Landing
the megadeal: Seven keys to closing big sales that make money
Your
salesforce needs help to remain objective, build trust, get the price right,
and keep selling until the deal is done.
It all started out so well. A
long-time, valued customer of a networking company put out the word that it was
planning a massive purchase of equipment. The supplier assembled a deal team,
submitted a bid, and made the sale. But not at a profit. The customer loved the
extra scope the supplier had built into its proposal but wasn’t willing to pay
for it, leaving the supplier with a choice of walking away or taking a hit. It
chose the latter. Of still more concern was a contract clause stipulating
delivery milestones. The deal was signed three months later than expected, but
no one thought to change the delivery dates accordingly. Within a matter of
weeks, the supplier found itself liable for penalties.
This networking company had just experienced the
downside of banking on megadeals. Winning them is the holy grail of many a
sales organization. Among the companies we have examined, it is not uncommon
for 40 percent of projected revenues to come from just 1 percent of deals in
the pipeline. A big government IT project, a contract to build and operate
oil-production facilities, or an agreement to run retail outlets at sports
stadiums can run into the hundreds of millions of dollars. But while losing a
megadeal can mean missing revenue targets, winning one on the wrong terms can
destroy value, either because of poor pricing—we often see margins that fall 50
to 75 percent below the typical target—or terms and conditions that put
companies on the hook for risks they haven’t fully understood or quantified.
The potential pitfalls increased as buyers improved
their procurement processes, centralizing them to raise their bargaining power
and deploying big data and analytics tools to gain deeper insights into
suppliers’ costs. Although some companies on the supply side—particularly
high-tech ones—are seeking to redress the power imbalance, many deal teams
still find themselves behind the curve, ill-equipped to win the big deal on the
right terms.
There’s no single fix. It’s about more analysis and
discipline when companies decide which deals to pursue and which to let go, how
to manage relationships, and how to price. It’s about supporting teams to shape
proposals to consistently high standards. It’s about incentives. And,
crucially, it’s about more involvement from CEOs looking at megadeals through a
shareholder lens to ensure that they create value. Here are seven measures
companies can take that can help them win more value-creating megadeals.
1. Use deal forensics
to eliminate deal fever
Deal fever is like summit fever, when fuzzy thinking brought
on by exhaustion and altitude sickness convinces climbers they have come too
far to turn back. Oxygen is in short supply on a tall peak, and so is
objectivity—which also eludes salespeople fighting to keep alive what might be
the biggest deal of their careers, whatever the cost. And because pursuing big
deals eats up resources, the longer one is on the table, the more difficult it
becomes to walk away.
To clarify the pros and cons of potential megadeals,
some companies use a deal-forensics scoring system. Here’s how it works: the
team chooses a handful of factors deemed essential to winning a good deal, such
as client engagement, the strength of the solution, the price, and the strength
of the sales team. A series of questions then gauges the bid against each of
these, at every stage of the bid, from submitting qualifications through the
negotiations. For example, what relationship does the seller have with key
decision makers? The answer might range from none to being a trusted adviser,
and it is scored accordingly on a predetermined scale. Other questions the
seller might ask include these:
·
Do
other bidders have stronger relationships?
·
Is
there any evidence that competitors have better solutions?
·
Will
the client follow through?
·
How
does the price compare with those of competitors?
·
Will
the deal be profitable?
·
Can
we staff the sales team properly?
·
Could
the contract be a game changer for how we are perceived in the market?
The weighting of scores for each answer is based on
patterns revealed by analysis of past deals that were lost or won, as well as
strategic considerations, which might, for example, change the relative weight
of a deal’s profitability as opposed to breaking through with a critical
customer. The answers—and overall score—will change as the deal progresses and
information accumulates.
In effect, the scoring system enables a stage-gate
review, helping executives to decide where people and money need to be
allocated to improve the prospects of certain deals, which deals to back away
from because they have little chance of success, or what action is needed to
improve the odds at different stages of the process. For example, deal
forensics revealed to a large outsourcer, at the outset of its bid, that it had
very little chance of winning a financial-services deal, because of poor
relationships. Rather than give up or continue in vain, it chose a third
option: with nothing to lose, it told the buyer’s procurement group it would
drop out of the bidding unless it could engage with the decision makers every
week. Procurement, fearing a less competitive landscape, agreed, and the
outsourcer went on to win the deal.
Deal forensics also flashed red on a megadeal that the
sales team of a high-tech company had been working on for nearly two months.
Relationship building had lost momentum, and the solution seemed weaker than
that of competitors. Faced with this realization, the supplier’s CEO suggested
that his CFO meet with the buyer’s CFO in a last-ditch effort to uncover the
key to winning the deal. Within days, the two CFOs had come up with an
alternative deal arrangement that kept the supplier in the running and
ultimately secured the sale.
2. To avoid overengineering
a solution, price first
Many deal teams still respond to a request for tender by
first scoping out the best technical solution. Only then do they determine the
price. The result: deals lost before the conversation even begins, because the
price is too high.
To win more good deals, the starting point has to be a
minimum viable solution (MVS) that strips out any scope not included in the
customer’s request for tender, as well as features that may be valuable for
some customers but make little business sense for this one. The result is a
solution that meets the
customer’s needs and indicates, when priced, whether it also meets
initial profitability criteria. The customer’s budget, pricing norms in a given
region or industry, and information gathered on competitors will then help
decide what margin is possible and, hence, the target price of a tender—as well
as the advisability of continuing to pursue the deal. This does not mean that
the scope cannot be expanded later through customer feedback, but it is better
to add in scope than to try and strip it out, as the networking company found
out to its cost.
It’s important to scrutinize all of a
deal’s key economics, which can extend beyond the seller’s corporate borders.
One company discovered that though its business units were willing to
collaborate and to abandon bells and whistles for an MVS, the margins some
external partners required were going to make it very hard to assemble winning
bids. The sales team therefore began taking a harder look at each partner’s
contribution and decided whether it was a crucial component of an MVS. The
answer was not always yes.
3. Think about
relationships in a more scientific way
From dentistry to real estate, relationships drive
sales, but many top executives rely too little on their relationships or assume
too much about them. This issue persists because most sellers “manage” such a
relationship in their heads and rarely assess its strength. A business-unit
leader we know became aware of just how poor a relationship his key-account
manager had with an executive at a major customer when the account manager
couldn’t find the executive’s office for a key in-person meeting!
Companies that manage relationships well use
deal-relationship maps to understand who matters, as well as what matters to
each party: price, quality, service. The map can then be used to develop the
right solution, to pressure-test and refine pricing terms and conditions, and
to ensure that the right messages reach the right people throughout the deal
cycle.
The map should identify not just the usual suspects—that
is, the CFO, CIO, and COO—but also those who hold informal power for awarding
specific sales contracts, such as the procurement lead or the customer’s
external partners. One deal was won because the supplier’s pricing team
developed contacts with the customer’s engineers, who were helping to model the
deal. The engineers’ rich insights into what their company was looking for
would otherwise have gone undetected.
Senior leaders need to be involved if relationships are
going to deliver. One company we know augments its sales approach on big deals
by assigning senior pricing executives to meet their counterparts on the
customer side. After each meeting, the pricing executives update the
stakeholder map to reflect new insights.
4. Appoint an overall
leader and standardize processes
A frequent complaint from senior leaders is that they
lack people with the full range of skills required to win big sales contracts.
It’s easy to see why: there are relatively few such deals to apprentice on, and
training people to lead sales of, say, trains or aircraft can take a decade or
more as they rotate through various roles. Companies therefore find themselves
competing for the same handful of people—or relying on the regional team that
unearths a deal (and often lacks the necessary expertise) or on the head of
sales (who might not have the bandwidth). When the sales chief at a fintech
player stepped out of his day-to-day role to run a major deal, the company duly
won the business but also missed other quarterly targets through management
inattention.
One thing that can help is to identify one or more
high-caliber sales-team leaders to manage all big contracts
and to help junior salespeople learn the ropes. One CEO we know held out for
six months to find the right person to fill the team-leader role, such was the
standard he set. Strong support processes are a second important enabler. Each
deal is different, but not so much that it defies any systematization. Frankly,
it is far too risky for sales teams to be creating—deal-by-deal, with limited
oversight—complex bid models that can run to hundreds of spreadsheet tabs or
specialized terms and conditions.
Components of the process can be standardized to help a
sales team shape proposals quickly, efficiently, and to a consistently high
quality. Strategy sessions that pull in the right people to decide how best to
approach and execute a bid, stakeholder mapping to understand which people
matter and how they should be engaged, competitive-response sessions to
understand where competitors’ weaknesses might lie and how to exploit them, and
solution reviews to identify opportunities for integrating products and
services—all these can be organized in a way that supports the team and the
best possible outcome.
5. Align incentives
to match shareholder value
The networking company mentioned earlier found itself
owing millions of dollars because of terms and conditions it could not meet.
The salesperson, who had already been fully compensated on the basis of the
contract’s sales value, did not suffer financially. Shareholders did,
however—as they often do when incentives are misaligned.
Overlooking risky terms and conditions is not the only
hazard. Without some skin in the game, salespeople can keep working for too
long on deals they know they are unlikely to win. Companies can inadvertently
encourage such behavior when a proportion of any commission is due at various
stages of the deal, such as winning a request for information or a request for
proposal (RFP). The salesperson will press to pass as many milestones as possible
in search of reward.
Misaligned incentives also destroy deal margins.
Companies may put a huge effort into setting a target price, but time and again
we see salespeople negotiating away the profit margin to bag a deal.
Discounting a price from $350 million to $320 million could still mean a hefty
bonus for salespeople rewarded according to revenue targets, but that $30
million reduction comes straight out of the company’s profit.
We’ve seen a number of companies stretching to do better
by setting long-term incentives that reflect not just revenues but shareholder
value too. One technology player has started adjusting compensation to the
operating income that a contract generates or to the achievement of strategic
objectives. But companies must go into compensation overhauls like this with
their eyes wide open: some individuals with strong track records in closing big
deals may walk away if their incentive schemes change and they fear losing pay.
The CFO at the above-mentioned technology company had to work hard to
counteract perceptions that the adjustments were unfair and would leave
salespeople worse off. Pointing out that the size of the compensation pie was
the same, she won over most, though not all, of the strongest performers.
More data and
better analytics can help companies encourage salespeople to focus
on the value, not just the volume, of a deal. A number of companies we know are
using advanced-analytics tools to help the salesforce stay firm on price. They
identify deal archetypes according to the type of customer, the product, and
the size of the deal, and then let salespeople clamoring for discounts know
when similar deals have been won on less generous terms. Information like this
makes it much harder for salespeople, even stars, to justify megadeals that
don’t create much value and can help them accept that new measures of
compensation are fair.
6. Keep selling even
if you lose a deal or choose not to pursue it
Deal teams should not walk away from potentially
valuable relationships just because they fail to secure a deal. By staying
engaged, it is sometimes possible to pick up adjacent business. Occasionally, a
deal that seemed lost can be rescued. One large software company, on learning
it had lost a deal on a Friday, flew its CEO to meet the buyer’s people over
the weekend. By Monday, the buyer’s CEO and board had reversed their decision.
More commonly, continuing to invest in relationships
built over the course of a tender raises the likelihood that future bids will
succeed. Our experience is that about 20 percent of lost deals produce
significant dividends over the next two to three years.
Sometimes expectations should be reset at the outset of
a bid, to acknowledge that the chances of winning are low but that the bid
process is an opportunity to build commercial ties in the longer term. One
telling example: a healthcare RFP was declared a “must win” by the sector sales
leader of a technology service provider. However, the deal forensics indicated
a very low starting score. The CEO let the deal progress for a short while, but
when the score failed to improve, he cut back the sales team’s resources,
effectively extinguishing any hope of winning the deal (and saving what would
probably be wasted costs). At the same time, though, he insisted that senior
salespeople and technical experts continue building relationships with the
potential customer and make sure his company’s capabilities were well
understood. This proved an excellent strategy. The service provider lost the
RFP, as expected, but won the next one.
7. Rethink the role
of the CEO
The six measures described above would surely have
helped the networking company avoid its sales fiasco. But winning megadeals is
not just about tactics—it entails a new way of thinking that values the
long-term health of a company over winning a megadeal. That can be a difficult
message to embed within a sales team long focused on how much it will earn. The
job of doing so falls to the CEO.
One newly appointed CEO felt that his task of
transforming the company’s performance hinged on transforming the sales team, a
challenge he threw himself into. He determined never to miss the weekly meeting
of the deal team when a large contract was at stake. His intention was partly
to support the team—listening carefully to learn more about how the deal was
progressing, where the risks lay, and where help was needed. But he also wanted
to demonstrate a different approach, nudging the team out of its default
setting.
For example, some team members were always keen to keep
on selling the old, familiar products they were more comfortable with. But the
CEO insisted that they consider which products suited the customer. And he made
sure that they scrutinized every deal from a shareholder’s perspective. Were
the financial implications of all the terms and conditions clearly understood,
and was the right balance struck between near-term profit and long-term growth
potential? In an important move, he would not allow these meetings to begin
until all senior team members were present. No delegating was allowed.
This is far from the traditional role CEOs have taken in
managing large deals. That is partly understandable—they are busy, after all,
and sometimes it’s enough to enter the scene toward the end of the process to
help close a deal. One CEO we know is typical: “I usually meet with the buyer’s
executive team and approve final pricing, but I don’t see a role beyond that.”
By then, however, it can be very hard to make changes that boost the
attractiveness of a deal to the seller or buyer.
More often than not in our experience, companies benefit
when CEOs imagine a broader role for themselves in megadeals. They should
always be asking tough questions about whether effective controls are in place
to manage pricing and profit. Above all, it is the CEO who can be most
effective at helping teams caught up in the exhilaration of a megadeal to
focus, front of mind, on their ultimate purpose: creating value for their
companies.
By David Levitch, Aditya Pande, and Brian Selby
http://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/landing-the-megadeal-seven-keys-to-closing-big-sales-that-make-money?cid=other-eml-alt-mkq-mck-oth-1707&hlkid=92b4e899a6c048d0afc83bbfb8f59f0f&hctky=1627601&hdpid=222284d9-604c-44b6-b677-e60a8f6a7851
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