Behavioral Science

The Roman historian Pliny the Elder wrote, “In Rome... the soldier’s pay was originally salt”. In the days before refrigeration, salt was widely used as a preservative and it was also believed to have healing powers, thus it became a currency of the realm.

Etymologically then, the word ‘salary’ comes from the Latin word for salt (‘sal’). Eventually this word salarium came to signify anything given in a stipend form or wages in exchange for labor.

We’ve discussed the idea of ‘non-cash rewards’ in the blog before, but salt was not exactly what I had in mind!

These days, we see forward-thinking companies using compensation strategically; which is to say, companies recognize the need to pinpoint incentives in order to modify, enhance and refine the behavior of their sales team – or any group in the company for whom an incentive may modify behavior.

I like to think of the finance and sales executives who modify and tweak their teams’ compensation plans as “behavioral scientists”; like any good scientist, they experiment with various inducements in order to observe the resulting behavior and thus determine whether the desired effect has taken place.

While there is plenty of art to setting comp plans that achieve the desired effect, there remains a heaping helping of science to it as well – in the sense that one needs to fine-tune plans over a period of time to see what’s working and what’s not.

This harkens back to the crucial piece of why we pay variable compensation in the first place: we expect it WILL change behavior. With this in mind, why would you ever want to do this without giving everyone involved real-time, web-based visibility? Without this level of dynamic access to your data across your entire organization, how will you know in a timely fashion if success has been achieved?

Or when small tweaks do need to be made, how can one feel comfortable with the possible outcome without modeling the possible changes using some specific assumptions? Tinkering blindly with an Excel-based compensation structure is a recipe for disaster.

With an on-demand compensation system, a company achieves a real, tangible competitive advantage. Several models can be quickly tested and refined without affecting any of your field personnel. When a SPIF program or new comp plans are ready to be launched, your company has the ability to move in a swift, nimble fashion.

People like to throw around the idea of ‘strategic advantages’ that can help give a company a leg up on its competition, but few strategic advantages have this ability to streamline your entire organization.

Let me illustrate what I mean with a real life example: Recently, a nationally-known auto parts retailer instituted these types of changes in their company. Faced with a struggling economy, a set of executives decided to look for innovative ways to boost their same-store sales. They settled on incenting their floor employees with variable compensation in order to sell more product; and they extended this also to their shop employees as a way to get them to open (and close) a higher number of service tickets per day. In addition, they gave their people web-based visibility into the compensation system so they could see, dynamically, what they were earning.

Prior to the launch of this new direction, several executives of the auto parts retailer expressed their concern that there was sure to be backlash from parts of the rank-and-file, because hourly wages for these in-store employees were cut nearly in half – though their potential for earnings became far higher than before. Management even expected a noticeable amount of attrition; surely hourly employees would quit in significant numbers if they were unwilling to be subjected to this new, unknown direction?

However, the result was a roaring success. Same-store sales jumped significantly and one region reported that their shop employees were getting through roughly four times the number of service tickets they had previously.

What originally had started as a pilot that might slowly be expanded around the country, immediately became fast-tracked for a wide-scale rollout.

This forward-thinking company is experiencing the benefits of conducting some behavioral science in the name of improving their business.

Throw on a white lab coat and join me as a part-time behavioral scientist – I think you’ll enjoy it.

“Science is a wonderful thing if one does not have to earn one's living at it.”
--Sir Humphry Davy (1778-1829)
Scientist, inventor, the pioneer of electrolysis, laid the groundwork for modern chemistry

SaaS 2.0? Predictions for the year ahead.

2007 was a momentous year for Software as a Service (SaaS), as it emerged as a disruptive force in an increasingly complacent industry. And while it would be easy to say that growing customer interest will propel SaaS to new heights in 2008, I believe there’s something going on right now that is about more than mere market momentum. From my viewpoint, SaaS is becoming increasingly savvy, and it isn’t too far-fetched to think we’ll soon being talking in terms of SaaS 2.0.

Here’s what I mean. In 2007, we were still witnessing the first generation of many SaaS solutions. Their limited functionality led to criticism that they weren’t as robust as their enterprise software counterparts. In 2008, we will see more SaaS companies building out or partnering to provide more robust solutions and platforms, along the lines of salesforce.com’s Force.com platform.

This is already happening in the market in which Xactly competes, as Incentive Compensation Management (ICM) offerings are morphing into full-blown Sales Performance Management (SPM) solutions, with rich analytics and functionality such as territory and quota management.

Just as exciting to me, SaaS will breathe new life into struggling enterprise software sectors in 2008, and will create entirely new sectors by lowering the cost of entry vis a vis traditional software models. This is huge. And the fast-expanding SPM segment is proof that it is starting to happen.

At the same time, SaaS will create entirely new ecosystems. In 2007, we witnessed the delivery of mash-ups combining data and SaaS functionality via single sign-on. In 2008, we will see SaaS companies supporting end-to-end processes and seamless user experiences through deep integration, software suites, or partnerships.

And through it all, SaaS vendors will only get smarter about customer needs. The advantage of managing all customer deployments under a single umbrella, as SaaS vendors do, is that we are better able to find common threads across customer problems, needs and desires. And customers don’t have to wait for the next release cycle—which, in the enterprise software world can mean waiting a year or more—for a SaaS vendor to implement major fixes and changes across the board. In fact, SaaS vendors are free to be innovative and practically impelled to deliver ever more value, because we are developing a single line of code for one platform shared by all users.

Finally, in 2008, Wall Street will increasingly wake up to SaaS as we witness an up-tick in SaaS IPOs, despite the down market predicted for the first half of the year. The recent successful IPO of Xactly partner and customer, SuccessFactors, is likely a harbinger of things to come. Along these lines, Wall Street bankers, investors and enterprise customers will come to see the distinction between tactical SaaS applications that conveniently automate non-mission critical business functions like recruiting versus truly strategic SaaS applications like SPM, which are at the center of driving business growth and profits.

Okay, I admit to a bias. But, as the SaaS industry matures, I firmly believe it will continue to burn a hole right through traditional software models throughout the rest of this decade and beyond. Whether we call it SaaS 2.0 or not, the SaaS we’ll come to know in 2008 will be light-years ahead of the SaaS we knew in 2007— in terms of functionality, robustness and appeal and, most importantly, in its ability to game-change a customer’s competitiveness and profit picture.