Selling To The Buyer’s Primary Ratio
Are you connecting with the number one metric used by CFOs and CEOs to measure business performance and to guide important decisions – including big purchases or investments? Here we will examine how talking ROCE with the buyer can boost your sales success.
Return On Capital Employed
The primary ratio is ROCE or Return On Capital Employed. For the seller it is a vital ingredient of building the economic justification required for a big spend decision.
ROCE = (net operating profit / capital employed) x 100%
Here is the definition of ROCE from the Financial Times:
‘The ratio of EBIT to shareholders’ equity plus long-term liabilities (debt), expressed as a percentage. A measure of how well a company uses all its sources of long-term financing to generate a profit (before tax and interest). Also called return on investment (ROI).’
Do you know what the primary business ratio is?
There is of course a lot of fine print in respect of how and where ROCE is calculated, what is included and what is not, including reporting standards, etc. But for the salesperson these details are less important than the concepts key implications for decision making.
ROCE is a phrase used by few salespeople, but many buyers. It may not be identified directly in the language of the RFx (request for proposal, etc.), but it inevitably plays an important role in the decision.
Indeed it is perhaps the number one obsession of CEO’s and CFO’s in big corporations and in lots of smaller ones too.
Selling To The Primary Ratio
ROCE is an international term – as we witnessed when 50 salespeople serving customers across 32 markets identified communicating the ROCE of their business process outsourcing solutions as the universal means of explaining their competitive advantage. So the question is how can your solution maximize revenue, or cut costs, while at the same time minimizing the capital investment required?
How effectively do you communicate the impact of your solution on the buyer’s primary ratio?
The primary ratio is aptly named as it relates to the primary purpose of the business – to generate a return for shareholders on the money tied up in business. That is to say the purpose of Boeing is not to build aircraft, or even to be the world’s number one aircraft manufacturer.
The primary purpose of any corporation it is to generate the maximum return on shareholder’s funds. That is the responsibility of business managers and something further motivated by the share options available to many business leaders.
The term primary ratio is also apt because it is the financial ratio of primary interest to the organizations primary executive – the CEO. Now most salespeople will quickly say ‘we don’t sell to the CEO’. However they do sell to those who report either directly or indirectly to the CEO – from procurement, to operations, or finance.
How directly are you addressing with the CEO’s business performance agenda?
It is not just about business Profitability, ROCE is also a measure of efficiency and sustainability. To use the language of strategy it is about ‘doing the right thing’, as much as ‘doing the thing right’.
CEOs are under pressure to perform, with short reporting cycles and shortening tenure in office. That means showing a quick return is key. If investors or the stock exchange is involved then ROCE becomes an almost obsessive business driver.
Why ROCE Matters In Selling
Behind every big buying decision is a more fundamental business decision. One that revolves around business resources, priorities and strategies. Your sale depends on the right decision about how scarce organization resource will be leveraged to generate the maximum return. This is why ROCE is as important for the seller as it is for the buyer.
Do you help the buyer demonstrate why the purchase/project should win out over others vying for funds?
Quite simply if a compelling return cannot be demonstrated, a purchase decision is unlikely to be made and the funds will go elsewhere. If ROCE has the power to determine what project gets the go ahead, then it has the power to ensure one supplier gets chosen over another.
There are 3 simple yet important concepts behind the ROCE that underpin its importance to the seller:
1. Every major project or purchase must compete for funds. For example an IT department may have an annual budget of 90 million, but projects under consideration that would require a multiple of that figure. In this era of slashed budgets projects, departments and purchases must compete for scarce organizational resources. In these credit crisis times this issue is more important than ever.
2. Funds cost money – The cost is in the form of equity, interest accrued, or interest/dividend forgone. There is an annual cost that is commensurate with risk. So if the real rate of return does not exceed the rate of inflation, plus the rate of commercial interest, a project or purchase will likely struggle to win support.
3. Funds will seek out the highest return – you don’t have to be Warren Buffet to know that. All other things being equal the project, purchase or initiative offering the highest rate of return is the one that should proceed. The seller must help the buyer to demonstrate a compelling ROCE.
There are, of course, a range of other factors such as risk and compliance – these are examined in detail elsewhere.
Seller Strategies To Increase ROCE
So how can you, or your solution improve the buyer’s primary ratio – the ROCE? Well there are two generic strategies to improve the primary ratio – that is ways in which the seller can seek to ensure a compelling economic decision for the buyer:
1. Reduce the capital that needs to be employed – by helping the buyer to:
- Free up, or liquidate the investment in: stock, facilities, equipment, cash, etc.
- Turn CAPEX (capital expenditure) into OPEX (operational expenditure) for example through a pay per use or SAAS model, or leasing rather than purchase.
- Do more for less
- Extend the life or increase the utilization of existing assets.
- Write down the book value of assets.
- Protect against inflation.
2. Increase the level of profitability by impacting on the buying organization’s top or bottom line in the following ways:
- Accelerate time to revenue.
- Maximize operating profit by cutting costs.
- Reallocate costs, in particular fixed overhead.
- Improve prices or margin.
How do you show how your solution will impact on the buyer’s ROCE?