Building Blocks of MSP Channel Success Part 3: MSP Sales Hiring 101

Finding and Hiring Your First Sales Representative

Hiring a first sales representative for your MSP channel program can feel overwhelming. What qualifications should prospective candidates have?  What determines whether they are overqualified or underqualified? Do they need to be in the office or can they work remotely? Should you hire from within the industry or simply look for raw talent and train a new hire to fit your needs? How will you compensate them? Should they be compensated based on gross profit, revenue, or both? How will you measure their performance? What should their sales quota, MBOs, and KPIs look like? These questions must all be answered before you begin the hiring process.

As a channel sales leader for many years, I’ve had my fair share of successful and unsuccessful sales hires. I’ve also implemented a lot of programs and quotas, some of which were helpful and others less so. In this article, I’ll share some essential factors to consider and provide recommendations to help ensure your first sales hire succeeds.

Defining the Role

“So, what would you say you do here?” 

Sorry for the lame “Office Space” humor, but what exactly will your new hire be doing? What skills, experience, and other qualifications do you expect them to have? 

Are you hiring a “hunter” or a “farmer”? Let’s say you’re hiring a hunter. To define the hunter role, document the revenue-generating tasks you and your team would prioritize if you had more time. This list may include lead generation, prospecting, closing deals, and increasing sales with existing partners. Consider the skills, experience, and qualifications necessary for success in the position.

Next, determine the non-revenue generating activities that support sales but don’t directly tie to new business. You can start this list by looking at the first list you made and asking yourself if you really want a well-compensated salesperson spending valuable time on these activities. If not, identify who else can do them to allow the hunter to hunt. Creating these two lists is essential for the next steps in the process.

Skills and Experience
What are the things new sales candidates must know, should know, and could know for this role?  Examples might include experience with Salesforce, understanding the uniqueness of the MSP channel, and public speaking skills. Candidates may not have them all but avoid compromising on the essential skills or experience required for the role and risk making a bad hiring decision – no matter how many other skills they have and how quick a learner they claim to be.

If you think hiring an experienced salesperson is expensive, try hiring one that isn’t.

Set a Budget
Before recruiting and screening, you MUST know how much you can afford to spend. And that means putting together a compensation plan. Hiring a salesperson without a compensation plan is like starting a business without a business plan. You could get lucky, but I prefer a little math to back my bets. While their on-target earnings (OTE) number (how much they will make if they hit 100% of their sales quota) will vary considerably in the MSP channel, the math for determining how much you can afford will not.  

Many expect a salesperson’s income to be paid for by net new sales alone. That may be true in some cases, but that expectation can be limiting in the MSP SaaS world. I recommend you blend some good old entrepreneurial optimism with a pragmatic approach here. Start with the historical monthly new partner revenue you have been creating and establish a target for annual recurring revenue based on organic growth plus the direct and focused sales efforts of your soon-to-be sales champion (yes, you will have to speculate a little). Now look at that number and ask if it will have a meaningful impact on your company valuation. The greater the impact, the more you can justify spending. If you are building to sell, don’t base your sales representative’s compensation only on available cash flow. Instead, make it a blend of the new revenue they generate and the net increase in your company valuation.

Once you’ve established your salesperson’s OTE, you can work backward from that number to determine their base salary against commission formula. It will typically be a 60% split of salary plus 40% commission to reach their OTE. Use your average sale price or average revenue per new partner to calculate how they will close the commission gap to meet (or exceed) 100% of their OTE. Also, have a guaranteed higher base salary period in mind, as some great salespeople may be unable to wait sixty to ninety days to get on target.  

Experienced salespeople will normally choose uncapped earning potential over a larger base salary. Ask them what they prefer.

Keep compensation plans as simple as possible. The more variables and conditions your compensation plan contains, the greater the chance of confusion. You can bring in a fractional CRO to ensure you start with a compensation plan that is as simple, comprehensive, and effective as possible.

There is a lot of debate about whether sales commissions should be calculated against gross revenue or gross profit (GP). It is a healthy debate, as both have merits and downsides. Most CEOs and CFOs tend to lean toward GP-based calculation. Let’s explore the pros and cons of each.

Commission Calculated Against Gross Revenue

Pros: 

• Simple: The simpler the compensation plan, the easier it is to understand and implement, reducing the administrative burden on employers and employees. 
• Motivating: A compensation plan that incentivizes high performance can motivate employees to work harder and achieve better results. 
• Fewer disputes: A clear and transparent compensation plan can help reduce disputes and conflicts between employers and employees. 

Cons: 

• Profitability concerns: A compensation plan that is solely based on profitability may not take into account other important factors such as employee satisfaction and retention.
• Lack of cost control: A compensation plan that does not consider costs may lead to overspending and negatively impact profitability. 

Commissions Calculated Against Gross Profit

Pros: 

• Profit alignment: Commissions calculated against GP can align employee incentives with company profitability. 
• Cost control: Commissions calculated against GP can incentivize employees to be more efficient and control costs. 
• Rewarding efficiency: Commissions calculated against GP can reward employees who can generate more revenue with fewer resources. 

Cons: 

• Complexity: Commissions calculated against GP can be complicated to implement and administer, requiring additional resources and expertise. 
• Decreased motivation: Commissions calculated against GP may not motivate employees who do not have control over revenue generation. 
• Disputes and confusion: Commissions calculated against GP may lead to disputes over how commissions are calculated and distributed.

I believe that unless you have a set of products with a fairly consistent cost of goods sold, you should pay commissions against gross revenue. First, simplicity trumps! No one wants an awkward conversation explaining why the commission on a larger or strategic deal was lower than expected. Also, you don’t want sales representatives walking away from deals that have strategic value to the company because they aren’t going to earn as much commission on them (sometimes you have to “buy your way in”). 

To ensure every deal is profitable, put some discounting guidelines in place. Give your sales representatives some standard discounts and sweeteners they can use at their discretion to close sales, but require any deal with a discount greater than an established threshold to be approved before it is quoted and presented.   

Unless profitability is your biggest concern in getting a good company valuation, focus on revenue and acquiring net new logos first. Many startups actually plan to lose money during high-growth years as they know they will get that money back in spades once they have established a greater market share. Know the average GP of competitors in your category and what potential suitors value. It is often more about revenue growth and not just gross profits during startup and growth phases. Leave discounting and gross profit margin concerns to the executive team, managed through clear guidelines with some wiggle room for exceptions.

Setting Sales Targets and Performance Metrics
When forecasting sales targets, start with realistic objectives and base performance metrics on market research, industry benchmarks, and your company’s goals. To determine your new salesperson’s sales target, calculate your historical growth, then add a conservative and optimistic estimate of their sales performance to that number. Somewhere between these two values is a good place to establish their quota.   

No matter how you structure your quotas, I encourage you to always base your performance metrics on sales results rather than activity. Don’t get me wrong, activity is important, but results are what you really want. 

A simple formula for a sales pipeline is:

Sales Quota
÷
Average Deal Size
=
Number of Deals Needed
÷
Lead Conversion Rate
=
Number of Prospects Required
÷
Lead-to-Prospect Conversion Rate
=
Number of Leads Needed

Two levers can drive more sales, better conversion rates, and more leads. So unless you have an endless supply of leads, measuring a salesperson by activities such as the number of dials, demos, and discovery calls made should be a last resort and used in a gap plan, or in the worst case in a performance improvement plan. When the salesperson misses a target or their linearity to goal is off, use activity reviews to identify where they need help and agree on what needs to improve to get back on track. Then hold them accountable for the improvements. If they are goal-driven, they will welcome the help, but if you regularly have to manage a salesperson at the activity level, something is wrong.

Resource Planning
Onboarding salespeople can vary from simply providing them with a desk and a phone to conducting multi-week training and certification programs before they make their first call. While we’d all prefer a comprehensive onboarding plan for our first salesperson, they will likely learn much of what they need to know on the job. To facilitate this, begin by creating a checklist and documentation process before they are hired. Start here:

• Review the company’s mission, vision, values, and culture with them to help the salesperson understand and align with the organization’s goals.
• Provide product training on the products or services sold, including their features, benefits, and unique selling points. If you have end-user training, determine what parts would be valuable for them to review. Having them sit in on new customer training or onboarding is beneficial too.
• Explain the company’s preferred sales approach, techniques, and tools, ensuring the salesperson understands how to approach potential customers properly. You should have the sales process defined before hiring your first salesperson. Document what you have been doing thus far to generate business. This includes lead generation, prospecting, qualification, presentation, negotiation, closing, and follow-up activities. Your sales process should be its own living document, constantly being updated.
• Familiarize the salesperson with your CRM and other relevant software tools to help them manage leads, track progress, and support client relationships.
• Review with them the role expectations and performance metrics you have set. Clearly outline their responsibilities, targets, key performance indicators, and the process for tracking and evaluating their performance. This would be a good time to review the lists of things you want them to be doing and not doing as well.

Schedule regular meetings between the new salesperson, yourself, and other team leaders to ensure a smooth knowledge transfer. During these meetings, allocate time to address specific topics and encourage open discussions. Note how quickly they can absorb and act upon new information so you can adjust their training cadence as needed. Continually update your onboarding process checklist and process to capture new insights, so you can create a more effective plan for future hires.   

Ready, Set, Grow!
Planning for growth will leave you with many “good problem” scenarios that should at least be considered, if not addressed, before hiring a new salesperson. Ensure your company is prepared to handle the increased support needs, new sales, and customer demands of hiring a salesperson. You may have a great solution that is easy to sell, but MSPs have very little tolerance for vendor growing pains – especially if those pains affect their support. Be sure to plan accordingly. And prepare to invest time and resources in managing, coaching, and supporting your salesperson to help them achieve their full potential.

Hiring your first salesperson for the MSP channel is a critical step in driving your business’s success. The key to that success lies in taking a strategic approach, setting clear expectations, and providing the necessary support and resources to empower your salesperson to excel.