Revisiting the Sales Capacity Model
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Today I’d like to go deeper into Sales Capacity Planning. This type of modeling attempts to find the perfect intersection between efficient hiring (aka cost allocation) and sales performance (aka bookings attainment). One formula to think through is the following:
Starting Bench Strength +
New hires x Ramp Schedule
Employee Churn x Domino Effects
At the bottom of today’s newsletter I’ll leave a simple Google Sheets model covering all of the core materials here.
We’re reinventing the wheel
Imagine this. Capacity planning is as old as the Industrial Revolution. Am I crazy? As society transitioned from an agricultural to an industrialized/consumer based society, businesses had to scale up from bespoke producers to entities capable of mass production. Business owners needed to predict demand. From their forecasts, they planned to develop the appropriate resources to meet that demand.
In fact, when I worked in FP&A at Intel we regularly converted TAM / SAM / SOM analyses into long range plans (LRPs). The goal was to predict demand in three to five year increments. Why such intermediate forecasts? Setting up a semiconductor fabrication (aka Fabs) facility can take multiple years to develop. Once the building is completed, there better be sufficient capacity to meet the demand of that future period and beyond. Once the building is complete, you can’t just go back and have a do-over.
So the same with sales organizations
The team we have sucks! Let’s fire them all.
Fine.
But it’s going to take you more time than you think to get a sales organization back online. Just like a semiconductor fab. You can’t just stamp your feet expecting a sales team to be born from the dust.
Think about all of the necessary steps below and assign a timeframe for each process. Several of these work streams can be tracked in parallel. Sure. But often times you find organizations staggering these items sequentially. Thus why everything slows down.
Identify key roles to hire for
Develop core responsibilities
Develop appropriate hiring profile
Develop interview process (aka interview loops)
Develop review and decision hiring processes
Onboarding and continuous enablement of reps
Vertical / industry enablement of reps
Product / solution enablement of reps
Developing and hiring managers
Territory assignments
Ramp time to first deal
Ramp time to 3x (sufficient?) pipeline coverage
Now we see why capacity planning matters.
Borrowing from manufacturing
I’m flat out stealing this from manufacturing. But when it comes to capacity planning there isn’t a one-size-fits-all approach. There are three different strategies which you can think through.
Lead strategy
Lag strategy
Match strategy
The Lead Strategy is an aggressive strategy. It calls for expanding capacity in anticipation of increased future demand. Ever see a company hire more sales reps than it has pipeline to support? I sure have! Back in the heyday of 2020-2021 when it felt like headcount plans were easy to approve, sales teams hired far more reps than they needed. Don’t have enough inbound leads? Who cares! We have plenty of new reps to smile-and-dial. We’re going to grow on the backbone of outbound.
This is the riskiest choice. What happens if demand never materializes? Do you just unwind the organization? Does that leave scars on the rest of the org? Firing a lot of people is NO FUN.
The Lag Strategy is a more conservative capacity planning approach. Lag capacity planning initially prioritizes meeting existing demand, with the addition of more capacity only occurring when the company reaches its maximum operational limit, provided demand continues to surge. This approach mitigates the risk of excessive production investments but also heightens the possibility of revenue loss and missed lead follow up.
This is the safest choice. But as they say, no risk no reward?
The Match Strategy (aka tracking strategy) is a moderate capacity planning approach. In this instance, sales teams hire in small amounts in response to market trends. Instead of hiring a large team all at once, it operates tranche by tranche. Small and consistent commitments as opposed to large commitments.
This removes the “digestion” problem of hiring too many people all at once. Imagine onboarding too many new people all at once. It also allows for more flexibility for the company to preserve its cash while making smart moves in the interim. The tricky part here is how do you continually train multiple cohorts of reps. Without an enablement systems in place, this strategy will become strained.
Ask HR or People Ops!
How many revenue operations folks talk to their HR operations counterparts? How many talk to their recruiters? Have you ever asked the following?
How many job reqs do we have open?
What roles do we have open?
What does our pipeline look like?
How long does it take to fill a requisition?
Ummm… this sounds like a pipeline call doesn’t it?
EXACTLY!
What empathy I have for people operations. Many people don’t know this about me, but before business school I was an external recruiter. A headhunter! Ewww. But wow, what a tremendous experience it was. I cut my teeth in the world of sales doing that role. I loved every minute of it.
Here’s what’s fundamental about it. If you know you need to hire two headcount by January 1st and you know that the min/max of filling that type of role is 45 to 150 days. Then doesn’t it make sense to also plan for when the job requisition should open?
45 days in advance: job req opens on November 17th
150 days in advance: August 4th
This is awkward isn’t it. Because many companies, especially startups, do not finish their Annual Plan until December. SOMETIMES JANUARY!?
Are we F*#&ed!? I didn’t want to say it… but maybe?
That’s one of the biggest reasons why I prefer keeping a rolling interview process going. You never know when it helps to build a running pulse on who might be available. NEVER STOP RECRUITING.
Anticipating churn
The beginning of year feels like “job change” season. Why? Because many employees receive their annual bonuses. They will not leave for a better opportunity if they know they’re going to receive a bag soon. A big bag of money is foolish to turn down. As they say in economics, assume that people are rational actors.
If you have a headcount plan locked in, then you also need to think about who in your current bench is going to leave. Many planning models will account for this in the form of churn. Again, ask People Operations what a cohort of sales reps looks like in the 12 to 18 month range? Look at this graphic from a 2017 Survey below from LinkedIn. It used employee ratings in their company survey to split respondents into two camps: employees with highly effective management vs employees with low effectively management. Where does your business stand? Source.
Let’s put it all together
With the simple model we need to outline a few glossary terms.
Sales Productivity: The effectiveness of the sales team on an individual basis; should consider their track record, skills at selling, etc.
Ramped %: The time required for a sales rep to reach close to full productivity (and yield what an experienced rep could consistently produce). The time required is a function of numerous factors such as the type of client, the onboarding/training system in place, and the capabilities of the product being sold.
Churn: The churn, or “attrition” of employees – which can be either voluntary or involuntary (i.e. left for a different role elsewhere or was fired by the employer).
Annual Recurring Revenue (ARR): In this particular context, represents the expected ARR a sales rep can generate once fully onboarded and is “prepared” to execute.
Here are some screenshots of the model which we’ll walk through:
Ramp: how long does it take for a rep to reach “maturity”?
Churned: using the article above, predicting employee retention
Simple Bookings Plan: this plan takes a “top down” target and applies “seasonality”
When putting it all together, how many people should you hire? Make a copy of the template below and decide which strategy you want to use: lead, lag, or match.
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Here’s the sales capacity model which you can use.