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The True Cost of Wrong Sales Hires Is …?

Events, Fire and Security, Medical, Technology | Marcus Cauchi | 12/5/16

true cost of wrong hire

Frankly, I’m staggered by the number of business owners and hiring managers who complain about their salespeople … when they were usually the fools who hired them in the first place.


Bad salespeople in your organisation are a symptom of management problems; bad management is the primary cause, and the problems start with bad recruitment.

And bad recruitment is heart-stoppingly expensive. Read on and discover why a bad sales hire can cost you as much as 30 to 125 times the basic salary you pay the salesperson who doesn’t work out in your role. I’m not even going to trouble you with the calculation of what a bad sales management hire can cost you. I repeat, 30 to 125 times base salary.

So next time you think recruitment is a chore that interferes with your “day job”, or next time you go for the low cost provider and get them to work on contingency where they have NO LOYALTY and will sell their best candidates to the highest bidder, reconsider, and think about paying one recruiter, on an exclusive arrangement, retained too to make sure you have their FULL ATTENTION. Before you throw your hands up in anger, and write vitriolic comments that I don’t know what I’m talking about, ask yourself this question:

“If I had hired a strong salesperson instead of settling on the one I did hire who is “causing” me all these problems, how likely is it I’d be facing all these problems today?”

I thought so.

Let me dig a little deeper. What was your recruitment process? Did you dig out an old job description and then use that as your brief for your next hire? Or did you take the time to design your ideal candidate? What are the predictors of success in the role you were trying to fill? Were you clear about the MUST HAVE characteristics? Assuming you even bothered to work that out, did you them compromise in order to get a warm body on a seat or did you hold fast until you found the right candidate?

What are the predictors of success in a sales role?
When I help my clients recruit we are always focused on finding candidates who meet the following demonstrable, habituated criteria:

  • Ambition and Drive
  • Takes Action
  • Accepts Responsibility
  • Sales Prospecting
  • Control and Close

In addition I advise them to look for:

  • Coachability
  • Curiosity
  • Repeated, Consistent Prior Success
  • Intelligence
  • Work Ethic

Then we design the ideal candidate so when we see them, we recognise them. We build a hiring template, interview questions that ensure we are selecting only candidates who meet these high standards of habituated behaviour, attitudes and beliefs, and the cognitive abilities to be able to adapt to the changing market conditions and resilience to the obstacles they will face.

We develop a hiring scorecard so we can compare like with like and keep our personal feelings in check, to prevent us from hiring someone we like but who can’t do the job. Let’s face it, the one thing salespeople usually can sell is themselves at interview. That doesn’t mean they can succeed in the role for which you are hiring.

I would rather they didn’t hire someone than they hired the wrong person.Wrong hires are the single highest hidden cost in any business.

We set clear expectations about what is going to happen from the outset and maintain that clarity throughout the life cycle of the interview process, the offer and notice period, the on boarding process and throughout their tenure in the business. Ambiguity is the mother of all mismatched expectations.

We develop a clear on boarding plan that covers the first 120 days, the time when the new hire is putting you and your company on probation. Our intention is to set them up for success. Fail to do this and you run the high risk of setting up even an A-player, for failure.
We are absolutely clear about the 30-day red flags that would result in an earlytermination of a new hire so if we have made a mistake we can remedy our error quickly. And we aren’t afraid to apply them when we see them. “Better no breath than bad breath on a sales territory.”

I have another tough question for you managers. Do you spend more than 3% of your time managing your people? If your answer is yes, why?

Are you spending 97% of your time helping your salespeople be better salespeople through training, coaching and mentoring since that is your job? Your job is to clear the path so they can do their best work every day. Your job is get the best out of them. Are you going out into the field and observing them in action? Are you helping them develop pre-call plans and running post-call debriefs so every visit is a learning opportunity?
Or are you “managing” from an ivory tower? Are you trying to manage the numbers (that’s impossible BTW, because once the number is in, you can’t do anything about it and at best, you are doing a supervisory role not a management role)?

So, What is The True Cost of Just 1 Wrong Sales Hire?

Please use your own numbers for this exercise.

How much do you pay them? (basic salary, guaranteed commissions, health insurance, pension, life insurance). What does that cost you?

How much does it cost you to run 1 salesperson? (expenses, phone, car, subsistence, travel, training, provisioning them with equipment, business cards, computer, demo kit) – typically 3x salary is a rule of thumb. What does that cost you?

When you’ve hired the wrong salespeople what does it cost you for them to burnthrough viable leads?

How much line management time is spent in briefing recruiters, advertising the job, sifting CVs and applications, telephone interviews, preparing for face to face interviews, arranging interviews, following up, writing up interview reports, writing to unsuccessful candidates, call backs, arranging second interviews, reporting back to senior management multiplied by their hourly rate? [10-30 hours is not unusual – what is the opportunity cost of that time]. What does that cost you?

How many interviews do you typically go through?

How much additional management time is tied up (HR, senior management, 2nd interviewers etc) with internal discussions on each position x hourly rate? [For senior positions this can be as high as 8-24 hours – what is the opportunity cost in your business for that time?]

Do you use recruiters?

How much do you spend on fees? 10%, 15%, 18%, 20%, 25%, 30%, more of basic salary? Or do they charge you on total package? Guaranteed earnings? What does that cost you?

What’s your interview to hire ratio look like? Do you typically have to interview 3, 5, 10 or more candidates before you find one you want to hire? How many interviews does that entail? 2, 3, 5 or more? What does that cost you?

Once you’ve hired a salesperson, what’s the average target for a new hire? £250,000, £350,000, £500,000, £1,000,000, £3,000,000 or more?

What’s their ramp up time? 4 weeks, 3 months, 6 months, 12 month or longer? During their ramp up period what percentage of their pro-rated first year annual target will they fall short? 20%, 40%? How much does that equate to in cash terms? Is that profit or revenue? What does that cost you?

If you look at your average salesperson, what percentage of target are they actually bringing home? 60%, 70%, 80%, 90%, 100% or more? If they are below 100%, on average what does that cost you per salesperson?

How long do you usually hang on to an underperforming salesperson after you realise they aren’t performing to target? What does that cost you per salesperson before you fire them and seek a replacement?

When you have hired the wrong salesperson in the past what is the cost of leads and marketing that they have burned through without bringing in new business? What does that cost you?

When you’ve hired the wrong salesperson in the past, have they lost you any customers? Did a competitor pick up that account? What was it worth annually? Take the lost income and double it because what came out of your pocket, went into a competitor’s pocket.

What is the average customer lifetime? 1 year, 3 years, 5 years, 10 years, or more? If a bad hire lost you an account, how many years are you locked out? Multiply the annual income by the number of years they got you locked out of that account to come up with a cash value of the losses?

How many accounts did they lose you? Add up all the revenues they lost you over their time on your payroll?

How many of your existing accounts that the bad salesperson was responsible for have growth potential? Did they have similar growth potential when this bad salesperson was responsible for growing them? How much money did s/he leave on the table? Did that create opportunities for your competition to come sniffing around, getting a foothold and putting your account at risk? What potential losses are you facing today even though you fired them?

What does that equate to in annual renewals, maintenance, cross sells, up sells and referrals if you extrapolate thee money they’ve left on the table over the customer lifetime? What’s the cash value?

What is the average lifetime customer value of a new client? If you take the number of new accounts the bad salesperson actually brought in and compare that against the number of accounts they should have brought in, and you multiply that number against the average lifetime customer value of a new customer, does that number make you wince?

LCV = AOV x AOF x CL +R

  • LCV = lifetime customer value
  • AOV = average order value
  • AOF = average order frequency
  • R = annual referrals’ value

Hypothetically, if your AOV is £5,000 and their AOF is 4 times per year, they stay a client for 4 years and bring you zero referrals, if they have lost you (12 clients over 2 years) with an average lifetime customer value (LCV) of (£80,000) would it be fair to say they have so far cost you (12 x £80k = £960,000)? Is that correct?

How do you feel about that?

Understand this depressing fact. Their salary and running costs, the recruitment fees, training costs and expenses pale into insignificance when you you compare the hidden costs of a bad hire.

But it gets worse …

What percentage of your sales team are hitting target today?

How long have you tolerated underperformance in your sales team before making the decision to fire and replace them?

How many wrong hires have you had in the last 2 or 3 years?

What is the growth potential your current salespeople are leaving on the table annually?
I could go on, but I don’t want any of my dear readers leaping off a tall building or slitting their wrists when you realise the true cost of a wrong hire.

 

You’ve missed my 2 day bootcamp on how to prevent bad hires, but if you’d like to sign up for my next one, drop me an email at mcauchi@sandler.com or if you can’t wait to stop the blood loss in your business, call me, invite me in and let me bring a ray of sunshine to your otherwise uncomplicated and near perfect day!

 

Read more from Marcus on his LinkedIn or contact him at mcauchi@sandler.com

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