Yesterday was a day of firsts for me.

First time in Latin America.  First time presenting via a translator
(it worked effortlessly).  And first time I've tipped more than
$1,000 in a restaurant!  (1,000 pesos equals just $US0.50.)

But there was one experience yesterday that I'm well and truly used
to: the reaction of workshop delegates when they determined that we
recommend eliminating commissions and paying salespeople salaries.

I didn't present our position on this explicitly — after all, it's a
secondary consideration, not the primary that everyone assumes it to
be.  But our position was inferred and it didn't take long for
delegates to put two and two together.  So when one delegate
eventually summoned up the courage to have me confirm that this is,
in fact, our position, the room descended into pandemonium.  (A very
noisy, animated, 'Spanish' kind of pandemonium!)

I want to share with you the three points of clarification I made
last night, relative to this issue.


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The emergence of cargo cults on some Pacific Islands after World War
II is an amusing and oft-repeated story.

The relatively primitive lifestyles of these islanders were
interrupted by Japanese aircraft dropping large supplies of clothing,
medicine, canned food and tents to support the Japanese war effort.
Some of these supplies were shared with islanders, in exchange for
their assistance.

After the war, when planes and their valuable cargos disappeared,
some islanders took to imitating the rituals they'd observed the
Japanese performing.  They carved headphones from wood and wore them
while sitting in fabricated control towers.  And they waved landing
signals while standing on abandoned runways.

I've noticed the emergence of a similar cargo cult in organisations
in recent years — particularly those organisations that sell major
products and services.

Sales departments have observed a rapid evolution in the performance
of their organisations' operations departments.  They've seen outputs
increase by orders of magnitude.  And they've seen quality and on-
time performance improve by similar degrees.

Of course, sales departments have also observed that these
performance improvements have been accompanied by an increase in the
usage of mathematics in operations — and, particularly, an increase
in the role of statistics.

Sales departments have taken to imitating these rituals — in the hope
that they will have a similar effect on the performance of their
departments.  Increasingly, we're seeing mathematical models,
sophisticated databases and business intelligence tools being applied
in the pursuit of greater (or more consistent) sales results.
What sales departments fail to recognise, however, is that operations
uses such tools to measure (and predict) the behaviour of processes
that are inherently measureable.  Sales processes, for the most part,
are not.

Let's consider the practice of sales forecasting: a perfect example
of this management hocus-pocus ...

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Hello there

The Ballistix Forum has moved.

And, in the process of moving, it has transformed itself into a Blog!

Actually, it has been transformed by Brenton and Jason from our capable
creative team (thank you guys).  What's more, we have managed to
preserve your ability to receive posts by e-mail (in case, like me, you
rarely find time to peruse such sites.)

If you value my occasional posts (and I hope you do) please follow this
link and enter your e-mail address near the orange light bulb.
Alternatively, you can add my new blog to your feedreader.

http://www.salesprocessengineering.net/

This move is part of another change that is afoot.  We've decided to
split the current Ballistix website in two.  All the content has become
part of my blog (along with content from the old Ballistix Forum).  And
our team is currently in the process of creating a new, trimmed-down
Ballistix site which will be purely commercial.

I'll let you know when that is finished.

But, for now, please click the link above and register your e-mail
address.

Justin

Hi there

Here are updated definitions of those two critical words:

Prospect: a prospect is an individual (or organisation) assessed to have a non-zero probability of purchasing during a reasonable time horizon

Notice the complete absence of qualification.  If you are not certain that an individual cannot purchase during a reasonable time horizon, then you should assume that he is a prospect.  Obviously, prospect lists can – and should – be indexed (prioritised) based on available information.

Opportunity: an opportunity is a prospect to whom you have allocated – or intend to allocate – a unit of a salesperson's capacity (note: you should only deem a prospect to be an opportunity if he has requested an appointment or if there is a reasonable likelihood of him accepting one if offered)

This definition of opportunity ensures that any prospect who is placing (or who may soon place) a load on your salesperson's finite capacity is identified within your CRM's Opportunity-management module – and that your assumptions relating to this opportunity (objective, dollar value, etc) have been recorded.

As you know, opportunity queues are also indexed (according to the expected yield each opportunity is expected to produce if allocated to the salesperson's next available appointment slot).  Qualification (which is categorical) is out: indexing (which is incremental) is in.

Now, you deem a prospect to be an opportunity if you send him a pre-approach letter with the intention of following-up that letter with the offer of an appointment.  The acid-test for reasonable likelihood (see the definition above) is the number of calls the sales coordinator needs to make (on average) in order to schedule an appointment.  If the ratio is 10:1 or less, that's okay.  If it's 20:1 it's definitely not.

If your sales coordinator needs to make 20 calls in order to schedule an appointment you either have an unappealing or a poorly communicated offer.  You need to fix this problem for a number of reasons – not the least of which that your sales coordinator is not – and should never be allowed to become – a telemarketer.

Justin

Imagine the project triangle: Features (F), Resources (R) and
Schedule (S). Each side of the traiangle can make a choice as
follows: Accept, Optimize, Fixed.

One variation of the project tradeoff rule is as follows:

We'll ACCEPT features while OPTIMIZING our resources and maintaining
a FIXED schedule.

A parametric representation of the above assertion is as follows:

We'll ACCEPT {F, R, S} while OPTIMIZING our {F, R, S} and
maintaining a FIXED {F, R, S}.

=|JRM: Can we not simplify the preceding to say that the project 'formula' has
three variables: features, resources and lead-time and that one can maximize
only one of these variables?|=

My team currently understands this assertion but does not comprehend
critical chain project management. Also there is an overwhelming
bias for "resource ask", which means adding more sub-contractor
resources to a project that is under execution mid-stream while
trying to deliver the project against an aggressive (and sometimes
unrealistic) timeline.

I'd love to reframe the above premise and shift the project
sponsor's thinking towards CCPM and Sales Process Engg so that each
project's supply chain can be streamlined to achieve high
throughput, reduce inventory and reduce operating expense.

Thanks for sharing any ideas.

Ramu


=|JRM: CCPM does not impact on the three variables, nor does it impact on your
ability to maximize only one of them -- both are facts of reality.

CCPM provides you with a better execution (and planning) model.  'Better' in
that it provides a more effective way of dealing with uncertainty than the
critical-path method.

I'm not sure if CCPM has any special implications for Sales Process Engineering
other than allowing (actually demanding) a tighter integration of the project
environment and sales.

Specifically, in order to fully exploit the benefits of CCPM, sales will need to
'sell' the key CCPM concepts (e.g. 'late start for early completion, replacement
of time-based milestones with buffer-penetration reports, etc).

Let me know if you -- or others -- can think of other implications.|=

If you are based in South America and you think you might be interested
in a license to deliver Ballistix Sales Process Engineering projects
(with comprehensive support, of course), please drop me a line off-list
(justin.roffmarsh@...).

Justin

If we were to classify the potential causes of low sales into three
categories:

1) Market and offer mismatch (wrong market, wrong offer or both)

2) Lack of appropriate channels for customer to hear about us
(promotional channels) or to buy our products (sales channels)

3) Sales management (managing the sales pipeline)

Which do you think tend to be the major cause of lack of sales?

Danilo Sirias

=|JRM: Well, I'd say (1) has the greatest influence.  Even with limited
visibility and a poorly managed sales process, clients will find a way to buy
from you if your offer (product) is good enough.

However, poor performance in (3) tends to mask problems in (1) and (2).  In
other words, management often assumes that poor sales are automatically the
consequence of a sales capability problem and investigates no further.

You may be interested to know that we address these problems in the reverse
order (3,2,1).  The reason is that good sales management (particularly in the
environments we engineer) generates both management information and the demand
for sales opportunities.

We free up massive capacity in salespeople's diaries and then make a commitment
to fill this capacity come hell or high water.  The resulting 'pull' forces the
organisation to address the other issues.|=

I guess I don't really mind that people generally regard me as being
opposed to salesperson autonomy (and, of course, performance pay).
Antagonism is certainly more newsworthy than conformity!

However, my position is not quite this simple, and a deeper
understanding of the basic principle at stake here is more useful than
the sound bite.

If you've viewed our multi-media presentation or read our whitepaper
(you can get both free on our website), you'll remember I present a
simple cloud (conflict diagram).

I suggest that managers typically equivocate between two approaches to
the engagement of salespeople.

On the one hand, management wants salespeople to be autonomous agents
(think, sub-contractors).  On the other, management wants salespeople to
be team members (traditional employees).

I argue that these two approaches are mutually exclusive: in reality a
person marches to the beat of his own drum OR subordinates to the team's
drumbeat.

I also argue that the case for autonomy is not as strong as is commonly
assumed -- providing management with the option to engage salespeople as
true team members.

Now the operative word here is 'option'.  My argument is not that
autonomy -- and everything that goes with it (including performance pay)
-- is necessarily bad.

Rather, I argue that, what is destructive is management's attempt to
equivocate between two mutually-exclusive alternatives.  (More on the
consequences of equivocation in a moment.)

THE CASE FOR AUTONOMY

Imagine that you are an executive at Hewlett Packard.  You have two
divisions, one manufactures inexpensive computers for domestic customers
(moms and dads).  The other division engineers custom solutions for
enterprise customers.

Think about how you distribute your inexpensive computers.  Do you have
salespeople knocking on doors in the suburbs?  Of course not, you
distribute them via Harvey Norman (think, Circuit City if you've never
heard of Harvey Norman).

Now, Harvey Norman is an autonomous agent.  They bring enormous value to
the table for you: massive stores (and car parks), a captive audience,
logistical capability and so on.  Let's call this value
'infrastructure'.

However, when we engage with Harvey Norman -- an autonomous agent -- we
must sacrifice some of the benefits we'd enjoy if we managed sales
internally.  We can't walk the floor at Harvey Norman and issue
directives to sales clerks.  It's also unlikely that we can collect data
at the most granular level like we can within our own organisation.

So, there's a trade off.  And with less information and less control
it's inevitable that we will not be able to integrate (synchronise)
production as tightly with our sales agent as we would if we owned the
entire channel.

And, as I hope you've already guessed, we compensate for this imperfect
integration by maintaining inventory. In other words, we build domestic
computers to replenish stock, as opposed to building to fulfil direct
customer orders (like Dell does).  As is always the case, poorer
integration equals larger inventories.

In this case (domestic computers) we're quite comfortable with this
trade-off.  Ultimate sales are made by an autonomous agent -- and we pay
this agent on a piece-rate (performance pay) -- and we're better off,
in-spite of the need to carry inventories.

THE CASE FOR TEAM MEMBERSHIP (INTEGRATION)

Let's consider our other division.  This division sells custom
technology solutions to enterprise customers.  These solutions -- by
virtue of their being custom -- are engineered to order.

You can see the problem already, can't you?

If these solutions are engineered to order, they cannot possibly be sold
from inventory.  If we can't build inventories of stock to buffer
imperfect integration between production and sales, then we'd better
strive for perfect integration.

Even though perfection is unachievable, it still shouldn't be hard to
see that there's simply no comparison between the degree of integration
we can achieve if we own the entire distribution channel as opposed to
what's possible when sales are handled by autonomous agents.

In fact, it may well be that tight integration between sales and
operations is the most effective way for you to gain advantage over your
competitors.  (If you operate in a pure engineer-to-order environment,
please go back and read that sentence again!)

So, in this case, it doesn't make sense for sales to be outsourced to
Harvey Norman or to any other variation on the 'autonomous agent' theme.
In this division (enterprise solutions), sales and production must both
march to the beat of the one drum.

However, when we take sales 'in-house' we must recognise that we
sacrifice the infrastructure that a Harvey Norman brings to the table.

And, obviously, considering our market, we're not particularly
uncomfortable with this trade-off.

GIVE AND TAKE

In summary, then, when we distribute through autonomous agents we give
up control but gain infrastructure.

When we own the entire channel we give up infrastructure in favour of
greater control.

EQUIVOCATION

I can almost hear you thinking, a typical salesperson is hardly
comparable with a retail giant like Harvey Norman.

And I'm glad you're thinking that: it's exactly my point!

When we (management) equivocate between engaging salespeople as
autonomous agents and team members, we end up with the worst of both
worlds: limited control and negligible infrastructure.

So, my position is not that salesperson autonomy is necessarily wrong.
It's that equivocation between autonomy and team membership is.

You need to consider your organisation, and its market, and determine
which approach to salesperson engagement is the more appropriate.  After
all, you can't eat your cake and have it too.

CLARIFICATION

In many organisations it's quite okay to have a mix of the two
approaches within the one channel.  For example, while it doesn't make
sense for the final link in Hewlett Packard's distribution chain to be
fully integrated, it's likely that HP has a team of salespeople who call
on Harvey Norman stores (channel managers).  These channel managers
should absolutely not be autonomous agents.

Even though Harvey Norman is a good example, an autonomous sales agent
can make sense even if they don't bring quite the same scale to the
table.

For example, if we have a manufacturer client, we will often turn
capital-city salespeople into true team members (as per our Sales
Process Engineering model) and encourage our client to engage autonomous
agents in regional areas -- who may well be individuals who sell a range
of non-competitive lines.

Somewhat of a combination of what I've read on this post...

1) Pay for an independant dollar value assessment of your house.

2) Do a little research on your own on houses that have sold in your
area. How fast and how much?

3) Go to 5 REA's. Show them your research and ask for their offer,
testimonials, references and services. Make sure they know that you
are seeing 4 other REA's and have a 6th option to sell yourself.

4)Pick the best!

=|JRM: It's important to remember that REA's are buy-side businesses.  In other
words, it's how well they procure their raw materials that's the primary
determinate of their success -- not how well they dispose of them.

Of course, this is just a fancy way of saying that the success of a REA is
primarily determined by how good a job they do of securing listings.  If a REA
can secure a big-enough book of listings (ideally on a sole-agency basis) it
will make money.  These listings will sell sooner or later, after all.

Because the RE market is relatively efficient, REA's probably do more to
generate sales by talking-down vendors than they do by talking-up purchasers.

Of course, when vendors have conflicting goals (as per a previous post), and
when purchasers have more degrees of freedom it's easy to see why this is both
possible and necessary!|=

If you review the article, the issue of the property not selling for a
higher price and REA pushing for  deal that may not be in the best interest
of the seller is that the risk of losing the sale increases as the price
increases.  The demand elasticity is unknown.  So you ask for a higher price
and you risk losing the entire deal.

So if a REA sells a property for say, 400,000 and his commission is 1.5%
(typical on a brokered sale - the listing agent gets a piece 1.5%, and the
broker gets the biggest part, 3%), he will make $6,000.

Let's say the seller wants to increase the price to $420,000, a 5% increase.
The seller would receive $18,800.  The REA would receive $300.  So - for
$300, the REA risks $6,000.  Most are unwilling to do that.

So putting the REA on the side of the seller means one must equalize the
risk/reward.  Therefore, offering a "non-standard" contract with a bonus for
a selling price above a certain threshold or an additional bonus for selling
within a certain time changes the equation for the REA and puts the agent
and the seller in a similar risk/reward position, thus creating better
alignment of goals.

Not what you originally posted about, Justin, but hopefully others will find
value in this.

Mark

Success is often found when goals are aligned. By this I mean aligning
your goals to the REA's.

I think you are correct in deducing that a fast sale is of more value to
the REA than the incremental commission on a small increase to the sale
price.

The other factor is that properties go stale if they are on the market
for too long. Once they have been seen by potential buyers (i.e. in
advertisements) they become 'invisible' to those buyers. So the longer
it's on the market, the harder it is for the REA to sell (there are less
interested prospects), and the more prone to discounting the REA will
need to become to move it.

Therefore, speed of sale is really the only common goal between yourself
and the REA.

Perhaps your sales 'process' could involve a series of REA's on
relatively high incentive on relatively short term contracts. To support
your process, as you switch from one to the next, you need  to have
different advertising collateral so the house looks different each time
it hits the market, so it becomes less invisible?

Since the REA is the constrained resource, all other activities would
need to subordinate e.g. be very supportive of adhoc inspections, etc.

I don't know what the rules are there, but you could package an
independent building inspection report etc, as this is something that
would usually take time for the potential buyer to organise and add to
their risk (in Australia this is the buyer's responsibility).

Mike

This is an interesting discussion at a convenient moment, as I am
about to sell my house using an REA. That in itself is not very
interesting and certainly not very unique (so why mention this here?).
I am however trying to figure out what model to use for the contract
with the REA to get him "aligned" (assumption: with the right model I
will be able to find an REA who is willing to take the deal).

The remark of Justin on REA's selling their own homes at a higher
price (though taking a little longer) triggered me as it is a symptom
I would expect when the goal of an REA is not aligned with the goal of
the customer (until the customer is the REA himself).

Although this is slightly off-topic as I am approaching this thread
from the angle of the customer, I think it touches just about enough
on the sales process to post it here.
I wonder if you could comment on my thought experiment – whether it
makes any sense, whether it contains fallacies, wrong assumptions or
negative effects, or whether it has already been tried and tested in
some form or another.

In line with the previous post there are two variables that are of
prime interest to me: (1) selling price (as high as possible) and (2)
certainty about getting the place sold (asap). I think there is a
third one that is related to the second but not entirely the same,
namely the exact date at which the house will change ownership. I
myself am not very fond of moving, so I would prefer to keep my old
home say one month while I already own my new home.


=|JRM: So here's a problem right away.  A (goal-seeking) system can only have
one goal.  That's the nature of reality.  In the TOC world, we are careful to
differentiate between *the* goal and necessary conditions (there can be more
than one of the latter).

This realisation should lead you to re-word your objective above.  It may be
that you want to maximise your sales price (goal), while ensuring that the sale
occurs prior to x date (NC1) and settlement occurs at x + 1 month (NC2).

Of course, you may chose to switch the goal I've nominated with the first
necessary condition.  In which case you would want to sell your home as soon as
possible (goal) for not less than $y (NC1), with settlement occuring 30 days
after the sale date.

If you approach a REA with conflicting goals, you are practically asking to be
'gamed'!

This clarification should make it easier to (in theory) align the REA's
interests with yours.

In practice, as you recognise below, it's necessary to take into account that
the REA has more properties to sell than yours and that -- quite possibly -- he
has finite capacity.

If you really want to maximise your equation, it may be that it's necessary to
sell the property yourself!|=


Background info: Over here an REA generally receives somewhere between
1 - 2% of the selling price (for private homes). I assume his goal
will be something like "maximizing profit" with behaviour that is
focused on short term transactions and not so much on long term
relationships.
What worries me is that in this classic model a plus or minus of say
10k (Euro in this case) in the selling price is not a very impressive
amount if you look at how much it contributes to the REA's goal. On
the other hand the effect it has on my monthly OE is significant
enough from where I stand.
I suspect that the REA will have a hunch that his time is dear if he
is to reach his goal, so spending less time on a deal is more
important than getting the best possible price. The assumption here is
that there is enough business for the REA "out there". I suspect that
this is the case for the reputable REA's. I know this does not
necessarily mean that he will accept a ridiculous price –he will still
have to get my OK – but I also think that the chance of getting the
best price is not optimal either.

So I am going to take alignment step 1: rewarding based on selling price.
I think that getting a better alignment on selling price is not too
difficult. It is possible to get a figure for the market value of the
house that both the REA and I can agree on. An REA should be able to
sell the house for that price in little time (within a few months)
without performing magic. If he is able to sell the house for a higher
price he is adding value in my perception and I am willing to reward
that. So, what I'm thinking of is to give the REA a rather significant
share of the extra value generated (say 25% for all extra generated
value, or a variable, increasing percentage). I think that should make
it far more interesting to perform some magic. But that is only one
dimension covered. Looking at his goal the REA might now be tempted to
hold off potential buyers for the next 15 years hoping to get an even
better deal.

Alignment step 2: security
I am happier when the REA closes a deal sooner. Now how am I going to
add this to the equation? I am not totally sure yet. I am thinking of
setting a time limit for him to close a deal after which the contract
is canceled without the REA receiving any payment. Maybe there should
be some room for extending this deadline in a situation in which
serious candidates are still in negotiation. I suspect that when the
REA is interested in my payment model in the first place, he is
someone who expects to get a high bonus. In that case losing this
contract is a pain. I will have to make sure that the deadline is set
in such a way that the REA has a fair chance to get a good price while
I have sufficient time to start all over again with a different REA if
need be. I might also have to add an option to cancel the contract
sooner if there is no progress at all.

What I still haven't secured in this model is my ideal transaction
date. I don't want to move twice and I don't want to keep two houses
too long, as that is a costly hobby. This need feels less important
and is negotiable when price and security are covered well enough.
Still, looking at rewarding magic, I could introduce some sort of
penalty based on costs incurred (two houses too long, or extra costs
incurred by moving to a temporary home).

Reactions, ideas?
Do you think this will accomplish anything (positive)?

TIA.

---Lars.

=|JRM: See my embedded comments above.|=

I think that the commercialisation breakthrough would need to centre
around reducing or removing the uncertainties for the vendor. This would
seem to be prime opportunity for TOC to be applied.

I think that the perception that REA's do nothing for their money, or
are in fact working for the buyer at the vendor's expense is tied to the
anxiety that the vendor feels about not knowing when their house will
sell and what price they will get.

Vendors may well be happy to pay something to have this uncertainty
removed. This is a commercial opportunity.

=|JRM: Mike, good insight!  I guess the uncertainty equation has two axes:
wait-time and price.  The service provider could reduce the uncertainty
associated with either or both.  I suspect, however, that many (if not most)
vendors are more sensitive to wait-time than they are to price.|=

Justin

From the perspective of someone who has dealt with Real Estate agents
a lot, the reason we distrust them is that they are given 5-7% of the
selling price for doing very little work.

To maximize their throughput they must encourage low prices for fast sales (the
small difference in commission is negligible to them) so they are always working
for the buyer regardless of who contracted them.

=|JRM: This was backed up by some research done by Steven Levitt (reported in
his book, Freakonomics).  He compared the sale prices of RE agents' clients'
homes with the agents' own homes.  They tended to take a little longer and sell
their own homes for more!|=

To counter this several "flat rate" real estate companies have
cropped up in this part of the world. They charge a standard fee to
advertise. They also have a team that will assist the seller with
appointments. There is no conflict because the seller gets what they
want (good advertising) and the real estate company gets paid
regardless of whether the house sells.

Closer to being institutionalized?

=|JRM: Sure, but for this model to be commercial, people must be prepared to
purchase the service in significantly greater numbers!  Additionally, the firm
must have a genuine cost advangage.  Agents may appear to earn a lot on each
transaction but I think it would be fair to say that an average agent probably
earns a pretty average income.  I suspect that we will see an increasing number
of start-ups beginning to nibble-away at the edges of this market (as is
happening currently in the recruitment space).|=

The work that this refers to is for govenment RFQ's. There is a set
delivery time and the lowest bid gets it assuming certain
qualifications. We have been working on expanding their market to
limit gov. contracts but this work offers a certain amount
of "filler" throughput when the shop has excess capacity. Any
throughput is better than none.

The strategy you refer to is one which they have been employing with
a different market (the walk in off the street jobs) and it seems to
be working. This in combination with the idea of keeping the
constraint working - even with lower throughput has meant sales are
up 30% over last year.

The big win here is that they have dropped the "cost plus" costing
method. Traditionally they have calculated the hours required and
the material needed with a mark up. They then refused to bill at
less than a certain hourly rate explaining that they would "lose
money" on the job. After going through the P's and Q's exersize they
realized the importance of maintaining throughput. Now they simply
quote according to what they feel the market price is.
Saves a lot of their engineers estimating time as well.

Bryan

=|JRM: Good news!  The fact that many managers refer to estimating as 'costing',
indicates the seriousness of this problem.|=

Bryan,

As with Justin, I believe that you have to be very careful utilizing
pricing to modulate capacity (actually I don't think one should do
it).  Customers are smart and the business is telling their clients
when they have available capacity.  Beyond precedence, this moves the
leverage into the customers hands rather than the business itself.
Also, it is likely to drive/incent other bad behaviors like waiting
for slow periods and buying larger batches...a lose/lose.  Lastly, it
is easy for the competiton to match this offer.

I believe a better way to manage this situation is to complete the
buffer management system which has already been started.  A buffer
managment system focused on driving the sales activities based on the
loading buffer in front of production.  Keep in mind, the measure of
the system should be based on throughput rather than sales which will
not only focus the company on the right products it will help keep
the organization from focusing first on reducing price.

I terms of modulating the system as the buffer gets filled, I believe
it is better to first change lead time over other alternatives
(assuming make-to-order) because it is easy and to implement and
generally doesn't cost a thing.

Please feel free to contact me if you would like to discuss further.

Kind regards,

Bill Rhind

The business has seasonality to it so clients understand that the
discounted prices are temporary. We agree that margins could erode if
precedents are set but since they have recently tapped into a new
market (after becoming qualified in a special field) they can choose
higher "profit velocity" jobs to quote. So they have begun to segment
their market.

They ARE beginning a promotional campaign and results are starting to
happen. The biggest change has been away from "waiting for the phone
to ring" to promoting and quoting aggressively to increase
throughput.

Bryan

Good, well thought out response, Justin.

Mark Woeppel
President
Pinnacle Strategies

=|JRM: Thank you Mark.  Who said sales guys don't understand operations
anyway!?|=

I have a metal fab shop client who, after grasping the throughput
accounting concept and dumping the "cost plus method" now has (on his
own) come up with a "three tier quoting" strategy.
He has weekly meetings with his three department heads and asks a
simple question ..." how many weeks of work do you have?"
If its one week or less, he quotes at a lower rate (bottom tier)
If its more than one week but less than a month he quotes at the second
tier.
If its more than a month he quotes at a premium - the third tier.
Does anyone see potential pit falls with this? We discussed some but
I'm interested in learning others experiences.

=|JRM: Estimating is an interesting subject: one that I've been intending to
post on shortly.

I'm concerned that your client's method is a little simplistic.  My prediction
is that it will cause a steady erosion in his margin, simply because each price
reduction will establish a precedent in the mind of his customers.  He may end
up making more money than he does now -- but probably not as much as he possibly
could.

I think his method has two missing ingredients.

1. It fails to recognise that your client has (presumably) the ability to vary
his volume of business-development activity (chase more work).  Now, presuming
that his constraint is production, he should have protective capacity in sales. 
This means that he can synchronise his *volume of business-development activity*
to ensure that the constraint stays put.

2. It fails to recognise the existance of market segments.  Rather than changing
the price he charges customers, what he should be doing is *changing the mix of
work he accepts* (where work from different segments generates a different
T/cu).

If disaster does strike and he does need to price aggressively in order to keep
production fully loaded with work, it's critical that whatever offer he makes
has conditions attached that make it obvious to clients that this really is a
one-time opportunity.  For example, he might advise clients that he has just x
number of hours capacity available (due, perhaps to a cancelled job) on y
machine on z date.  He might advise that he will only accept jobs that are
production-ready now and that will not put a load on some other workstation.

In such a case, it would make sense to price aggressively to ensure that this
capacity is filled -- but it would not make sense to float such an offer past
the same customers more than a few times a year.|=

Hi Larry

There’s an interesting diagrammatic view of paradigm lock on water
management in:

http://portal.unesco.org/science/en/files/1755/10286998490helpbookletmr.pdf

Might provide a non-TOC way of describing the conflict to your client.

Jim Bowles

Hi Larry,

     Some points on this.

     It is almost impossible that clients can see past a paradigm shift
(that is: understand the majority of the cause and effect logic in a
future reality one paradigm shift away from their current reality). In
the case you're discussing I have detected at least two: 1) that the
lost T cannot be recovered later on and 2) you guys are able to
significantly reduce their development cycle (without distorting the
content).

     In the case of the 1), comes an interesting (wrong) assumption: if
the product is successful we can always get more funds to increase the
production capabilities later to make up for lost sales now. While this
is wrong it has solid root in reality: if we are talking about a product
development there are significant risks associated, mainly the risk of
not "getting it right", while I assume you've checked this out the
accumulated experience of managers induces a "wait-and-see" behavior.
Also assuming your client is positioned in a country where access to
capital is not difficult this reinforces the idea of "first get it right
then get it out of the door".

     So their position regarding this paradigm shift can be illustrated by:

        D. Wait until development is complete before committing to
significant investments
     B. Protect company and oneself
A. Great management & results
     C. Achieve more to company and oneself
        D'. Invest in accelerating opportunities

     In this cloud you can see their wrong assumptions, but more
important that this is: can you seek where your offer (and
communication) clearly evaporates this cloud?

     Regarding 2) I'd call this second paradigm shift a sub-paradigm
shift because it is a part of the BD and CD' assumptions in the cloud above.

     Just to help you, I'll play a (unrealistic) candid devil's advocate:

     Larry, why would I - being a successful executive until now - invest
in accelerating a product's launch (even a very profitable one), while I
can wait until it is developed and debugged and the launch it to the
market accessing more capital to increase production if needed and
without jeopardizing my position and career?

     All the best and I sincerely hope you and Bill can pull this off
quickly and are able to share more with us asap.

     Cheers,

     HB

     PS: the VV bonus idea hinges upon two assumptions that are normally
left of in analysis of it's effectiveness: a) the bonus is (very) small
compared to the increase in results, b) there is no way, really no way,
the company can get close to this level of results by itself in the time
frame proposed.

     If you leave any of those out the scenario you describe may very
well arise, but with the two properly done I haven't seen yet it fail,
and I've seen this in other fields. For instance: success fees of
lawyers negotiating M&As. Now you may challenge (and, at least for me
this is very welcome) the capability of Goldratt Consulting being able
to pull this bonus scheme off - and if so please indicate why you think
(under the two assumptions above) this can still go wrong.

     PPS: believing in "lock-tight logic" is a clear indication of
ignorance about logic in the hands of humans.

=|JRM: Personal injury lawyers and those that chase class-action work also make
offers similar to the VV one -- and benefit from those two pre-requisites.  It's
important to note however, that these kind of law firms are structured *quite*
differently from a traditional law firm.  In other words, a traditional law firm
would quickly go broke trying to win work on this basis.  It's interesting to
ruminate on the *essential* differences between the two business models.|=

Hi, Justin

Thanks for your thoughts. That's the type of input I was hoping for.

My bet is that they will not accept our proposal as is, because they
are stuck in the cost world. We have established a good realtionship
with them, so I don't think they'll just send us away, but work to
negotiate something like you suggest.

The difficulty is that its hard to show a benefit with a fraction of
a critical chain ;-) Worse, I fear that when they are done with Bill,
they are initially going to be depressed at how far they are from
having a realistic plan, and at ths magnitude of the tiger they have
by the tail.

I intend anyway to first get them a short-term plan that they can use
to work on the task behaviors, at least for their most overloaded
resources. If they can begin to do that, they will see immediate
benefit. The risk is that they are focusing on the wrong tasks,
because we won't have the chains to the T generating deliverables.

Regards,
Larry Leach

=|JRM: You're welcome, Larry.  Keep us in the loop!  A benefit of selling them a
multi-day, facilitated, solution-design 'project', is that you get to keep them
anchored in the Throughput-world long enough for them to do a decent job of
designing the future reality and the transition plan -- as well as long enough
to at least partially transition to the Throughput paradigm.  I find that after
spending two days picking-up executives on cost-word concepts like 'profitable
sales', then the executive team at least learns how to recognise for themselves
the vestiges of corrosive cost-world thinking.|=

Hi, All

So, here's the latest:

"Bill & Larry,
As Larry and I discussed in a brief phone call yesterday, I have to
agree that collecting more detailed data on costs for ROI and savings
potential at this point probably doesn't need to be done. In any
event, I think everyone in XXXXXX's management is well aware of the
magnitude of the cost of delay. (And that includes initiating the
project ASAP to minimize delay.) I will be done with my review of the
draft proposal and get comments back right away. Thanks for your
patience.  m"

So, that's one step forward. That "cost of delay" is what still
worries me. I am not sure that means they understand and accept that
the non-recoverable lost profit is hundreds of millions.

The great news is that he clearly accepts that delay of the decision
to get started equals delay of the result! (Which isn't generally
true with CCPM, by the way.)

Larry

Hi, Justin

Well, if it were a standard "improvement", that might be possible.

Understand that the 70,000 percent is a return on their invesment in
us.

=|JRM. Larry, I'm very uncomfortable with this.  It sounds like what salespeople
sometimes call the 'reduction to the ridiculous close'.  ("If this new suit just
helps you close 1% more deals, then your $700 investment will generate $1.5
million in additional sales over its four-year life.  That's a ROI of ...")

If their investment in you is inconsequential relative to the pay-off, then you
shouldn't be modelling it!  Isn't the model meant to be a decision-making tool
for them?  If all it does is states the obvious, then it's not worth doing. 
What else could you model?  The return on total capital employed?  The risk
profile of the project?|=

So, if they don't hire us, its a meaningless thing. The lost profit
opportunity of hundreds of millions is the real thing, and independent
of us.

To them, the questions are when do they get the first product in the
hands of a customer, and after that, at what rate do they ramp up
production, and to what level.

They have factor of two differences on the time line estimate
(guesstimate, really) between the people doing the work and what
management wants. They know they don't have the skill to fix that
conflict, or they would have. They also know they don't know where they
are, and struggle every time they try to figure it out.

What they don't know is that even the worst case is probably way
optimistic with the processes they are using for project execution. But
they do know that similar products have experienced substantial delays
in the past, and that has them worried.

Of course they aren't convinced that we offer the solution to that
worry.

Regards,
Larry

=|JRM: I feel like you might be asking for the sale too early in the engagement.
In a situation like this, I'd try and simply sell them on the idea that you
*might* have a solution (or the capability to create one).  That's a much easier
sale!  The next thing I'd do is pitch them a short (paid) engagement where you
(in concert with their management team) figure out if you do, in fact, have a
solution, what it looks like, how it should be executed and what the commercial
case for it is.  Of course this plays to my point a few posts ago about you
facilitating the latter stages of their decision-making process.|=

Hi, Marjorie

They know they can't do it without what we offer. I am sure they know
there are others who can help them, too.

Actually, it isn't what we can do that we are selling. It is what
they can do with the process we will create with them.

They claim to agree with the order of magnitude of the result, too.
Its just that they think in order to present it to the money guy, it
needs to have unquestionalbe details that match all their
assumptions. But, for the decision at hand, the details are
meaningless. That's where the dissonance comes in.

Larry

Hi, Humberto

Thanks for some thoughtful input.

It definitely is a paradigm shift. I went throught the same shift
while working the proposal, and it took a little work to get, of all
people, Bill Dettmer to agree fully with it. He was getting led down
the detailitus road.

The client says he agrees with the paradigm shift. But, then says
something that leads me to think he hasn't really gotten it.

It is a VERY unusual situation. So, let me see if I can convey it.
Its hard to discuss because we are bound by a non-disclosure on the
details of the product.

Treat it as an assumption, if you like, that it is a very high value/
high margin product with an effectively unlimited market...they
already have hundreds of orders, at multimillion dollars apiece, and
they haven't made one yet. They aren't promising one for over two
years, yet people are plunking down a couple of hundred thousand
dollars to "get in line".

The problem is that they are choking the development process, because
of cost concerns. They admit to have, in effect, lost the last year.
They do not have an effective plan por execution process that will
get them to the end product in a predictable time. Expereiences with
similar products frequently show large delays. They admit that they
have to struggle to figure out how they are doing on all the work
they know is ahead of them.

They will net a few million dollars per unit (T) as soon as they can
put the product out the door. They plan to ramp production up to well
over 100/year.

Now, here's the paradigm shift. The T they are losing by any delay in
schedule is NON RECOVERABLE. It is profit lost forever. The reason is
that if they are able to ramp production up further in the future,
they can sell those too...so there is no way to ever "make up" for
the profit loss of delayed introduction.

So, the profit loss (or gain) has almost nothing to do with their
increased OE and I during the delay period. But, that seems to be
what they focus on.

This isn't exactlty the same as the "first to market" advantage,
becasue as far as can be told, there isn't anyone even close to
entering the market with a competitive product. It also isn't a
saturation situation, such as the iPhone might reach. The market for
this product is large enough relative to realistic capacities that
their production capacity will likely always be the constraint.

Nonetheless, they seem focused on controlling development cost.
That's where the paradigm problem comes in.

So, it looks like option 2 to me in their nonconsious mind
(intuition). But, they can't say that to guy with the money.

=|JRM: So you don't know the nature of their conflict.  You need these guys to
help you draw a cloud.  Why don't you do a thought experiment with them where
you are their boss and they are trying to justify the project.  They can
instruct you on their perception of their bosses' position (which will really be
their side of the conflict) and you can help them flesh out the other side of
the conflict (which is currently yours)!|=

BTW, I think the "bonus" idea Eli puts forth in VVs is a recipie for
disaster. It will logically and inevetatably lead to a pissing
contest. If they succeed, they won't want to pay you, and will show
why it was "other things they did" that made it succeed, despite your
input. If they fail, they will blame it on you. A little study of
psychology enables one to develop this causality with, what some
TOCers like to call, "lock-tight logic".

Regards,
Larry

=|JRM: Yeah.  "Lock-tight logic" actually means, get ready, we intend to call
the client an idiot when he fails to purchase our simplistic proposition!|=

Hi, Justin

Ah, more assumptions. We know why they haven't yet said yes. The guy
with the purse strings doesn't come back to town till next week. The
managers are sitting on a multi-hundred million dollar per year
throughput opportuntiy, and can't make a $100k decision without him.

The money guy seems to be something of a Howard Hughes (in more ways
than one relative to this). He may not have billions of dollars, but
he certainly has hundreds of millions of personal net worth. When he
comes to town, they eat at the cheap fast-food steak place...because
it has "good value".

=|JRM: So, if he appreciates value, he will likely appreciate a 70,000% ROI,
yes?!  I seem to remember reading that Sam Walton spent squillions on
information technology while refusing to replace the plastic chairs in the
corporate HQ.  It's uncommon for entrepreneurs to make hundreds of millions of
dollars while simultaneously making dumb decisions.  Sounds to me like the guys
you are dealing with lack the business owners' gumption.  I'd suggest presenting
your proposal to him as a possibly flawed proposal: "Your team -- under our
guidance -- has modelled the likely outcome from this initiative and we're
consistently getting a 70,000% result.  Can you help us find the flaw in our
reasoning?"|=

Nonetheless, you provide a good example of unwillingness to accept
reality, and wanting to go down the wrong path. So what if we made an
order of magnitude mistake, and it was "only" 7,000 percent? (PS: We
didn't: after I helped Bill fix his math. And, the customer agrees
fully with the order of magnitude...just wants to put more detail
into it before presenting to the guy with the purse strings.)

Actually, the managers "own" the much greater risk of what they are
doing not working. They know it intuitively, which may be the driver
of the cognitive dissonance. It may be hard for them to admit to
themselves that they are where they are: in danger of screwing up the
most fabulous opportunity of their lives, because of their own (in)
actions.

=|JRM: Your diagnosis of 'cognitive dissonance' assumes a conflict.  What --
other than not saying yes -- are the patient's symptoms?  (I'm assuming, because
you haven't given us the cloud, you don't know the nature of the conflict.)|=

Anyhow, we proposed taking all that detail out of the proposal,
instead of adding more, and our key contact said "OK, we agree with
it anyway". The problem was that any detail caused them to fall off a
cliff of detailitus, wanting to discuss those details vs. the key
point. IMHO, most people are very bad at this kind of subordination.

=|JRM: I'm no fan of the Socratic method early in the engagement -- when people
want direction -- but I believe, in a major-sales environment, that prospects
should be made to build their ROI model and design their own project outline
(with you guys facilitating, of course).  I hope the critical analytics were
done by them and not by you.  This feeds into my point above.|=

If I were they, I'd be saying to myself, "Ah-ha...we are really
screwing the pooch on this one. I need to get right on this. I better
get one or two others with what these guys are offering, and see if I
can get a better deal". Or, maybe I'd be calling one of the big-time
consulting houses to bail me out.

BTW, we are in this enviable position because one of their customers,
a former customer of mine, wants to buy many millions of dollars
worth of their product...and he wants them NOW! He went to see them,
drooled all over their product, but then had indigestion over their
plans to get there. He told them, "You REALLY need to talk to these
guys..."

I'll let you know what happens in a couple of weeks.

=|JRM: I suspect you've got us all on the edge of our seats now!|=

Larry

(PS: The numbers are actually conservative. This is a KILLER product,
at the right time...if they can pull it off.)

Hi

Gordon Ramsay is using the TOC principles when working with the restaurant
owners (implicit if not explicit) The example given of a fixed price meal is
only one example from the series of films. Just like TOC it is, specifically
'customized' to one restaurant and once case.

Cheers Karl

=|JRM: Well, if you spot other examples, be sure to share!|=