Kunal Mehta on Lessons Learned from ROLLING OUT the Commercial Ratio
Declaring War on Inefficiency
In this episode of the Inside: Sales Enablement podcast, Scott Santucci and Brian Lambert are joined by Kunal Mehta from the private equity firm TCV. Kunal shares a behind-the-scenes view of rolling out the Commercial Ratio to all TCV portfolio companies. What were those discussions? What was the focus? What happened?
Conversation has been edited for clarity.
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 $0.15 of growth for every $1 they spend on sales and marketing.
So with that as a frame of reference, I'm delighted to introduce Kunal Mehta who’s been advocating and developing this Commercial Ratio concept. We're going to learn about some of the experience he's had as his company TCV, a private equity firm, has rolled out the Commercial Ratio to their portfolio company. So Kunal, please introduce yourself and sort of set the tone a little bit.
What is Commercial Ratio and why is TCV so interested in it? How are you guys rolling out some of your portfolio members?
Thanks, Scott and Brian. My name’s Kunal Mehta. I head up the center of excellence for sales and marketing at TCV. The Commercial Ratio is really a center of gravity for us internally. How we talk at TCV about driving efficiency across sales and marketing. It comes naturally inside TCV but there's certainly more work to do when we introduce it inside of the portfolio company.
I love the story you tell, Scott. I was watching a YouTube video this morning. I have no idea how their algorithm works for serving up videos to me but there was one that came up on hang gliding. I've never clicked on anything hang gliding related or have any interest whatsoever in hang gliding but I clicked on this one. And this guy, Chris Gurksy, had signed up for this class in Switzerland and the instructor forgot to strap him in and he took off.
The video was about this guy holding on for dear life, for about 2 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.
I love using stories, and I know you do too, to introduce a brand new idea. I think the point here is that Commercial Ratio is like flying and it's something different.
If you’ve never gone hang gliding before, the first step is stepping off that cliff and just hanging on for dear life. That fear factor that lasts for a few minutes before you go, “Hey, I'm flying.” You’ve got to be willing to take that first step off the cliff in the first place.
Let's review. What is the Commercial Ratio?
Commercial Ratio is a metric. And it's a metric that's simply Revenue Growth, which is calculated by the annual revenue that you've got this year minus the annual revenue from last year, that’s the numerator. And then the denominator is the total spending that you've had for Sales and Marketing for the current period. That's it.
I can't keep stressing how simple the calculation is and how complex most people want to make it. This a top-down view from an investor standpoint.
Why is that so important and why is it such a revealing metric for investors, CEOs, and CFOs? What does it tell us?
Commercial Ratio tells us about the efficiency of sales and marketing. From a private equity perspective, we view that as a single function of driving revenue. What you often see though is those two functions don't operate very cohesively together. That shows up in the ratio and shows up in a much lower ratio the more divorced from each other that they are.
The ratio itself, if you've ever watched the movie Moneyball, it's the number that they came up with, it’s on-base percentage. How do we drive that number up to generate more wins? Who are the types of people we need to bring onto the team that are going to drive that number up and ultimately generate runs, which generates wins? We view the Commercial Ratio 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. At any private equity company that you look at, certainly we'll also want to look at efficiency overall. It’s so funny, we could be making peanut butter and jelly sandwiches, and we want to do it as efficiently as possible even with our own kids.
The way the ratio works, it gives us a real quick sense of how that revenue engine is working inside the company now and where we can look for opportunities to introduce projects that help improve that ratio. And it certainly drives companies to work closer together inside of sales and marketing.
Why would you just focus on sales and marketing to focus on growth?
If you look at sales and marketing through that lens, the return on investments is tremendous. The way we've calculated it and the way you guys are talking about it, we've used sales and marketing primarily as the biggest lever to driving growth. I don't think it's any surprise that the relationships between those two functions are often poor. The fastest way to move the needle is to build a metric that combines the two groups together and focuses them on projects where if they don't work on together, they'll never move the needle on efficiency.
An example of that might be if we know what companies that have the highest likelihood to buy, why wouldn't we have Sales on those named accounts, but also Marketing providing air cover and ground cover specifically to those accounts. As simple as that sounds the majority of companies don't actually have a systematic way for doing that.
I had the great opportunity to introduce the Commercial Ratio to a handful of some of your leading portfolio companies. Can you give our audience a flavor of some of their questions? How would you describe the introduction of the Commercial Ratio and how to go about doing it?
One of the big lessons learned is with folks at TCV, the finance and metrics come very naturally to them and we potentially get ahead of ourselves and how we communicate that to companies. They might not be ready for the message. While something comes so naturally to a finance person, it might not come that naturally to a sales leader or a marketing leader. So we've had to really sit down and kind of explain the ratio in the meeting when we're talking about it with the sales ops leaders.
I think there is a combination of a little bit of fear, a little bit of vulnerability, and then ultimately it's like, “Oh, I get it. I get it.” I think what TCV is doing as we onboard, certainly with new companies now, is we're spending much more time walking through how we think about efficiency, how we measure this metric, and what can move in a needle on value creation, certainly this metric and the number.
How did we arrive at the metric?
Scott and Kunal were interviewing general partners in the company and started out asking open ended questions, for example: What do they look for? One of the general partners started listing out 30 different, very specific metrics from the top of his head. This led to an a-ha moment for Scott and Kunal.
What we have to recognize is that everybody has their own unconscious competence. 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. When we asked, “So why all those numbers?” He got to one reason: I’m looking at productivity. That's how I'd explain it to other people. But you just asked me how I do it.
I think 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 the portfolio companies are dealing in the present and most cases the past because of 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 we've gotten simplicity around the ratio inside your portfolio with your general partners. Now, the question becomes how do we get the portfolio companies on board. So why is it that your leaders believe the CFO is the person to introduce this metric?
If you look at the leader inside TCV, I think he became frustrated over the years of saying we've made these gigantic investments in sales and marketing, and it often falls short of what was originally promised.
It led to him as the leader declaring war on inefficiency, which is why this magic number took root at TCV. And how do we drive these two teams to work together? This was the metric that every general partner was already using in a slightly different way, but it was what they were using to try to drive the teams to work together. What they didn't have -- and where portfolio ops at TCV is starting to move the needle overall -- is building these sets of projects that more scientifically move that needle.
If you look at the evolution of why this mattered to TCV, it really came down to a lot of companies made promises early on in terms of sales and marketing and how much it's going to deliver and the leaders inside of TCV just got super frustrated that they never saw that. 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.
"Investors aren't going to ask you about Sales and Marketing anymore. They're interested in your Commercial Process and view Sales and Marketing as two sides of the same coin."
Let me translate why I think this is so powerful. It's so simple, but it's transformative. For years in B2B sales and marketing, we've heard about sales and marketing alignment. Guess what? Those departments haven't aligned on their own.
What's powerful about this metric is the investors aren't going to ask you about sales and marketing anymore. They're interested in your Commercial Process and view Sales and Marketing as two sides of the same coin.
Yes. Once it's two sides of the same coin, this is the advantage of doing things together as a team, right? You are immersed in all those details. This is vantage of doing things in partnership with or collaboration.
What's being highlighted here is the accountability that's associated with that metric. That's one of the things that, anybody who's been in sales and marketing or sales ops is seen as the lack of accountability across those departments.
So another thing that's happening all is that your leadership is saying we're going to hold somebody in your business accountable. Tell us about how that conversation goes.
Yes. So I love the way you explained it. They're two sides of the same coin. And once we get the two teams to see that, how do you win the war within when you have so much muscle memory working against you? It often requires an objective party, which I think was your original question.
The CFO or the CEO have the power, certainly, to get both teams to work together. It's almost like they're an objective referee who's held accountable to that ratio.
Once they see it's two sides of the same coin where they work together, there is a war within because the two departments typically don’t work together. There's so much muscle memory that's working against them and so much connective tissue that just needs to be built that hasn't built before.
The role of the CFO or the CEO who's held accountable provides that objective third party to keep them moving on track.
I love that you called the CFO an objective referee. That's such a great illustrated concept because as the referee, they're interested in making sure the rules of the game are being followed. One of the rules that we have to make sure we're following is profitable growth. If we're spending too much sales and marketing resources to drive revenue growth, then we're not following the rules of how we'll be evaluated.
As part of that, referees are inherently fair. One of the things that people in sales and marketing feel because they don't have a good mastery of “financial language” is they're intimidated to ask for help from CFOs. But really if you just do a little bit of work and meet them halfway, don't CFOs try to help connect the dots? Isn't that what you see more often than not instead of just eliminating budgets?
I think the role of the CFO is they're extremely committed to understanding the business and working with the business. Other departments are intimidated by that, but it's like that hang gliding example that we just started with.
They're a partner in your success. And if they don't understand what you're doing, they can also be a partner in cutting too fast because that's a natural tendency for a CFO to do. So you're going to want them on your side either way.
Before you became private equity, you were a sales enablement, sales operations person. What advice would you give "Past Kunal" about embracing the Commercial Ratio? What steps should you go do immediately to start helping the business? What would you do?
So ultimately the role of sales enablement is to drive revenue more efficiently. So we're aligned on the definition, right? They are a productivity engine and that their projects focused on making the sales rep more efficient or more effective in front of the customer. I think earlier on in my career, the prescription was a lot of activity. And there were many, many of those mason jars that you've used in the past.
That goes into just driving all sorts of activity around what we thought would drive. You know, better knowledge of products and solutions make reps more efficient. But ultimately in the end, when we got asked to prove out the value, it became easy to see how superficial the connection was between an enablement activity and then the ultimate effect on revenue.
If they evolve with this ratio you can actually do less and have less activity and work on projects where you have much more confidence on how it's going to move the efficiency needle overall in the company.
I think that's a better place to start from an enablement perspective. An enablement professional can have much more precision over why something's going to work. They can have much more precision working with the CFO and others on what they're going to do to impact that ratio over a one, two, or three year period versus just being focused on so much activity and potentially even propagating more complexity than they should.
Keep reading: Find out why the Commercial Ratio is a great starting point for addressing sales and marketing challenges. Learn how to use the metric to engage with your executive team.
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