Managing Sales Representatives in the Semiconductor Equipment and Materials Industry

Part 1

Frequently, OEMs or materials suppliers for the semiconductor industry will refer to their sales agent/representative as, my distributor. In fact, to be a distributor, a company must take both title and possession of the goods and re-sell the product at the price of their choosing, not necessarily at the manufacturers suggested price. In the case of a true agent, the agent usually has the power to make commitments and binding contracts for the company that they represent. Unless a company has very great confidence in such an agent, they do not usually want any non-company representative making binding contracts for them.

Most often, SEM (semiconductor equipment and materials) type companies will take their products to market by selling through a combination of direct (company employee) sales people along with commissioned sales representatives. These commissioned representatives (reps) simply use their relationships or product and industry knowledge to persuade a customer to buy products from the OEM or materials supplier they represent. In turn, they are paid a commission on the net proceeds of the sale.

A typical sales rep will represent anywhere from two or three up to ten or more of these companies. (commonly referred to as principals) It is always interesting to note how a particular rep will succeed abundantly for one or two principals and virtually ignore the others. The secret is usually how that principal manages the relationship.

Keys To Rep Success

Successfully managed rep relationships are simple:

Choosing the right rep with the best relationships for the right territory. Often, the principal chooses the rep for all the wrong reasons. For example we hear . . .
- They spoke good English - While good communication with your rep is important, in a non-English speaking country, their selling skills lie with the local language, not the language of the principal.
- They were the most technically competent. They were all engineers and understood our product. - While this is a desirable and important trait, the principal's company probably has plenty of technically sharp employees who can go with the rep to speak with the customer. It is the rep's relationship(s) that opens doors. It does no good to be technical genius if you can't get past the front door to the real decision maker. Contrary to popular belief, just because you build a better mousetrap, the world will not beat a path to your door until they are aware of it.
Reps should be chosen because they have a good reputation, a proven track record, have developed close relationships in the territory, and have some reasonable level of technical knowledge about the industry. If they have good technical knowledge about the principal's particular product, that is just a bonus.

The next step to managing the relationship is to properly train the rep. Most good salespeople have the kind of personality that just drives them to want to go out and tell someone something they know. Those principals who have invested the maximum time, energy and cost in training the rep will find they get a larger share of their time. They can't wait to share their knowledge. However, if they do not really understand the product or its features and benefits, they will somehow shy away from that line.

One of the common problems to managing the relationship is the overall compensation. I have heard principals say, Well, they started out wanting ten percent commission, but I negotiated them down to seven percent. What the principal doesn't realize is that he probably just negotiated himself into a guaranteed last place priority in that rep's daily routine. The cost of running a rep company (especially in foreign countries) is substantial. When principals calculate the fully loaded cost of running their own sales organization they usually find that the rep is cheaper. However, the main consideration is did they get the order? It is much better to raise your price a few percent to compensate the rep and get orders than to save a few percentage points of commission on a sale that never occurred.

The next key to managing this successful rep relationship is communication. Many principals do everything right except spending the time and effort to form personal relationships with the rep and Work the rep on a regular basis. If your company is the one that is most often sending faxes, phone calls, frequent visits and information, you are most likely going to get a larger share ofthe rep's time and attention.

Part 2

Let us presume that up to now, you as a semiconductor equipment or material supplier company, have done everything right to choose, motivate, train and work with your designated rep for a particular territory. The rep is now beating the bushes in the territory to get your product installed, right?

What many of us fail to realize is that at this point, this rep and his/her employees are investing in your firm. The work in a territory that is not yet mature is known as prospecting and mining. The rep doesn't get paid for prospecting and mining . . . only for completed sales. The time and expenses to land that all important first sale is pure direct investment on the part of the rep. If this prospecting and mining does not go well at first, or if the principle fails to support the rep early on, the rep company is likely to drop the effort or scale it back quickly.

This presents another problem for the principle. How can a principle tell that the rep has lost confidence or interest in their product? If the rep is tricky, they can hide this slow down very well. The rep may think to himself, I can't afford to spend any more time on this line, but I don't want to lose it in case an order comes into the territory. 'Therefore, a significant amount of time (and lost sales) can pass under the bridge before the principle wakes up to the problem.

To recognize a rep slow down on their line, the principle looks for several warning signals:

Much slower to return phone calls and requests.

Continual excuses why they cannot attend sales meetings or training classes.

Few, if any, new evaluation orders.

Re-assigning the current hot salesperson from your line and assigning you a less productive salesperson.

Seems to have lost their taste for hard negotiation with you, the principle. Anything is O.K.

When a principle realizes that the effort is softening on the part of the rep, several options are available:

Realize that the rep was ready and able to serve the territory, but the principle let them down early in the relationship. In this case, the principle must talk directly and openly to the rep, admit the shortcomings and look for a second shot. Since the rep has already invested time, money and training in the principle, they will most likely be glad to take a second look at the situation.

Also, the principle must clearly state that he/she realizes that there has been a slowdown of effort on the rep's part. Use examples of other successful territories to show the rep that the product is a winner when successfully introduced and supported. The principle must be willing to open up their books and share confidential information with the rep to regain their confidence.

Realize that the rep relationship is so damaged that it can never be restored to a profitable level. (See, Take a new route)

Realize that this rep is never going to have the relationships or ability to do justice to your line (See, Take a new route)

Recognize that neither the product nor your company will ever give the proper support and backing to make rep territories successful (you take a new route or position)

Recognize that this particular product will take the kind of prospecting and mining effort that cannot be reasonably done by a rep. In this case, the job must be done by company direct sales and application staff. Say good-bye to the rep and install the direct sales office.

In Part 3 you will find: take a new route, when is the right or wrong time to "go direct," and your common mistakes that drive reps nuts.

Part 3

In our previous installments, we looked at how to choose a representative, how to define a representative, what to expect and what to look for when things may go bad. Today, we discuss when is the time to choose to stay with the rep or go to a company direct sales force.

Often, the rep is the first to make contacts and start a company or product out in a particular territory or market segment. After that prospecting and mining work is done and the territory becomes successful, the next major thought that enters the principles mind is gee, why should I continue to pay the rep all those commissions, we can go direct and save a lot of money. The customers know us now and loves our product, we no longer need the rep.

Sometimes, this may be true, if the volume of sales in the territory become more than the rep can or is willing to handle. It may require more technical knowledge or the customer may need to communicate directly with the factory for technical or security reasons. However, many times this need for greed on the part of the principle is very faulty thinking for several reasons:

Never believe that your product is so great that the rep can't switch from you to a competitor and do the same for them as he did for you.

The cost of commissions to the sales rep may indeed be cheaper than the cost of one of your direct people. Rep companies tend to be small, homespun affairs that maintain a low overhead.

That rep probably owns the relationship. To drop the rep may anger the wrong person at the customer and cost you the business, regardless of how well the customer likes your product.

What are the chances that you can get as good of a salesperson to take over the territory?

So, if it is not really time to change reps, try negotiating a lower percent commission for the increased volume. Add some of your technical field people to help call on customers with the rep to build up one on one relations with the customers. Today, as in the past, a company never sells anything to another company... people sell to people.

I know of a recent interesting case in the semiconductor equipment industry. For about ten years, this large OEM company used a rep firm to sell two lines of their products in the U.S. territory. This rep company took the U.S. sales from 0 to over $300 million per year in about ten years time. The U.S. was the only territory in the world where the principle had a market share that was #1 (at around 42%). This was a very successful relationship for all concerned.

The OEM decided that it was time to go direct and tell the rep good by. After all, just look at that 6% commission that could be saved. So, over the past two years, the OEM phased out the rep company and took the territory direct with their own people. Today, it is estimated that this OEM has a market share of around 17% and sales are under $200 million per year. Everyone loses, except the competitors. In addition, I feel sure that their direct sales group is costing the OEM closer to 10% of sales. A net loss for almost everyone.

Often, technical companies believe that the world buys their product simply because it is so well engineered, performs so well, or is so technically impressive. Warning: HIGH TECH EGO MANIA. Very often, it is still the one-on-one personal relationship that sells the product.

When it is time to move from the rep to the direct force, make the rep a positive part of the change. Give the rep firm a long term consulting agreement to help bridge the relationship building period. Make them feel that they are still part of the team. Give them awards and plaques for their past contribution. This is an investment that will pay off big for years to come.

In part 4 we will discuss things that principles do that drive the rep sales force nuts.

Part 4

As mentioned in earlier installments, principle companies look for a good representative to sell their products and feel that they are investing in that rep. In fact, the opposite is true . . . the minute that a rep signs up for your product line, they begin investing in your company. That is to say, you are not paying them anything until they perform, so their time, auto, expenses, overhead (some portion of it) is being paid by them while they try to get business for you. Then, if they are successful, there is no guarantee that you will keep them long enough for them to recover their investment over a period of time.

Another current problem reps face is that there has been a trend toward consolidated buying from the larger suppliers. The fact is, the larger suppliers (equipment and materials) usually have their own sales force. The smaller and more innovative suppliers are the ones who depend on reps . . .until their products and the rep's selling make them successful and they join the ranks of the big boys themselves. This means that the rep must work harder to convince the buyer and engineers to take a chance on the smaller or newer player.

A third problem that reps currently face is payment. To a rep, they are a member of your team. They feel that the principle should treat their commissions just like they would treat internal payroll. Unfortunately, especially in down times like we are currently facing, many accountants see the rep as just another accounts payable. Therefore, they can be stretched out like everyone else. This starts a whole new chain of events. Thirty days goes to ninety days, to one hundred and twenty days. Meanwhile, the rep still has to pay his/her bills and payroll. Consequently, they slow down selling that principles products ... the sales manager gets chewed on for not selling more product ...he/she panics and starts to look for new reps ...and finally all the good relationships built up by the rep organization go out the window. The principle ends up much worse off than when they started. The next month, the accountant proudly announces how he/she has stretched the accounts payable out and saved the company from destruction. The CEO may never even know the real truth.

In short, the modern rep has a very tricky road to travel and must be a more seasoned businessperson than in years past. More than likely, before a good rep takes on a new product line, they will ask for a monthly retainer to do your bidding, to at least get started. If the principle shies away from this need to literally invest in the rep, they will possibly end up with a much less effective sales force.