The Year of Optimization
WMMM #041 - This week I share a perspective on the sales role at a cloud service provider in 2023.
Jeff Keplar Newsletter November 12, 2023 15 min read
Twelve months ago, at AWS’ annual re:Invent conference, aka “Cloud Computing Woodstock,” 2023 was projected to be the “Year of Optimization” for cloud computing users.
In this week’s edition of Win More, Make More, we look at how that affected the sales role at the leading cloud service providers (CSPs) and provide a perspective as we look forward to 2024.
Consumption
Consumption, the most dreaded illness at the beginning of the 19th century, was misunderstood.
It got its name from the belief that sufferers contracted the illness due to an excessive lifestyle.
It was later determined that lifestyle had nothing to do with the horrible affliction.
The infectious Mycobacterium tuberculosis bacteria, aka tuberculosis, caused the disease.
In cloud computing terms, consumption is the usage of billable CSP resources by cloud users.
These resources are typically compute, storage, and networking.
In the cloud computing industry, consumption is also misunderstood as it relates to the expectations and management of the CSP salesperson.
The Landscape
The top CSPs are AWS, Microsoft’s Azure, Google, Oracle, and IBM.
Recent conversations with multiple sales professionals across these employers helped form the perspectives I share this week.
These CSPs do not represent the first sales role for any of these individuals except one, enabling the benefit of perspective in the conversations about sales at a CSP in 2023.
Aside from Oracle and Microsoft, which have SaaS offerings, the primary cloud services offered by these CSPs are IaaS and PaaS, which is where this article is focused.
If you are an enterprise salesperson working for a cloud provider, many of these likely apply to you:
The emphasis is on consumption
The role of the salesperson changed
Optimization means reducing spend
Unrealistic expectations and misaligned incentives
Ineffective management
Questionable priorities
Improper internal tools
General lack of understanding.
Let’s dive a little deeper into each of these before looking forward.
The emphasis is on consumption.
The promise of cloud computing led to a rush to “the Cloud” by enterprises.
Some of the expected benefits include:
only pay for what you use
eliminate significant capital investments (>$100M) in data centers
increase the rate of technology adoption
centralized data security
Increase accessibility - anywhere, any device
business continuity
quicken application deployment
instant business insights
reduced energy consumption and carbon footprint.
The rush to realize these benefits created unintended consequences.
Executives at enterprises became too ambitious with their expectations for how much and how fast they could move their IT to “the Cloud.”
In their eagerness to drive change in their organizations, many executed agreements with CSPs that reflected their ambitions.
From a CSP’s perspective, while these enterprise agreements represented commitments to spend money on cloud services and a “win” over competition, they could not recognize revenue until these customers actually consumed and paid for their cloud services.
So, the CSPs changed the focus of their GTM organizations to “Consumption.”
The role of the CSP salesperson changed.
CSPs pivoted their sales organizations to a different sales motion.
They communicated a “meet the customer where they are” message.
“Let it come over time” is another example of the messaging to their sales personnel.
Growing customer commitments or structuring “new deals” was discouraged.
“Workloads” became the new obsession.
Taking on-premise workloads and migrating them to “the Cloud” is the most common pattern.
Identifying and quantifying the dollar amount of the “Consumption” of new workloads became the charter for the CSP salesforce.
“How are you going to expedite new workloads?” became the new mantra, repeated over and over in QBRs and forecast calls.
This new role no longer valued behavior that:
Acted as an agent for change
Influenced Buyers to value benefits promised by the CSP
Assisted the enterprise in making a decision
Helped Buyers “buy.”
This new role no longer completed a sales process with an agreement between the parties with terms for conducting business.
It’s possible that a decision to spend money with the CSP still exists.
The alternative is to keep spending with the internal IT department.
And if the enterprise has agreements with multiple CSPs, there is probably a winner of the workload and a loser.
But the role sounds more like a post-sale implementation job.
Understanding their business through reviewing Annual Reports and 10ks
Understanding their industry, their customers, how they make money, and who their competitors are
Understanding their organizations, their people, and their processes
Understanding their priorities for the current year as communicated by their C-levels
Identifying and engaging the right resources for them when needed
Advocating on their behalf within your employer
Problem-solving and project management
Reporting and administration.
That’s more like the role of a Customer Success Manager.
Optimization means reducing spend.
Waste was another unintended consequence of the sprint to “the Cloud.”
Less than optimal architecture, licensing agreements, data usage, and security and AI systems are examples of areas ripe for optimization.
The unknowns were plentiful, and the migrations so voluminous that it is now apparent and easy to implement cost reductions.
The enterprises have caught up with the CSPs in their knowledge of “the Cloud.”
The CSPs have recognized this and have pivoted to “helping” their clients optimize.
What resource do you think our CSPs chose to help their clients with optimization?
You would be incorrect if you guessed a technical, customer-centric resource that doesn’t carry a sales quota.
Our CSPs chose their cloud sales representatives for this task.
If you think our CSPs have no clue, I’ll remind you not to underestimate Big Tech companies.
These people are pretty smart.
Read on for specifics.
Unrealistic expectations and misaligned incentives?
So, why use an expensive resource for a role one can fill at a lower cost?
There is a lot to unpack in attempting to answer this question.
First, there are three elements to the compensation package for an enterprise salesperson at a CSP:
Base salary
Variable compensation (commissions)
Equity (4-year vesting).
Let’s use a hypothetical as an example:
Annual base salary = $120,000
Variable compensation at 100% of quota = $180,000
New-hire equity = $120,000.
So the expected annual compensation for this salesperson is $330,000 ($120k + $180k + (¼ of $120k).
Let’s say, hypothetically, that the price of the CSP’s stock triples during the first 24 months of employment.
While this example is hypothetical, at least two of the five leading CSPs have experienced this phenomenon at least once in the last five-year period.
So, now that enterprise salesperson’s expected on-target-earnings (OTE) is $390,000 ($120k + $180k + (¼ of $360k).
Now, we introduce the change in the role of the salesperson.
To illustrate what occurs in the market, we use another hypothetical yet real-world example.
Debra is an enterprise salesperson working for a CSP.
She has ten years of enterprise sales experience and has worked for this CSP for three years.
Debra has an OTE of $390k.
Debra has five accounts in her territory.
For FY22, these accounts produced $11M in revenue through consumption.
Debra was assigned a consumption quota of $18M for FY23 (64% YoY growth for the Year of Optimization.)
Debra’s accounts have produced $7M through September and are projected to deliver $8.5M in total for FY23.
They were successful at reducing their spend through optimization.
Eliminating the excess spending was relatively straightforward.
Debra is projected to finish at -23% growth and only 47% of her annual quota.
Debra’s FY23 compensation is projected to be $273,000. Her base and equity amount to $210k. The CSP’s incentive compensation plan for 2023 contained some gates that Debra failed to hit, reducing her commissions to 35% of the on-target-variable (OTV), or $63,000.
For comparison, a Customer Support Manager (CSM) is a salaried position with an equity component. The salary range is $160,000 - $200,000. The equity component is $40,000 - $60,000, vesting over four years. There is no sales quota. The high end of the cost of this resource is $215,000.
When determining whether to migrate to a Customer Support Manager or continue with an enterprise salesperson, the CSP likely considers economics and other factors like continuity of customer representation and the skillsets of people management.
If the CSP invokes the quota assignment strategy in the example provided, the economics yield a cost for the CSM of $215,000 versus the cost to continue with Debra of $273,000.
For $58,000, the CSP receives a more experienced professional and all attendant benefits for at least one additional year.
With the lifetime value of Debra’s five accounts easily exceeding $100M and at risk, if the CSP doesn’t immediately help them optimize (they can easily switch to a competitor - this CSP discouraged a sales-led approach that would have created incentives for these customers to stay), $58,000 appears to be a wise investment.
Ineffective management
With the change in the salesperson’s role at these CSPs, sales management has become ineffective when motivating and leading salespeople.
It has become a reporting role versus a sales role.
This explains the wasted time pushing for accuracy on the opportunity amount early in a sales cycle when it’s unachievable. (Details found in Improper internal tools)
Numerous hours are spent managing Salesforce, only to miss the forecast repeatedly for reasons beyond our control.
I heard examples of the effort expended on spinning stories to tell the next level what they want to hear.
We see over-indexing on sound bites like: “Understanding the customer’s business and industry better than they do…”
It is typical to hear of managing sales cycles and salespeople to a solution sale when there are no “solutions” to sell, only building blocks.
Building blocks require the sales approach of a consulting project, which is much different than selling a solution.
The most damaging development is a lack of leading by example in favor of management from our basement (unfair WFH imagery to emphasize a point.)
Satya Nadella, by the way, was unanimously mentioned as the best (only) lead-by-example selling executive in the cloud industry.
Questionable priorities
Reporting the news over making the news.
The inordinate amount of time spent in Salesforce and spinning stories to attach ourselves to positive outcomes and separate ourselves from adverse outcomes, especially when we had little to do with either.
The internal obstacles that must be overcome to spend time with customers.
Improper internal tools
CSPs do not implement Salesforce in a way that supports their consumption business.
This was a common theme in my conversations.
Examples repeatedly given include the dollar amount of the opportunity, the close date, and the sales stage.
Hours are required to estimate the dollar amount of a workload.
(See General Lack of Understanding for more detail.)
The estimated range (low to high) is typically so broad that it rarely justifies the time invested in determining it.
Until we have moved several steps into our sales cycle and invested precious internal resources on a POC, the only legitimate data we have is the amount costing the customer currently to run their application on-prem.
At what stage of our sales cycle will the customer be willing to disclose that information to us?
Once we have an amount, we must break it down into monthly run rate (MRR).
How many months of our fiscal year will this workload run on our cloud platform?
To answer that, we must know how long the customer will take to complete their migration.
We take the months we have estimated this workload will run on our cloud platform this year and multiply it by the MRR to create the opportunity amount.
For the close date, we use the first month that we estimate the workload will run in our cloud.
A common occurrence with these migrations is arriving at the go-live hour, and something previously unknown to everyone involved causes the customer to delay the go-live temporarily.
Examples range from a customer error in their test plan to the CSP upgrading their servers hours before the customer launch.
The delay can be a single hour, a day, or a week.
Sometimes, the migration must wait until the following month or even a quarter.
When this happens, the data about this opportunity in Salesforce is immediately inaccurate.
The salesperson misses their forecast.
Even a 1-hour delay impacts the opportunity amount.
A 1-month delay affects both the close date and opportunity amount.
General lack of understanding
Providing IaaS and PaaS is a very technical world.
With the exceptions already noted, for the most part, the CSPs are dominated by an engineering culture.
There is a lack of understanding and appreciation for a sales culture and sales-driven process and procedure.
One example is pricing a workload.
Hours are wasted estimating the dollar amount of a workload.
Take a step back and think about it.
We have identified an on-premise workload with a LOB that might deliver value to their business if moved to our cloud platform.
What is the cost to run their application on our cloud?
To answer that question, we must know how much processing (CPU), storage, and networking the application would “consume” when running in our cloud.
We typically obtain this data when we perform a POC.
So, we have progressed to the POC stage in a sales cycle and invested resources before we can give the customer anything more than a rough cost estimate.
At what point does this become a qualified opportunity?
Workloads must be migrated and running on the cloud by midyear, or there isn’t enough time to impact the quota.
It often takes longer than six months to migrate a workload, so whatever effort we make this year has little impact on our quota retirement.
It should impact next year’s quota, except that if we are reporting accurately, sales operations has already accounted for this revenue in next year’s expectations and applied a growth number on top of it to determine our quota, so we won’t receive credit for our efforts in growing the business.
We are at the mercy of organic growth from the customer to make our number on this workload the following year.
Looking forward
Debra’s performance in helping her accounts optimize was outstanding.
Her performance against her quota will not meet expectations and might have been even worse had she not been able to help her customers add some workloads.
These two statements appear to contradict when evaluating Debra’s performance.
The CSP’s incentive compensation plan does not account for optimization.
Our hypothetical yet real-world story has an all too common unhappy ending.
Debra’s FY23 performance against her quota will finish below minimum expectations.
Even though she engaged the right resources to help her accounts successfully optimize and remain happy customers of her employer, Debra is offered a choice of a severance package or a Performance Improvement Plan (PIP), which contains unrealistic expectations not intended for her to achieve.
She will accept the severance package and be gone by the end of the year.
Pretty harsh, huh?
Unfortunately, this hypothetical happens so frequently that it appears to be a playbook.
The business world can be brutal at times.
It’s better to be informed and aware.
Instead of sugarcoating reality, I prefer to preach toughness.
Be aware of what we are getting into.
Enjoy the opportunity while we have it.
Make adjustments when things change.
If this article hits a little too close to home for any of us, please do not despair. We have options.
We can a) Do Nothing, b) pivot our career to a CSM, or c) explore the market for a pure sales role.
Let’s review each option.
Do Nothing: We may be at a moment in our life where we value the current paycheck over everything else. If so, that is the awareness of an adult with responsibilities. Celebrate our awareness! Let’s make the best of our situation and live to fight another day. Focus all of our energy on keeping our current role.
Pivot to a Customer Support Manager role: As we consider this move, let’s first confirm that our employer wants to move in that direction. If so, plug into their system and determine what we need to do for them to make us a CSM. If not, and if we still want to pivot, explore the market for companies that hire for a role like that and find out what we need to do to be considered for that role with them.
Return to a pure Sales role: The phenomenon described here predominantly occurs in Big Tech CSPs in the IaaS and PaaS business. The industry still needs enterprise sales professionals. If we prefer a large company, SaaS and Consulting Services providers have sales forces and are good targets. In my experience, growth companies of any size selling complex enterprise software are excellent candidates. It may be obvious, but there are many more small companies than large ones. Here is an example of a profile for a small company in the cybersecurity segment:
This startup has at most fifteen customers.
We have no “pull” because there is no awareness of our company in our target account segment.
Our company has created a solution that does not exist anywhere else in the industry.
We are a first-mover and define the market.
There is no budget for what we sell because it does not replace anything in place today.
Our market is the enterprise segment; literally every enterprise could use our solution, but they haven’t realized it yet.
We are responsible for creating our own leads.
We aren’t looking for ways to prioritize the leads we are getting.
We aren’t getting any.
We aren’t looking for ways to end a conversation with an early disqualification.
We are interested in initiating the beginning of a discovery session.
We are interested in establishing a rapport and beginning to build trust.
We are interested in influencing a small amount of interest through fear, uncertainty, doubt, or some form of personal win.
Any company fitting this profile needs an enterprise sales team.
Thank you for reading,
Jeff
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