Roundtable: Sales Force ManagementRoundtable: Sales Force Management
From vendor credentialing to new ethical guidelines, medtech sales reps are working in a rapidly changing environment.
March 1, 2008
ADVERTISING, DISTRIBUTION, & SALES
Matters aren't getting any easier for medtech sales reps. Already challenged by a fickle third-party payer system and intense competition in nearly every sector, today's reps are also facing an increasing array of vendor credentialing requirements and tougher legal scrutiny than ever before. For this issue's roundtable discussion, MX called upon a panel of experts to provide their views about the current state of medtech company sales efforts, and the implications of current trends for sales management in medical device companies (see sidebar).
MX: Gaining access to hospital purchasing decision makers is becoming increasingly difficult for medical device manufacturers. In recent years, medical device sales reps have seen a proliferation of requirements that providers are demanding vendors meet in order to call on them. How prevalent are vendor credentialing programs among hospitals, and what types of requirements are most common?
Mark Adams: On the East Coast, Philadelphia and Boston seem to be the cities that are jumping on vendor credentialing requirements faster than anywhere else. Hospitals are telling vendor reps that after a certain time they will not be allowed in the hospital unless they have paid a fee. But the fee is expensive, and it's becoming restrictive.
One hospital system in Philadelphia also wants vendor reps to take a proficiency test to ensure that they know their products. I'm not exactly sure how they are going to be able to quantify that.
For the Philadelphia area, a company called Status Blue (Marietta, GA) has begun to tout itself as a healthcare vendor certification service. According to this firm, the company pays $180 for each rep, and then the rep is certified for several different hospitals in the area. The materials I saw didn't say which hospitals had signed onto the program, only that Hahnemann University Hospital was going to begin using the program.
Mark Miller: The way that these requirements are being imposed by certain hospitals or groups of hospitals does seem to be a little bit dependent on region.
For instance, the University of Wisconsin charges $250 to register a rep. The rep may also be required to take some kind of test. That registration allows the rep to call on people throughout the university, and to bring in their managers.
Other places are requiring reps to come in on a Saturday and complete 4–8 hours of training before they will be permitted to come into that single institution. Obviously, for smaller companies such as Zonare, that represents a significant barrier that could prevent our reps from selling successfully.
Another vendor credentialing company is called RepTrax (Lewisville, TX). I guess it costs $175 a year for a rep to join that service. In addition, the reps have to go online and enter a lot of information, and then prove through some kind of certification that they have the proper vaccinations and immunizations and so on. Hospitals also have to pay a fee in order to join this service.
Are these practices mostly being adopted in academic healthcare centers, for-profit hospitals outside of university centers, or both?
Miller: I think it's in both. We've seen it in community hospitals as well as teaching institutions.
Adams: It's almost comical when you're standing in an inner-city hospital with a gigantic trauma department, and the hospital staff are asking guys in suits and ties for credentials, while everyone else can just saunter around the hospital. It's absolutely amazing.
How are medtech sales forces adapting to vendor credentialing programs? How does the effect on small manufacturers differ from the effect on larger companies with more reps?
Miller: Zonare is a small start-up company based on the West Coast. But we're trying to offer training at some of our sales meetings, and we're trying to prepare our representatives and encourage them to share best practices. We've even offered to provide immunizations when our representatives come out to the home office.
There's no question that larger companies are at an advantage, because they can negotiate for their entire company across a large number of hospitals. And since those hospitals would obviously have more than a single rep calling on them from that company, it makes sense for them to set up an agreement on a companywide basis.
Smaller companies often find themselves in more of a hit-or-miss situation. Each time we go into an institution, we don't know what's going to happen. Sometimes we get tripped up by unexpected requirements, and our rep has to retreat. And a lot of times the reps don't even go into the hospital, they just go somewhere else. And that's not good for us.
Adams: It's also not good for the hospital. Because smaller companies that are just ramping-up may very well have a better mousetrap.
These fees pretty much amount to extortion. And I'm not sure I'm willing to pay fees like that just so my people can go in to offer a hospital significant pricing underneath my competitor, and all the other things that we've got to offer.
We sell a very large piece of capital equipment that drives catheters. It costs a fortune to ship this equipment into a hospital to demonstrate it, or to loan it to a facility for 90 days so that it can perform more procedures. To be required to pay a fee on top of that just doesn't seem right.
It seems that some commercial firms are heading in the direction of providing standardized vendor credentialing. How far along is that trend, and how acceptable do hospitals consider such credentials?
Adams: It seems to be hit and miss. If I had more information about some sort of standardized program, I would feel a bit more comfortable. But right now, I don't know from hospital to hospital or region to region who I'm going to be dealing with or what the institution might require.
We've not gotten the standard vendor letters that most purchasing departments send out, saying that we should be prepared for particular requirements. Or, for instance, warning us that reps are not going to be able to buy lunches at holidays. We're not getting any of that communication; we're basically just walking into the hospitals and getting blindsided.
Miller: It would certainly be nice if there were some standardization. But one doesn't get the impression that the firms that are currently providing credentialing services are in any hurry to head that direction. Instead, it seems like they are just trying to plug themselves into a situation that is very frustrating for companies, in order to make some money out of the deal.
It would be nice if the American Hospital Association or another appropriate body would issue a position statement on these practices, indicating the expectations for both hospitals and vendors. That way, companies would know from the beginning how to train their sales team, and individual reps, and applications folks. They would know what to expect, and they would expect the same thing everywhere they went.
Vendor credentialing amounts to a revenue center for hospitals, which means it's an expense line for sales managers. Overall, what are you having to put in your budgets to accommodate the fees that hospitals are charging?
Adams: That's the problem; we honestly don't know. If I could standardize at $185 per rep and try to calculate a total based on their number of accounts, the situation would be a lot more comfortable. But I have no idea what each of these services is going to charge, or how many hospitals are going to be involved.
I can't budget for something that I have absolutely no information about. And that's really what it boils down to at this point. We don't have any kind of information from these people at all. And it's just impossible to budget without knowing what I'm going to have to do.
Miller: Ditto that.
Even before pay-to-play arrangements began gaining traction and making it difficult for reps to get into hospitals, many institutions had already begun to change their ways of dealing with medtech sales reps. How has the purchasing power in the medical device marketplace changed in recent years?
Marshall C. Solem: We've definitely seen a continued increase in the involvement of other stakeholders—beyond the physician, surgeon, and clinical staff—in the decision process. Now, specialists in areas such as infection control, quality, materials management, purchasing, and so on, are playing a much larger role. And increasingly, depending upon the product, IT specialists are also getting involved.
These changes are really shifting the dialogue from a sale based on clinical effectiveness, to a sale that relies on economic factors and a much more overarching value proposition.
Consequently, companies are trying to figure out how to retool their sales forces, whether through training or other means. Often, they are retooling their messaging and their marketing materials in order to deliver this new, broader message, and to make them work with all the new and varied stakeholders in the hospital setting.
How does that trend change the relationship that your sales reps have with physicians? And how does it affect your company's sales strategies?
Adams: It's pretty clear that physicians have lost a lot of power and clout. Our company sells into the electrophysiology lab, and the connection has always been to their interventional partners. But now those interventional partners—because of the diminished status of the stent market—don't have the same financial clout in the hospital that they had in the past.
So, it's much more difficult for us to help the physician get his requests for the equipment and disposables that he wants through the purchasing department.
I don't know that particular purchasing decisions are actually being influenced by the purchasing department. But overall, administrative considerations are playing a larger role now than in the past. The hospital only has x dollars to spend, and it is going to make sure to expend that money only in departments that are making a profit.
So, I don't know if it's a purchasing issue so much as it is an administrative issue.
If your reps are selling less to physicians than in the past, does this also reduce the feedback and input that they get from physicians?
Adams: It's very clear to us that physicians don't know what they can purchase. When asked, they all say they want to buy those disposables and that console. But then they will also admit that they don't know if they have any money.
So then the sales rep has to go from the physician who is specifying the product to other hospital employees. And at this point, the whole game changes.
The lab director says, 'I don't have any money for that. I can't buy a piece of capital equipment. I can't even rent one.' And then the rep has to climb the ladder from there to the hospital administration, while at the same time coordinating every step with the purchasing department.
And at every rung of the ladder, the rep has to have a really, really, good story to tell about why this product is going to be not only beneficial for patients, but also an enhancement to the hospital's profit centers. Without that, even a product that already has FDA approval and third-party reimbursement coverage is not going anyplace.
Dale Hagemeyer: One way to combat possible decreases in feedback is to look to syndicated data sources such as Health Market Science (www.healthmarketscience.com), for data about which devices physicians are prescribing for their patients. These data are gleaned from actual insurance claims.
It is becoming critical that companies understand how effective their sales efforts are at influencing physicians. It is one thing for a physician to say that he or she favors a company's product. It is quite another for a company to be able to monitor physician behavior and have data to describe it.
What are companies like yours having to do to accommodate all of these different groups that are influencing sales?
Miller: Zonare is in the imaging business, with an ultrasound imaging device that physicians and sonographers use to diagnose patients. But a lot of the hospitals that we sell into are trying to commoditize products. In many departments, hospitals are trying to get their buyers and users of equipment to say that there is a set group of devices that are good enough—in effect, that it would be okay for the hospital to pick from any of two or three different equipment brands.
From this perspective, physicians have lost much of their previous influence over purchasing decisions, and the importance of clinical performance has been greatly watered down.
Nevertheless, we still try to identify the physicians and sonographers inside of a hospital or department that do have clout. And we try to teach them that, in spite of what the hospital is telling them, they still have a lot of power in making a purchasing decision.
Because Zonare is a small company, product and brand awareness is not as strong as with larger, more-established companies. So we need physicians to step in and say, 'I've got to have this and nothing else.'
We encourage physicians to speak up if they see a technology that makes a difference and offers clinical value, where the value proposition includes both better patient care and reduced cost. Instead of just rolling over, those physicians are urged to stand up and make it known which products they want.
Consequently, we are training our salespeople to identify the doctor-drivers within hospital departments who will help to make it possible to buy our products.
Adams: Mark, I'm curious about all the consolidation that's going on in your end of the business, where large imaging companies such as GE and Philips are gobbling up everybody else.
Do you think that the pressure being exerted by hospitals to reduce the number of vendors to only two or three is a driving force behind such mergers and acquisitions? In effect, is this a factor that is motivating companies such as GE and Philips to keep buying small companies—companies like yours—to make sure that they retain control over hospitals' lists of approved vendors?
Miller: Yes. There's no doubt that hospitals are trying to do business with fewer vendors. And at the same time, they want to keep companies such as GE and Philips on their approved list, so that they can buy those companies' systems. This does create an incentive for large imaging companies to snap up smaller, start-up players.
Another incentive results from the fact that such large players don't really innovate anymore. Their R&D departments don't generate innovations. Instead, they continue to make products similar to what they've had before. And when something new comes out that is innovative and makes a difference, then they'll buy it.
Do the circumstances that we're seeing in the device industry essentially compel small companies to be willing to sell when they reach the point at which they can't expand further without being part of a larger entity?
Adams: For several of the companies I've been with over the years, I was brought in specifically to build and sell them. So I have a little experience in this area.
At this point, it's impossible for a company to succeed by being a one-trick pony. A company will get to a certain level of revenue that corresponds to a certain level of required compliance activities, and one of several scenarios will emerge.
Publicly traded companies like ours really don't have much choice if they are approached by an unwelcome suitor. If the offers are anywhere near to being reasonable, they simply have to give in.
By contrast, privately held companies either run out of money or their venture capital or angel investors run out of patience. In the latter case, the investors then want some return on their investment or they want their money back.
The outcomes of these scenarios explain why you don't really see very many medtech companies that start from scratch and rise to annual revenues of $100 million, or are able to grow and successfully retain their independence over the long term.
Miller: Small companies like ours are very exciting places to work, but they do face a lot of barriers. Building a small company takes a tremendous amount of effort, but overall, the biggest tragedy would be if people stopped bringing new products to market and didn't innovate and do these kinds of things.
One of the biggest efforts that we are undertaking right now is in the area of national accounts. We're trying to get on contract with some of the key independent delivery networks (IDNs) and buying groups that influence a large number of hospitals.
That's where we're at a little bit of a disadvantage right now. And this speaks to what Mark was just talking about. It does take a lot of effort, a lot of energy, and a lot of dollars to get to this point. And sometimes it's just easier to join another company to accomplish this goal.
But it is very gratifying when the company does win a contract like we did. Because we have successfully differentiated ourselves, we won a contract with Kaiser Permanente, and we've also won a number of other IDN contracts. And these are making it possible for us to successfully go out and distribute our product.
In order to better differentiate themselves, some companies have begun to perform economic outcomes research so that they can provide that information to their sales reps. In your experience, what are companies doing beyond their clinical studies to support the economic case in favor of their products?
Solem: In our clients, we're seeing a lot of growth in health outcomes departments and reimbursement departments, so that companies can start tailoring their message and their value proposition to all these other stakeholders—particularly the economic stakeholders.
Some companies are putting in place special business-oriented reps—separate from their clinically oriented reps—to try to better understand and build a relationship with these other stakeholders in the institution. Sometimes a company can get its clinical reps to perform that role, so that there is only one person involved. In other cases, companies are splitting the business role and the clinical role into two different positions.
But they are clearly doing postapproval studies and tracking. And they are conducting lots of outcome studies in partnership with some of their best customers, so that they have a real story that they can tell to the economic stakeholders in order to be successful in this realm. Because it's clear that the clinical story alone doesn't cut it anymore.
So working with medical specialty societies and clinical thought leaders is really only one part of the puzzle, because companies still have to make the economic argument. Is that basically the situation in today's marketplace?
Miller: When we teach and train our sales reps, we like to have them talk about the return on investment. We prepare them to perform a complete analysis of the economics of the decision to purchase or acquire a piece of capital equipment like ours, including the return on investment, how long it will take to pay it back, and what kind of revenues can be expected.
We also look at this issue from an R&D standpoint. For instance, we spend a lot of time investigating what product features will contribute to a better work flow—and hence, improved economic performance—for the users of our equipment.
Ultrasound is heavily used in both emergency departments and labor and delivery departments. In both settings, we realized that users are often carrying the ultrasound unit from room to room to room. To improve their efficiency, we reduced our unit's boot-up time from a minute and a half down to 15 seconds. And doing that cuts down overall costs significantly.
Hagemeyer: Medtech companies could learn a bit from their pharma counterparts about working with thought leaders. Medtech companies need to better map who these leaders are, who they influence, what channels of communication they use (e.g., Web, face-to-face, phone, direct mail, etc.), and how these influence networks can be used to extend a company's influence. For instance, the peer channel is growing in many areas, and is influencing the ways that we as consumers think about and approach information gathering. It is important to turn our business focus in the same direction.
Sales and Ethics
The marketing and sales practices of medtech companies are coming under increasing scrutiny. For example, in September 2007, five leading orthopedic manufacturers agreed to pay fines totaling $311 million to settle a Department of Justice probe into alleged industry violations of the Federal Healthcare Antikickback Act and the False Claims Act. How is this increased scrutiny affecting how medical device manufacturers (across all sectors) manage their sales functions?
Solem: We're hearing much more discussion from our clients about the need to keep sales and marketing practices within guidelines. Compliance is starting to become part of performance evaluations for regional vice presidents and managers, and obviously an expectation for individual sales reps.
Many companies are relieved that medtech sales practices are returning to an emphasis on which company can deliver the products with the best clinical and economic outcomes for their customers, rather than which company has the biggest or best entertainment budget.
However, in some of these discussions we still hear the lament that not everybody is playing by the same rules, and that competitors are playing outside the guidelines.
So, for the most part, companies welcome the use of guidelines because they think it's going to level the playing field. And that's especially true for small manufacturers that could never compete with the deep entertainment pockets of bigger companies. Those companies are hopeful when they sense that the playing field is becoming more level, but still perhaps just a little miffed that everybody is not quite playing fair yet.
Adams: From my perspective, the ethics, and morals, and principles of my company all trickle down from my chair to my sales force. And actually, each of us, as a sales manager, knows exactly what our people are doing—or pretty close—because the money that they spend has to come from someplace. And I'm the guy who has to sign off on expenses.
So I encourage our reps to do the right thing. And I explain to them on a regular basis that this is the way we're going to do business.
When I'm expounding to my reps and asking for more sales interactions with key positions and key opinion leaders, for instance, I make it very clear that those peoples' opinions should not be considered for sale. Because if they are, they are also for sale to somebody else with much deeper pockets that we couldn't compete with.
Unfortunately, some of our colleagues don't have the same ethics and principles. But unethical sales practices are less of a problem across the board than they are in specific sectors. There are some companies and distributors that call on specific types of medical specialties, and those people are more susceptible. Moreover, old-style distributor reps that seem to be prevalent in fields such as cardiac rhythm management, orthopedics, and some other businesses, tend to be a little more abusive with money, toys, gadgets, and giveaways.
I started as a sales rep in 1982, and at one time or another I have worked for most of the large players such as Johnson & Johnson, Boston Scientific, and Medtronic. In all the years I've been doing this, I have never seen those kinds of abuses. I play by the same rules now that I did when I was working there, and I've never played at that level. I've never taken anybody golfing, fishing, skiing, or to a bar with a pole down the middle of it, or anything else like that. I've got a great reputation with physicians as being an honest, honorable guy who knows the products they use, and I'm happy with that.
This is really sort of a 'buck stops here' kind of mentality. Everybody else in the corporate office may be able to claim deniability. But all of these practices trickle down from the vice president of sales, and it's that person's responsibility to make sure that the company adheres to proper practices.
Miller: In our area of business, so many different groups of people are involved in the decision to buy our equipment that there is little potential for abuses to take place.
Nevertheless, we're obviously doing everything we can to put policies and processes in place, so that our sales reps will do all the right things that have been spoken about here. For instance, we track each and every order on its own. And we have strict policies and processes to ensure that everything involved in the sale is included in the sales quote, with no side letters or riders.
Our company is also subject to two significant types of reporting requirements that limit the potential for abuses. First, because we have a contract to supply the Veterans Administration (VA), we have to report all of our deals to the government. And second, because we are a publicly traded company, the Sarbanes-Oxley Act requires that we follow the rules for revenue recognition, making sure that we have delivered on every verbal or written promise to every customer we've sold to. It costs companies a lot of money to track this kind of stuff, and those costs are especially stiff for small companies.
So ethics guidelines are only one means that companies can use to control sales practices. From a practical standpoint, reporting requirements such as those imposed by a VA contract or by the Securities and Exchange Commission's revenue recognition laws can be just as important.
Hagemeyer: I think that business strategist and author Don Tapscott has the right approach: transparency is a critical empowerer. Last fall I spoke at a conference with Senator Paul Sarbanes (D–MD). We had a chance to talk a bit about transparency as a philosophy as opposed to a requirement. It is quite liberating once you 'get it' and have the ability to 'do it.'
What percentage of your company's business is subject to the Federal Supply Service rules?
Miller: Probably about 15%.
Adams: For us it's probably about 5–8%.
Many companies have adopted the AdvaMed Code of Ethics as a guide for sales interactions with healthcare professionals. How do companies ensure sales force compliance with these policies (or others)? Are these policies adequate guides for keeping companies out of trouble? What kinds of activities do you undertake to make sure that all of your sales reps are trained in these policies?
Miller: We have not adopted the AdvaMed Code of Ethics. However, we have our own policies and processes in place to govern how our sales and applications people go out and make sales calls.
Solem: Particularly the larger clients that we work with have all pretty much adopted the AdvaMed code. But merely agreeing to such a code is never enough. To make sure that there is compliance throughout the company, the code really has to receive top-to-bottom commitment and buy-in, and programs have to be created to train employees about the code and promote its use.
Among our clients, we're seeing a lot of that kind of activity. They're not just giving lip service to their adoption of the AdvaMed code. They're also putting systems in place to make sure that implementation really happens.
Companies are creating the systems to track their sales-related expenditures. And in some cases, those systems may involve making some or all of managers' incentives dependent on compliance with the code.
Out of concern over the behavior of pharma sales reps, the District of Columbia recently voted to require the registration of pharmaceutical company sales reps. Do you think city, state, and regional authorities will begin to adopt this strategy for medical device reps as well?
Solem: I haven't heard a lot of backlash yet from outside sources, but it seems everybody thinks they are crazy.
We're seeing a lot of moves directed at the pharmaceutical industry. People are trying to limit the access that pharma reps have to healthcare providers, and limit their ability to use information on physician prescribing behaviors and things like that. But a lot of these moves—particularly in New Hampshire and the northeast—have been thrown out of court as not legitimate.
The effort in Washington, DC, has something of a different twist to it. It is motivated by a combination of ethics concerns as well as a desire to restrict promotional efforts that lack content. Those promotional efforts might not be unethical, but they are often more hype than substance, so there is still an interest in controlling them.
Whether these restrictions will survive future court challenges remains to be seen. But in the future, it seems likely we'll see more such efforts. How they will ultimately settle out is anybody's guess right now.
Hagemeyer: I work closely with pharma as well as medical device companies. I don't think this type of reaction will spread widely. The state gift laws have already restricted what reps can do in terms of influencing with things of value. It would take a lot of wrangling to get the states to agree on a federal version of this type of legislation. Watch for pharma to be the pattern, but don't expect much in the near future. The worst is over.
This summer, the French government is implementing a sweeping registration and certification program for sales personnel. It is a real nightmare for the companies behind those reps. Among all the EU nations, only the French are doing this, because it is so restrictive and labor intensive.
Fortunately, we're a long way from where the French are.
Are restrictions and requirements such as these likely to percolate into the medical device industry?
Adams: It always seems like everything ends up percolating into the device industry—including things like these kinds of pharma restrictions.
But device companies generally don't have five or six reps calling on the same doctors for individual products. That aspect of pharma sales seems to me to be a bit of an abuse. Doctors are only going to see so many people in a day. If they are seeing that many pharma reps, not only are they not seeing device reps, they are also not seeing patients.
The average doctor needs to see 30–60 patients a day just to be standing in their office space. But that's not possible.
So doctors basically extort the company to bring in lunch. Companies complain about it but, in essence, pharma is abusing the privilege. The fact that they are now getting dinged for it is probably their due.
I hope these new requirements don't trickle over to the device industry. We are not able to do the same things that have gotten pharma reps into trouble. Nor would we want to do so.
Structuring Sales Forces and Compensation Models
Medical device manufacturers have multiple options when it comes to structuring their sales forces. How are medtech companies determining whether to build direct sales forces, rely on independent sales reps, or formulate some sort of hybrid approach? What types of factors need to be considered?
Solem: Obviously, a lot of things need to be factored in. One of the biggest considerations—particularly for small manufacturers with a niche product, or even companies seeking to market a broadly appealing platform technology to medical specialists for a specific niche procedure—is whether the company can afford to build the critical mass of a sales force all by itself.
If the company can't afford to build that core group by itself, hiring independent reps, or going through a distributor or partner with a broader portfolio can be the way to go. In fact, being part of a larger sector-specific portfolio is often a good way for a start-up company to gain access to the market for its product.
In cases such as this, the question that company executives need to address is whether the use of one of these outside approaches will reduce costs or add value beyond what the company could do for itself. In some cases it does, for sure.
On the flip side are companies that choose to build their own direct sales forces. Doing so is quite expensive, but also gives companies a lot of advantages. Not the least of these is control over the way the company approaches its customers. Companies lose a lot of that control when they go through independent reps, which makes that a somewhat risky choice.
In our experience, there are four elements that companies generally consider when they are structuring their sales forces. The first is how the proposed structure fits with the company's product launch and market penetration strategies, not just today, but also for the future.
The second element is whether the structure will improve the effectiveness of the company's sales reps—whether they are part of a direct sales force or independent reps. In this regard, companies need to consider whether the proposed structure will make the sales reps more effective at communicating both the company's clinical and economic value propositions.
The third element is efficiency—essentially, what will implementation and operation of the proposed structure cost? Sales force structures that make use of independent reps are typically a little bit cheaper. On the other hand, companies may pay a little more for a direct sales force, but get increased effectiveness.
The last element is manageability. Companies need to consider whether they already have in place the systems and practices that will be needed to support the proposed sales structure. Or, if they don't, what it will take to implement such supporting mechanisms.
Once they have reviewed these elements, our clients are typically in a better position to make their decision. I'd say the general bias is for a company to go direct whenever it can, thereby keeping its destiny in its own hands as much as possible. But there are certainly situations in which an independent, distributor, or partnership type of arrangement makes sense.
How strong is the competition to recruit medtech salespeople? How does that competition affect your strategic thinking with regard to elements such as Marshall just described?
Adams: There are certain markets in the country, like the Plains States, where I would love to be able to hire a distributor, so that I wouldn't have to bear the expense of a direct sales rep. But it's very difficult to find distributor reps, or distributor organizations with multiple reps, that you can rely upon on a regular basis.
Those reps have a tough challenge. Not only do they have to sell products, they are also in a constant, frantic race to line up more clients. That's their lifeblood. Consequently, a company can never be really sure how much coverage it is actually getting from such an organization. And it's also tough to figure out whether the reps' contacts are appropriate for the company and its products.
CryoCor's area of specialization is electrophysiology treatment of atrial fibrillation. And in this realm, it takes a specific knowledge set for sales reps to be successful. I don't have any bias against distributors, but I don't typically find the knowledge set that we need in distributor reps. Moreover, I agree that overall, a company gets better coverage from a direct rep.
I don't have a model for the people I hire. I don't care if they are tall, short, old, or young, and gender makes no difference. All I really look for is just a good salesperson that can knock my socks off in an interview, and convinces me that they are the right person for that job.
Nowadays, however, one important criterion is how fast the candidate can hit the ground running. Smaller medtech companies, especially, just can't give a candidate 90–180 days to get up and rolling. We need somebody who is going to get in front of customers and begin making an impact in a very short period of time. Consequently, the candidate's history and what their experience enables them to bring to the table can be very important.
I also look for a person who is a good fit for the territory in question. In my experience, it isn't possible to hire in a blanket fashion across the entire country. I've watched the big boys try to do that, and it may work for them; but I can't afford to have territories open as long as they do. Consequently, I modify my hiring process to fit whichever region or territory I'm looking at.
What strategies are medtech manufacturers using to recruit sales personnel, both for domestic and overseas markets?
Miller: I've been in the business of selling diagnostic ultrasound equipment for a long time. In this sector, there are a lot of moving parts influencing the purchasing decision, and salespeople have to wear a lot of hats.
Here in the United States, going with direct sales reps is probably the best strategy for this sector. That determination is based mostly on our understanding of the four core markets that we address, and where we believe our greatest opportunities are going to be. To cover these key target markets, we believe our best strategy is to hire direct reps and compensate them very well—on the high end of the competitive scale.
Our strategy changes when it comes to overseas markets or markets of secondary importance. There, we may sell our products through dealers who may also have some kind of distributorship role. Overseas, in particular, we have fewer direct subsidiaries that are part of the company. We probably cover 75–80% of our overseas markets through a dealer-distributor type of network.
Merger and acquisition activity in the medical device industry continues to accelerate. Following a merger, overlap in account coverage and roles, downsizing, or even a need for relocation can lead to huge stress and unrest among salespersons. What are the most crucial considerations for medtech sales executives looking to effectively manage small- and large-scale sales force integrations?
Solem: One of the biggest issues that we see during integration is that the salespeople lose sight of the fact that their primary job is to sell to and support the customer. They wind up spending too much time on tasks related to integration, and the customer gets lost in the process.
And then, in the midst of that mayhem, competitors pounce. They pounce on a company's people, at all levels, and try to recruit them away. And they pounce on a company's customers, and try to lure them away.
So one thing that absolutely has to stay in the forefront during integration, is that the main job of the company and all of its employees is to take care of the customers. Way too often, this isn't what companies wind up focusing on.
A second big issue is for the newly merged company to focus on retaining its best people from both the buying and selling companies. Again, competitors are wise to the mayhem associated with mergers. Uncertainty within either of the merging organizations can make employees begin to look around for their best opportunities. And this impulse doesn't just come over recently hired or mediocre reps; even good, long-time employees will use company uncertainty to explore their options. So companies really need to have programs in place to make sure they are retaining their best people.
A third issue that often arises has to do with the models put together in the banking justification for the merger. Those models often incorporate greater expectations for sales synergies than are probably realistic in the marketplace. Consequently, they underestimate the size and type of sales force that will be necessary to cover all of the merged company's accounts. And the inevitable result is too much downsizing in the sales force. That is certainly a concern to be watched for when companies are merging.
Culture clashes between the buying and selling companies are also inevitable. Sometimes it's appropriate that the acquiring organization completely blend the purchased company into its ranks in such a way that the acquired organization just sort of disappears. In this case, the acquiring organization doesn't really look very different, except that its salespeople are now selling more products.
In other cases, it's much better for the merged company to identify and adopt best practices from both of its parent organizations. In this case, it's important that sales managers watch for practices that would be worth adopting, and then work through their implementation as part of the integration that will create the culture of the new organization.
A final consideration is speed. Mergers and acquisitions can be very large deals, and they often compel corporate management to focus on their internal affairs. But going through all of the details leading up to a merger can also waste a lot of time. When the deal is done, moving quickly into the integration phase and reestablishing good communications with stakeholders—not just internally, but also to the marketplace—can go a long way toward putting the merger event in the rear-view mirror. Then the newly merged company can get on with building and implementing the new strategy of the integrated organization.
Adams: I never keep more than a peanut butter jar in my desk drawer, because I never know when I'll be packing up and moving again. When a merger takes place, the VP of sales is always one of the first to go, usually accompanied by the CFO. We walk out the door about the same time, and I wave goodbye and thank the CFO for vesting my options.
What's really challenging right now is the environment that's been created by all of the mergers in the cardiology space, by the problems that Guidant-Boston Scientific is having, and by Johnson & Johnson cutting back after its ill-fated purchase of Conor Medsystems. A lot of reps are on the street because of these issues.
So now, when reps—and even sales managers—hear about a potential suitor, they are already heading for the door. An alarming number of people are saying, 'There are too many reps on the street from all these mergers and acquisitions, and I can't depend on our acquirer treating me properly. I'm going to protect myself by making sure I'm not the last guy out the door.'
It didn't used to be that way. In the past, reps felt that they were carving out a career for themselves in a newer or larger player. Or, they were excited about their options vesting.
This environment makes retention extremely difficult. Salespeople have to trust their company and its managers implicitly. But now, salespeople don't really trust anybody on a regular basis. That's why they are so independent and why they are doing what they are doing. But it's a real challenge for management.
So the mayhem that Marshall described is currently a serious problem?
Adams: Absolutely; there is no question. It has become the industry standard for reps to move about every three to five years.
Companies can lose the trust and interest of their reps almost on a whim. Once reps have worked for some companies, for instance, they never want to work for them again. Or, their friends worked for a company and didn't like it, or didn't feel they were treated well. Or, they previously experienced acquisition by a larger player, and they just don't want to go through it again. For any of these reasons, reps can be out the door very quickly.
In the case of M&A activities, some of these departures could be premature. Just because a company is being courted by a prospective suitor doesn't necessarily mean that the deal is going to go forward. There are all kinds of Securities Exchange Commission requirements to be met, and a lot of other factors that might kill off a deal. But none of those is of much use to the company if all of its sales reps have already left.
Is there a certain nervousness in the workforce?
Adams: Yes, you might say so, to some degree.
Solem: One can only imagine what went through the heads of the reps at Abbott Diagnostics last year, when GE said it was going to buy them—and then all of the sudden the deal fell through. So what happened to the Abbott sales force in the meantime?
Miller: I'm not even part of that business, and I had calls from Abbott reps.
I have been involved in a few mergers and acquisitions, and I believe that I've seen the good, the bad, and the ugly among them. But I do believe that the most important thing a merging company can do is to retain as many of its employees as it possibly can, focusing on the retention of salespeople in particular.
Very early on, companies must focus on what the sales management structure is going to be, so that they can quickly give their salespeople a sense of security. These people need to feel a sense of security from a financial standpoint. They need to know that they can continue to make the same money that they have been used to making or expecting to make.
Just as urgently, and perhaps even more importantly, salespeople need to know who they are going to be working for in their regional teams. Salespeople can be motivated by money. But in many cases it's who the reps work for and with that will determine how long they're going to stick around. Companies need to get those teams focused, motivated, and going in the same direction, so that they can begin to make everyone feel comfortable working with one another.
What are the most popular sales compensation models for medtech sales forces? How does this vary according to company size, or the type of devices or equipment the manufacturer produces? What drives the decision to adopt one compensation model over another?
Miller: For capital equipment sales, we have a compensation structure that's about one-third salary, and two-thirds variable.
For the variable portion of the pay package, we think that what works best is to have a ramped, plateau, or tier-type structure. So at the beginning of the period (typically the fiscal year), the company pays out at a target rate, which ramps up throughout the year as the rep brings in more sales. At the end of the year, the rep is making commissions at a higher rate than at the beginning.
On top of that, we put in place bonuses for hitting certain triggers or targets, enabling the rep to make additional money.
And at the end of the year, when a rep has exceeded target for the year, the company also pays upside money where the sky is the limit. What typically happens is that 20–25% of the company's reps reach beyond their target and are able to earn that upside money. They serve as models for everybody else. And that helps to provide motivation for others to do it as well.
Hagemeyer: If other industries are any indicator of how sales compensation models will evolve, don't expect changes in the model itself. Instead, look for more-automated solutions that allow reps more real-time visibility and ability to interact with their compensation plans. They will be able to do modeling, create what-if scenarios, and see a greater linkage between what they do and what they get.
Does that model work for a lot of companies, or is that a sector-specific approach? What alternate kinds of compensation models are being used for medtech sales forces?
Solem: This kind of structure is quite common. Below goal there is some form of goal-based payout, with the pay rate increasing as certain thresholds are crossed. And then, above goal, there are kickers that include commissions with accelerators. I'd say that's a very common plan across all sectors.
Certainly there are a number of companies where compensation is based purely on commissions from dollar one. That approach has merit in certain situations, particularly with capital equipment sales. But it's probably overused, or used in many situations where it's inappropriate.
We rarely see management by objectives (MBOs) as part of rep-level plans. They tend to be more at the manager level.
So rep compensation tends to be some combination of a goal-based portion and a commission.
Some of you have designed sales forces from the ground up. When you have an opportunity to do that, do you rely entirely on your own experience, or are there also tools available that enable you to explore the implications of various models? What tools are available to sales executives looking to enhance rep understanding of their companies' sales compensation and commission models?
Adams: I think it's strictly a matter of experience. When you're in a small, start-up company—even one that is publicly traded—it's rare to find executives who are accustomed to building a commercial sales organization. They've never done it before, so that task is all pretty much on the VP's side of the court.
Reps are looking for several fairly specific things. Of course, job security and financial security are the topmost items. But after that, risk and reward are big subjects in their minds—especially when they are interviewing with a small, start-up company.
That concern over risk and reward manifests itself in several kinds of inquiries. Naturally, they want to know what their base salary will be. Then, they want to know if the company offers a guarantee on commissions or, if not, a willingness to increase the base salary to a satisfactory level. Then, in return for taking on the challenge of selling for a small company, reps want to know what kind of equity position they can achieve. And finally, they want to know whether the company can offer a family benefits package comparable to those offered by large companies.
We've come up with a base salary that allows us to avoid a guarantee. At the same time, we're not drawing so much money that the reps don't have any motivation to apply themselves. We promise commissions from dollar one, just like everybody else, but with an understanding that this promise doesn't mean much. This is an issue that is peculiar to whether a company's products are capital equipment, capital equipment plus a disposable component, or strictly disposable, and it has to do with the cash flow of the commissions. But in our world, if a rep sells something, he will get a commission—and it doesn't really matter if it's dollar one, or dollar 437,000.
Selling equipment, such as Zonare's ultrasound imaging units, creates a crescendo of emotions for sales reps. They are continually racing through the technology evaluation process, and going through the budget process, and taking steps that can take months at a time. And that's exhausting; absolutely exhausting.
We have the advantage that we also sell a line of disposable products. Obviously, sales of disposables helps to improve our company's cash flow. But it also does the same thing for the sales rep, helping reps to fill in their revenue gaps. The reps see a commission every month—though on a smaller scale than when they make a big capital equipment sale—and that helps to level out their family finances. And that's a big thing.
Is the distinction between capital equipment and disposables an important factor for determining the type of compensation plan a company might put in place?
Solem: Absolutely. There are fundamental differences between those two types of plans.
We have heard a lot of discussion about sales force automation tools, but sometimes it isn't clear what products represent the cutting edge of functionality in this area. Do you have a sense of what the gold standard is in automation tools right now?
Solem: In terms of functionality, a couple of characteristics stand out as the current gold standard.
The first is customer relationship management—essentially, the ability to track various interactions that the company has with its customers, so that every sales call can be informed by that information. That way, reps can familiarize themselves with issues that their clinical or technical service counterparts have been dealing with, so that they're not blindsided by circumstances that they don't understand.
A second important function is providing reps with a way to understand the sales potential for their various products in different accounts. Systems with this kind of functionality include detailed information about all the accounts in a given territory, and enable reps to review that information for all of their accounts. That way, reps can identify where the potential is, where they've got good penetration, and where the best opportunities are—and then they can target their sales efforts at those opportunities.
Those two functions are probably the most important attributes that exist in the best systems currently available.
Adams: Last year, I walked the show floor for the American Hospital Association annual meeting, knowing that I wanted to standardize on a widely used customer relationship management (CRM) system. What I found is that there are really just three systems that are widely used: ACT!, GoldMine, and Salesforce.com. When I asked the reps for large companies what they are using, it became pretty clear that Salesforce.com has become the gold standard. According to my reps, it's easier to use than GoldMine, which can be awfully operator-specific.
So it looks to me, right now, as though Salesforce.com is the standard for rep software in the medical device industry.
Hagemeyer: The mud standard certainly exists, and that is sales force automation systems that are heavy on managerial functionality. Such systems give managers access to what the reps are doing, but they are so internally focused that they do little to help the rep. In these systems, functions like forecasting and pipeline management are suspect.
Bronze-standard systems offer tools that help manage day-to-day activities and relationships. They also help save time in generating quotes, managing the supply chain, and so forth.
Silver-standard systems have capabilities that help a rep understand customer relationships and the business. Reporting, dashboards, and alerts are all such capabilities.
Gold-standard systems have all of the aforementioned plus the ability to use data to create customer insights. They fully enable the mobile worker and are customizable at the user level.
I'd say what medtech companies generally use in the market are mud- to bronze-level systems. What is actually available for sale approaches silver. Gold is hard to achieve, because companies often offer some combination of medical equipment, supplies, and devices. Because the selling models for each of these areas is so very different, companies almost have to have a separate solution for each area. So far, few vendors have been willing to specialize to that extent.
Generally speaking, how sophisticated are medical device manufacturers in implementing sales force automation tools?
Miller: I've been with small-, medium-, and large-sized companies, and it seems to me that medtech companies of all three sizes want to adopt some kind of sales force automation or CRM tool. But their success in doing so is based largely on how easily the sales force is able to adopt or adapt to the tool.
A number of factors contribute to the success of a company in getting its sales reps to use a new tool. Some of the keys factors include whether the tool is easy to use; whether reps can readily navigate around in the tool; and whether the reps can access the system wherever they happen to be—inside a hospital, on the road, at home, or wherever.
We've invested in a product that gives us quite a bit of flexibility and enables our sales reps to manage all of their accounts. It stores all the information the reps need to know about each account. And it includes a quoting tool and a forecasting tool, so that the reps can prepare their 30-, 60-, and 90-day forecasts.
As far as which CRM system represents the gold standard for our particular industry, it's difficult to say. Siebel CRM has been used pretty widely, but reps seemed to have a lot of difficulties with it. I know a lot of guys in the beginning were using ACT! We moved them over to ACPAC (now Sage CRM), and our sales force seems to like it quite a bit. I haven't really used other systems.
Adams: I find that any program you can get reps to use is a good program. So long as they are putting in their data and not complaining, you're doing really well.
Solem: From a benchmarking perspective, the medical device industry is behind several hundred other industries in terms of its sophistication in deploying sales force automation tools. There are certainly a lot of systems out there, and they are all in use to various extents. But, in terms of really leveraging the power that some of those systems create, I'd say the medical device industry is a fair bit behind other industries.
This may not be fair, but I attribute some of this to the nature of the selling process for medical devices. Medical device sales reps have developed a sort of cowboy or Lone Ranger culture. The reps are very self-sufficient, very proud, and even egocentric—though not in a bad way. They can control their own destiny, and they don't see a need to be burdened with all of the administrivia that has often been associated with CRM systems.
Some of the early CRM implementations were certainly overloaded with administrative detail, and they probably fueled the adoption of that viewpoint about what CRM systems are. And even though such characteristics needn't be the case, the earlier perception still persists.
Consequently, the medical device industry has been really quite slow to reembrace CRM on its second time around. Other industries have done so, including the pharmaceutical industry, and all of them have surpassed the sophistication of the medical device industry in this regard—by a long shot.
Hagemeyer: Medtech could learn a lot from pharma and consumer goods. Both are more advanced because they tend to be more homogeneous, and because their markets are big enough to support specialized solutions.
Miller: I absolutely agree with that. And a lot of it has to do with the fact that you can't change an animal's stripes.
In capital equipment, the most successful salespeople—the ones that companies embrace—are like hunters. And those guys tend not to want to sit at a computer, no matter how often they're told that they have to use it, or how valuable it is. Instead, they like to carry things around in their own heads, scribble little notes, run from account to account—and make sales with their customers.
And when good results happen that way, management turns a blind eye to other transgressions. The company's attitude becomes, 'who cares if they're not doing exactly what we've asked them to do on the CRM.'
Adams: I have not yet seen a rep who can do both well. I have great paperwork reps who know everything the competition is doing, but their overall sales are not what I would like them to be. If I had to bank everything on one of those rep's territories, I'd be in a soup line some place.
And yet, I've got another rep who is absolutely my star, month after month and quarter after quarter. That rep is our innovator, the person who's going to make a significant contribution to the company's bottom line. But I have to struggle to get even basic paperwork from that rep—including expense reports.
Today's sales force automation tools offer a lot of capabilities—predictive modeling, territory management, key opinion leader (KOL) management, and so on. But the situation you're describing suggests that small and mid-sized medtech companies may never completely use those capabilities effectively. What's the return on investment for such systems under those circumstances?
Adams: I have a marketing person who has an MBA, and is probably one of the smartest people that I've ever been around. She's young, progressive, and well liked by the reps. She helps them with all the little things they need, and they appreciate it.
So basically, I have her monitoring everything the reps are doing on the CRM. They comply with her far better than they would with repeated e-mails from me. She can wheedle things out of them that I can't get. And this makes my reporting a whole lot more efficient.
The person that's interpreting and condensing the company's data, and helping the reps to compile their reports, can really make a difference about how much effective data the company's sales management gets.
Miller: A company's return on its investment in a CRM system has a lot to do with how actively the company pursues the information. A company that manages its information on a regular basis can probably get out of it what it put in. But it's very, very, very hard to measure.
Our CRM includes a quoting tool that's excellent. It's an outstanding part of the system that was probably worth our investment all by itself.
On top of that, our forecasting tool is also part of our CRM system. It enables us to manage our business through the regional and zone managers who oversee detailed operations and float their forecasts up to me. If we didn't have the CRM tool, it probably would be a lot more difficult to get accurate information, to use account histories as the basis for predicting future performance, and to project our expectations for coming 30-, 60-, or 90-day periods. Over the past six quarters, our forecasts have been right on target. So our forecasting tool has given us predictability that makes it possible for us to set expectations for the company properly. I don't think we could have achieved that predictability without such a system.
But I don't know if it really creates more business for us.
Solem: Sales force automation tools are never really the answer all by themselves. Many such tools are implemented as though they are a panacea capable of solving all of a company's sales problems—and just as many of them fail. And almost always, that's because they are not surrounded by the systems, programs, support, and communications that are essential to making them successful.
Rather than focusing on the costs of using a particular tool, companies should pay attention to determining what sales rep and customer behaviors and related processes it would like to change as a result of deploying the tool. And then, what else needs to be in place to ensure that those behaviors are changed? And what metrics can be tracked over time to confirm that the behavior changes have been accomplished? And finally, what value might there be to the company when those behaviors have been changed?
That might be a slightly more encompassing way to think about these tools. It's better than thinking, 'I'm deploying this piece of software that will raise costs a little, but everything is going to be peachy because this tool will increase sales a lot.' I don't think that's ever the case.
Hagemeyer: I don't think there is a medtech-specific tool that offers capabilities in territory management, predictive modeling, and KOL management. User organizations are still highly transactional in their focus, and are just starting to be more analytical in a disciplined way.
Greater focus on higher-order sales processes will ultimately result in more industry-specific solutions. But certainly, using more spreadsheets isn't the answer. For the time being, companies are having to make due with bronze and silver solutions, because gold solutions aren't available yet.
So, in order to make the best use of these tools, companies also need to put in place appropriate managerial and human resource structures?
Solem: Right; and not just the help-desk stuff. Companies need to determine how they're really going to use this information. And then they need to determine what will be necessary to support those uses. If necessary, the company should hire an MBA to help the reps gather or analyze the data they need to improve sales.
Hagemeyer: A fool with a tool is still a fool. Companies have to establish processes and then make sure the tools map to the processes. Companies also need to give their reps tools that make them more effective and efficient at what they do.
I don't think human resources functions can play much of a role in this process except for change management. The real job lies with sales management.
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