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Three Questions CSOs Should Ask Before Cost Cutting

By Dave Egloff | May 05, 2020 | 0 Comments

Beyond the obvious health issues and scares, COVID-19 has caused economic shockwaves across nearly all organizations regardless of industry or geography. Certainly, sales forecasts are down. However, it’s more than that. So much – too much – is still unknown. While some CSOs were once comfortable waiting things out, many are now feeling the need to consider cost-cutting.

Over the past several weeks, Gartner has observed that sales forecasts hit a relative bottom but are starting to slowly improve. Yet, during the same period, the number of CSOs anticipating a “reduction in force” has more than tripled. Consider that for a moment – despite a slow rise in sales forecasts, the pressure to reduce expenses is building rapidly.

Undoubtedly, CSOs need to manage and probably cut costs as this crisis continues. Before taking any actions, CSOs should work with their peers, including the Chief Financial Officer and Chief Marketing Officer, to inventory their cost-cutting options and ask three key questions:

1- Are deals being lost or are they future demand?

CSOs must assess whether stalled late-stage opportunities are being postponed in the short-term, postponed for an extended period (i.e. beyond the fiscal year) or permanently lost. This assessment is helpful in review sales compensation options. As an example, if opportunities are delayed for a shorter-period, recoverable, minimum guarantees can be a great means to help sellers with their personal cash flow without the organization taking on too much financial risk. Anecdotally, setting the guarantee amount between 50-80% of the monthly target seems common.

Alternatively, if opportunities are expected to be delayed for a longer period, including lost permanently, quota reductions may be seen as a legitimate option to improve seller engagement. Keep in mind that quota reductions will drive up the relative costs per sales and can cause a spike in expense if sales rebound more rapidly.

2- What will the recovery look like in terms of timing and velocity?

CSOs must develop a hypothesis on the recovery and develop plans to gain momentum despite the uncertainty. Sales organizations, recovering more slowly than their industry or competition, risk losing customers and market share. Conversely, if the CSOs can ready and rebuild their sales organization as fast as the economic indicators strengthen, they may gain customers and market share.

While this seems somewhat obvious, these are considerations when evaluating reductions in force. CSOs should partner with their heads of sales enablement and sales operations as well as their HR business partners to assess the lead time to rebuild their sales force. If it takes 2 months to hire a new seller and another 6 months to get them ready to sell, CSOs need an 8 month lead time to rebuild sales capacity after layoffs. Note: while 6 months may seem long, Gartner observes that new-seller time ramp up to “full productivity” has been increasing and a 2018 survey revealed 7 to 12 months as the most common response.

Layoffs are certainly tough emotionally. They can also put longer-term sales success at risk. In some cases, furloughs may be a better option.

3- Which discretionary investments should not be cut?

Dry powder is an investment term that refers to cash or liquid assets that are kept available for future opportunities. This is expression also applies to sales organizations who must retain the ability to rebuild as fast as the economy may recover. Historically, organizations that excelled coming out of the downturn had retained 5-7% of their spending for strategic transformations or innovation.

While the current reality is one of uncertainty and sometimes despair, savvy CSOs always are mindful of recovery preparations. With available funds, CSOs and their internal go-to-market stakeholders can prioritize and invest in areas that promote innovation and differentiation. Equally, this internal team must be cognizant of the longer-term impacts on buyer preferences. For example, coming out of the COVID-19 crisis, buyers may prefer digital and virtual sales channels.

While sales cost management should be an always-on strategy, many CSOs find themselves needing to react to these unexpected and new pressures. Even those CSOs who have been prepared may still need to consider alternatives given how unprecedented this pandemic has been. CSOs should work with their CFOs to remediate the current expense issues but also highlight the enduring negative consequences of cutting too quickly or too deeply.

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