Ep49 The Commercial Ratio: Declaring War on Inefficiency with Kunal Mehta

Welcome to the Inside: Sales Enablement Podcast Episode 49

It's a given that the sales and marketing engine is full of waste and inefficiency. Despite the best intentions of very smart people, something is still not quite right. How do we know? The Commercial Ratio tells us that most companies get .15 cents of growth for every dollar they spend on sales and marketing.

Scott and Brian are joined by Kunal Mehta from the Private Equity firm TCV. Kunal shares a behind the scene view of rolling out the commercial ratio to all TCV portfolio companies. What were those discussions? What was the focus? What happened?

Find out why the commercial ratio is such a great starting point for addressing sales and marketing challenges and how you can use the metric to engage more strategically with your executive team.

You can find out more about the commercial ratio at www.commercialratio.com

Let us know what you think!

EPISODE TRANSCRIPT:

Intro 00:02  

Welcome to the inside sales enablement podcast. Where has the profession been? Where is it now? And where is it heading? What does it mean to you, your company, other functions? The market? Find out here. Join the founding father of the sales enablement profession Scott Sam Tucci and Trailblazer Brian Lambert as they take you behind the scenes of the birth of an industry, the inside sales enablement podcast starts now.

Scott Santucci 00:33  

I'm Scotty NTG.

Brian Lambert 00:35  

I'm Brian Lambert and we are the sales enablement insiders. Our podcast is for sales enablement, leaders looking to elevate their function, expand their sphere of influence, and increase the span of control within their companies.

Scott Santucci 00:48  

Together, Brian, I've worked on over 100 different kinds of sales enablement and issues as analysts, consultants or practitioners. We've learned the hard way what works and perhaps what's more Important, what doesn't?

Brian Lambert 01:02  

This podcast is focused on you and being a great orchestrator. We've had a lot of episodes on orchestration and being orchestrated elevate your role. And on this particular episode, we're going to talk more about the commercial ratio. But before we do that, Scott, do you have a centering story for us?

Scott Santucci 01:18  

I do. I've got a I've got a little short one up. Actually, a lot of us are going to be familiar with this. The story it's a children's tale from the mid 1800s, from yawns, Christian Anderson. And really, it's about the Emperor's New Clothes. And if we remember that, if we remember that story, some swindlers go into this into this village, and they say we've got this amazing new fabric, and it's the most amazing, comfortable, glorious new fabric. And here's the deal. What's makes it super amazing is only smart people can see it. The dumb people can't see or appreciate how valuable this fabric is. And the emperors like wow, I want to do that. And all the Emperor's aides would look at this, look at the progress that these guys were doing after they set up their loom and make the Emperor's New Clothes, his new outfit his new wardrobe. And they watch his progress because of course, the Emperor wants to see his advisors. And none of them wanted to admit that they didn't see anything at play. because keep in mind, these guys are scam artists, right? But no one wanted to admit that they couldn't see it because by admitting it that they couldn't see it. Guess what was happening? They were saying that I'm stupid, right? Because only stupid people can't can't see it. So Wow, that's fabulous. And then the other a would be Oh, you're right. I see how fabulous it is to It's

Brian Lambert 02:43  

amazing. That's looking great.

Scott Santucci 02:45  

That's looking great. So everybody sort of kicks the can down the road and the Emperor does. He puts the clothes on and the the charlatans mind mine out putting it on as close to the Emperor doesn't want to admit He can't see it too. So he just assumes everybody else's. And he walks out and parades out. And of course, no one wants to say anything to the Emperor until the little kid says, Hey, he's got no clothes. So that's that's the moral of that story. And that's our centering story.

Unknown Speaker 03:20  

All right.

Unknown Speaker 03:21  

So.

Unknown Speaker 03:23  

So what does that have to do with sales enablement?

Scott Santucci 03:26  

we're actually talking about really the the premise of that fable and sometimes simple. The simple things i'm not i'm not available to us. And what we're talking about is really the commercial ratio. And really what we're, what the commercial ratio is, is more or less the kids saying, hey, there's no close here. In sales and marketing. We spend tons and tons and tons and tons of money and tons and tons of energy and throw tons of headcount at trying to drive more sales. But is it productive and whole idea of the commercial ratio is a simple view to say, does the sum of the parts or do the sum of the parts? Are they greater than the whole. So it's a simple idea. But unfortunately, a lot of us don't want to bring it up, we want to be the ades because we don't want to upset the Emperor. So is that as a frame of reference, I'm delighted to introduce canol Mehta, and he's been really sort of advocating and developing this, this this commercial ratio concept. And what we're going to do is learn from him, what some of the experience experiences he's had, as his company, TCB private equity firm has rolled out the commercial ratio to their portfolio companies. So can all please introduce yourself and sort of set the tone a little bit what is commercial ratio and why is TCV so interested in it? And how are you guys rolling out some of your portfolio members?

Unknown Speaker 04:56  

Thanks Scott, and Brian, and again, my name is Ken Math I head up the Center of Excellence for sales and marketing at TCV. And the commercial ratio is is really a it's it's a center of gravity for internally how we talk at TCV about driving efficiency across sales and marketing. And it comes naturally inside of TCV. But but there's certainly more work to do when we introduce it inside the portfolio company and, and and I love the story you tell Scott I, I was watching a YouTube video this morning and I have no idea how their algorithm works for serving up videos to me, but there was one that came up on hand gliding, and I've never clicked on anything hand gliding, related or have any interest whatsoever in hand gliding but this guy, I clicked on this one and Chris Goertz, he was the guy who was in the video, and he had signed up for this class in Switzerland and that the the instructor for that to strap him in. And he took off. And the video was about this guy holding on for dear life for about two minutes and 14 seconds. And that's all he could think about. And I feel like when we roll this out into a portfolio company, if they just trust the system and hold on for a brief moment, I think they'll see the value in the commercial ratio really quickly. But there is that moment or they just gotta, they got to overcome that and see how it's worked at other companies and kind of get get rooted in the process. There's, there's it's something that every company Ultimately though, though, comes to to talk about more naturally over time with TCP.

Scott Santucci 06:50  

So that's awesome. One of the things that I'm thinking here is I love using stories and I know you do too, to introduce a brand new idea. And I know that a lot of our members and our listeners just say, Yeah, like just get to the point you just get to the point. I think the point here is that I think what you're saying canol is that commercial ratio, it's like flying. And it's something different. If you never hang glide before, the first step is stepping off that cliff and just hanging on for dear life. That fear factor, let that last for a few minutes before you go, Hey, I'm flying. You got to be willing to take that first step off the cliff in the first place. Is that more or less what you what you're trying to introduce to us? That's correct. Yeah. So that I think then what I'd like us to do is let's, let's review. What is the commercial ratio commercial ratio is a is a metric. And it's a metric that simply is it's a, I can't keep stressing how simple the calculation is, and how complex most people want to make it most most non finance people But it's taking it's basically its revenue growth, which is calculated by, say the annual revenue growth that you've got this year subtracted from the revenue growth from last year at your revenue growth. And it's subtracted by, well, that's the top, that's the numerator. And the denominator is the total spending that you've had for sales and marketing for that period during that period of time. That's it. And that's what the ratio is. That's what it is. So cool. Why is that so important? And why is that such a revealing metric for say, investors and CEOs and CFOs? What does that tell us?

Unknown Speaker 08:41  

Yeah, so it's, it's it tells us about the efficiency of sales and marketing. You know, from a private equity perspective, we use we view that as as a single function of driving revenue. What you often see though, is those two functions don't operate very well. cohesively together. And that shows up in the ratio and shows up in a much lower ratio the more kind of divorce from each other that they are the the the ratio itself if you if you've ever watched the movie Moneyball it's it's the number that they came up with his on base percentage and how, you know, how do we drive that number up to generate more wins? Who are the what are the type of people we need to bring on to the team that are going to drive that number up and ultimately generate runs which generates wins. We've the commercial ratio is very, very similar in that regard. We want to look at the company through the eyes of that ratio, and what they're doing to drive more efficiency on that ratio. And any private equity company that you look at certainly will also want to look at efficiency overall, it's so funny when we could be making peanut butter and jelly and jelly sandwiches and we weren't Do it as efficiently as possible, even against their own kids. So they the way the the ratio works, it just gives us a real quick sense of how that revenue engine is working inside the company now, and then where we can we can, you know, looking through that lens, we can look for opportunities then to introduce projects that help improve that ratio. And it certainly drive companies to work closer together inside of sales and marketing.

Scott Santucci 10:28  

That's awesome. So let's keep it this top down view from an investor standpoint, and let me share with you so we you know, as you know, we've been we've had a webinar on the commercial ratio, we've got commercial ratio, comm as a site to share this information. So we're getting a lot of feedback. And some of the questions really arrive at Well, why would you just focus on sales and marketing to focus on growth, really sales is involved in driving all Revenue. Why would you just track it that way? That seems like a stupid metric, which is these are exact quotes I've heard. So why would Why are we not factoring in all looking at all of the revenue growth and assigning the sales and marketing in there because if you look at sales barking through that lens, the return on investments tremendous

Unknown Speaker 11:20  

the way we've calculated it, and the way the way you guys are talking about it, we've used sales and marketing primarily as the the biggest lever to driving growth. I don't think it's any surprise to any of your listeners, that the relationships between those two functions just just are often poor. So what's the fastest way to move the needle is to build a metric that combines the two two groups together and focuses them on projects that if they don't work on together, they'll they'll never move the needle on efficient So, you know, an example of that might be if we've chosen and we know, the companies that have the highest likelihood to buy, why wouldn't we focus sales on those named accounts, but also marketing on on providing air cover and ground cover specifically to those accounts? As simple as that sounds, you know, the majority of companies don't don't actually have a systematic way about going, going and doing that.

Scott Santucci 12:30  

So, you know, you and I had had the great opportunity to introduce the commercial ratio, even before we did the did the webinar to a handful of some of your leading portfolio companies. Can you give our audience a flavor of some of their questions, and, you know, you have a huge advantage being the owners of businesses, you get to sort of say this is a metric that we want you to do. The rest of us are going to have to bubble that up and do it. So How How would you describe, though the introduction of the commercial ratio? And how Yeah, about doing it? And, you

Unknown Speaker 13:10  

know, it's a, it's such a good question, I think I think one of the big lessons learned is, is um, with, with folks at TC, the finance and metrics come very naturally to them. And and we potentially get ahead of ourselves and how we used to communicate that to companies and and, and they may be might not have been ready for the message because it you know, while something so naturally comes to a finance person, it might not come that naturally to a sales leader or marketing leader. So we've had to really sit down and kind of explain the ratio in the meeting that you're talking about with kind of the sales ops leaders, I think there is a combination of a little bit of fear, a little bit of vulnerability and and then ultimately, it's like Ha, I get it. I get it. I think what TCP is doing as we onboard, certainly new companies now, it's we're spending much more time walking through how we think about efficiency, how we measure this metric and kind of what can move in needle on value creation. And certainly this metric and the number.

Scott Santucci 14:21  

Yeah, so I want to add some add some color to this, because I can tell you and I have been working on this concept for eight, nine months, right. I mean, it's been a while. One of the things that, that I'd like to highlight is how do we arrive at the the metric we were interviewing general partners in your company, and what do they look for? And I remember one in particular, where we asked I love starting out asking open ended questions. We asked that one open ended question and one of your general partners to started listing out I think I lost track. I couldn't keep track enough.

Unknown Speaker 14:57  

exactly what you're talking about. Yeah,

Scott Santucci 14:58  

I know. Right? I know. You do. Right, cuz I remember us talking about it. It was like, could you keep track of all them? Like 3037 different very specific metrics that he was just rattling off in his head? Yeah, he's able to connect the dots in his head. Remember that? Could you cut? I

Unknown Speaker 15:14  

totally remember I took him like a minute, like even a minute to and he just kept going.

Scott Santucci 15:18  

Yeah, exactly. We had to sort of Whoa. And then what we have to recognize is that everybody has their own unconscious competence. And to be able to get all of those metrics down into one thing is really empowering because I know a lot of us are going to want to focus on all the individual details. But then when he when we asked so while those numbers, he got to one looking at productivity, I'm looking at I want to figure out the levers of how we get. So really, you're looking at this thing is it well, that's how I'd explained it to other people. You just ask me how I do it, right. And it's really funny and it's natural. Because that's the way human beings are. But I think if what what is very hard to realize is, that's what he does for a living. He helps you see the future and say this is where your business is going to be the most valuable in the future. But where you are today is your companies, the client companies, the portfolio companies are dealing in the present in most cases, the past because the data that they're looking at, so it's a big shift. And I think that's one of the things that we need to be more understanding of, so that we can appreciate what our investors are looking at. So can all we've talked then and so as this as we've gotten simplicity around the the ratio with inside your your portfolio, your general partners, now the question becomes, how do we get the portfolio companies CEO CFO, so why is it that your leaders believe the CFO is the person to introduced this metric to,

Unknown Speaker 17:02  

you know, I it's, there is a, if you look at the leader that the leader inside a TCV, I think he became frustrated with over the years of saying, looking at, like, we've made these gigantic investments in sales and marketing and it often falls short of what was originally promised. And it led to it led to really him as the leader kind of declaring war, which is why this magic number two Ruta TCP, declaring war on efficiency effectively and how do we, how do we drive these two teams to work together? And this was the metric that every general partner was already using in a slightly different way, but it was what they were using to, you know, try to drive the teams to work together. Other what they didn't have and where we're portfolio ops at TC v kind of starting to move the needle overall, is building these these sets of projects that that more scientifically move that needle. But But you know, if you look at the evolution of why this matter to TCP, it really came down to a lot of companies were made promises early on in terms of sales and marketing and how, how much it's going to deliver. And, and they just got really, the leaders inside of TCV just got super frustrated that they never saw that. And they easily saw both teams weren't working together. In some cases, the way we asked for the metrics, often propagated that because we asked for marketing metrics and sales metrics. So now we've even taken a step back and we look at the numbers specifically. And then how are we moving the needle on the overall commercial ratio?

Scott Santucci 18:55  

So I think so let me translate this to our audience of why I think this is so Powerful. And so it's simple, but it's transformative. What is the highlight? Is it for all my years in b2b sales and marketing? I've heard about sales and marketing alignment. Right? We've heard about that. And guess what? those departments haven't aligned on their own. So what's powerful about this metric is we the investors aren't going to ask you about sales and marketing anymore. We're interested in your commercial process of which we've used sales and marketing is...