Open source mechanics: Comp’ing renewals, hiring inside sales

I’m in the middle of finalizing Alfresco’s (for the Americas) sales compensation plan. It has been one of the most difficult things I’ve ever done. You’d think it was just a matter of setting commission percentages and accelerators, but it’s harder than that. It’s very difficult to fine-tune incentives so that nomads work for the group.

One of the aspects of creating the plan was what to do with renewals. Some of Alfresco‘s peers comp renewals – others don’t. Some give full commission and booking credit in the first year, and then 50% commission credit (and no booking credit) thereafter.

I’ve opted to fully comp and credit renewals. Why? Because it aligns interests between the salesperson and the customer. (One large open source company has apparently adopted this model recently, having started with a “no reward for renewals model,” so companies of any size can adapt to it.)

My CEO, John Powell, has said,

Software is simply an excuse for a business relationship.

What he means is that in open source software, the bits are simply an excuse to provide service to a customer. In the proprietary world, selling the bits is 95% of the salesperson’s job (though this is changing as the market saturates and slows, and maintenance revenues take on huge importance). The salesperson’s relationship with the customer is largely over as soon as the customer writes a check. So is the company’s relationship, which is why proprietary vendors routinely score so low on support metrics – support is an afterthought.

At an open source company, support/service is everything. The relationship begins, not ends, when a customer signs a check. Because as an open source company selling subscriptions to services, those subscriptions end the minute I stop providing value. Risky for the vendor? Sure. But that’s where risk belongs.

While I’m on the topic, one other thing that struck me during this process is just how vital inside sales to the open source sales process. Larry Augustin captured this importance:

Returning to our discussion of natural growth rates, if the product does not have the adoption and usage to generate pull, the model won’t work. The initial temptation is often to fix this problem by creating “push” (i.e. spending money on BMW-driving sales reps to push the product). While push may be an answer, the real answer needs to come from an understanding of why the adoption isn’t there. Why aren’t people downloading, installing and using our product? How can we better understand the needs of the user, and make our software more useful to them so they will want to use. After all, we’re making the software and source code available for free. Price is not a barrier. If people won’t use our software for free, how much good is push really going to do?

The answer isn’t hiring an army of direct sales people, Willy Lomans (from Death of a Salesman, perhaps my favorite play of all time) who cost a lot and may even care a lot, but whose ends are out of whack with their means. They simply aren’t a good fit – at least, at first – for a demand-driven open source vendor.

The answer is to leverage inside sales to capture inbound demand, as MySQL, SugarCRM, and others have done very well.

Inside sales, then, is not low man on the totem pole in an open source company. It is the lifeblood of its revenue-generation, and should be treated as such.

Here are some of the principles we’re following in hiring our inside sales team:

1. We don’t hire junior people into the IS team. We hire people that can sell at any level in our customers. We want people that can scale.
2. Every salesperson starts in inside sales. I’ve written on this principle before.) The reason is clear: we need our sales team to think first to pick up the phone or send an email, not get on a plane. We need people that can close a deal at very little cost. If we’re going to charge 1/10th the price of our proprietary competition (and we do, and we have great margins at that price), we need each sale to cost less. We have fantastic margins, but only because we’ve learned from MySQL, SugarCRM, Red Hat, etc. as to how to close deals at little cost. Customers should pay for service, not a sales person to sell to them.
3. When an Inside Sales rep proves herself (by consistently hitting and exceeding quota), she’s given the opportunity to be a territory executive, and then to help hire her replacement. When she successfully nails a few quarters as a territory executive, she’s given the chance to be a named account executive. When she nails that, she gets to replace me. (-: Our policy is to promote from within. We want people to grow their careers with us. We actually have a set number of quarters necessary to move to a new level, so progression is very predictable. (I got this policy framework from Lars Nordwall at SugarCRM – he has every salesperson start with some small deals so that they can prove that they can close deals over email/phone.)

These are just a few examples of policies we use to motivate our sales team. We’re still small, so I’m sure we’ll tweak things as we go on. But it’s critical to grow a sales team organically, as Larry points out, so that you channel demand into deals, but don’t force the company into a mishapen mass that costs more than it sells. Hungry for profits now, not later.

Btw, this should not be read as anti-direct sales. I’m a big proponent of direct sales, but at a given point in a company’s life. You don’t need a direct sales force to close $5-20K deals. You do need them when you start scaling up to $50-250K (and beyond) deals, after a year or two in business. Scale direct sales with enterprise demand. Just make sure they are molded as open source direct sales people first.