Outsourcing Lead Generation – You must be out of your mind

I regularly receive inquiries from companies looking to outsource their lead generation efforts. Their intent is fairly straightforward – They would sell more if only their ‘experienced’ sales people could get in front of more qualified prospects.

In most cases, the desire to outsource lead generation is driven by the acknowledgement that ‘We can’t get the people we have to make cold calls’ and/or the acknowledgement that ‘We tried building a lead generation team ourselves and haven’t been successful.’

The third, often-unstated, reason is the urgent need for near-term revenue -‘We need to boost sales this quarter’. This is perhaps the most absurd reason because it ignores reality that sales cycles are rarely less than three to six months long.

Regardless of our client’s motivation, I made the decision years ago not to offer lead generation as an outsourced service. I have since ‘tweaked’ this stance but there is value in understanding the logic behind this decision. Eschewing lead generation as an offering was a straightforward business decision…. the economics don’t make sense.

Before fully explaining this statement, let me provide some context. Companies typically refer to inside sales and outside sales. Instead, we talk about the sales process in terms of sales resource competencies – specifically, the capacity to Initiate Opportunities and the capacity to Develop (and close) Opportunities. Instead of fixating on location, our competency-based approach acknowledges the reality that significant business can be closed ‘over the phone’ while dispelling the image of outside sales as cruising around town in the company car sipping Frappuccinos.

The economics of Opportunity Initiation can be considered from two vantage points. The first is Revenue Impact defined as the relationship between level of effort and the degree to which that effort directly contributes to revenue generation. In terms of time and effort, Opportunity Initiation represents 75% of the total energy required to generate revenue. At the same time, that effort does not appear to directly contribute to ‘closing’ deals. Companies find it hard to justify allocating more than 25% of their total cost of acquiring that revenue (Cost of Sales) to this portion of the overall process.

This 75% contribution of effort to 25% allocation of cost is only half the story. The economics of Opportunity Initiation must also be evaluated based on the expense associated with running a team. Lets do some math:
- Assuming we are targeting a 20% labor cost of sales, $1,000,000 requires $200,000 in salaries and commissions.
- In our suggested model, a minimum of 25% of this total cost of sales ($50,000) will be allocated to Opportunity Initiation resources with the balance ($150,000) used to fund Opportunity Development resources.
- If we factor a conservative 20% labor overhead (taxes, benefits, etc) we are left with $40,000 and $135,000 to fund Initiation and Development respectively.
- Many variables exist (average deal size, sales cycle etc.) Regardless, it is probably reasonable to believe a ‘Developer / Closer’ can be acquired for a base of $65,000 and $135,000 in total target earnings.

Focusing on Opportunity Initiation, we are left with a few challenging questions:
- Is it reasonable to believe you can field an effective Opportunity Initiation effort with $40,000?
- Who will manage this function? To this point we have ignored the costs associated with managing ‘Initiators.’
- Acknowledging not every sales person is successful and ‘Initiators’ are prone to moving on, what is the impact of resource failure rate / attrition on the economics?

I started this entry by stating the economics of Opportunity Initiation are terrible. It is interesting to note that our clients typically report a 25% success rate for their internal Initiation efforts – that’s right…factoring involuntary (‘You’re fired!’) attrition and voluntary (‘I quit’) attrition, it takes four resources to deliver the expected revenue from a single funded headcount.

This data leads to two conclusions based on three hypotheses:

Hypothesis #1 – As a stand-alone function, Opportunity Initiation (inside sales, lead generation, etc.) is unsustainable. More accurately, it is difficult to cost justify lead generation as an internal effort due to the expense to impact ratio compounded by a high degree of resource failure and attrition.

Hypothesis #2 – Outsourcers face the same economics, which is why 3rd party vendors are populated with $12 per hour staff that lack the necessary skills or training. You are unlikely to find an outside vendor that can deliver a quality service at a price you are willing to pay.

Hypothesis #3 – Without an effective Opportunity Initiation effort, it is difficult to fully leverage your higher value (and higher cost) Opportunity Development resources.


Conclusion #1 - Companies must deploy Opportunity Initiation efforts in-house because internal efforts can be quality-driven even in the face of poor economics. Stated differently, a company has the capacity to over-invest if a long-term benefit can be found. Outside vendor s rarely take the same approach.

Conclusion #2 - The economics of Opportunity Initiation can be improved dramatically (and investment increased proportionately) if a company factors the long term benefit of using its Opportunity Initiation team as its primary source for tomorrows Opportunity Developers. In simple terms, the most important reason to deploy an Opportunity Initiation effort today is to ensure access to the experienced talent you will need tomorrow. In our research, an internally produced Developer/Closer costs you one-fourth of sourcing from outside your company.

Like I said…if you are considering outsourcing lead generation, you must be out of your mind