Investing On The Back Side Of Growth
You Have To Spend Money To Make Money – But When, Where, and How Much?
The notion that a business must spend money to make money has persisted for thousands of years, since the Roman playwright Titus Maccius Plautus wrote ” He who seeks for gain must be at some expense.” While no private equity or venture investor will argue that you need to invest in sales and marketing to grow a business, they are increasingly questioning how, when, where, and how much to invest their growth capital. As the go-to-market becomes more data-driven, scientific and process oriented, sophisticated investors – and their Chief Financial Officers (CFOs) – are demanding their sales and marketing leaders develop more reliable, consistent, and scalable growth investment models.
D. Tyler Drolet, a CFO with a 40 year track record working with sales and leadership teams to improve growth, profitability, and cash flow calls this ‘investing on the back side of growth.’ “In my experience, when growth in a business stalls it’s usually because leadership has not developed a system for reliable and scalable growth,” says Drolet. “A big part of that problem is boards and CEOs are so focused on marketing spend and sales leadership they are not looking at all the growth levers within a business,” he clarifies.
By growth levers, Drolet is referring to fine tuning the many variables that add up to define the modern go-to-market model – such as product-market fit, market definition, sales force design, coverage models, customer treatment models and pricing strategies. They also include a wide array of growth assets such as brand preference, channel infrastructure, partner networks, and knowledge about customers. In all there are forty growth levers that are proven to be causal of revenue growth according to an analysis by Revenue Operations Associates.
“As an example, when I walked into one business, and we examined all the growth levers with sales and marketing, we isolated a number of issues that were holding back sales,” says Drolet – who has led 6 sell-side exits of hyper growth technology firms. They include Active Endpoints, which was bought by Informatica, Qvidian which was bought by Upland Software and Connance, which was bought by Bain Capital. “Initially, we realized we had to adjust our pricing structure and discipline to factor in different types of deals – high volume users and transactional users. Then we also found we had to specialize our sales forces to support two different types of selling motions, and rethink the training, quotas, and assignments to reflect that refined model. Ultimately, we adjusted a lot of different moving parts in concert, and through continual refinement we achieve greater margin consistency, more reliable customer acquisition and were able to retain our top sellers longer – which has a big impact on the top and bottom line”
At this point you might ask, what is a CFO doing getting involved in the nuts and bolts of commercial architecture, sales force design, pricing strategy and demand generation motions? “
“Based on my forty years of experience as a CFO, business leaders rarely pull all the growth levers that could unlock more revenue with existing resources,” says Drolet. “They fail to measure and manage all 40 of the proven growth drivers to identify and address all of the root causes of underperformance. And even in cases where managers and consultants have taken steps to optimize each of these levers in isolation, I’ve learned that most growth issues are the result of a combination of factors being out of alignment.” This point of view is reinforced by research. An analysis by Revenue Operations Associates shows that over half of growth outcomes are created by teamwork across functions not within sales or marketing. And almost a third (31%) of CFOs are actively making it a high priority to integrate their finance processes from back office to the front offices across organizational hierarchies.
“I usually get called in to improve a situation after the company has missed their goals for several quarters and management has tried pulling on a few of the basic growth levers – like replacing the head of sales, or cutting the marketing budget,” says Drolet. “But the problem is rarely that straightforward, and I’ve seen a lot of managers and programs unfairly blamed for a bad system of growth.”
“When I walk into a business, what I usually find is that the financial, operational, and performance reporting systems are not set up to measure and manage all the core growth drivers in a business,” he adds. That is a big problem according to Drolet, because when a business fails to examine all the growth levers and variables in the GTM, it leads to blind spots that stall revenue and margin growth. Typical symptoms of this include:
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Revenue and margin leaking due to lack of coordination by the functions that support the revenue cycle;
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Inconsistent revenue realization and cash flow because Finance is not involved early enough in the process in critical pricing, planning, forecasting, compliance, cost to sell, and resource allocation decisions;
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Diminished customer lifetime value due to lack of coordination between Marketing, Sales and Customer Success And Finance to identify and monetize cross sell and expansion opportunities.
“In my experience, the most successful growth performance results from a deeper collaboration between the CFO and a CEO and growth leadership to truly understand all the levers of growth, says Drolet. “This means you need to work together to constantly adjust and refine their product/market fit, the reliability of customer acquisition, and perfect the formula for customer expansion. The best organizations are using the principles of Revenue Operations to build a process of continuous improvement across the revenue cycle with Marketing, Sales, Service, Product, and Finance.”
Drolet is on to something. Today most CFOs are actively working to drive greater alignment and collaboration between the revenue team, finance, and operations. For example, 81% of finance leaders believe they will benefit from improving the level of collaboration and communication between sales and finance, according to a survey of financial professionals by CFO Research. Two-thirds believe that better alignment between finance and sales leadership will lead to improved revenue forecasting a 5% increase in revenue growth while simultaneously lowering both finance and sales costs by 5% and giving them greater control and compliance.
It is only after the team has tweaked these variables to the point where the outcomes are measurable, reliable and profitable does Drolet advocate pumping more growth investment in the business. “I may have a reputation for thriftiness, but I won’t hesitate to invest once a growth formula has been proven and measured in practice to be reliable and repeatable,” he adds. This is what Drolet means when he talks about ‘investing on the backside of growth.’
“Investing on the back end of growth requires high levels of predictability and reliability in both customer acquisition and customer expansion,” says Drolet. “And the key to establishing predictability is having strong marketing and sales processes. So, I try to push our CRM, marketing and sales teams to analyze our performance as deep into the revenue cycle as possible until there is greater than a 90% probability of deal close. On the back half of the ‘bowtie’ I try to force the same discipline on all the signals and programs that predict renewals and expansion sales.
So, what can you do to start investing on the back side of growth? Drolet advises owners, CEOs and growth leaders to constantly be asking whether they are measuring all the growth levers in their business and whether they are pulling the right growth levers to achieve their revenue targets.
“As a CFO – and a leadership team overall – you have to always be questioning and refining your product market fit and resource allocation in dynamic markets, and you need to put in place a process of continuous improvement to keep that feedback loop going to incrementally adapt, refine, improve and prove your GTM model,” says Drolet.
Again, Drolet is not alone here. A growing number of finance leaders are questioning and refining their revenue planning assumptions, forecasts, and resource allocations more frequently to become more agile. Most (57%) senior financial executives are actively accelerating the pace of forecasting in their business in the face of market opportunity and economic headwinds.
A good way to start is to identify and address what’ is holding back your revenue growth is to conduct a comprehensive analysis of your GTM system that evaluates all 40 proven drivers of go-to-market performance to identify and address the root causes of revenue underperformance and get growth back on plan. By working together across finance, sales, marketing and customer success, your team should be able to evaluate, prioritize and align on the top growth levers to refine in your business in a matter of weeks.
This article was originally published on Forbes.com