April 4, 2012
I have great admiration for the work of Daniel Kahneman. He’s an Israeli psychologist whose work with the late Amos Tversky won the Nobel Prize in Economics in 2002 even though neither was obviously an economist. The pair built the foundation for behavioral economics and did early work on framing, or how we perceive issues based on what other information surrounds them.
Kahneman’s work — the part I am most fascinated with — focuses on how we think and his new book Thinking Fast and Slow summarizes his work and that of others in the field and it has significant implications for our daily lives as well as many applications within CRM.
Kahneman postulates two systems, or ways of thinking, which he calls System 1 and System 2. The systems are really metaphors for how the brain works — they don’t show up on an MRI. System 1 supports thinking quickly, reflexively and in the moment. It is the snap judgment or gut instinct that evolved to keep us safe from hungry lions and we rely on it still. System 2 is what many people would call “real” thinking. It supports the number crunching we do to get quantitative answers, and other deliberate work we do whether or not it involves algebra.
Both systems likely evolved on the savannah. When confronted by a predator System 1 was most responsible for fleeing the scene. System 2 would have been more useful for an individual trying to find the best place to cross a river — not too deep and no crocodiles, please. You get the idea.
Kahneman shows through experimentation how the systems work and how we may prefer to let System 1 do the heavy lifting even when it is out of its depth because System 2 involves real work and the brain would rather not engage. Here’s an example. A bat and a ball cost $1.10 as a set. Individually the bat costs $1 more than the ball, what does each cost?
According to Kahneman for most people System 1 springs into action concluding that the bat costs $1 and the ball $0.10. Did you get this answer? It happens to be wrong because $1 is only ninety cents more than ten cents. If the ball costs ten cents then the bat would have to cost $1.10 which would make the set $1.20 not $1.10. If you do a little algebra you discover that the bat costs $1.05 and the ball can be bought for a nickel thus conforming to both conditions.
For many situations the difference between an answer of ninety cents and $1.05 is a difference without a distinction. But a willingness to accept the wrong answer tells a lot about our brains and CRM use too and the propensity some of us still have to blow off CRM as too much work. How many times have you heard this regarding SFA, “It doesn’t do me any good. It’s just extra work because I’m just collecting data for my boss.”?
I hear it often. In fact some emerging companies use this as a reason that their products are superior to what’s on the market right now. Their products are easier to use, less invasive they say. But forecasting results tell a very different story. These new vendors claim to be better because they, in effect, don’t ask the user to think and in the process they perpetuate wrong answers. Thus the road to CRM enlightenment is pockmarked with potholes of ignorance.
Part of each one of us prefers the ignorance of the wrong answer because System 1 took care of it and we didn’t have to engage System 2. The ninety-cent answer gets us close enough — that is until we go to the store and discover that we don’t have enough money.
For a long time there’s been anecdotal information about CRM’s benefits, which has been unconvincing to at least some people. A diminishing number of System 1 types assume it’s too much work while others might see it as the path of least resistance — two valid System 1 responses. At the same time though, some System 2 types think there isn’t enough proof and want clear ROI numbers, which are hard to get. Actually the System 2 types are really just engaging System 1 by expecting someone else to do the work. It can get complicated.
The advent of analytics as a part of the CRM suite was supposed to shed new light on CRM’s efficacy and some clear information is now coming to the fore. Last week I spoke with Swayne Hill a founder of Cloud9 Analytics and the SVP, Global Field Operations. He’s started blogging about his experience using analytics in selling and the findings are very interesting.
From his writings I can say that one of the knocks against CRM is valid, it is used to capture data for future analysis, but for a long time that analysis was performed by many managers operating in System 1 mode. They took the forecast and added their gut feel for the data often promoting some deals and de-emphasizing others. Despite this effort though, our data suggests that most sales forecasts are profoundly unreliable.
To take a System 2 approach with a sales forecast almost demands analytics because there is simply too much data for a human brain to crunch in a timely way. So using his own analytics including a new forecasting tool, Hill began analyzing his company’s performance. He freely admits in one post that the company missed its forecast a couple of months running which got him and his peers very interested in figuring out why. Indeed, a company that specializes in sales forecasting has to both eat its own dog food and benefit from it.
In short order Hill discovered that his sales reps were three times more likely to win a deal when the VP of sales for the prospect was involved in the decision. That sounds like a no-brainer but it isn’t. Lots of large organizations have sales operations groups and often they can make the purchase decision for a product like this, especially if it can be shown to save money (that’s the emphasis in operations). That’s basically a System 1 decision.
But it’s the sales VPs who can drive a decision if they think it really will boost sales. So while the operations side of the house might not buy if the ROI isn’t great enough, the VP of sales might be more willing to make the purchase if a vendor can show a modest performance improvement over time and that is a System 2 decision.
Hill’s discovery led to a metric, a sales milestone that is now built into the Cloud9 internal sales process. If for some reason a deal gets to forecast stage without the customer’s sales VP being involved the forecast it is marked down for that reason. So ironically, and very interestingly, this new milestone has become a System 1 decision point.
Hill’s blog is full of observations like this and I think he’s right to focus on ensuring data collection in sales. I think every sales organization can go through an exercise like Cloud9 and come out the other end with valuable new insights into how and why it is successful. But that analysis is a System 2 activity that will ultimately drive System 1 activity. We need to challenge ourselves to not take the easy route of what’s been done before, to fully engage our minds.
Finally — and I know I’ve said this before — as important as data is, it is useless without analytics to turn it into real information. Hill had plenty of data about the importance of the VP of sales but sitting in the database it was diffuse and useless. When it was organized by analytics it became information, which was, in turn, converted into knowledge that future System 1 types can leverage.
CRM works and it is worth doing because it gives us the tools to engage in System 2 work to make ourselves more productive. If we’re simply relying on data capture and System 1 cogitation, our results will be mediocre. But there’s nothing wrong with using a System 1 shortcut once you know it’s based on knowledge.
Systems 1 and 2 play into social CRM strategies as well and I will be writing more on the subject soon.
The long recession and the rise of social CRM were not simply co-incidental. I believe they happened together. That’s not to say that social CRM happened for some cosmic reason, I neither subscribe to the belief that all things happen for a reason nor do I believe I am qualified to hold forth beyond what I’ve just written. I think social CRM — whose roots precede the recession — became important during the recession because it represents a good and inexpensive way to keep tabs on existing customers and possibly capture some new ones at low cost.
That’s recession 101 in my book. Manage the installed base, capture the business that’s available, keep the maintenance stream coming in and, whatever you do, don’t give a customer a reason to leave you. In the process you can promote your thought leadership and that’s valuable too. Social is perfect for that and a good deal more. But now that the recession is giving way and job growth — a frustratingly lagging indicator — is making tentative gains, many companies that I speak with are turning their attention to revenue and how to accelerate it.
Just as managing the customer base is recession 101, accelerating revenue is recovery 101. Some of us may not have made the psychic switch yet but that’s coming. Lots of people I speak with, especially vendors and VC’s, have the revenue idea firmly in place and, just as social predates the recession, revenue performance management (RPM) predates the recovery.
VC’s like Bruce Cleveland, a former high-ranking executive at Siebel, have been writing about RPM for a couple of years and today I can speak with him and people like Phil Fernandez, Founder and CEO of Marketo, or Swayne Hill, CEO of Cloud9 Analytics and many others about RPM and have good discussions. The talks aren’t simply about revenue and how nice it is but more substantively, they’re about accurately identifying opportunities and bringing them to fruition not just in a reasonable time but like clockwork.
Unlike other trends that we’ve seen over the years, RPM is unique in that it focuses on end-to-end business processes and quite possibly the overlap of responsibilities and systems to manage those processes. One of my favorite examples of a sales manager and a company that “gets it” is Dave Fitzgerald an EVP at Brainshark who has a constellation of SaaS applications covering the end-to-end spectrum. From lead nurturing to forecasting to compensation, Fitzgerald has RPM covered and he could be its poster child.
Every recession has an end and there’s always an idea or technology that leads us out. Often, what leads us is a tacit agreement to do things better and at less cost than we did prior to the meltdown. The idea makes sense and it spreads virally and no one wants to be left behind with a business practice that is outdated and relatively expensive. On-demand computing was one of those drivers from the last recession, so was the on-line meeting. Companies like Salesforce.com and WebEx became big players in the process.
You might say that those companies were too small to have a concrete effect on the economy at large. But keep in mind that they weren’t alone and in any case, no trend has to carry the economy on its back, the trend need only be leveragable and contribute to the growth rate, which is a more doable thing.
Revenue performance management fits the current need. It is a blanket term that can easily apply to managing anything in your SG&A line as it can apply to revenue generation. Its orientation is growth, not simply maintaining a hunkered down pose waiting for things to get better. The economy is shifting; everywhere I look experts are showing us how to do more with a little less.
Anneke Seley of Sales 2.0 fame is telling us to look at hybrid Web-phone-and field selling. Analytics vendors are showing us how to mine our social data to find the customers and prospects and customers who really need our attention. And experts like Thor Johnson are telling marketers to get more quantitative in discussions with the C-level both to justify their budgets and to have greater impact on a company’s direction.
When you boil that ocean down one of the surprising things you are left with is that the distance between sales and marketing is shrinking and that might be the biggest thing to come out of this recession. Sales and marketing each have their jobs to do and each is different from the other. But what’s clear is that if there was ever an either/or discussion about sales vs. marketing, the conjunction is changing from “or” to “and”.
As that change takes place we are already seeing the emergence of a new job title, the Chief Revenue Officer or CRO. I’ll admit CRO doesn’t exactly roll off the tongue but I am old enough to remember when CIO didn’t roll off the tongue either. I am also seasoned enough to recall other gems like vice president of first impressions, proof that some trends are fads. But CRO looks to have some staying power, most importantly because of that “R” word. Who doesn’t love “R”?
The CRO is the person who will need to understand both sales and marketing and most importantly also know that the two need to be mutually reinforcing. It does no good for one to be the servant of the other. CRO is a status to which both the VPs of sales and marketing can aspire. Does this mean that CMO and CSO go away? I don’t know. Does the CFO report to the CEO? The Board? Or work with the CEO? It matters.
What’s certain, as I look at the landscape is that marketing and sales are a lot different today. Customers are in control and many people recognize that the sales process is rapidly giving way to the buying process and that sets the stage for some interesting realignments.
Happy Groundhog Day!
