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Saturday, March 31, 2007

Back in July last year I wrote an article on Ecademy called "Is Sales Outsourcing Right For My Business?". The article was aimed at helping people understand sales outsourcing and whether it was a good fit for their business.

I recently had a discussion with a sales outsourcing partner about the different models used and what the benefits are of each one.

Sales outsourcing, in the sense of contracting an external sales team, is still a young business model.

Models used by sales outsourcing companies range from 100% revenue-share/commission (usually only adopted when the company has established relationships they believe they can exploit for a superior return) to a hybrid fixed fee plus commission.

In addition to this, many companies using the 100% revenue-share model are forming joint-ventures with their clients with an exit strategy established up-front; once they build the business to a specific level the client either buys out their share and brings the sales function back in-house or, if the client's business is sold, the joint-venture is included in the trade sale.

To me, this model encourages long-term commitment on both sides, which is always a problem when working purely on commission. Plus, from a sales outsourcing perspective, it provides a larger upside through building equity. This is the principal of shared risk models - a higher reward for greater risk.

An alternative, particularly suited to very early markets, is to work on a fee + commission to ensure some control of time committed, activity levels, etc and then to phase into a full commission or joint-venture model once traction is established. This has the added benefit of both parties getting to know each other prior to any venture.

The common thread in each model is a balance of risk and reward between client and sales outsourcing firm.

Factors such as maturity of products and markets place a large part in deciding the best model. If time-to-revenue is likely to be long, then some form of retainer will ensure commitment from the sales outsourcing firm.

Otherwise, and I have seen this happen, the client will get 6 months into the contract and find out that their sales partner has dropped them for a more attractive offer.

If that happens, the opportunity cost in delayed market entry will far out-weigh any savings on fees.

Shared risk means just that... shared risk.

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Posted by: David Regler @ 12:27 pm |   | Links to this post  

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