Question

Susan stared in her glass of beer. This was the first time she was in charge of the whole consulting project. Making it a success was a must. Her client was a medium-sized television station. In a drive to cut costs, they were considering to outsource sales. Susan had just participated in the board meeting in which the key contender presented its proposal. The board had a positive impression but wanted to hear Susan's reaction. According to the sales company's proposal, they would be compensated on a variable basis. In particular, they proposed the following scheme: • 10% on the first $400 million in sales • 5% on sales above $400 million The sales company argued that their sales force was much more effective: for similar clients, their revenue generated per dollar spent on sales was more than two times higher than what the client currently achieved. The client had about $500 million in advertising sales and had no other sources of revenue. Their fixed cost was $420 million, which went mainly to the purchasing of television programs and to general overhead. Finally, they had $80 million in sales expenses, all of which was variable (in function of the number of ads sold).

Case Questions: (1) If you were Susan, would you advise your client to accept the proposal? (2) If not, what counteroffer might you propose?

Answer 1

Considering the data , the client was hardly making any money ( $500 million in sales revenue with total expenses of $ 500 million ($420 miliion + $80 million ) , so it pays to listen to a new proposal to boost sales .

However the danger is :

a) what if the outsource sales company did not achieve or substantially underachieve the target ? Then the company woud be in a big soup . e.g. they achieve only $ 200 million by outsourcing and undercutting their existing sales force .

b) If the move to outsource is also accompanied by firing the entire company sales force , then the problem would be compounded as they will lose on both the counts . In case they want to switch to old system it would be difficult for the company.

Ans 1 : I would advise the client the following :

a) Keep the existing sales force . Outsourced sales force has historially never beaten company sales force.

b) Outsource the sales on a trial basis for 1 year to the outsource sales company with the caveat that minimum slab for any payment has to be $200 million of annual sales . If they succeed and show promising results , then they can be retained - however they will continue to be supported by the existing company sales force .

Continuous monitoring of the outsource agency based on the parameters designed with the help of the sales force .

See he performance for 1 year onthis combined basis and then evaluate after 1 year .

Also consider proposal form other outsource sales companies for benchmarking .

Note : If you liked the answer please give an Up-vote , this will be quite encouraging for me thank you !.