May 19, 2021

Issue #56: Why CS Won’t Report to Sales in the Future

Chris Hicken By Chris Hicken
CEO at 'nuffsaid
why-customer-success-won't-report-to-sales.

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Wayne McCulloch just published The Seven Pillars of Customer Success. His new book outlines an adaptable framework for building a strong Customer Success organization and is packed with detailed examples of how companies have put his seven pillars to the test. 

 

This week’s newsletter highlights an excerpt from the final chapter of his book where he shares predictions about the future of Customer Success—and makes the case for why “reporting to Sales” won’t be part of that future. 

 

You can read the rest of his predictions and more by ordering the book here

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The future of customer success begins with finding its rightful place in the organization: doing so will directly impact the function’s effectiveness. Correctly placing CS within your organization will unleash its full power.

 

Customer success (or more specifically, the owner of the customer journey) should report directly to the CEO. I notice a lot of nondigital-native companies develop customer success functions within their organizations under sales. This is a mistake; this trend prevents the CS function from fulfilling its obligation and reaching its true potential. 

 

You tend to find CS reporting to Sales in larger, traditional companies more often than in young, modern ones (or younger companies with digital native leaders). Leaders in traditional companies are extremely experienced experts in their industries but often have little to no experience with the SaaS and cloud-based tech movements. Considering customer success is a function born of those movements, the disconnect is easy to see.

In the next 4 sections, I’ll dive into the origins of this disconnect and 1) how the pre-subscription era mindset led to the common practice of CS reporting into sales, 2) what organizational complications develop alongside this org structure, 3) the “death spiral” that can occur for both teams when CS sits under sales, and 4) the huge benefits of having customer success report to the CEO. 

#1 Pre-subscription era mindset

This trend, having CS report into Sales, isn’t happening intentionally—it’s happening as a result of a pre-subscription era mindset that simply isn’t as effective in today’s subscription-model world. In the pre-subscription era, the head of sales ruled the roost. They were the person responsible for the majority of the company’s revenue and was thus a very powerful person in the organization. Back then, all revenue was tied to sales (and a little piece from services or support functions). It didn’t matter if it was new customer acquisition, retention, or expansion. Before subscription-based business models, sales got credit for it all. 

 

But all that started to change when the subscription economy arrived. Suddenly, customers no longer needed to pay a massive amount up front. Instead, they were asked to pay monthly. This transactional change also inspired a change in the way customers expected to see value. In the past, it would take years to implement software and drive to adoption. Today, customers expect to see value on day one. If they don’t, they will cancel their subscription and go somewhere else.

 

Land and expand is the motion of increasing sales. Older companies and executives try to shoehorn sales hunters into farmers missing the true value of a customer success organization. It’s not about selling more licenses (traditional sales model); it’s about exposing value and helping customers achieve their desired outcomes. This comes from CS management. 

 

And these changes caused business leaders to have to put more emphasis on retention, which if you think back to the very first chapter of this book, was the first wave of customer success. Customer success was born to focus on retention so sales could focus on new customer acquisition.

#2 Organizational complications 

In the first wave of CS, when the function was a baby, there were no complications in the way it was structured because no one noticed a problem. But what do you think happened when companies started to grow? What do you think happened when CS started to own more revenue than sales from retention? 

 

It resulted in a massive complication. “I’m the head of sales or chief revenue officer. I should own all the revenue. CS should report to me.” Traditionally, sales owned all the revenue, and seeing larger revenue dollars sitting under a different department looked weird—and ruffled a few feathers. But over time, if a business is successful, expansion and retention revenue will increase proportionately faster than new business revenue. It’s just math. 

 

Salesforce, for example, renews more than $20 billion in revenue each year, but their new customer acquisition revenue is much smaller than that. They can’t sell $20 billion in new revenue annually. Customer success has the job of retaining revenue from customers who have been using the platform for 20 years. It’s just easier to retain $20 billion in revenue than it is to newly acquire it. 

 

So it’s also no wonder a lot of CEOs place customer success under sales. Sales has traditionally been responsible for all revenue and CS works to retain revenue, so tying the two together makes sense and can seem like the simplest org structure option. Another reason why CS commonly sits under Sales is because this practice may lessen confusion around expansion. As much as people want it to be, expansion is never black and white and it’s hard to draw a solid box around ownership of expansion. 

 

These are the reasons why a lot of CEOs place CS under sales, but I’m here to tell you that’s all wrong! Customer success should report directly to the CEO (or at least a CCO).

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#3 A death spiral

I’m not alone in this thinking either. Dave Kellogg (who previously worked at Salesforce) wrote an article about this. He claims that when CS reports into sales, it’s detrimental to both teams. You want sales to focus on sales. When CS reports under sales, the sales team gets sucked into account management issues such as renewal challenges and transactional expansion conversations.

 

The idea seems collaborative, but it’s actually destructive. Sales is a really, really hard job, and I challenge anyone who thinks otherwise to put themselves in a salesperson’s shoes. Try to sell

against your competitors and live off your commission check. Sales is hard, and you need your salespeople to focus on it without any distractions. New ARR has to be their metric of success.

 

Customer success suffers, too. When the function sits inside sales, it forces the CS team to be support oriented (like it was in the past) rather than growth oriented. CS exists today because the old way of doing things needed improvement. It was created to fill in the product gaps. But as you’ve seen in each of the pillars, CS has grown into a growth engine. When the CS team reports under a sales organization, they are pushed into a support role. They aren’t empowered to expand business or identify advocates.

 

When a CSM isn’t driving value, they are more likely to handle support issues themselves. They want to create value somewhere, so they work tirelessly, with restricted resources, until they get the job done. This creates a death spiral. On the other hand, when a CSM is responsible for expansion, they are more likely to behave in a way to help expand an account rather than retain an account.

#4 When you do it right

When you build compensation plans and operational models correctly, CS will flip major expansions over to sales, and sales will flip incidents and insights back to customer success. This means CS will find sales opportunities and share them with sales, and sales will find areas of improvement and share those insights with CS. You don’t want your farmers competing with your hunters and vice versa, do you?

 

Another advantage of separating the two is that it creates another professional avenue for your sales professionals. Instead of closing three deals a day, they can have access to 10 to 20 customers with transactional expansion opportunities. Once they learn the ins and outs of how customers operate, they can transition back into a sales role. Keeping the teams separate creates an easy and beneficial way to rotate employees around the company. 

 

Separating your CS and sales team creates an internal system of checks and balances. Oftentimes, salespeople are tempted to book new business they know won’t renew. 

 

“I know you don’t have any support people and can’t afford this $200,000 product, but I’m going to help you out. I’ll sell it to you at an 80% discount.”

 

The salesperson is motivated by new ARR. If they need $40,000 to get to their number, they’re going to make that deal every time. They are incentivized to close new business. We’re telling them to do this.

 

Regardless of the lack of renewal, a smart SaaS company doesn’t want that customer’s business anyway. They will inevitably be the customer who is always in trouble and always calling support for help. These are the customers that escalate issues and create a lot of noise inside the organization. There is nothing about this situation that’s good.

 

Customer success is measured on gross churn and has a strong incentive to call the sales team out when they make deals like this. “This isn’t a smart deal for us. This customer isn’t going to renew, and they aren’t equipped to manage the product internally. They’re going to cost us money. We need to pass.” Separating the teams creates a natural checks-and-balances system and suddenly you’ve got two executives at the same level having a conversation about what’s best for the company, not what’s best for the individual team.

 

When CS and sales each report to the CEO, Sales can stay focused on new customer acquisition and CS can focus on growing customers. 

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CULTURE

 

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SCALING

 

The Judicious Imposition of Structure

 

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