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Copying or posting is an infringement of copyright. [email protected] or 617-783-7860.

CASE: E-232

DATE: 08/08/06

Mike Harkey prepared this case under the supervision of Mark Leslie, Lecturer in Business, and James Lattin, Robert A. Magowan Professor of Marketing, as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright 2006 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved. To order copies or request permission to reproduce materials, e-mail the Case Writing Office at: [email protected] or write: Case Writing Office, Stanford Graduate School of Business, 518 Memorial Way, Stanford University, Stanford, CA 94305-5015. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means electronic, mechanical, photocopying, recording, or otherwise without the permission of the Stanford Graduate School of Business.

CLEARION SOFTWARE

Truth, like gold, is to be obtained not by its growth, but by washing away from it all that is not gold.

Leo Tolstoy

INTRODUCTION

Clearion Software developed software solutions for large enterprises and governments. Founded in 1996, the company had become the worldwide leader in its market segment by 2003. By January 2006, it had clients in over 200 countries, and its revenues were accelerating in all of its territories around the world, with one exception: the Americas region. To Mark Jacoby, sales VP of the Americas region, this was a cause for great concern. He had missed his quota for the first time in his career at Clearion. In addition, four of his five quota-carrying sales directors had also missed theirs. He feared that he had increased the number of people in his organization so fast that it had become inefficient and poorly managed. He also feared that his key people were more concerned with building empires than building profitable and scalable businesses. He felt that it was time to make his team accountable for its investments. Jacoby believed that in order to improve the performance of the Americas region he would need to reevaluate his strategies for setting quotas, allocating headcount, and assigning territories.

COMPANY HIGHLIGHTS

Clearions primary software offering was a so-called Service Level Automation (SLA) tool, focused on automating the management of IT infrastructure, including hardware, operating systems, networks, and applications. Its solutions improved the efficiency of data center resources by monitoring and adjusting applications and resources against pre-defined rules and business goals. For example, in the event of a hardware failure, Clearions tools would compute a new optimal distribution of resources and then redeploy those resources without human intervention. Additional events that were automatically handled by Clearions software included server load spikes, hardware additions, and application crashes and rollouts.

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Clearion was the market leader in its SLA niche and faced little direct competition. In the short-term, it was focused on serving technology, financial services, and public sector accounts because of the massive IT needs and budgets in those industries. Over the long-term, its market opportunity was limited only by its ability to scale its sales organization and move faster than a handful of competitive upstarts. One leading research organization reported that industry revenues could reach over $1.3 billion by 2008. Clearions total revenues were $297 million in 2005 and $180 million in 2004, representing an increase of 65 percent. In 2005, revenues were comprised of software license fees (74 percent) and software maintenance and services revenues (26 percent). The average selling price for a license to use Clearions primary productMontagewas $95,000 in 2005. The company planned to drive future sales growth through the continued expansion of its sales organization. Led by SVP of worldwide sales Colin Davitian, Clearions sales organization had more than doubled in the previous 12 months. Three regional sales VPs reported to Davitian: Mark Jacoby; the VP of the Europe region, Alex Brose, and the VP of the Asia Pacific region, Jeff Swanbeck. (See Exhibit 1 for an organization chart.) The Americas region achieved the highest sales total of the three regions, accounting for over 50 percent of worldwide sales in 2005. However, it was the slowest growing region: revenues increased from $129 million in 2004 to $155 million 2005 (or 20 percent). In January 2006, when Davitian met with Jacoby to discuss the 2005 sales totals for the Americas region, he was clearly disappointed. Davitian said:

The performance of the Americas region did not meet my expectations. Its year-over-year growth rate declined to 20 percent in 2005, down from 45 percent in 2004. This was particularly alarming because I had allocated a huge budget to the region for the year, giving Jacoby the resources to more than double his headcount. Without question, I was dissatisfied with the return on my investment in the Americas. I told Jacoby that he needed to show that he could utilize our resources more efficiently in 2006. He had no choice; his quota was going up like everyone elses.

AMERICAS SALES ORGANIZATION

Jacoby was responsible for Clearions U.S. and Latin America sales territories. He had 25 years of experience in various sales organizations, including six years in Clearions rapidly growing group. He enjoyed and participated in the phenomenal success of the company. His responsibilities expanded from manager of a few field sales reps in 1999 to VP of the Americas in 2003. In 2003 and 2004, he consistently exceeded his quota by over 25 percent. Naturally, it came as a surprise to him that his performance had faltered in 2005, missing his target for the first time at Clearion. He fell short of his quota by only one percent, but the 48-year-old Jacoby was highly motivated to turn things around. Five sales managers reported to him: the director of the east region, Jerry Garton; the director of the west region, Steve Hall; the director of the Latin America region, Wally Cheng; the director

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of the federal group, Allison Chapas, and the director of inside sales, Melissa Dreyer. (See Exhibit 1 for an organization chart.) Jacoby knew that he needed to find a way to make his sales managers more productive and efficient. Drawing on his own experience, he decided to reevaluate his strategies for setting quotas, allocating headcount, and assigning territories. Setting quotas was particularly important because compensation for many employees in his sales organization was performance-based and wide variations in achievement were possible. Bonus compensation ranged between 80 and 200 percent of base salary. Jacoby said, Most sales managers have the unilateral power to assign quotas to their sales employees as they see fit. As a result, they have an absolutely massive power to influence their employees income. In addition, most sales managers controlled two major factors in determining the success or failure of their quota-carrying sales employees: the number of headcount allocated to support a territory and the territory size. To be sure, quotas may be easier or harder to achieve given differences in resources and territories. With this in mind, Jacoby decided to review his strategies for setting quotas, allocating headcount, and assigning territories.

Setting Quotas

In January and July, Jacoby received a half-year sales quota for the Americas sales organization from Davitian. At the same time, Jacoby would meet with each of his managers individually to review their performance for the current period and their forecast for the next period. Based on those discussions, Jacoby would divide his target among his quota-carrying managers. He said:

My quota-setting process was largely subjective, and I gave each manager a number based on my assessment of the situation. Elsewhere, sales managers will give every sales rep the same quota. That is a very simplistic approach, and for a certain type of business at a certain stage of maturity, it may make sense. At Clearion, where we have observed clear patterns of buying in certain territories, I did not feel that approach made any sense.

In 2005, Jacoby faced a number of challenges related to his process for allocating quotas, including sandbagging, lobbying, and gaming.

Sandbagging The most common problem Jacoby faced was sandbagging, when sales employees would downplay their sales expectations and attempt to convince him that they deserved a small quota. He said:

Sandbagging is a natural outgrowth of a compensation system where lower quotas can yield higher bonuses. In general, sales employees are deeply suspicious that their quotas are based on the sales forecasts they keep for themselves. They also believe that the more accuracy in the information they provide to their managers, the more they will be penalized. As a result, sales reps would prefer to tell their managers as little as possible until they receive their quota.

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While there are no immediate penalties associated with the practice of sandbagging, there are certainly reputational penalties associated with the more egregious violations. The degrees of sandbagging range from the slight haircut to the electric shave. A wildly self-serving forecast would certainly damage the trust between me and a sales rep. For example, in January 2004 Garton demanded a target that was 30 percent below the quota I had in mind for the east region. From then on, I began to be suspicious of his tactics.

Notwithstanding these dynamics, sandbagging persisted in the Americas sales organization, and Jacoby felt he suffered from a lack of transparency into his managers pipeline. For one, if a regional manager withheld information about prospects in the pipeline over and above her forecast, Jacoby felt he could be missing out on investment opportunities.

Lobbying Another common problem that Jacoby faced while setting quotas was lobbying from his sales managers. An offshoot of sandbagging, lobbying techniques were also used to drive down quotas. When sandbagging, managers would conceal sales opportunities; when lobbying, they would describe factors in the market that were adversely influencing their ability to succeed. Jacoby said:

During quota-setting time, magic rules start popping up out of the blue, such as sales cycles are longer in Latin America during a World Cup year. On the surface, such assertions may appear logical. But every manager has a dozen or so of these lobbying truisms up her sleeve. The net effect is that none of them are very believable. Other rules I have heard include east coast companies will negotiate harder on price, and west coast companies are on vacation for the month of July.

Jacoby felt that excessive lobbying eroded his trust in his sales people and challenged his ability to effectively discern reality. For example, one of his managers had a pattern for hyping doomsday scenarios and Jacoby felt he had lost touch with the territory. Consequently, he felt compelled to spend more time trying to understand the dynamics of that particular region than he did for other regions.

Gaming Gaming or manipulating the quota process was also quite common. Without fail, no matter the quota system, sales employees will endeavor to find a way to influence the outcome in their favor. For example, Jacoby found that some salespeople would try to close all of their deals in June and December in an attempt to make their performance appear like a close call. Jacoby said:

Any person who has survived in the sales environment long enough to become a manager must have learned to become very persuasive about all things related to her quota. In fact, sandbagging, lobbying, and gaming techniques can be rather effective. It depends on the manager. The typical regional director is not highly analytical. Hes often a sales guy who happened to be good enough to become a

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manager. He sets quotas based on gut, and he is subject to influence just like everybody else. Hall, for example, pays little attention to spreadsheets. One of his managers once told me that he can barely use his personal computer. So when quota-setting time comes around, Hall will make decisions based on a few simple rules. For instance, assuming his quota increased 10 percent, he will give a sales rep who hit her quota an increase of 14 percent and a sales rep who missed his an increase of only six percent. His argument is that sales managers who over-engineer their forecasts are wasting their time because there is typically too much uncertainty in the sales process to bother with getting too sophisticated with allocations.

Self-Assessment The sandbagging, lobbying, and gaming tactics employed by Jacobys managers certainly made his task of setting quotas a difficult one. Even more concerning, he had no way to adequately measure his performance in setting quotas. He said:

Its not always clear when the results come in at the end of a performance period how I have done in setting our quotas. For example, we have had huge variations in achievement by region. At the end of last year, one region reached only 81 percent of its goal, and another achieved over 120 percent. I could have interpreted those results in any number of ways. To satisfy my ego, I could have said that my quota-setting was fine, and it was a case of one region under-achieving and another over-achieving. On the other hand, I could have said that my quotas were offone regions was set too high and the other too low. In fact, its possible that the performance of the regions was actually quite similar and that they had done the same job with different goals. Unfortunately, the consequences of getting quotas wrong are really enormous for the organization. People who cannot hit their goals and yet are over-achieving will be frustrated, and people who are hitting easy goals will have an inflated view of their performance. Together, poor goal-setting can create major morale problems.

Allocating Headcount

In 2005, Jacoby set quotas every six months according to schedule. Conversely, he allocated headcount on an ad hoc basis, and he faced two major challenges as a result. First, his managers required more time to fill openings than he would have liked. Typically, managers would request headcount only after quotas were set, and then they would attempt to fill the openings before the end of the half-year period. Jacoby concluded that the new headcount investments were not being used to address immediate needs and were only loosely tied to goals. The second problem he faced was in the area of shared resources. In 2005, Jacobys regional managers were allocated headcount in a fixed ratio of one corporate account manager (CAM) to one territory sales manager (TSM) and one systems engineer (SE). CAMs came with quota, whereas TSMs and SEs did not because they were shared inside sales resources [who reported to

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Dreyer]. Accordingly, SEs and TSMs were always in high demand. However, Jacoby found that SEs and TSMs were being hoarded by a few managers. He said:

Our inside sales group was being raided by the managers who were the most adept at strong-arming people. It was often a negotiation between different stakeholders with different titles, different pay rates, and different levels of seniority and credibility in the company. The pushier, more domineering managers would get the lions share of the resources. In addition, there were no penalties in our compensation system for excessive use of shared resources. We only measured top-line performance. So a manager who reached her quota of $27 million at a cost of $26 million would have achieved her goal. On the other hand, a manager who reached only $26.5 million at a cost of $4 million would not have made her goal. From a profit and loss standpoint, our reward system did not make any sense. We had spent a lot of money on new headcount just to help a team make their number, and in most cases, they would achieve their goals. As a result, sales totals were getting bigger and bigger each year. More often than not, however, the return on the incremental investment in headcount had fallen well below our expectations.

Assigning Territories

In addition to the challenges he faced in allocating headcount, Jacoby had had his hands full in assigning territories in the past. However, in 2005, the toughest decisions were made by his subordinates, who were left with the unenviable tasks of increasing quotas and shrinking territories. On the one hand, this was a common problem among fast-growing companies: they are forced to separately manage more and more territories as the cost of not doing so increases. On the other hand, Garton for one did not find it easy to subdivide his territory. But, he felt he had no choice. He found that a number of leads in the Washington D.C., Baltimore, MD and Charlotte, NC areas were not being pursued as aggressively as he would have liked. His northeast manager (who was responsible for the region north of North Carolina and Tennessee) was consumed by opportunities in Boston, MA and New York City, NY and his southeast manager (who was responsible for the region south of Virginia and Kentucky) was fully absorbed in deals in Atlanta, GA and Miami, FL. In both cases, Gartons subordinates had created promising leads, but simply lacked the time and resources to deliver on them. Gartons solution was to add a third regionthe midatlantic regionwhere before he had only two regions in his territorythe northeast and southeast regions. (See Exhibit 2 for territory assignments.) He said:

Most sales managers want to build an empire, and they measure themselves by the size of their territory. They would rather take an infinitely large territory assuming they could make an infinite amount of money. Nevertheless, theres a well understood bar where a territory is deemed large enough to be split apart. Through past experience, everybody knows that when a territory gets to a certain point, its no longer efficient not to have someone directly managing it. We had

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reached that point in my territory and that made it easier to convince the northeast and southeast managers that it was in their best interests to give away some of their territory. Even so, they were left with a sour taste in their mouth about the deals they had left on the table because the expectation in a growth company like Clearion is that your quota is going up every period. So in both cases, the regional managers were expecting a larger quota to come with their reduced territories. On the other hand, the incoming midatlantic regional manager knew that she had a richer territory because it already had been developed by the previous managers. It was a very tricky situation. But when a company is growing so fast, there is no other way to fully capture the value of the various opportunities than to increase the number of territories.

NEW PROCESSES FOR 2006

Objectives

Based on his review of his processes for setting quotas, allocating headcount, and assigning territories, Jacoby felt he had better appreciation for his inability to achieve quota in 2005. The Americas region was rife with problems that were only getting worse as the organization grew. Jacoby concluded that he needed a new system. He was not certain that he could address all of the issues in his previous system, but he was convinced he could at least improve upon it. Accordingly, he set forth a few objectives to guide his thinking, including: 1. Optimize for profitability (and not revenue). Rationale: Jacobys mission from Davitian was clear: he needed to become more efficient. In addition, he was concerned with the potentially irresponsible empire building taking form in his organization. He wanted to hold his sales managers accountable for their consumption of resources. 2. Improve understanding of spending allocations to make better informed investment

decisions. Rationale: Jacoby struggled to fully understand his managers businesses for many reasons, including rampant sandbagging, lobbying, and gaming. In addition, he lacked the ability to be able to track the performance of an investment in headcount. 3. Merge decisions about headcount and quota allocations into one decision. Rationale: Making decisions about headcount and quota allocations separately yielded a number of suboptimal outcomes, including a lack of accountability for incremental headcount. Jacoby said:

My belief was that if I could tie together all decisions about headcounts and quotas, I could begin to run my sales organization as a business, making calculated investments and holding people accountable for those investments. In this manner, no headcount request would be free. If a manager wanted a new

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hire, she would have to make that request at the beginning of the compensation plan period and take on incremental quota associated with the headcount.

4. Empower managers to participate in the decision process and work collaboratively. Rationale: Jacoby felt that his quota-setting process placed him in an adversarial position against his staff: they had no incentive to share information with him. Moreover, they had no incentive to work collaboratively with other territories. 5. Accelerate hiring times. Rationale: Jacobys managers required more than four months on average to fill open positions. He felt that by compressing hiring times he could increase managers accountability for new hires. 6. Make managers assume the cost of SEs and TSMs. Rationale: Previously free resources, SEs and TSMs were being hoarded by a few managers. Jacoby hoped that by holding his sales managers accountable for their consumption of resources, he could improve the efficiency of his organization.

New Model

Based on his plan to combine his quota-setting and headcount allocation decisions, Jacoby developed a new toola quota and headcount allocation modelto guide his budgeting process for the first half of 2006. It only took a few hours to build, and its central components were simple. First, he needed to figure out how to assign resource consumption costs to each regional director, when resources were compensated differently and some resources were shared. He said:

I decided to take all of our headcount and convert them into units. The baseline was set at one unit, and it described our entry level staff people: TSMs and SEs. On the other hand, more experienced and higher paid employees, like CAMs, were set at two units. Units are a simple and easy to understand currency, whereas salaries are diverse and overly complicated. (See Exhibit 3 for unit conversion information.) In order to figure out what weve already invested in a region, I added up the number of units that were being used by that region. For example, the east region was using about 200 units and the federal region was using about 64 units. (See Exhibit 4 for headcount by region.)

Jacobys next step was to figure out how productive each region had been based on the number of units it utilized. He quickly calculated each regions contribution per unit by dividing its total revenues by its number of units. By doing so, he learned that the federal group had been the least productive, generating $110,000 in revenues per unit for the six-month period ending December 31, 2005, and the west region had been the most productive, generating $190,000 in revenues per unit for the period. (See Exhibit 5 for contribution by region.)

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Lastly, Jacoby revisited his six objectives for setting quotas and allocating headcount and concluded that his new model helped him to immediately address the first two of his six objectives. For the first time, he could evaluate each regions contribution to profits by using the proxy measure of revenues per unit. With this new information, he felt he could optimize for profitability and make better informed investment decisions. The next step was to address his third objective, merge decisions about headcount and quota allocations into one decision.

Quota and Headcount Allocations

As promised, Davitian had raised the quota for the Americas region. Jacoby was responsible for $92.5 million in revenues for the first half of 2006, an increase of 14 percent over the second half of 2005. He also calculated that he had the budget to increase his headcount by 12 percent. Now he needed to put his new model to work and allocate the incremental headcount and quotas in one exercise. As he began making his decisions, he wondered which region would likely yield the most profits to the business from an investment of headcount during the performance period.

West Region In addition to generating the most revenues per unit, the west region had also achieved the most overall revenues, almost $40 million in the second half of 2005. The director of the west region, Steve Hall, was a 20-year sales veteran and an empire builder. He was utilizing the most resources, over 210 units, many of which were shared resources. On the one hand, Jacoby did not feel it was appropriate to penalize Hall for his vast consumption of resources because he was using his headcount more efficiently than his peers were. In addition, Jacoby knew that if anyone could take on and successfully achieve additional quota, Hall was that person. He had exceeded his quota by an average of 30 percent for the last three performance periods. On the other hand, Jacoby wanted to adapt based on his past mistakes and knew he could not be too generous with new headcount allocations. For one, it took Hall longer to fill openings, averaging over five months per new hire. With all of this information percolating in Jacobys mind, he decided to raise Halls quota by 14 percent (comparable to the increase in quota for the Americas region) and allocate him 28 new units (also in line with the region). Under the new unit system, Hall would have the flexibility to determine how to use those 28 units, whereas in the past, he would have been required to hire in the fixed ratio of one CAM to one TSM and SE. He was not sure which hiring approach Hall might take: he might stay with convention or perhaps pursue a new distribution of resources. In any case, Jacoby was curious what type of hiring incentives he might be instilling with the new unit structure. Nevertheless, he expected another hugely successful quarter for his leading regional director. (See Exhibit 6 for quota and headcount allocations by region.)

Federal Region On the other end of the spectrum, the director of the federal region, Allison Chapas, missed her quota for the second half of 2005 by 19 percent. Jacoby expected sales cycles to be longer for Chapas: she was selling to the notoriously slow-moving federal government, whereas the east and west regions had their pipelines filled with quick and nimble high-technology enterprise clients. His hope was that there would be a larger benefit in the long-term by focusing on the federal market. Even so, Jacoby was disappointed with the shortfall in sales in 2005 because

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Chapas had more than tripled the size of her organization in the previous 24 months. He hoped that 2006 was the year that the federal group would realize meaningful returns. With some hesitation, Jacoby reduced Chapas quota and allocated her additional units for the first half of 2006.

East Region The director of the east region Jerry Garton missed his quota for the second half of 2005 by 15 percent. Jacoby was not entirely surprised by this outcome because he thought he had given Garton an especially difficult goal. Garton had been sandbagging, lobbying, and gaming more than any of the other regional directors, imposing significant time commitments from Jacoby. In part, Jacoby set the target for the east region so high to send Garton the message that his tactics would not be tolerated. Unfortunately, by January 2006, Garton had not changed his behavior. Even worse, his productivity had fallen short of expectations, generating $30,000 less in revenues per unit than the west region. Jacoby was running out of patience with Garton and wanted to see some results. He wondered if there could be any explanation for the productivity differences in the east and west regions, given the similarities in customers they were pursuing. He increased the quota for the east region by the largest margin (19 percent) and allocated it the lowest percent increase in units (10 percent). He hoped that the east could begin to close its productivity gap with the west. After he had finished making his decisions about quota and headcount allocations for the Latin America region, Jacoby had achieved his third objective; his budget was set. He decided that it was time to call a meeting with his five direct reports.

The Team Meeting

By meeting as a group, Jacoby thought he could put his new model to the test against his fourth objective, empower managers to participate in the decision process and work collaboratively. He knew that this was an ambitious goal because it necessitated a change in behavior from his managers. Typically, Jacoby met with each of his regional directors individually, listened to their sandbagging, lobbying, and gaming stories, and then made his decisions about quotas alone in his office. When he assigned quotas, his regional directors would learn only their own number and not those of the others. But Jacoby wanted to try something new. In the meeting, he unveiled his new system of measuring headcount by units and presented his budget and allocations to the whole group. He also revealed a new policy that was implicit in the allocations: new headcount came with quota attached to it, meaning that any director that wanted to hire additional people had to be willing to assume incremental quota associated with that headcount. Jacoby believed that this new policy would help to address his fifth objective, accelerate hiring times. Jacoby hypothesized that if new headcount carried as much quota in its first performance period as experienced hires did, regional directors would be highly motivated to hire the new people immediately. When Jacoby had finished presenting the nuances of his new model, each regional director now had access to more information about the Americas region than ever before. They could see that the federal group had been the least productive; the east region had a tough quota to hit; the west

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region would be adding even more headcount, and so on. Jacoby had not fully considered any potential risks in making quota and headcount allocations transparent across the region. Nevertheless, he hoped that the benefits of doing so would mitigate any complications that might arise. He also hoped that a healthy discussion about his various allocations would ensue. Jacoby said, I thought that by giving them a broader perspective beyond their own region, they would feel compelled to consider the companys objectives beyond their individual fiefdoms. I had hoped they would try to act like team players. But instead, the regional directors kept fairly quiet, and he could sense that they were busy absorbing all of the new information.

Complications

A few days later, Jacoby met with each of his managers individually to talk about the new model and his allocations. He was eager to hear if they thought he had been equitable and sensible with his budget. His first meeting was with Chapas. She told him:

To be honest, I think its a bit unfair to compare the federal groups revenues per unit against those of the east and west regions. And I certainly did not appreciate being confronted with this information in front of everyone in that meeting. Everyone knows that government contracts take more time and resources to close. I need to jump through more hoops than everyone else; I need to spend time securing licenses where others do not, and I need to build a broader set of relationships.

Over the last two years when I was increasing the number of headcount in my group at a fast clip, I felt I had your support. In addition, we did not track or even consider revenues per unit. Why am I being punished for behavior that you had approved all along? Your two-dimensional spreadsheet fails to capture the subjectivity that is required in quota-setting.

Jacoby agreed with many of her points. His model highlighted the relatively low revenues per unit in her territory, and he could understand why she felt uncomfortable in the meeting. Indeed, selling to governments required longer sales cycles, and some productivity shortfall was to be expected. On the other hand, Jacoby was disappointed that he had not seen a satisfactory return on his investment in her area, and he wanted her to know that. When he met with Garton, Jacoby learned that he was also unhappy the new model. Garton said:

Why is the east region being singled out here? No other region is being asked to improve its revenues per unit anywhere close to the nine percent you are demanding from me. If revenues per unit matters so much, why is the federal group getting eight new units? Thats almost half as many units as I am being allocated, and the federal group is only one sixth the size and one half as productive as the east region. It does not make any sense.

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On the other hand, Melissa Dreyer, who carried the same quota as Jacoby, was more supportive. She said:

I do not understand why the east region is not as productive as the west region. They are targeting more or less the same customer profile. Yet, the east is not getting the job done, simple as that. Consequently, I am reluctant to allocate any additional TSMs to the east until I can see some improvement.

Wally Cheng mentioned that it did not seem fair that a new hire would be measured at the same productivity rate as a more mature headcount. He asked Jacoby to consider how likely it would be for a regional director to recruit, hire, and train a new hire to be as productive as an experienced person within a single performance period. Jacoby acknowledged that it was not likely. On the other hand, he asked Cheng to consider the benefits that came with the new policy: it made managers accountable for new headcount, which he thought could accelerate hiring times. Additionally, he asked Cheng to feel free to propose other solutions that would achieve similar objectives. Cheng could not think of any on the spot. Instead, he said:

I see your point. If SEs and TSMs are free, then everyone will fight for them. But isnt that what you want? The best salespeople will get the resources, hit their quotas, and get bigger bonuses. If they arent free, and I am going to have to carry quota for every SE and TSM I hire, why would I even bother? Based on the unit system, I have every incentive to go out and hire the most experienced CAMs I can find. CAMs are professionals, and I know for sure that they have hit quotas before. On the other hand, how many SEs and TSMs even know what a quota is? The only people we can find to fill those roles are junior and need to be trained. In my opinion, if you give regional managers a license to spend units in any manner they choose, you will end up with an organization with all CAMs and no SEs and TSMs. Then how productive will we be? I think you need a better system for allocating shared and inside sales reps.

Cheng also questioned the logic of optimizing for profitability in the new model, when quotas (and therefore compensation) were based on revenues. Jacoby recognized that an indirect alignment of goals could create complications over the long haul. For the time being, however, he was not very concerned with the matter. He knew it would take some time for the Americas region to adapt to his new model. For now, his primary consideration was his allocations. Given all of the feedback he had received from his regional directors, he wondered how prudent and fair he had been in assigning quotas and headcount.

LOOKING AHEAD

In June 2006, as the end of the first half-year performance period came to a close, Jacoby knew it was time to revisit his process for setting quotas, allocating headcount, and assigning territories. Final revenue numbers had not yet come in, but he knew it was going to be a decent quarter. He was sure he had achieved his quota for the Americas region. On the other hand, at least one of his regional directors was bound to be disappointed. Clearly, he was anxious to see the results.

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Meanwhile, he took a few moments to consider his accomplishments. He felt he had successfully created transparency into the profit contributions by each region. He believed that this information enabled him to make better investment decisions. He also felt that he had successfully converted decisions about headcount and quotas into one decision. Moreover, none of his managers came to him asking for new headcount after January. In July, he knew that requests for new units would come and that they would come bearing incremental quota. In other words, he felt he had achieved the first three objectives he had set for himself in January. In addition, his managers had grown to accept the idea that SEs and TSMs were no longer free. Nevertheless, he was not sure how the previously free resources would be used in the future. To his delight, he also noticed that hiring times had been reduced to an average of less than two months per hire, which he believed represented considerable progress against his fifth objective. Conversely, he wondered how he would evaluate his effectiveness against his fourth objective, empower managers to participate in the decision process and work collaboratively. To be sure, he had shared more information with his regional directors and included them in the process as a team, not as individuals. Even so, he was disappointed in the nature of his individual meetings with his managers. Jacoby said:

It was more of the same: sandbagging, lobbying, and gaming. Only now, the context of the debate was centered on their new scapegoat, the new model. In a way, by giving them more information, I had given them even more ammunition to make their sales pitch for a lower quota. Suffice to say, I did not observe any collaboration or teamwork. In sales, its pretty simple. Sink or swim, you are on your own.

As he began to outline his objectives for updating and refining his quota and headcount allocation model, Jacoby wondered what areas of the model and his process for making allocations needed to be adjusted.

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Exhibit 1 Organization Chart

Mark JacobyVP of Americas

Jerry GartonDirector, East Region

Wally ChengDirector, Lat. America

Allison ChapasDirector, Federal

Steve HallDirector, West Region

Colin DavitianSVP of Worldwide

Sales

Alex BroseVP of Europe

Jeff SwanbeckVP of Asia Pacific

Melissa DreyerDirector, Inside Sales

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Exhibit 2 Territory Assignments (East Region)

Before August 2005

Northeast Region Southeast RegionConnecticut AlabamaDelaware ArkansasIndiana FloridaMaine GeorgiaMaryland KentuckyMassachusetts MississippiMichigan North CarolinaNew Hampshire South CarolinaNew Jersey TennesseeNew YorkOhioPennsylvaniaRhode IslandVermontVirginiaWashington D.C.West Virginia

After August 2005

Northeast Region Midatlantic Region Southeast RegionConnecticut Kentucky AlabamaDelaware Maryland ArkansasIndiana North Carolina FloridaMaine Tennessee GeorgiaMassachusetts Virginia MississippiMichigan Washington, D.C. South CarolinaNew Hampshire West VirginiaNew JerseyNew YorkOhioPennsylvaniaRhode IslandVermont

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Exhibit 3 Units By Position

Position Abbreviation UnitsCorporate account manager CAM 2.0Territory sales manager TSM 1.0Systems engineer SE 1.0Channel sales manager CSM 1.5Channel systems engineer CSE 1.0Manager of TSMs TSM Mgr 1.3Manager of SEs SE Mgr 1.5Manager of field reps Field Mgr 2.5Other Other 1.0

Exhibit 4 Headcount by Region, as of January 1, 2006

H2 05 Exit Headcount

Region CAMs TSMs SEs CSMs CSE TSM Mgr Field Mgr SE Mgr Other Total Headcount Total UnitsEast 38 40 38 7 5 4 8 6 0 145 200West 40 42 40 8 8 4 8 6 0 156 214Latin America 4 4 2 0 0 0 2 0 0 13 19Federal 10 12 10 4 4 1 2 2 2 47 64Totals 92 98 90 19 17 9 20 14 2 361 496

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Exhibit 5 Contribution by Region

Second Half of 2005

Achieved Quota % Shortfall H2 2005Region in H2 2005? or Revenues Headcount Revenues/Unit

Yes or No % Surplus ($ in millions) (In Units) ($ in millions)East No -15% 32.0 200 0.16West Yes 20% 39.6 214 0.19Latin America No -10% 2.5 19 0.13Federal No -19% 7.0 64 0.11Totals No -1% 81.1 496 0.16

Exhibit 6 Quota and Headcount Allocations by Region

First Half of 2006

QUOTA HEADCOUNTH1 2006

Region Revenues % growth New Headcount % growth Total Headcount Revenues/Unit % growth($ in millions) (In Units) (In Units) ($ in millions)

East 38.2 19% 20 10% 220 0.17 9%West 45.1 14% 28 13% 242 0.19 1%Latin America 2.8 14% 5 27% 24 0.12 -10%Federal 6.3 -10% 8 13% 72 0.09 -20%Totals 92.5 14% 61 12% 557 0.17 2%

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