During the economic downturn that
most of corporate America experienced in 2001, the following
companies had something in common: Intel, Texas Instruments,
Cirrus Logic and Hunt Wesson.
What tied them together was their decision last year to
go from a direct (in-house) sales force to a contract, or
outside, sales agency for some or all of their major product
lines. Two other companies - Motorola and Phillips - chose
to use a contract sales force after spinning off a division
(the semiconductor operation for Motorola; the Airpax for
Indeed, in times of recession and/or cost-cutting, the
use of outside sales representatives or agencies typically
increases. As Erin Anderson, a marketing professor at INSEAD
puts it, "These agencies tend to do well when times are
But if Anderson and colleague Len Lodish, a marketing professor
at Wharton, had their way, outside sales agencies would
flourish regardless of the economic climate. The two have
collaborated on research that studies how to get the most
out of an outside sales force consisting of employees "who
don't report to you, don't take orders from you and in general
can't be managed the way your own employees are managed,"
It's hardly an academic question. The payoff for a productive
relationship with an outside sales force can be substantial.
Properly handled, says Anderson, outside sales representatives
will not just work hard to sell your products, but can provide
you with important information about the market in general
and your competitors in particular.
Given the broad interest in sales force management, both
in-house and on a contract sales basis, Anderson and Lodish
will teach an executive education course March 3-7, 2002
in San Francisco titled "Leading the Effective Sales Force."
The best available statistics, says Anderson, indicate
that about 50% of all companies operating in North America
use a contract sales force in some capacity, whether for
a piece of their product line, a certain geographic region
or a particular application. The 50% figure is high because
"a lot of companies use outside reps for the 'leftovers'
- segments or products that aren't really central to what
they are doing," Anderson says.
For example, a company that makes power tools might hire
an outside sales force to sell its products to one particular
and not very large customer segment, such as military PXes.
On the other hand, some industries, like electronic components,
hardware and chemicals, use outside reps for a substantial
part of their business. National Semiconductor and Advanced
Micro Devices fall into this category, in part because their
components are used in so many products in so many industries
that it would be difficult for an in-house sales force to
cover the entire market.
Contract sales forces can sell services as well, such as
advertising. For example, a radio station might use an outside
sales force to sell its radio time to advertisers. The theory
is the same, says Anderson. "Potentially anyone could advertise,
and an in-house sales force can't cover everybody."
While some outside agencies are huge - especially in the
food business where one agency ("food broker") often employs
several hundred people - agencies in most other industries
tend to be small. The typical outfit is a 5 to 10-person
firm covering a well-defined and somewhat narrow geography.
Anderson says that some industries don't lend themselves
well to outside reps. Pharmaceutical companies' sales forces
are almost always in-house because of ethics and accountability
issues unique to selling drugs. But for smaller pharmaceutical
products, says Lodish, drug companies "are finding they
can't give them the attention they need. An outside sales
force, one with expertise in the industry, can. So the pharmaceuticals
are turning to outsourcing in these instances."
In their research into business to business markets, Anderson
and Lodish have studied how outside agencies allocate their
time to their various manufacturer clients, i.e. which manufacturers
received more of the sales reps' time and which received
less. The key, it turns out, is "optimal allocation."
"The biggest thing you as a manufacturer can do to make
your outside sales force interested in selling your product
is to make it financially interesting compared to the rest
of the agency's products," says Anderson. "Basically you
have to sell your product to the sales force before you
can sell it to your customers."
Anderson and Lodish worked out the time split that would
maximize an agency's profits. "We asked the following question:
If we were the owners of this agency and all we wanted to
do is make as much money as we could, what amount of time
should we give each product? What time spread would give
us the optimal return? The optimal return goes up if one
product line offers a better commission to the sales force.
It goes up if one hour spent selling that product gives
the agency more volume than one hour spent selling something
else. The optimal return goes down if an hour spent selling
doesn't lead to many sales or if the commission rate is
The important thing to remember, says Anderson, is that
"sales agencies are run by good managers with a good nose
for where the money is. Some manufacturers don't think sales
reps have the brains to figure that out. They do."
Anderson and Lodish also looked at the "more human" side
of the business when trying to determine which manufacturers
were able to get the most selling time from their outside
reps. They found that the second biggest factor, behind
optimal allocation, was the manufacturer's ability to communicate
with the agency. That includes "good listening." Manufacturers
who listened as well as talked were successful in getting
a rep's attention, which resulted in two payoffs - more
of the rep's time and more information from that rep on
the market. "One of the reasons many companies don't like
to use an outside sales force is because they say they can
get market reports from their own people. But a lot of inside
people don't take the time to make those reports, while
many outside agencies do," says Anderson.
The third most important dynamic in the manufacturer/sales
force relationship is synergy. An outside sales rep will
make up a portfolio of products that are complementary,
but not competitive. For example, the rep will sign up a
paper manufacturer, a desk supplies manufacturer, a printer
manufacturer and so forth, so that he or she has one brand
in every product category. When the sales rep calls on an
office products buyer, the rep covering this market has
the advantage of a full product line that not only increases
sales for him and his client but also ensures better access
to the time-challenged buyer. "A sales rep can leverage
off the fact that he is the trusted source of information
for a whole slew of products. He sells more products and
provides a service to the buyer," says Anderson. Synergy,
she adds, "means your line fits in well with the other lines.
The more your product has synergy, the more time you will
get from your rep."
Anderson recalled an electronic components sales rep who
was convinced by a manufacturer of rotating crystal balls
to include his product in sales calls to discotheque owners.
Discos are stuffed with sophisticated electronic equipment,
so the rep, an engineer by training, made long sales calls
dominated by discussion of electronics. The rep later told
the crystal ball manufacturer that he was "too embarrassed"
to promote the product during his calls. "That's negative
synergy," says Anderson. "An engineer talking about crystal
balls" was not a winning combination.
The researchers also studied the impact that "getting along
well" with your outside reps has on a successful relationship.
"Yes, it's important to get along with, and trust, each
other but what was striking in our research is that this
attribute is not that big," says Anderson. "At the end of
the day, the reps are businesspeople. They won't spend more
time on your product just because they like you. The price
you pay for not being buddies with them is not very high.
Again, this goes against the image many manufactures have
of sales people which is that are unsophisticated. They
Sales agencies care about accurate forecasts, mainly because
it helps them decide how much time to put into selling a
particular product. While forecasts were not as influential
as the other factors mentioned above, "No news is bad news
when trying to develop a sales forecast. We tell manufacturers
that if they have any kind of information that would indicate
how their product will sell in the field, don't hold it
back," says Anderson. "Share it with the sales agency so
the rep will be more confident in his forecast. It will
get you more time."
Almost important as accurate forecasting are the growth
prospects for a manufacturer's product category. "The potential
for that category to grow over five years will affect the
attention it gets from the rep," says Anderson. "It shows
sales agencies are thinking about the future."
Anderson and Lodish also studied the manufacturer's power
over the agent. "We find, as you would expect, that the
more powerful the manufacturer is, the more time his product
gets. The more powerful the agency is, the more it can decide
how much time to give. But overall, this relationship is
not that big a factor, mainly because these agencies very
carefully keep a diversified portfolio of manufacturers,"
says Anderson. "They follow the 'rule of one third.' If
one manufacturer is beginning to account for more than one
third of the agency's sales, it risks becoming too powerful.
The agency will most likely focus on growing its business"
in order to dilute that power.
After more than a decade of research into this field, Anderson
is more convinced than ever that outside sales agencies,
if managed properly, make sense for most companies. Yet
even companies that sign on with agencies "are almost apologetic
about doing it and, in fact, tend to misuse them. And when
they misuse them, these manufacturers then turn around and
blame the sales agency rather than themselves or their product."
In the 1980s, Apple Computer used all outside sales reps
but eventually went to an all direct (in-house) sales force
after claiming that reps weren't doing a good enough job
of selling Apple's products. "We now know, of course, that
there were significant market reasons why the computers
weren't selling, but Apple chose instead to blame the reps,"
says Anderson. Companies that mismanage outside sales agencies
will also mismanage their own direct sales force and often
end up in bankruptcy, she added.
Ironically, even when outside sales forces are doing well,
companies will use that as another excuse to discontinue
them. "One of the most common reasons a manufacturer will
ditch the rep and go direct is because the rep is doing
a great job," says Anderson. "The manufacturer thinks, 'Wow.
We could do even better if we had our own people.' It's
the fundamental attribution bias: You blame external forces
for all bad news and take credit for all good news. So reps
are in danger of losing business if they do well or if they
do badly." What some companies don't realize, adds Lodish,
"is that outside sales reps are often more motivated than
the internal sales force. They know more about the market
and they are hungry for the business."
Anderson recently spent time interviewing members of a
$100 million manufacturer of electronic components located
in the northeastern U.S. that uses an outside sales force.
She also interviewed several of the outside reps. "One of
the things that was clear from talking to company employees
was that they have an unquestioned respect for their sales
agents. They view them the way others view their lawyers
or consultants or accountants. They trust and respect them
and treat them as professionals. The sales reps handle 85%
of the manufacturer's business. It's a very successful relationship."
Published: January 30, 2002