Do You Dare Outsource Sales?
To say Sven Harms is fond of outsourcing would be an understatement. The co-owner of Pioneer Research Inc. in Moorestown, N.J., Harms believes his 45 employees should focus on one thing only: the design and marketing of binoculars and underwater cameras. So he lets outside contractors handle nearly all of his administrative and technology chores--from payroll and human resources to Web site hosting and development.
Harms has done more than hand off his back office. He also outsources Pioneer Research's public face: its sales force. The way Harms sees it, he doesn't have much choice. He wants his company to have national reach but can't afford to put his own people on the road. To cover the nation effectively, he figures he would need at least 30 salespeople at an annual cost of about $160,000 each, including salaries, benefits, travel expenses, and sales incentives. Instead, Harms contracts with 20 independent sales firms, which give Pioneer Research some 60 people on the ground, helping to bring in annual sales of $15 million. Outsourcing "was the only thing we could do," Harms says. "Revenues were small. Cash flows were small. Credit lines were small. We couldn't hire a lot of people."
Think of it as the final frontier of outsourcing. Small-business owners have long delegated onerous, behind-the-scenes tasks to outsiders in an effort to expand their companies while keeping payrolls small. Now, many are beginning to hand over what may be the single most critical front-office function--sales.
Would that make you nervous? It should. Outsourcing your sales force means that a customer's first contact with your company could be with someone you've hardly met. You won't be able to tell your salespeople whom to visit or when. And you can forget about getting regular field reports. But for small companies with big aspirations, shifting sales onto someone else's shoulders can make sense. Many "rep" firms have worked in the same industry and territory for decades, providing instant access to customer relationships that could take years for you to build and cost hundreds of thousands of dollars. The best part: Since reps work solely on commission, it won't cost you a dime to get started, and if it doesn't work out, you can fire them with a scant 30 days' notice.
As a group, they're often called "manufacturer's reps," but plenty will also represent service companies, and some specialize in cutting-edge industries where it can take months to close a single sale. The Manufacturers' Agents National Assn., a Laguna Hills (Calif.) trade group, estimates there are 25,000 rep firms nationwide, each representing an average of 10 companies and employing six people.
This is not your traditional outsourcing relationship. To succeed with a sales rep, you need to master a management style that's equal parts benign neglect and in-your-face meddling. Rep firms tend to be small, entrepreneurial outfits, often headed by someone who was once a top sales agent at a larger company. Like most entrepreneurs, they didn't go into business for themselves so someone else could tell them what to do. Then there's the loyalty issue--a rep's ties are often deepest with his customers, not the company whose product he sells. In fact, most successful reps have worked for decades with the same customers, who have come to rely on the reps as trusted advisers who help sort among an ever-expanding array of products and services. While reputable companies won't sell products that compete directly with yours, many represent dozens of lines. It's up to you to keep on top of your reps and make sure your lines are front and center.
That's not always easy, says Derek Holloway, sales manager at Winco Inc., a $6 million medical-equipment manufacturer in Ocala, Fla., with 82 employees. Winco contracts sales out to 11 independent companies that collectively have 42 salespeople selling Winco's wares to hospitals, doctors' offices, and medical-equipment dealers. The cost to Winco: a commission of 9%. In a matter of months, one of Winco's reps drummed up $150,000 in new business in a territory that had been stagnant. Holloway also has had to fire less effective reps, one of whom went on to bad-mouth Winco to its customers. On balance, it beats switching to a full-time, salaried sales force, which would double or triple the company's sales cost--as long as you're vigilant. "A good rep will do magic for you," says Holloway. "A bad one will take your company down."
Keith Schwartz knows this all too well. His Euclid (Ohio) company, On Target Promotions, is recovering from a disastrous outsourcing experience. Last year, the $3 million, four-person company, which markets ties, belts, and scarves to food stores and drugstores, hired a rep firm to cover an East Coast supermarket chain. The account generated sales of $100,000 a year, but by having someone on the ground, Schwartz expected that sum to double. Instead, the rep firm blew the account, generating only a tiny order ahead of last Father's Day, and no order at all for the crucial Christmas season. "Today, we're fighting just to get back in," Schwartz says.
While Schwartz wishes he had kept better tabs on his reps, most sales reps say that meddling managers are their biggest problem. Tom Searcy, chief executive of Accelerant Inc., an Indianapolis rep firm that sells call-center services for six companies, recalls one client who checked in twice a day for reports--even though it typically took three months to close a sale. "They were very anxious to know exactly what was going on," says Searcy. "But in reality, they lost that luxury when they outsourced."
That means you have to be extremely careful when selecting your rep firm. Make sure the other companies they represent complement, rather than compete with, your business. Ask a potential rep to provide you with a marketing plan, complete with detailed sales projections. Put those numbers in your contract, and use them as benchmarks. Once you've made a selection, make sure you have the infrastructure to support your new sales force. "Requests for information from customers might go from 15 to 45 a day," says Miller. "If you can't provide that, the rep's going to lose confidence in you." So will the customer.
Smart managers also demand a fair amount of feedback, even if it isn't the blow-by-blow account of an in-house rep. "If my phone's not ringing, if I don't get faxes, if I don't have contact over a week or two, I know things are not percolating," says Winco's Holloway. He expects to see progress within 60 days of hiring a rep, whether it comes in the form of actual sales or detailed reports of what customers want or are saying about Winco. Big month-to-month sales fluctuations are another possible sign of trouble. Unless your business is very seasonal, it could mean the rep isn't working the territory consistently--what Holloway calls "crank and coast." At the beginning of each year, Holloway asks for quarterly sales forecasts--and he holds his reps to them.
Finally, just because you've chosen to outsource, it doesn't mean your responsibility for sales is over. This is not like handing over your accounting chores. Judi Flowers and Greta Longmire, co-founders of Bonjour Fleurette, a Sausalito (Calif.) manufacturer of high-end women's slippers with 25 employees, will sign their sixth rep this month. While Flowers and Longmire will handle large department-store clients, like Saks Fifth Avenue and Neiman Marcus, the reps will give them access to hundreds of small, independent boutiques. During the past four months, Flowers and Longmire have brought in about $75,000 in orders. With the reps working trade shows and selling to boutiques, they're hoping for revenues of $500,000 in their first full year.
The two will still spend plenty of time on the road themselves. Doesn't that defeat the purpose? Not necessarily. Reps in the fashion industry often have showrooms, and Flowers once walked into one only to see her company's slippers tossed haphazardly on the floor. Dismayed, she quickly arranged them into an attractive display, using an antique mirror and a scattering of the colorful, custom-made silk flowers the company uses to adorn its footwear. "You can't let these people just go off on their own," says Flowers. "You have to stay involved." Your sales may be outsourced and out of sight, but they shouldn't be out of mind.
By Kimberly Weisul