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A new wrinkle on outsourcing


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September 02, 2005

A new wrinkle on outsourcing

Steve Hamm

Earlier this year, when I was gathering info for what turned into a cover story about IBM, I asked CEO Sam Palmisano whether IBM would consider handling other companies' sales operations for them. It made sense to me. IBM's sales force is one of its most valuable assets. You would think that others would like to tap into that expertise. His answer was that he hadn't considered that possibility, though IBM later pointed me toward an example in Japan where they were running a client's e-commerce operations.

Outsourcing of sales may not be top of mind for IBM, but it is for authors Erin Anderson and Bob Trinkle, who just published a book on the topic, Outsourcing the Sales Function. They argue that the long established practice in some industries of using manufacturer's representatives should be adopted much more broadly and aggressively by companies throughout the economy.

The authors believe that companies can get improved results from outsourcing sales because OSPs (outsourced sales professionals)--a term they coined--can bring a level of consistency and best practices to the job that's difficult to achieve with an in-house sales staff. They believe that many companies don't understand the true costs of their sales operations because many of the expenses are mingled in with other administratve expenses, making it seem--incorrectly--that it would be more expensive to outsource the function.

Their poster boy for sales outsourcing is chipmaker Intel. After it bought Digital Equipment Corp.'s semiconductor business in 1998, it used outside sales organizations to sell three lines of products in markets where its normal salesforce had no experience and few contacts. The result was a fast takeoff and strongly growing businesss.

About 11% of all business-to-business commerce in the United States is handled thorugh manufacturer's reps, but Anderson and Trinkle believe it would be much higher if business leaders understood the plusses. "We believe we have found a major inefficiency that's purely phychological," says Anderson, a professor of marketing at INSEAD in Fontainebleau, France. "Companies are willing to outsource their back office operations. So, why not the salesforce?"

Turns out, it's partly a chicken and egg situation. Because there isn't that much demand for manfacturer's reps, there is not an abundant supply of them. In this era where no stone is being left unturned in the effort by companies to operate more efficiently, it seems likely this logjam will be removed in fairly short order.

09:03 AM

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I have never heard of outsourcing sales. I myself am a sales professional for ADT Security. (B2B)

I think it's great Idea. I see a business opportunity in the making. Are there presently any outsourcing firms specializing in outsourcing sales? I have not heard of any.

Posted by: Brett at September 5, 2005 02:23 AM

Dear Mr. Hamm:

I'm glad you see IBM true strength - marketing. Their technology in lot of ways is lagging and holding back the U.S. Technology abilities. They have all these patents in Armonk and in San Diego.

IBM is holding America back technically by being a technical laggard. Someday in the very near future IBM will fade because it still believes in MVS, CICS, TSO and so forth. Tomorrow's systems simply can't function with these stiff, outmoded software dinosaurs.

When will we wake up?

Walter Earl Roper

roperw@uisalumni.org

Posted by: Walter Earl Roper at September 11, 2005 08:31 AM

I agree that the manufacturer's rep model is very under-utilized. I was with one of Intel Corporation's manufacturer's representatives for 11 years, the last 6 as a V.P. and partner before I sold my share of the business. I was involved with the start up and execution of the Intel relationship for the last 5 years of my tenure. It was and still is an absolute success. The rep model has a great deal of merit and could be utilized across a multitude of industries. The ability to consistantly maintain the cost of sales at a known percentage of your revenue is one of the greatest strengths, along with the ability to shar a line card to leveraging products/services and business contacts that are synergistic with your product or service. It also increases your strength in the distribution channel. If anyone has any questions or would like further insight on making this model successful from someone who has been there feel free to contact me.

Posted by: Bob Jones at September 12, 2005 03:48 PM

As a manufacturers representative in the high technology components industry, we have consistently created new customers for our Principals. This is due to our geographical access to the customer and fostering of long term relationships. The synergistic product lines we represent allow us to maintain access to designers, engineers, and materials management throughout product life cycles. The 'rep model' is a viable and mutually profitable method of going to market.

Posted by: Eric Post at September 27, 2005 01:16 PM

Having been a mfgs. rep for 34 years, I heartily endorse the concept, but must also state that many mfgs. do not really understand the "care and feeding" of their rep force.

As independent entrepreneurs who front virtually all the costs associated with the sale sprocess, reps deserve more respect and cooperation from their principals (mfgs.). We are not employees under your thumb, but more like partners pulling in the traces with you to get to a mutual goal.

When we achieve it, do not begrudge us our rewards and look for ways to cut our commission rate or otherwise "take back" some of what was promised if we did our job - bring you the sale - as well as aid your marketing, customer service, credit, and other corporate functions.

Not surprisingly, the mfgs. I've represented who understand this are the ones we worked the hardest for and achieved the greatest mutual success with.

Posted by: Greg Thomas at September 27, 2005 01:58 PM

To Brett and others like him: Go to www.era.org and look around.

To Steve Hamm: Thanks for your positive spin. What isn't obvious, even in "Outsourcing . . ." is the resistance principals now using reps show at paying the commissions due. This is best illustrated by the difficulty one gets from them when asking for help tracing outsourced activities. Let's hope that your forecast of growing acceptance of the OSP will come true.

To Bob Jones: Thanks

Posted by: Bob Parsons at September 27, 2005 02:38 PM

Dear Mr. Hamm,

Thank you very much for your well-written article on "outsourcing sales". I've been a manufacturer's rep (industrial electronics) for 31 years. A "rep sales force" is usually the most efficient, most productive and least expensive way to "go to market". Not always but far more than the current 11%.

To the gentleman who wrote from ADT, I can say his company and products are probably best handled by a "direct" sales force. But his is an exception rather than the rule. I won't list all the reasons why this is as I'm sure Erin and Bob's book explains when using a rep sales force "makes sense" far better than I ever could.

In my opinion, there are two major reasons that causes companies to hesitate changing to a manufacturer's rep sales force either in some areas or the entire country/world (a blend of "direct" and "rep" works just fine with company employees covering small but major dollar markets and reps covering the rest). The first reason is that some consider a rep sales force as an extra layer of sales coverage and expense (it is not -- a rep sales force is "instead of" not "in addition to"). The total cost of "going to market" always drops when switching to using reps and almost always results in having "more sales feet on the street". The second reason is a concern that they might have less control over their sales force if they aren't company employees. This has been proven to be just the opposite time and time again. Assuming the company does proper "due diligence" and hires rep firms with the necessary experience, technical training and market knowledge, they hire proven successful people who make their living on straight commission. The expression "if we don't sell -- we don't eat" has been the hallmark of the "rep business" since it first began. Rep firms form tighter working partnerships with their "principals" (companies they represent) than is usually found in a "boss/employee" relationship. It's in the best interest of both parties to do so. When a company makes the decision to "go rep", they rarely return to direct sales. Their new partners in business take care of hiring salespeople, bear the burden of employee benefits, administration, motivation and all that goes with having employees. A costly matrix of time, money and effort is reduced to a single expense item on their P&L statement -- "rep commissions".

The gentleman with ADT asked if their are companies or individuals that specialize in guiding a company in evaluating if "going rep" makes sense (more profit/more market share) and, if it does, work through the steps to make a smooth transition. The answer is "yes". There are consultants who do this (most are ex-reps or ex-sales management individuals who utilized and worked with reps for many years). There are a number of national organizations who assist (for free or for a minimal sum) companies in finding reps to interview. Two are the Electronic representatives Association (http://www.era.org) and the more broad-based MANA (http://www.manaonline.org) that covers virtually every industry (not just electronics). There are others as well.

There has been consolidation in the manufacturers' rep business just as in most areas of the world's economy. But there are still many thousands of well-established, professional sales agencies all over the world (not just in the United States) ready and willing to grow a company's sales in the territories they cover. And, as I say, in the most efficient, most productive and least expensive manner.

Thanks again for an excellent article.

Best regards,

Gary Yantis gyantis@midtec.com

Midtec Associates, Inc.

www.midtec.com

Posted by: Gary Yantis -- Midtec Associates, Inc. at September 27, 2005 04:25 PM

Mr. Hamm,

How impressive to finally read an article about the industry profession I chose 8 yrs ago-manufacturer's rep. I began my business with one electro-mechanical product line and today have 11. The companies we represent now see the value of our expertise, synergy, account knowledge, and as you mentioned, our rapid deployment of

"best practices". Though some principals see outsourcing as a necessity due to low market exposure and the inability to justify sales pioneering costs, others have learned of our marketing value through education. With the help of your article and organizations like ERA (era.org) and MANA (manaonline.org) we see less of that glazed over look from friends, family, and business professionals when they ask....so what do you do for a living?

Jim Cyr

President/CEO

Westron Sales Inc.

San Francisco, CA

www.westronsales.com

Posted by: Jim Cyr at September 27, 2005 09:34 PM

You bet this is one of the keys for business success in the future in many industries.

As a consultant to many different manufacturers representative associations I have studied this process from an independent standpoint. The success of Reps in many industries can not be denied. It is a very economical way to build a market, especially for pioneering new products.

For more information on this well developed, but still emerging concept go to www.MRERF.org for research and information.

Posted by: Steve Martin at September 28, 2005 01:20 PM

Thanks for the article Mr Hamm!

I found it very interesting that the gentleman from ADT has not made the connection of outsourcing sales and the term Manufacturer's Rep. He has dealt with "Independent" reps for years. Just about every line (including major companies such as Pelco, Bosch, Panasonic, Sony, Sensormatic, etc.) use manufacturer's reps such as us. I would encourage him to go to our website at Warrenrep.com and notice the manufacturer's we represent. Manufacturers Reps are by far the most stable and economical method of sales. Our company has been in business over 40 years and have had lines nearly as long. To sum it up, we are "inter-dependent" Professional Sales Organizations that are excellent "alternatives" to replace factory direct sales forces... nothing more and nothing less.

Best Regards,

Brad Warren

Posted by: Brad Warren at September 28, 2005 05:41 PM

It's the future.

Outsourcing is just another way of trading. In enables companies and regions to do what they do best.

There is an entire family of system tools that help organizations outsource any business activity that they can define. Take a look at wwww.digitalfuel.com for an example of systems that track outsource business process services.

Thanks for this great article.

Posted by: Carter Coleman at October 25, 2005 04:41 PM

Sales Outsourcing has become a multi-billion dollar industry. The idea is that if a firm focuses on one concept, that they specialize to an extent where they become experts. Marketing and accounting have led the way in this front.

The primary concept of sales outsourcing is branded representation of a product or service. Sales Outsourcing firms like Sales Partnerships become virtual sales forces for our clients. Our firm, for example, represents companies ranging from large banks, international IT/telco firms, to software firms. A true sales outsourcing environment will outperform 95% of their client's internal sales forces due to the singularity of focus and the abilities to perform the task in a consistent and repetitive fashion.

Manufacturer's reps are value added resellers that don't extend the customer's brand. They sell whatever product works for the mfr rep at the time. This built the auto industry but doesn't work as well for modern business practices. Our success rate versus mfg reps is a 2:1 to 4:1 outperform.

IBM is wise to consider outsourcing. They would be matching the successful practices of their competitors. Specialization of tasks is the lesson Henry Ford taught us -- it's about time for industry to realize that sales is a professional task that lends itself to specialization.

Posted by: Fred Kessler at January 31, 2006 07:04 PM

My compnay, Virsalent, Inc., has been doing outsourced sales for three years. I can tell you that we work with the same passion and dedication as if we were employees. We work hard for our clients because we want to maintain a great reputation with solid references. Our salespeople have the pleasure of selling multiple products, so they don't get bored pitching the same thing day after day. We have also cultivated a very large database of corporate contacts, in a variety of industries, that we can call on with multiple product offerings. If anyone has any questions about the outsourced sales model, feel free to contact me.

Posted by: Joe Blank at August 3, 2006 04:14 PM

Great article on manufacturer's reps. I've known several reps that have been doing this for years and enjoying that 100 grand per year part time job.

Posted by: Tim Butler at October 28, 2006 07:41 PM

This was an excellent article that illustrates some of the many advantages that outsourcing sales can provide to companies. After successfully building and managing software sales teams for 20 years, I launched my own outsourced sales company (www.truesalesresults.com).

When companies are considering consulting or outsourcing options, they should focus on investments that return quantifiable revenue results as opposed to cost savings or advice on how to improve revenues (i.e., without the actual execution part).

Regards,

Steve Crepeau

CEO

True Sales Results

Posted by: Steve Crepeau at January 26, 2007 02:24 PM


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