Some numbers are sacrosanct especially in sports. In baseball, the home plate to first base is always 90 feet. In basketball, the hoop is 10 feet from the floor. And in golf, the golf hole is four and quarter inches in diameter, a measurement officially sanctioned 121 years ago by the Royal and Ancient Golf Club of St. Andrews in Scotland. Now, golf manufacturers want to change the size of the golf hole from the current standard to 15 inches across. Why? Because they are concerned that the smaller hole in golf and the time it takes to putt is the reason why golf is losing participants. The golf manufacturers believe it is time to shake up the game. The key question from my view is: Does making it easier to play address the problems really facing the golf industry?
In mortgage banking, many companies are doing the same thing golf manufacturers are trying to do by window dressing what the real problem is. Let me explain. A mortgage company’s breakeven point is reflected in the number of originators who meet the company’s minimum monthly volume standards (units and dollars). The monthly numbers are critical reflections of the originator’s sales productivity and what it takes for a company to be profitable. At many companies, the standard monthly volume goal for an originator is 4 units.
Let’s assume that the breakeven number is an accurate reflection of all costs including profit margin (again it can be a different number for different companies) that the originator must hit. Originators who perform above the minimum would be considered productive and those below, not. This is not a calculus formula, but a simple calculation that any manager can perform. After managers conduct this analysis, the next logical step would be to address underperformers quickly.
However, when I visit sales organizations, I often see managers holding on to people who are unprofitable! The reasons range from “I won’t have enough people to cover the market” (in reality, underperformers are not covering the market) to “What would my boss say if I let them go?” (Wow, your profits are impressive without the underperformers).
In numerous studies my company has conducted on sales force productivity, we found that a small percentage of originators — roughly 10% — produce greater that 50% of the total volume in a company. When you add the next 10%, that means a total of 20% of originators produce on average 60% of a company’s total volume. The remaining 80% to 90% of the originators do the residual volume.
What does the math tell you? With so many originators performing so poorly (The MBA 4Q 2013 Profitability Report shows an average of 2 units per LO) higher costs come into play quickly in a sales organization. Failure to address underperformers systematically and efficiently is fatal to a sales group. Keeping proven underperformers on your team or reducing the budgeted goals to accommodate sub-par performance is a recipe for disaster.
The golf industry is right to be concerned about future participation in the game. But they seem to be ignoring that golf green fees are expensive and not affordable for many people. Making the hole larger is not going to make it less costly and more popular. Similarly, mortgage banking companies can’t keep hiring originators who are not profitable. The numbers speak for themselves and it’s time for managers to realize that ignoring break-even numbers is not compatible with long-term success.
Is it time to evaluate those on the bubble—I would be glad to discuss how to implement an effective performance system for your firm.