Thursday, December 8, 2011

What is the ROI of Sales Engineers?

Businesses often ask what the ROI (Return on Investment) is of something, before spending money on it.  Sales Engineering is an example - of course the prediction and calculation of ROI is quite a tricky subject.

ROI growth - Image by Christian Ferrari
Financially speaking, an ROI is about the performance of investments - which to a company are Assets that go on the balance sheet. An SE is a cost in personnel.  Lets relax this definition though and use the term investment to mean the annual fully loaded cost of running your SE team, and ROI to mean the additional value that this team brings.

This is the part where it is harder to directly measure.
How do SEs add value?

  1. Bring in sales that can't be won without SEs (the technical sale)
  2. Help sales staff bring in sales quicker (less time for each deal)
  3. Increase the size of deals through their unique understanding of customer environment
  4. Improve ability of company to negotiate - better customer knowledge
  5. Discover new opportunities while working closely with a customer
There are probably others, but these are the main ideas I think we can work with. (please let me know which others you can think of!

1. Bring in sales that can't be won without SEs (the technical sale)

Knowing which deals these are can be difficult.  Sales people might be reluctant to say internally how much they needed an SE for each deal.  They are also very proud to boast when they close something without an SE.  A business needs to look on this point objectively and decide on a percentage factor how much the SE facilitated the deal.  

Looking at the activities performed we can get a sense of how independantly the Sales person was able to work through the deal.  Although this would then neglect the fact that good sales engineering work doesn't need to take a long time.  A well executed demo saves the need for several more demos, or a more extensive POC.

What you could do is look at the activities that only SEs can perform well - a good tech demo, a POC, a technical RFP response, and if a deal requires these activities then it counts as one that requires an SE.

Count the revenue here towards the SE ROI target.

2. Help sales staff bring in sales quicker (less time for each deal)

Making business happen faster is another key point.  Maybe your sales staff could convince some customers that the product just works, lets get it in for a trial, pay for some services to install/help and you can have your money back if it doesn't.  In fact I am sure many companies have tried this approach before a sales engineering role had matured.

The problem with this is, it can take more sales staff effort.  It ties up on services staff to support these implementations, and if they are not successful, even though services might get paid, it is not really why your organisation should have these staff.  They should be there to help customers who do buy your products.

So to measure how much quicker the SEs help make the deal we need to think about the saved effort in the sales cycle.  How much time does a well executed demo or POC save?  How effective is your SE at engaging technical staff that a sales person cannot - like Enterprise Architects or DBAs?

This needs more work - but I believe a good SE should be able to save 50% of the time on the deal - at a minimum.  This is not necessarily time of the overall sales cycle - but in adding another face to your company that can help your customer understand your product and solution areas in more detail - you reduce the number of emails that need to go to and fro, and can save the need for additional meetings and multiple proofing efforts.

The improvement in the sales team's ability to close more deals in the same time is the key measurement - or the ability to keep more opportunities in the pipeline.

3. Increase the size of deals through their unique understanding of customer environment

An SE tends to get closer to the customer's key people than a sales person can.  Often the customer believes the SE offers more knowledge about the solution and should appear less threatening (more on this later).  So an SE might find that this particular opportunity can be widened in scope or priced differently due to environmental factors.  If the sales person was unaware of these factors, or only becomes aware due to the SE, it is a clear gain in ROI from the SE's help.

In these cases we need to measure the increased size of the deal from the SE and count towards the SE target.

4. Improve ability of company to negotiate - better customer knowledge

Like the previous point, an SE will sometimes find out some other reasons why you can be stronger in negotiation.  This may include finding out internal deadlines for the implementation, lack of competition, size of their budget or any other factor important to the negotiation.  It might be as simple as finding out that the buyer loves to play golf, or is dying to go to a particular restaurant.

This is a soft skill that will take an SE far - and also will help increase the value of business they are working on.

There is a negative side to this too - your SE may blurt out that the business really needs this deal this quarter or the business might go under.  Try rescuing a deal from that one...

Measure this as how well the pricing is maintained on deals the SE works on, compared to the average.

5. Discover new opportunities while working closely with a customer

Finally, SEs can be great at sniffing out new opportunities while on site with a customer.  If your company tracks where leads come from, it could be a good opportunity for SEs to be recognized (and perhaps rewarded) for finding opportunities for selling more or related products while dealing with an existing customer or prospect.  In this case the lead itself should be considered as part of the value of the deal - most companies have a concept of how much business in its pipeline is worth.  

Measure this how you would measure business coming from any other pipeline source.

The Total ROI

With all these factors at play we come to calculating the total ROI.  Just add up the above 5 numbers and call the result your ROI.  This should reflect the added value the SEs have made.  If you don't have good measurements, you will need to estimate how much of the revenue the opportunities that the SEs have worked on is due to each of these factors.  This sum should be a proportion of the overall revenue figure.

Now what?

If we find that hiring 3 SEs gives 300% ROI (we earn 3x as much revenue as we pay the cost of the SEs) then we would then need to consider what the incremental cost of hiring one (or more) additional SEs would be, and decide whether there is still additional gains to be made.  

This could be much more accurate than just considering simple ratios of Sales staff to SEs or a simple % of revenue.  It should also lead to a better balance of SE workload, improved performance and a whole new load of KPIs to measure the SE team and leadership on.

That's all for today!  

2 comments:

G said...

John Care made the following comment on LinkedIn which I thought would be good to share:

I think you're on track with these metrics. I wrote an article earlier this year about "What's an SE Worth?" that might help you. It's on the Mastering Technical Sales site here > http://www.masteringtechnicalsales.com/files/How_Much_Is_An_SE_Worth.pdf

Tom Mairs said...

Great post - thanks! I have been trying to put this into words myself, but you have articulated this extremely well. I'll just "share" the link.