make them responsible for resourcing the project or setting salaries. In some cases as a firm, you may wish to offer discounted rates (maybe because you have too many available resources or you wish to win an engagement which you consider has a strategic profile). If the salesperson is paid on margin, then they are penalized for following company strategy. An alternative approach would be to pay the salesperson based on the revenue value of the engagement and the person who manages the resources (e.g. practice or business unit manager) on the overall margin of the engagement resourced by members of his team. This drives complementary behavior. The resource owner offers a minimum price to the salesperson for use of that resource to achieve their target. The salesperson is then incentivized to exceed this margin by asking for a high daily rate, leading to a win/win for both parties and supporting the strategic goal of the company.
Many professional services schemes have been derived from the product sales world with little or no modification. While sales techniques, methods, and processes are very similar, incentive schemes need to be aligned to the business goals. Consider what is important to your business at any point in time (cash flow, revenue growth, margin, building a new service line, new geographies, etc.) and align your schemes accordingly.
Finally, whatever you decide on, remember, the simpler the better.
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