In the first two posts of this series, Part 1, Part 2, we’ve listened in on some conversations between Arthur and Heather about Arthur’s Commission System Replacement project. They’ve identified four objectives, and have also uncovered some very interesting information that invalidated a key assumption held by many of Arthur’s stakeholders (the Sales Managers).
Let’s pick back up with Heather and Arthur as Heather explains what this new information means for the project as they identify characteristics they will look for in a solution.
“Another thing you can do is guide them through an exercise I have used before to make sure the focus of effort is in the right place,” said Heather as she got up from her chair and headed to the white board.
“Well, we can give it a shot… What’s this exercise?” asked Arthur as he nervously ran through all of the various curse words he expected the sales managers to call him.
Heather drew a two by two matrix on the white board and labeled the X Axis “Mission Critical” and the Y axis “Market Differentiation.” Then she labeled each of the four quadrants, until what she had on the board resembled this:
“This,” said Heather pointing to the drawing on the whiteboard, “Is the Purpose Based Alignment Model.” Arthur felt as though there should be a flourish of music played in the background based on the way she made the pronouncement.
Heather explained the idea behind the model. If you take a look at the main activities of your organization and decide whether they are mission critical and market differentiating or not, it helps you to determine how to approach those activities. She referred Arthur to a blog post as she described the model in more detail.
“So,” said Heather hoping everything she had just said sunk in. “Let’s take a look at the activities for your company. What are the key activities that you think your company has?”
Arthur sat there for a minute and considered the question. “I’m not quite sure what you mean by ‘activities,’” he said plaintively.
Heather nodded. She ran into this problem a lot when using this model. When she talked to people who were experienced with the idea of Business Architecture, she would refer to these items as capabilities, but when talking with people who had not been exposed to Business Architecture, this level of abstract thinking was a bit more challenging. “Let me give you some examples.”
She wrote the following items on sticky notes and put them up on the whiteboard:
- Claim processing
- Product Development
- Office Cleaning
“Oh, I see,” said Arthur.
“So let’s figure out where all these go. Why don’t you come up and put these sticky notes in the quadrants where you think they fit,” said Heather. She stepped away from the whiteboard as if inviting Arthur to come up and move the post-it notes around, which is in fact what she was doing.
Arthur got out of his chair and started placing the post it notes in various quadrants. When he was done, it looked like this:
With the Analytics activity sitting in between the Differentiation and Parity quadrants.
Heather silently took a look at the board for a second, saw a few things that she wanted to react to right away, but thought better of it, and decided to start with the one that didn’t have a real home.
“So why did you put Analytics in between Differentiation and Parity?” she asked Arthur.
“Well… I know that we are really putting a push on having a lot more information about a lot of things and trying to use that to know what populations to sell to, but I’m not sure if that can really differentiate us in the market place.” Arthur said.
“Remember that Differentiation activities are those things that help you to maintain a competitive advantage. Sometimes I like to use the billboard test.” said Heather.
“What’s that?” asked Arthur.
“If you have a truly Differentiation activity, you wouldn’t hesitate to make it the center of an advertising campaign. You’d be happy to put it on a billboard that effectively says buy from us because we do this,” said Heather, finding herself getting more and more irritated about one of the post-it notes on the board.
“Oh, okay,” said Arthur reflecting on the company’s advertisements about how data focused they are. From everything he understood, that campaign was actually starting to pay off. He reached over and moved the analytics sticky note up to Differentiation.
“Alright,” said Heather trying to avoid looking at the offending sticky. “So do you think commissions is a Differentiation activity?”
“Well, it does help us drive new business. You said that Differentiation activities are those that help you gain market share, right?” said Arthur looking quickly at the notes he had jotted down when Heather went through the quadrants.
“Yes, however are the commissions actually doing that? Do you think that people buy insurance from you because of your commission structure? We’ve also just found out that regardless of that structure, agents sell roughly the same amount, and do you know of any of your competitors who don’t use commissions for their agents?” Heather said.
Arthur thought about that for a minute.
Heather continued, figuring she’d find a way to ignore the offending sticky note. “Remember that parity activities are important too. They are mission critical after all. It’s common for people using this model to put the thing they are working on up in the Differentiation quadrant because that seems like the cool place to be. But, the fact of the matter is that commissions just isn’t that differentiating. Can you imagine having a billboard that says “Buy from us because we use all kinds of funky commissions rules to pay our agents?” She stopped, figuring she better quit while she was ahead.
Arthur stared at her for a second. “Well, if you put it like that,” he said and moved the Commissions sticky note down to Parity.
Heather really wanted to address the annoying sticky, but she resisted, figuring she’d check on one other thing first. “So, why did you put Office Cleaning up in Partnership?”
“Well, you said that Partnership are those things that you go outside of your company to do, and we use Service Master for office cleaning. I just thought… yeah.” Arthur trailed off as no longer convinced himself about where he had put Office Cleaning at.
“I would agree that Office Cleaning is not particularly mission critical, but do you think it is very market differentiating?” asked Heather with a raised eye brow figuring she only needed to give Arthur the slightest bit of prodding.
“No, probably not. I guess it should go down to Who Cares,” Arthur said moving the post it note down into the lower left quadrant.
“Yep. The approach for activities in that quadrant are to either not do them at all, or outsource them completely.” Heather now saw her opportunity to broach the subject that had been annoying her this entire conversation. “Speaking of who cares, why did you put IT there?” She forcefully tapped the IT post it note.
“Oh, I just wanted to see if I could get a rise out of you,” Arthur said with a sly smile. “It’s probably Parity,” as he slid the post-it note over.
The white board now looked like this:
“So given that Commissions is marked as Parity, how should we approach any projects dealing with it?” asked Heather only a little chagrined that she had let Arthur get under her skin with IT post-it note placement.
“Well, it’s mission critical, so it’s important that we do it ourselves. Does that mean we have to build something ourselves, and we can’t buy something?” said Arthur looking at the white board.
“Not necessarily. The best strategy for Parity items is achieve and maintain parity, to mimic, and simplify. In effect, you want to match what’s expected in the industry, but you don’t really want to go beyond that. One good way to match what’s done in the industry is to buy a commonly used system and adjust your processes to match that. You have to assume if the system is good, that they’ve baked generally good practices in when they built it. What you don’t want to do is buy a COTS package and then customize the heck out of it because you think your processes are oh so special. You were heading down that path with looking for a system that allowed for massive customization of rules when that doesn’t really lead to any differentiation.”
Arthur nodded, and then said “What’s ‘COTS’? Are we going to have to put in that many late nights that we have to sleep at work?”
“No,” said Heather shaking her head, the smug smile coming back, “Commercial Off The Shelf. Some people also call it Out of The Box. It’s a term that refers to all of those software packages you were looking at.”
“Oh,” said Arthur a little sheepishly. “Yeah, I was pretty convinced that we’d have to find a software package and make a lot of changes to it. What little investigation I did really didn’t give me much confidence that we’d find something to completely handle all those unique rules.”
“That would have been a case of you treating a Parity activity as if it were Differentiation,” she said referring to the Purpose Based Alignment Model drawn on the white board. “A lot of people do that and end up wasting a lot of time and money making a lot of changes to purchased software that most likely would have met all their needs out of the box if they didn’t think their situation was so unique. You really want to do as little customization as possible to purchased software because the more changes you make, the more painful it is to update, and the more likely you’ll skip upgrades which will end up hurting you in the long run. Plus, by using software developed by a company you trust, you more often than not are getting practices that have been effective for other organizations in similar settings. Hence the idea of mimicking and simplifying.”
“Now keep in mind, there is probably a part of your project that does need to be treated in an innovative fashion. Since the organization overall views analytics as Differentiation, you’ll want to think about if there are any analytic components in this project and treat those particular items accordingly. There’s probably a lot of value in observing if there is any correlation between commissions structures and sales. For example, if you make a change in the commission structure, is there a change in sales around the same time. You won’t always be able to directly tie the two together, but you probably want to put some work into making sure you have the appropriate analytics set up to look into those types of questions.”
Arthur considered what she had said for a second. “So what does that mean for this project?”
“Well…,” said Heather looking back at the whiteboard, “I think we’d start by revising the requirements for the RFP to this:”
- Accept inputs from multiple policy systems to determine commissions
- Create unique commission rules for each individual agent
- Support multiple hierarchies: some sales channels are organized based on product, others are based on geography, some are based on both product and hierarchy
- Allow for adjustments to occur in the calculated commission rules
- Allow for manual determination of commission payments
- Create unique commission rules based on free form attributes and specific values of those attributes
- Support multiple commission rules unique to the individual, unique to the policy
“I thought about erasing those two desired items, but I figured it would be worth keeping them in to see if any of the packages have some capability to adjust rules. We should at least find out if those capabilities exist, but we don’t want our decision driven by those needs. At the same time, we also should start talking to the sales managers about removing the complexity in the rules, because even if you have the capability to handle a lot of different rules, that doesn’t eliminate the time needed to set them up,” Heather said.
“That makes sense,” said Arthur starting to put the pieces together. “The tricky part is convincing the sales managers.”
“Do you think this exercise will help?” asked Heather, referring to the white board where she had drawn the Purpose Based Alignment Model.
“Yeah, I think so,” said Arthur staring out the window of the conference room. “But perhaps what will really seal the deal is the numbers we found about the agents. They tend to react to hard and fast numbers more than anything.”
“Well,” said Heather starting to pack her things, “We better get to talking to the sales managers. The quicker we start those conversations, the sooner we can get moving on the project. We should, after all, have their support with what we’re looking for in a commissions system.”
What you have just read is a very important conversation for the commissions project. Heather helped Arthur to identify and quantify what his project was actually trying to accomplish, and then used that as a decision filter to determine if his original solution would meet those goals. She also used the Purpose Based Alignment Model to help Arthur think about his approach. Notice that he was originally going to go out in search of tool that would automate everything that he was doing currently, but Heather used the Purpose Based Alignment Model to encouraged Arthur to think about the activities his department was responsible for and how they were being performed.
Paying commissions was not a Differentiation activity for his organization, yet he was about to take on an approach (with a great deal of customization to allow for very specialized rules) that treated it as if it were Differentiation. Realizing that commissions were in fact Parity, allowed Arthur to place more emphasis in finding a tool that allowed him to do commissions as efficiently as he possibly could, but in line with what was the expected norm of the industry. If during his product search he found that some rule customization was common (by virtue of it showing up in several of the products he considered), then he could certainly acquire a tool that had those capabilities. But he may also scale back on the amount of rule customization and still give the appropriate room of movement for his sales managers to competitively compensate the independent agents.