Strategic Growth and Decision-Making at Qualtrics

Qualtrics (A) In January 2013, on a sunny yet chilly morning in Provo, Utah, Ryan Smith, the enthusiastic young CEO of Qualtrics, had just finished reading an article in Business Insider. The article stated that “Ryan turned down a $500 million offer for his startup and is thrilled about it.” 1 Ryan was obviously eager to show the world that he had made the right call. In mid-2012, Ryan had turn down the above-mentioned offer and, instead, decided to accept $70 million in Series A funding from Accel Partners and Sequoia Capital, with confidence that, one day, Qualtrics would become a multibillion-dollar company. Qualtrics, founded in Ryan’s parents’ basement in 2002, started as an online survey software provider for data collection and market analysis. As time went on, the company evolved into an insight platform helping organizations collect, analyze and act on customer experience, employee engagement and market research data. It further evolved into an XM (experience management) platform. Since the beginning, Ryan heavily emphasized a strong sales culture. He wanted a passionate and hungry sales team that would go the distance to sell Qualtrics’ product and services. As early investments in a field sales force were not possible due to high costs, he relied on a purely inside sales model, with salespeople interacting remotely (and not face-to-face) with their clients over the phone. Along with Dan Watkins, the current head of inside sales, Ryan developed and implemented an insidesales-only model that was low-cost but, through a scientific approach, effective in selling. He aggressively hired people of all ages, education, and gender that fit the company’s determined sales culture. The inside-sales-only model, with an added emphasis on a strong sales culture, turned out to be quite successful. Qualtrics witnessed triple-digit sales growth year after year. The sales team grew from only 4 in 2002 to almost 200 by the end of 2013. With annual revenues of $50 million, Ryan was setting his eyes on the international market. Ryan, however, wondered whether the inside-sales-only model was the future for Qualtrics. With more sophisticated new products that could serve enterprise customers, he wondered whether a shift to a field sales model was necessary. Most of Qualtrics’ competitors in the enterprise SaaS industry had relied on a field sales force to go to market. Furthermore, to pursue international markets, at least some form of a field sales component seemed necessary. However, Ryan was concerned that adding a field sales team would conflict with the company’s culture. Surely, there would be backlash internally if Qualtrics hired a field sales team from outside. Both he and Watkins had worked very hard over the past several years to prove that the company did not need a field sales team with millions of frequent flyer miles to be successful in sales. So, once again, hiring a field sales team seemed to contradict the core DNA of the company. Qualtrics Qualtrics, founded by Scott Smith, Ryan Smith, Jared Smith, and Stuart Orgill, a began its business in 2002 in the Smiths’ basement with the idea of developing an online survey research platform that enabled academics to conduct market research at affordable costs. In the early years, Ryan acted as both CEO and head of sales, and he targeted sales mainly to business schools across the United States. At the time, the company’s product line consisted of single software packages such as Survey Z, Perfect Survey, and SurveyPro. In 2004, Jared Smith and his engineering team introduced a comprehensive solutions package, Research Suite, which had the sophistication and technical capacity to support corporate clients. By 2006, Qualtrics had reached $1 million in annual revenue. It had 12 employees and served more than 100 universities. The company expanded its market scope by launching a corporate product line in 2007, under the tag line: “Sophisticated enough for a PhD, easy enough for an intern.” The business continued to grow throughout 2008 and 2009. By the end of 2012, Qualtrics had almost 250 employees and recorded $50 million in annual revenue. It served over 3,500 enterprise customers (notable customers included Barnes & Noble, CVS/Caremark, GEICO, Microsoft, Neiman Marcus, Royal Caribbean, Southwest Airlines, Thomson Reuters, Toyota, Vodaphone, and Zappos) and 1,200 universities. 2 To further scale business operations, Ryan decided to receive $70 million in series A funding, the company’s first institutional investments, from Accel Partners and Sequoia Capital. By 2013, Qualtrics had three main product lines on the market, targeting both academia and industry: Research Suite, Site Intercept, and Qualtrics 360. Research Suite was an online survey research platform used for data collection and statistical analysis. Survey Monkey was the main competitor for this product. Site Intercept allowed customers to create customized content for website visitors, thus increasing visitors’ responses to website surveys and online promotions. Qualtrics 360 was developed to support HR managers in employee feedback and reviews. With a portfolio of products that could be used within human resource departments, Qualtrics naturally became a competitor of SAP SuccessFactors, IBM Kenexa, and Korn Ferry. The Sales Strategy at Qualtrics Since the beginning, Qualtrics had relied purely on an over-the-phone-based inside sales model. This model started with Ryan himself as the company’s first salesperson. Because of limited resources—both money and time—Ryan often could not physically be at the client’s location to prospect, demo, convey, and ultimately sell. As a consequence, he looked up contact information over the web to identify key prospects (mainly renowned professors at U.S. business schools) and coldcalled them by phone. Based on this model, Ryan devised a sales strategy, unique to Qualtrics. The core elements of the sales strategy were: 1) inside-sales-only model; 2) fit-based recruiting; 3) aggressive a Stuart Orgill joined the company as a co-founder in 2003. variable compensation plan; 4) tiered sales structure; 5) scientific approach to selling; 6) radical transparency; and 7) bottom-up “Trojan Horse” customer acquisition process. The inside-sales-only model Like most start-ups, Qualtrics had limited resources at the beginning, and, thus, Ryan had to devise a way to reach as many potential customers as possible while keeping costs low. Ryan believed that an inside sales model, using a common telephone, as well as other information technologies such as video conferencing, suited this approach. In using this sales method, Ryan realized that a salesperson did not have to be face-to-face when selling SaaS products. Ryan stated, “These are changing times. People are becoming more comfortable transacting over the phone and online, even for b2b transactions.” Ryan was successful in scaling up the inside sales model as the company grew. By 2012, Qualtrics had acquired more than 3,500 customers (including the very first ten clients that Ryan had brought in back in 2002) through a purely inside-sales-only model. Fit-based recruiting Ryan believed hiring the right people was the key to the success of an organization. He wanted to recruit people who not only excelled academically, but who shared the long-term vision of Qualtrics. He wanted salespeople who had not only quantitative skills, but also the intangibles needed to close the deal under various circumstances. Mostly, he wanted young, diverse people who were hungry for success. An HR executive commented, “Everyone should know how to swim, somewhat, before coming to the pool, or you’re going to sink. Qualtrics [does] not have room for people who are unprepared!” Ryan established a high recruiting bar to hire top-performing graduates. A high GPA was necessary to be a salesperson at Qualtrics, but this was not enough. The applicants were assessed based on following criteria: GPA; work experience during school; extracurricular activities, such as intercollegiate athletics; living experience abroad (or away from their home state); and, most of all, a fit within the Qualtrics’ culture. In the early years, Qualtrics hired most of its salespeople from nearby Brigham Young University (BYU). Many BYU students had experience living away from home (in many cases experiencing a new culture) due to the Mormon mission and, thus, often were a good fit for the independent and hungry culture of Qualtrics. Later, Qualtrics focused its recruiting on bringing in diverse individuals from various backgrounds. Aggressive variable compensation plan Since the beginning, Qualtrics had paid salespeople a low fixed salary but a high variable uncapped commission. Ryan believed that the sales reps should be compensated only if they brought tangible outcome to the company. Ryan supported the idea that the compensation plan should provide employees constant motivation to work hard. He also offered sales reps informal spot rewards occasionally, incentives paid out from Ryan’s own pocket, to reward extraordinary achievements. This strategy often induced strong loyalty from the salespeople. A salesperson typically received a base monthly salary of $2,000, and a commission of 10% of the revenue generated in that month. His or her total OTE (on-target earnings) typically consisted of a 50:50 mix, 50 percent income from a fixed salary and 50 percent from commissions (10% of revenue). A salesperson also received overachievement commissions (up to 20% of revenue) above and beyond the annual quota. Figure 1 Qualtrics’ incentive compensation scheme (annual) Source: Company document. Note: Commission rate at 10% Tiered sales structure In an attempt to further motivate salespeople, Ryan established a tiered sales structure. A salesperson was promoted to team leader, supervising his or her own sales team, after demonstrating excellence in both sales and people management. After being promoted to team leader, he or she earned a slightly higher fixed salary, the same performance-based commission as a regular salesperson, and additional commissions based on the sales performance of his or her team, often resulting in six-figure total compensation Ryan realized that not every salesperson was motivated to become a team leader. Thus, he installed an additional career path (referred to as the veteran sales career path), targeted towards experienced sales reps who had exceptional sales ability but were not motivated to lead. Sales reps who chose this path had more control over their sales process. Less than 10% of sales reps chose this career path. In early 2007, Dan Watkins, a former BYU student with prior work experience as a sales manager at a consumer-goods company, joined Qualtrics as a regular sales rep. Watkins was a natural at selling and in just two months was promoted to team leader. As a team leader, Watkins developed a sales process diagnosis framework to monitor, assess, and ultimately improve sales performance. Watkin’s team excelled and consistently made quota. Ryan decided to implement this framework throughout the sales organization. Soon after, Watkins was promoted to head of (inside) sales, overseeing the entire sales organization. Scientific approach to selling During Watkin’s tenure as a team leader, he regularly met with his team, hearing feedback and diagnosing problems, to find better ways to improve efficiency in the sales process. During the meetings, each team member had an equal voice, regardless of his or her tenure. With the team’s feedback and his own personal analysis, Watkins developed a diagnostic model of the sales process, with six stages (shown in Exhibit 1). He collected information on the transition rate at each stage; answer rate, set rate, show-up rate, conversion rate, and win rate (average transition rates are shown in Exhibit 1). These statistics were used to assess how a sales rep was doing at each stage of the sales process. Watkins also used the average figures to set sales quotas. For example, knowing that his sales team typically made 26 cold calls a day and 6,240 calls (=26 calls/day × 20 days × 12 months) a year, using the average transition rates, one could assess that, on average, the team closed 32 accounts annually. Because a typical deal size was $7,500, an annual sales quota could be set at $240,000 (=$7,500 × 32). Also, by reverse engineering transition rates for each individual salesperson, Watkins was able to give guidance on how many activities at each stage of the sales process a salesperson needed to perform to meet quota. Watkins told his team, “I believe that [the] sales process should be very formal. Sales, in fact, is a work of science. Once you master how the sales [process] works, you can expand it to your own ways.” Radical Transparency Qualtrics was well known for its transparent and open culture. As outlined in internal and external company documents, “every member should know everything that’s going on within the company. … As a result, the whole workforce progresses faster, creating a culture of continuous improvement and engagement.” 3 By actualizing this idea, the company built an internal monitoring and control system, Odo—an abbreviation of odometer. Through Odo, every employee could access his or her own, as well as other colleagues’, goals, realized sales, performance metrics, career history, and so on. With Odo, all employees, de facto, shared their information with others, resulting in self-policing and social pressure to drive better behavior. More importantly, Odo allowed new employees the transparency to observe and model behavior after top reps, therefore accelerating the pace of their onboarding. Data from Odo was also used as an assessment tool. It tracked sales reps’ sales activities (e.g., the number of calls, contacts, meetings, etc.) to compute each sales rep’s productivity score, referred to as “points.” Each salesperson received different point and revenue quotas based on their past performance. Anyone who made both quotas in a given time was considered a ‘super star.’ If a salesperson failed to meet either the point or the revenue quota, the team leader diagnosed the sales rep as either ‘in trouble’ or ‘a rising star.’ Obviously, termination was the course of action if a rep was consistently not meeting any of his or her quotas (See, Exhibit 2). Consistent with Qualtrics’ transparent culture, its headquarters embraced an open office floorplan. The workspaces, break rooms, and conference rooms were all transparent, with glass walls. No one, including Ryan, had an office (See, Exhibit 3). The executive team at Qualtrics believed that the culture of radical transparency led to high employee engagement. Specifically, it allowed employees to: 1) realize how they fit in the big picture; 2) minimize distractions; 3) increase collaborations across departments and people; and 4) model the behaviors of the best employees. Bottom-up “Trojan Horse” customer acquisition process Qualtrics implemented a simple yet cost-effective customer acquisition scheme—referred to as the Trojan Horse—to support the inside-sales-only model. This tactic originated in the early days of Qualtrics, when Ryan was its only salesperson. Ryan realized that there were multiple departments within a university, and each department was a potential customer. He first approached faculty members at business schools, starting with the Marketing department. Once he successfully closed a deal, he broadened his scope to contact other departments, such as the social sciences, nursing, etc. This gave him credibility and support within the entire university when closing a package deal with the school administration. Ryan recognized similarities in the business world—that is, one large enterprise deal can be won from a number of smaller deals. By utilizing this customer acquisition method, Qualtrics was able to successfully open large enterprise accounts using only its inside sales teams. Decisions The seven core elements of the sales strategy served Qualtrics well, evidenced by high revenue growth and low employee turnover. However, because of changes in the product and customer mix, a new sales strategy seemed necessary. Qualtrics’ had diversified its product portfolio, with various types of products targeted towards different customer types. In the early days, there was only one product—Research Suite. Initially utilized primarily by academics, Research Suite was used by small companies, large enterprises and everything in between though its deployment was generally for relatively simple processes, and the sales process was relatively straightforward. However, increasingly advanced applications of Research Suite coupled with later products, such as Site Intercept or Qualtrics 360, which were primarily used by enterprise customers, required a more complex and sophisticated sales process. In addition, Ryan felt that there was a vast opportunity for Qualtrics to grow overseas. While serving international markets with the existing inside sales force seemed plausible, Ryan wondered how effective it would be at selling in a totally different culture. In order to go to the next level, a field sales force seemed necessary. Ryan, however, was worried about the potential negative effects of creating a field sales division. He was proud of having created a unique sales culture, devised purely of an inside sales team that was diverse, passionate, and hungry. Though many people had told him that his inside-sales-only model could not scale, he managed to make it work, growing from merely one salesperson (Ryan himself) to nearly 200 salespeople. Thus, he was concerned that creating a field sales division would go against the company’s DNA. It may not be who they were. It may not be what they had experience in or had trained for. In addition, if Ryan decided to create a separate field sales division, how would he do it? He could have a part of the inside sales team transition to this role. But, once again, they did not have expertise in traveling across the world and selling face-to-face. A second option was to hire seasoned salespeople in the SaaS industry with millions of frequent flyer miles. If so, Ryan would have to devise a new sales force compensation plan (likely higher fixed salary and lower incentives) and assign enterprise accounts to these new hires. This probably would not be well received by the account holders in the inside sales teams. Even now, the tension among the salespeople was intense over customer ownership. In fact, the inside-sales-only model had intensified this conflict. An anonymous sales rep at Qualtrics commented, “We are living in the Wild Wild West. Anyone could be anyone’s client. So, it is [a] free for all. Whoever called in, whatever the company or whoever took the inbound calls could support that client. I am currently working with the clients, all across the board, every industry, every region, and every location.” Hence, aside from whether to add a field sales force, Ryan recognized the need to reorganize the sales structure. He wondered how he could manage the global markets, while, at the same time, attenuate current problems and foster the next chapter of business growth. Exhibit 1 Sales Process Source: Company document. Note: Answer rate: % of cold calls answered. Set rate: % of customers that agreed to meet (online or offline) with a sales rep among contacted customers. Show up rate: % of customers that actually showed up to a meeting among scheduled customers. Conversion rate: % of customers that showed interest in purchase among customers who a sales rep met. Win rate: % of customers that actually purchased among those that showed interest. Percentage in parenthesis is the average of all Qualtrics’ salespeople. Exhibit 2 Source: Sales performance: points versus revenue Company document. Exhibit 3 Source: Qualtrics headquarters (Provo, Utah) Company documents.