When I ask senior managers if they think their companies encourage retention of low performers, they respond, “No way! That would be crazy!” But, when I ask why so many branch managers are slow to fire underperformers or why we have so many originators doing less than 2 units a month, senior managers cite a number of excuses i.e. managers are too optimistic and believe the sales person is going to turn it around soon; the sales person is just having a slump; or it’s seasonal. In my opinion, the real reason is that the producing manager structure actually encourages managers to keep low performers! Here’s why.
In a great sales book by Kevin Higgins entitled Engage Me: Strategies from the Sales Effectiveness Source, he discusses how companies typically focus on the total branch profitability and when that is driven by one or two people, the other sales people are then viewed by direct managers as incremental contributors. This is where the idea of some volume is better than nothing. I see this thinking a lot when consulting. This seems like a logical assumption. (In the last few weeks, I discussed how recruiting branches is still the primary way companies are recruiting originators.
However, this approach is an old model that simply doesn’t work in a higher cost environment. The reason? Under the producing branch manager structure, the model can hide the unprofitable originators (especially when the manager is the top producer) even though the branch itself can be profitable. From the branch manager’s viewpoint an underperforming originator is at least contributing some volume which is better than nothing if the same individual was fired. The problem is that companies have unwittingly encouraged the thinking that something is better than nothing versus looking for better sales talent which is all about recognizing that the Lost Sales Opportunity is not just corporate’s problem but the branch manager’s as well.
In the past, the cost to originate was low but not anymore. The financial numbers are frightening today with the typical gain on sales around 270 bps or so and personnel cost is 180-190 bps all in (66%). As a result, there is not a lot of room for other things such as investments in leading edge technology, training or even employee retention efforts. The pie is only so big.
I think it is time to change the model. It is evident that a company needs more originators who actually contribute vs. originators who are not profitable. The first step to implementing a change is to measure each originator for profitability and don’t get fooled by the total branch profitability.