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Saturday, April 01, 2006

"Pay Per Performance" is a concept that appeals to many interested in sales outsourcing. It makes sense, after all, to only pay when you get results, doesn't it?

Of course, in order to interest an individual or company to work on this basis, there needs to be a significant reward to compensate for the risk and costs you have removed from yourself (not entirely though, as we're not discussing opportunity costs here; we'll save that for another blog).

When you've got no revenue, and non-performance costs you nothing, then how much of the upside are you willing to share? 50%? 60%?

I know another business development company that, on a pay-per-performance basis, takes 75% of any profit made on the deal. Would you be OK with that?

Here's a story from Outsourcing the Sales Function which illustrates the potential problem.

In the 1990's, Jeffrey Katzenberg, a Disney executive, agreed to produce a movie on an entirely performance basis - 2% of the proceeds. At the time, Disney didn't hold high expectations for the project. To everyone's surprise, The Lion King, became a runaway hit and Disney made over a billion dollars in profit.

The performance pay that Disney owed Katzenberg was so large that Chairman Michael Eisner simply refused to pay him. Katzenberg took Disney to court, holding up his contract as exhibit A. Disney eventually settled.

So here's the rub with "pay per performance" - when things go really well, the large rewards can generate regret and envy, even though it was all agreed happily at the start.

In our experience, once sales start to come through, companies will quickly want to re-negotiate the level of performance pay. Of course, if there's a pipeline of business that's been generated and starting to flow, your sales outsourcing company will be reluctant to do this. After all, they've done the "hard work", now it's just a matter of closing the deals taking the lion's share of the revenue.

As always, having a clear exit and hand-over strategy is essential to avoiding potential problems in these type of arrangements.

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Posted by: David Regler @ 2:05 pm |   | Links to this post  

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