Recruit where your large competitors won't, get your people to train each other, and never, ever let them compete on price.
'At a recent exit interview with one of our promising young salesmen, I pressed him to explain how our competitor, a much larger mortgage-banking company, could compensate him at such a high level considering his experience and productivity. Our (now ex-) salesman replied, "Your company has been great and has taught me what the margins are and what it takes to produce profits in this business. I know this larger company doesn't understand loan origination and doesn't realize it can't pay me what it promised. My hope is that they remain dumb long enough for me to get established within the company. Besides, if they ever figure out the business and cut my compensation, I'm not afraid to move on."
I could have tried to change his mind with friendly persuasion or -- if that failed -- a pay raise, but I didn't. This kind of competition, I know, is precisely the sort that a small company can't, and shouldn't even try to, overcome. A salesperson who is willing to bet that large companies will show poor judgment has never learned and will never appreciate the advantages of selling for a smaller company.
And there are advantages to selling for smaller companies, or so our best salespeople tell me. Indeed, after 11 years of doing business, The Hammond Co. has yet to lose a sales manager (and we currently have 16) to the competition. When I recently asked our sales managers why they work here rather than for our competitors, which are all much larger and wealthier, they told me that they enjoy the opportunity to participate in all sales issues -- an opportunity that usually isn't available at large banks or savings and loans.
That sense of opportunity lies at the heart of The Hammond Co.'s success over the past decade. We are a mortgage-banking company that originates, sells, and services residential real estate loans. Since our founding in 1975, our capitalization has gone from $150,000 to $13 million. We had our initial public offering in 1983; revenues during our fiscal year that ended last March 31 totaled $21 million, with $606,000 net income. And yet, based on the size of our loan-servicing portfolio, we ranked only 194th in the American Banker's 1985 listing of the top 300 U.S. mortgage bankers. Most of the others are owned by commercial banks or other financial institutions.
To come as far as we have, our salespeople have had to compete for loan originations against financial intermediaries with substantially greater resources than our own. That competition is particularly tough because our competitors view loan origination as fundamentally unprofitable but necessary to build a lucrative mortgage-servicing portfolio. As a result, they are not reluctant to compete on price, capitalizing losses from loan originations to increase mortgage servicing. But, despite our price disadvantage, The Hammond Co. has managed to make a significant profit on the loan-origination portion of our business in five of the past seven years, while building a $650-million servicing portfolio -- a significant achievement in the mortgage-banking industry.
I have our sales force to think for such accomplishments. At 100 people, it comprises about one-third of our work force and reflects what I believe to be an important advantage that small service companies have in going up against large competitors -- the ability to focus on sales. We have used that advantage not by trying to outspend or underprice our competition, but by being creative in the recruitment, training, and motivation of our salespeople. Granted, we have sometimes faced severe competitive pressures to which there were no short-term solutions. We have always managed to overcome these difficulties, however. Along the way, we have developed some rules that may be useful to other small companies in a similar position:
* Recruit where the big companies don't (and won't).
Smaller companies often appear to be at a disadvantage when it comes to recruiting. After all, we can't offer things like extensive formal training at high salaries; we need new salespeople to produce revenues almost from the start. While some new recruits thrive on the experience, others are bewildered and present a poor image to potential customers. So our challenge is not only to outflank large competitors in our recruiting efforts but to integrate the new salespeople as rapidly as possible.
We meet the challenge by finding unusual sources of recruits. While our large competitors go around raiding one another and recruiting people with real estate backgrounds, we look for interesting alternatives. During the late 1970s, for example, we found that disenchanted schoolteachers made excellent prospects. They exhibited a level of intelligence and a sense of organization that carried over well into mortgage sales. More recently, we've had good luck with recent college graduates working in well-managed restaurants, of which there are many in our area. After a year or two of restaurant work, these young people are often ready for a job with greater opportunity. Accustomed as they are to a controlled business environment and hectic work conditions, they adapt quickly to mortgage sales and show good customer skills.
While schools and restaurants have been fertile recruiting grounds, we can't take candidates based on such experience alone. We must have people with the right characteristics -- people who are ambitious and motivated, who will fit into our corporate culture. To identify these recruits, our sales managers put candidates through a tough screening process. They look for possible problems, quizzing applicants about their lifestyles and outside interests. We generally avoid hiring people with personal problems.
In addition, all prospective salespeople go through a three-day training session that concludes with a two-hour rhetoric and logic test. More than half of the candidates are dropped on that basis. This process may seem inefficient, but it works for us.
* Let your people train each other.
For those salespeople who survive the initial screening and training, we provide additional training intermittently. But we no longer take the big-company approach. We tried that route a few years ago with extensive sales-training sessions and organizational meetings: it just didn't work. To begin with, such an elaborate program required additional staff, which we couldn't afford, and nobody felt comfortable with the tight structure. When we held monthly meetings, the newer salespeople asked for weekly meetings. When we held weekly meetings, we were told that the sessions weren't productive enough and detracted from time in the field. I eventually concluded that the structured, big-company approach was simply stifling our sales force's creativity.
So instead of worrying about the frequency and format of meetings, we decided to focus on the information being covered in them. The first step was to assemble a four-person committee to oversee the training process. I serve on that committee, along with the regional managers, to convey the importance we attach to sales training.
The committee began by looking at the kind of information necessary for successful sales meetings. That obviously included information about products, about customers, and about the technical aspects of real estate finance. But how do you teach salespeople in a small company to develop profitable relationships with customers, to sell the company's strengths, and to convey a sense of their professionalism and fair dealing? We've learned that consultants, motivational gimmicks, and time-management seminars are of nominal value. Instead, we encourage our people to train each other using the case-study method of teaching made popular at Harvard Business School, a method I first encountered five years ago while attending Harvard's Smaller Company Management Program (now the Owners/Presidents Management Program).
Our version of the method relies on cases written by branch managers, based on real experiences they or their subordinates have had, that run anywhere from 3 to 20 pages. To teach overcoming sales objections, for example, one manager wrote about an especially difficult real estate broker who, despite many reservations, was eventually persuaded to recommend our services. To teach about ethics, I wrote up a case of a loan that had suspicious documentation.
The training sessions are built around the cases. Salespeople will read a case and then meet informally for an hour, without the instructor, to talk about it. We have found that these premeetings encourage participation and sharing of ideas during the formal discussion that follows. That session is led by the manager who wrote the case and generally lasts about 90 minutes.
Of course, some cases work better than others. As a rule, the more complex and subtle cases make for livelier discussions and do a better job of teaching than those showing extreme situations. In my view, that's because they more accurately reflect the real world of selling. In any event, we have had great success with the case-study approach to training. It has done more than provide effective instruction; it has also proved to be fun. In fact, it has generated so much enthusiasm that both managers and salespeople now ask to write the cases.
* Don't try to compete on price.
As a smaller company, we are often at a pricing disadvantage. It is not uncommon for a large competitor to invade one of our markets with substantially lower interest rates than we can offer. To counteract this, salespeople have a tendency to tout "better service," but this rarely works. The truth is that most of our competitors have service comparable to ours.
So how can the sales staff of a small company cope effectively with such apparently ruinous competition? We have found no easy solution. My conclusion is that waiting is the best strategy. Sooner or later, the competitor always returns to making loans at market rates.
Of course, we temporarily lose some business with this approach. We recognize that customers will usually go elsewhere to get a better price. Our response is to remain involved, to be reliable and fair dealing. We hope that when the below-market-rate lender reverses its pricing strategy, it will appear to have slammed the door in the customer's face, and we will have an opportunity to recover the business.
I've seen it happen time and again. We'll be handling the loans for a builder putting up 50 houses. A competitor comes in offering lower rates. Our salespeople plead with me to match the lower rates. I refuse. I tell them to keep in touch with the builder, because the competitor could foul up the loan processing or suddenly change its rates. When it does, we'll get the customer back.
At The Hammond Co., it's no crime to lose business because we can't compete on price. It is a crime not to get the business back eventually. Smaller companies cannot control a large market share, but we can maintain a customer base with a strategy of patience and reliability.
* Keep your people informed.
I have always told our sales staff that our company has no secrets. As a small company, we have the luxury of being able to debate every success or problem that arises. Personnel changes, compensation arrangements, and pricing decisions are all open for discussion.
Some salespeople become frustrated with the endless discussions of issues, including ones that don't appear to affect them. "Doesn't anything ever get resolved around here?" they ask. But, over the long term, this open, participatory style serves an important purpose. Our experienced salespeople come to accept the process as normal and get used to the idea that many tough issues have no clear solutions -- just a range of alternatives. Their attitude is, "Let's make the best choice we can and get on with business."
The real payoff comes during a crisis. In our 11 years in business, we have had three major events that could have been catastrophic for our company. In each case, we kept our sales staff completely informed about the crisis and our strategy to survive. To my amazement, not a single salesperson jumped ship during those perilous periods.
In retrospect, I realize that the loyalty of our sales force had much to do with our open approach to information. People are inspired by a crisis, provided they believe in the organization going through it and feel they can participate in solving the peoblem. In our case, the salespeople became obsessed with helping the company through its difficulty.
* Pay for profitability, not volume.
A strange mentality exists in our industry. Many mortgage-banking chief executive officers seem to have in common a sense that there is an adversarial relationship between a company and its salespeople.
Part of the problem, I believe, stems from our industry's cyclical nature; it has a history of hiring and laying people off as interest rates and loan volumes fluctuate. Another factor is that CEOs of mortgage-banking companies tend to regard the sales department as a group of independent contractors, rather than the most important part of their organization. Compensation systems reflect this mentality by basing pay on sales volumes. Our company takes a different approach, basing managers' compensation solely on profitability. That way, our managers win when the company wins and lose when the company loses.
As for our salespeople, their compensation is set by the sales managers, who usually tie commissions to profits rather than volume. This approach encourages our salespeople to learn about the company's margins and overall finances. As they do, their trust in the company increases, and so does their effectiveness in the field.
* Support your sales force personally.
The Hammond Co. goes out of its way to provide tangible forms of support to the sales force. We insist that our salespeople have professional displays for presentations. I myself periodically call on major customers with our local salespeople as a way of encouraging professionalism.
Through all this, the message to the sales force is clear: we regard the sales organization as the premier part of our company, and everyone else -- including myself -- is there to support its efforts. The message, in turn, reinforces the sense of opportunity in The Hammond Co. Our salespeople want to become branch managers; our branch managers want to manage regions; and our regional managers all want to be president. This mentality is a fundamental aspect of our company culture and, in my opinion, the most important ingredient of our success. I sometimes wonder whether we'll be able to maintain this attitude when we operate in 40 states rather than the 4 we currently serve.
* Promote from within -- but beware the pitfalls.
Managing salespeople is an ongoing chess game. Small companies pay a steeper price than large ones for attempts to cover the failings of weak managers and for premature promotions to meet growth targets. We cannot incubate salespeople or put them on hold waiting for someone to retire or for a new product to come on line. Every salesperson in a small company must come to bat every single day and create revenues.
But not all salespeople develop at the same rate. Some blossom early, while others take a much longer time. And some may never rise above mediocrity. What is their future? They may be nominally profitable, but they are not promotable. On the other hand, it can be very damaging to their selfesteem to see others promoted over them -- especially in a small company, where they cannot blend in with an army of average performers. When they are passed over, these people become receptive to outside job offers, creating more turnover in the sales organization than I, for one, would like. The fact is that every company needs a certain percentage of average salespeople. Unfortunately, I have not yet figured out a satisfactory way to hold on to them.
Another pitfall of promoting from within concerns the challenge of getting new managers up to speed. At The Hammond Co., the main criterion for promotion is a history of sales success. This has led to a recurring scenario -- so recurring that we teach new managers a case study based on it. The problem, however, arises again and again.
The scenario goes like this:
We select a new market and promote the salesperson will the top sales record. This person is usually young, with little management experience. Initially, believing that the previous sales group didn't run a tight enough back room, the new manager decides to get everything organized. After several months, the staff appears very efficient, if only it had something to do: there is little or no business.
Frightened over the lack of sales, the new manager focuses now on developing business. Suddenly the business appears in such quantities that loan processing breaks down. Despite all the time spent on organizing, the back-room operation cannot handle the load efficiently because the overworked staff has had to rearrange its priorities in order to solve short-term problems. When customers get angry, written procedures and policies fly out the window.
Next comes the most important test. The new manager has usually lost some customers because of poor service but gained administrative experience under fire. If the manager can go on to develop a balance between sales and back-room management, he or she will succeed and become profitable for the company. Most of our sales managers have been through these phases, and the majority have passed that final test, but not without some bruises.
When I explain this process to my directors or to managers of larger companies, they are astounded at its apparent inefficiency. "Why don't you train these people better?" they ask. "Why don't you give them better support? Why don't you have better training manuals?"
My answer is that we do what we can afford to do and teach what we know how to teach. Left unsaid is the fact that out of this chaotic process comes strength -- strength that is a direct result of the opportunity we are able to offer our people because we are small.'