Very large deals can be a great opportunity for a company, or they can take away from the bottom line. Join David Levitch, Associate Partner, and Adit Pande, Partner, from McKinsey & Company as they share their findings on how to land the megadeal while ensuring the greatest return. Winning these complex deals requires better deal forensics, a new approach to pricing and engineering, standardized processes, better-aligned incentives, and more. It may be challenging, but it is more than possible.

Many of the companies that actually win the megadeal don’t properly understand the risks associated with the deal.”

David Levitch | Associate Partner, McKinsey & Company
 
 
 
 

Kevin Micalizzi: So, David and Adit, I’m super excited to have you here with us today on the podcast. For those listening in, we’re speaking with David Levitch, Associate Partner at McKinsey and Company based out of Chicago. Welcome, David. Would you share a little bit about yourself?

David Levitch: Thanks, good to be here. I work primarily with heads of sales on seller productivity and sales force transformation. Prior to McKinsey, I actually carried a bag out in the field. I sold software for Oracle. I sold services for CEB.

So my career has really spanned both actually, out there selling services as well as actually working with heads of sales on what the future of the organization’s going to look like.

Micalizzi: Excellent. And we’re also joined by Adit Pande, who’s a Partner at McKinsey based in Silicon Valley. Adit, would you share a little bit about yourself?

Adit Pande: All right. Thanks for having us. I’m out of Silicon Valley. I’m a Partner in McKinsey, and I lead McKinsey’s sourcing practice. As part of that, I work with large enterprises and help them on some of their biggest sales decisions as it relates to large services.

David and I have been doing a lot of work in this space. It’s a pleasure to be here.

Micalizzi: Fantastic. I’m Kevin Micalizzi. I am the executive producer of The Quotable Podcast. And I’m joined today by my guest host Tiffani Bova, Global Customer Growth and Innovation Evangelist at Salesforce. Welcome back, Tiffani.

Tiffani Bova: Oh, thanks for having me, Kevin.

Micalizzi: Let’s jump into it here. We’re talking today about the mega deal. And I know so many sales reps in so many companies think everything will be fantastic if we land a couple mega deals.

Would you share a little bit about why you focused on the mega deal? And we can jump into how to land those deals.

Levitch: Sure. What we found as we started working with a number of companies ranging from large telcos to outsourcers. — we even worked with a food services provider that provides food to one of the large professional services teams — what we found is that these companies have these deals that could make up about 1% of the number of deals, but 40% of the revenue.

And we found that roughly, generally two ways that companies approach these deals: One is they let the people in the field run it. The people in the field have never seen a deal this size, and they often don’t know how to handle a deal that might be 10, 20 times what they’ve ever done in their career.

On the other side of the fence, we’ve actually seen a number of heads of sales step out of their day-to-day role and actually go run the deal themselves.

I worked with one fintech company, the head of sales stepped out for the largest deal that the company had ever seen. They wound up winning the deal. And I said, “Well, how did the rest of the quarter go?” And he said, “Oh, we blew it. No one was actually managing the business.”

But what we’ve found is that it’s difficult to win, because people don’t have a process in place. But even worse, for many of these companies, when they actually win the mega deal, they didn’t properly understand the risks associated with the deal. Maybe the OI was too low, the operating income was too low. They thought, well, we’ll upsell later. Or there were terms and conditions in the contract they actually didn’t understand, because the contract was so long, they wound up destroying material shareholder value.

So as we got into this, we found, look, they’re actually really difficult to win. And when companies do win them, they’re actually not winning what they thought they were winning. And so as Adit and I started working with this, we thought, there’s got to be a better way. That’s really what we focused on across the last number of years, is developing that better way forward for companies.

Micalizzi: Oh, it almost sounds like a Moby Dick scenario there.

Levitch: That’s a great way of putting it.

Micalizzi: From looking at an article you had written around this, I know you talk about a couple different areas that companies should be focusing on to overcome some of these challenges and really approach the deals in a proper way. What’s the best place to start?

Levitch: As I think about the best place to start, I think it’s just putting a little bit of what I would call rationality into the deal system. We often seen, again, for someone that has never seen a deal that size as 10, 20x, they’ll do whatever they can to keep the deal going.

But once you start doing that around five, 10, 15 deals, for some companies, they can’t sustain that many mega deals. Others, the number might be 30 or 40, but how do you actually drive deal forensics into the deal to eliminate what I would call deal fever?

And both at the front line as well as all the way up to the management team, all the way up to the CEO. Every so often the board gets this deal fever. And yet, if we can just win this deal, the rest of our problems for this quarter for this year will be solved. So I would say let’s start there.

Bova: I just want to back up a little bit on what you just said, because I think, number one, I couldn’t agree more, having sort of carried a bag myself. Those big deals get everyone’s attention. Everything stops. Everyone gets focused on it.

All of a sudden, there’s 25 people that are quote, unquote, working this big deal and putting all kinds of effort on it. And, as you said, you can’t kind of scale those big deals for all kinds of reasons, just because of resources people throw at it.

But more importantly, do you think that they distract some of the smaller deals, if you will, within the pipeline at the time that actually may be more profitable and better for the business, but that top-line revenue number is kind of the shiny object in the corner?

Do you think it’s too distracting because of its sheer size versus its real value to the business?

Levitch: I think that’s a huge problem. I remember Adit and I walked into a deal room one time, and there were 125 people working on the deal. And the region kind of literally stopped everything else they were doing to try to go win this multibillion-dollar deal.

And it turned out, when we actually started to go through the deal forensics, they had less than a 10% chance of winning that deal and even lower likelihood of winning that deal at any sort of profit.

And so our recommendation was to shut down that deal and actually start focusing on the regular business of the day.

Pande: Yeah. I think there is an organizational element to the question. Should large deals be handled as part of the day to day? Should they be handled separately? What are the pros and cons?

We understand companies are different, and they’ll organize themselves differently, but we’ve often found that there is some merit to considering separating the two, a little bit to your question.

Part of the reason is the distraction of the resources and the leadership. The other thing is we often find that if you don’t measure and account for winning or losing large deals separately, the experience at least is that sales organizations tend to think that they will, especially in the second and the latter half of the quarter of the year, make up for the losses of the smaller deals to the wins in the bigger deals.

So it’s actually quite disruptive, and you start to carry forward the gap that you inherit through the smaller deal that you’re not winning by chasing some of the bigger ones.

So one of the things that we do talk about in our article and one of our experiences is — and it may or may not fit for every single situation — but we often find there’s real value in separating the two out for the purposes of focus, but also for the purposes of having a better fiscal discipline in winning quarter by quarter so that you’re not sort of depending on the bigger and bigger [wheels].

Bova: Yeah. And I guess my question back would be big-deal definition if you are an organization that has a big average sales price — it could be multimillions. But if you’re a company that has sort of a smaller average sale price, a big deal may be 10, 20, 30,000 [dollars]. Right? Big deal doesn’t just mean millions. It could be big deal per company. Fair?

Pande: Yeah, I think so. I think if you had to put a rule of thumb, it’s probably if you took your average deal size, we’d say a big deal is somewhere in the 10-times range of that average deal size. But to your point, absolutely. I think the challenges that, let’s say, a $10 billion company would have, those challenges will typically arise in the $100-to-$300 million annualized revenue kind of deals. For a smaller company, that could very well be $50 million or $20 million, as well, if you were especially a billion-dollar, $2 billion company.

Levitch: And for a startup that’s trying to get their first deal on the ground and trying to really growth hack their way to profitability, this might be an even smaller deal, where they said, “Look, we’ve only done small pilots so far. This is the first time anyone’s actually bought our services, bought our software.” And so you might see the whole company stopped and focused on that one area.

So I think that’s a fantastic point. It’s methodology. These rules don’t just apply to your large outsourcing companies, your large B2G contracts. They really do apply across the board.

Bova: And you could almost play that out for partners as well. I’ve worked with many companies who say, “We’re going to go strike a deal with a McKinsey,” as an example. “And we’re a startup, we’re a small business. We want to get access to that sales pipeline that someone like a big, global SI, top-five kind of guy can give us.”

And so same thing almost on the partnership, right? If your average deal yourself is X, and then Y would be the 10-times size.

But if you could get to partners that always did those very big deals, sometimes they get confused and go chase the big partner and kind of go, “Okay, we struck the partnership. We built it. When will the deals come?”

Levitch: I think that’s exactly right. That’s a major issue, is once you’ve signed it, there’s more work to be done. And you can’t just rely on having won that or having closed that.

Micalizzi: David, when you were starting, you were talking about how, for some of these deals where companies have landed them, they’ve actually not price it right. They’re really doing themselves a disservice by closing these deals. What are you seeing happen?

Levitch: People just don’t understand the spreadsheets they’re putting together oftentimes. They don’t understand the terms and conditions, unlimited liability that are actually going into these deals. And so because there’s such information asymmetry, it’s very difficult to actually get underneath what’s in there, especially during a very short deal cycle.

Pande: I think the challenge that David is outlining is sort of the approach companies use in large deals, when you’ve got hundreds of little pieces that need to be priced.

The other angle to this is, if you think about pricing for a 10-person application service, that’s sort of the standard that these companies are used to. In a deal that’s $100 million or $500 million or a billion long, right, typically the approach that the client of a customer is looking for is not actually, okay, if we just scaled everything, can you tell me how much this would cost for 500 people, 10,000 images, etcetera?

They’re actually not, even though they’re issuing an RFP, request for a proposal, they’re actually looking for a RFS, a request for a solution.

So the approach that we found to be winning instead was rather than taking the inputs and trying to price it through this complicated sheet that made sure you didn’t miss anything, our suggestion — and we found it to be very valuable for very clients that we’ve worked with — was to actually say, “Let’s take a clean-sheet approach and start with — what would be the right solution for the kind of service that the client is asking for?”

And we actually don’t tie ourselves to their current system, their current processes.

And when companies are able to do that, what clients get back in return is actually a much more differentiated price and a much more differentiated solution and a much higher value proposition and a sense of innovation that actually others are unable to create if you’re simply following these spreadsheet-based solutions.

So when we think about pricing, it’s not just simplify the solution, simplify the approach, simplify the spreadsheet, or automate the spreadsheet. That’s actually probably the tail end of the idea.

The bigger idea here is go from replying to a proposal to building a solution that’s clean sheet, brings in the newest technology and actually challenges the customer to want to change and transform their business process and then figure out what the price would be.

Bova: And what makes it hard for people to not do it in that order? What have you found that is the opposite of that? And how have you helped? What are sort of your top suggestions for getting people to think about the opposite side of that, like you just described?

Pande: Yeah. The issue with many of our clients is that they’re not organized to bring seven different parts of the company together seamlessly, to think innovatively, to think creatively, and then to challenge the customer.

So part of why we think this is something you should do in a big deal versus, let’s say, a much smaller deal is in a smaller deal, it’s typically a more narrower solution, narrower scope, so a piece of a company. Let’s say it’s a solution that’s needed for a storage requirement or a certain type of development project. You can do that with parts of a company.

But when you’re thinking about a $500 million deal, you do need all arms of the company to come together. And this is one of the big challenges that we see in at least companies of $5 billion and bigger. It sounds like a simple idea, which is, can we just get all the different arms of the company — the storage arm, the solution arm, the services arm, the compute arm, the network arm — to all come together and seamlessly have a solution that works for the client? So part of the issue is just cutting through the organizational boundaries.

The other thing is, each of these parts of that company actually have their own go-to-market teams, have their own targets. So oftentimes they’re actually not thinking about an end-to-end value proposition for a client. They’re actually thinking about their individual business cases, their individual quarterly provisions.

So what we suggest in large deals is, number one, you have to cut across the organizational boundaries. By the way, that’s typically done at the CEO level. So another theme that we should talk about at some point is the role of the CEO. But, number one, cut across organizational boundaries.

Number two, put individual business unit targets aside and actually build the best solution for the client. Again, this is almost always done at the C-suite table, because otherwise, individual businesses typically tend to not, at least in our experience, be as easy in working with to put aside their own targets and sort of put the client’s target in mind.

Micalizzi: I’d like to pick up on that in terms of the CEO, because I think a lot of them live with that hero culture mindset and love to jump in with these kind of potential opportunities, which isn’t necessarily effective overall. What are you seeing with CEOs?

Levitch: One thing we’re really seeing with CEOs is, for these type of deals, taking a more active role in how to think about them. And so oftentimes, as Adit mentioned, each BU has a different head of sales. They’re each optimizing for their own group.

The CEO or the head of a number of BUs often needs to be the person to pull all that together and say you’ve now stacked margin on top of margin. You might have security that fits within each BU and is already embedded into the cost of the project.

And then you might have security that fits overall and isn’t added on. And so if you’re actually trying to be competitive, you can’t add in security in multiple places, then add it on to the entire deal.

So we’re seeing CEOs take a much more active role. Many companies are actually taking a process by which they actually price the deal first and say, “Here is the number we need to hit. Let’s solution to that.”

And then the CEO will cross the BUs and say, “Okay, here’s actually how we’re going to solution it. We’re going to take security out of here. We’re not going to layer on security here, because we know we’ve got to be within this target price range.” And that target price range might be $5 to $6 million for a smaller company. It might be $250 to $275 million for a larger company. But you know, based on past history, this is where our competitor’s going to land.

And as a CEO, it’s your job to do a few things. One is to make sure the company lands there, to make sure the [BUs] are actually working through those things, but also to make sure that each and every person is actually taking an executive-level view, because you actually get to a point where you might have a frontline seller, you might have a [pricer], an engineer that’s taking the view of the people that are working with every day.

But oftentimes these are company-changing decisions, so the CEO actually needs to pull people out and say, “Are we answering what the board is concerned about?” and taking a customer lens as well.

So that’s what we’ve seen very successful CEOs do, is give the head of sales the room they need to operate, but ensure they’re enabling them to be successful.

Pande: Yeah, maybe just to build on what David said, I’d say historically it is not uncommon for CEOs to take on an external-facing role in such large deals, where they’re actively engaged with the CEOs, their CEO counterparts in these large-deal situations. But I think we would say that that has to continue.

The piece that I would say is relatively new is not so much the external organization of the CEO, but more the internal activism of the CEO within the company. And I would almost break this apart into two pieces. One is more strategic and then one is more operational.

On the strategic side, it’s really convening the teams on a weekly basis to review these large deals and really get into some of the forensics of, where are we exactly on this deal? Are we on a trajectory that we think we will win or not? And are we basing these on actual facts and data?

Second thing, again within the strategic umbrella, would be the convening of the different heads of the businesses and actually having a solution that cuts across the different businesses, cuts across the different business targets and has a solution that works for the client.

I think on the operational side, I saw this really well with one of the CEOs we worked with, was: He really role-modeled right from the top. The situation was the company was in a culture where the heads of the businesses would often delegate some of the decisions and many of the meetings.

And in this particular place, for all the large-deal reviews, which were on a weekly basis, the CEO essentially made a rule that no one was allowed to delegate. And he did this mostly to role-model the fact that the decisions for these large deals had to be done in the CEO’s boardroom table and everybody had to be present, either on the phone or in person.

I think it took about a month or two for the senior team to understand how important and serious the CEO felt about these large deals.

But it was a very important operational step, one we often don’t see with other CEOs, where this particular gentleman made it a point to showcase how to run the meeting, how to ask for the facts, how to push back. In some cases, if the deal team wasn’t prepared, actually stop the conversation and say, “Come back the next week. Your further budget will not be approved till you’ve come back and actually given us all the right facts.”

So anyway I think the external orientation should continue, but there are a large amount of things that we expect CEOs to do within the internal context, both on a strategic level as well as operational.

Micalizzi: Now, you touched on incentives earlier. And I think most reps are compensated on whether the deal closed or not, not whether or not it’s good for the business or actually has a long-term viability.

What are you guys seeing in terms of what works for incentives on these kind of deals?

Levitch: We’ve seen companies try a host of different items to try to drive the right incentives, everything from MBO [management by objectives], because these deals are so long in between sometimes the start and the end of the deal. And oftentimes whether it’s a startup or even an established company, a lot of these deals are exploring new ground that’s never been closed before all the way to we’re just going to pay you on a straight revenue topline number.

Our recommendation based on what we’ve seen is, the MBO generally encourages the wrong type of behavior. I worked with one agent, a Telco that managed entirely on MBO for these large deals with a kicker at the end when they closed the deal. It was around, did you set up an introductory meeting? Did you gain intent? And what that drove was the number of deals that should have been eliminated within the first month, within the first two months that sellers knew they continued to hit MBOs even if they wouldn’t hit the kicker at the end.

When we’ve seen people focus entirely on revenue, we’ve seen the type of behavior I described before, which is — I don’t care about the profitability of the deal. What I only care about is the topline number.

So what we’ve found very successful for companies is no quota commission only for these deals, and more a focus on the end deal. And so that means, what’s the revenue at the end? What’s the OI that was modeled? And then a holdback for a year to actually see, does the model hold up?

And so what’s been successful, many sellers will say, “Well, it’s not my fault if delivery can’t deliver the number.” That’s why it shouldn’t be the entire piece, but holding back 20–25% based on the OI in the deal, that goes up or down based on if the deal’s actually more profitable than the model, they actually get paid more.

So it’s got to go both ways. And then oftentimes we see a kicker on certain products. But those are some of the main things we’ve seen be successful in that incentive space.

Bova: So I have a questionnaire that I’d love your guys’ opinion on. And maybe you even disagree with what I’m about to say, which is always great, but I see a lot of rigor go into pricing around — like, what is the price a company’s going to charge? What’s the product? What’s the roadmap? What’s our strategy?

There’s a lot of C-suite analysis and kind of strategic thinking and rigor that goes into all parts of the business, but not so much on the sales side. And it’s specifically around like this conversation we’re having around compensation. If there’s 100 people in on the deal — like we were talking about a few minutes ago — does everyone get paid?

And the same level of rigor, I just don’t see go into the planning of something even as basic as compensation. Would you agree with that?

Levitch: I’ve seen some companies do an excellent job of that. And it’s a difficult transformation, because I’ve seen a lot of companies that handle it very poorly. Specifically what I’ve seen that works well is, to your point, I think you roll it into a win bonus pool. So the seller gets paid on what the deal actually closes for on those metrics. And then, for many of these deals, money’s been put aside for a win bonus pool that’s then split among the solution architects, the solution, the presales, whomever else was involved in that deal.

There’s often times, when it’s not done well, a lot of infighting that exists over who gets paid — “I should have gotten paid more.”

What we’ve seen is companies start to model it upfront and say, “This is what we expect to happen. Here are the people we know are involved in the deal,” and actually start to syndicate that spreadsheet months in advance of the deal closing and edit it as the deal goes on, so there’s always a view of here’s how we think the win bonus pool will pay out. But I’ve seen companies without this [plan], and it always leads to frustration and often attrition right after that.

Bova: Yeah, and I think just even beyond compensation, right? How do they approach big deals? They put a lot of rigor on how do we approach product development, R&D, partnerships, finance, credit, organizational structure. But that same kind of rigor, I just don’t see beyond compensation, just kind of the entire act of selling, you know, in quotes, selling.

Levitch: I think that’s exactly right. And that’s part of the reason Adit and I have been doing a lot of work here, is we go into a lot of companies, and there’s just no rigor, it’s very ad hoc. There’s no formal approach to even relationships.

So I’ll use relationships as an example. A lot of the companies we walk in to work with, we’ll say, “Who are the buyers?” “Oh, it’s going to be the CFO.” “Does the board approve?” “We don’t know. We haven’t figured that out yet.” “Who influences the CFO if the CFO is making the decision?” “We haven’t really thought about that.”

And so that rigor that you expect to go into an everyday sales cycle is not even going into these big-deal sales cycle. And you start with, “What’s the strategy?” all the way to, “How do we execute it?” And in a lot of companies we go into at first, we just don’t see that happening today. And I think that’s spot-on. And I think that given the institutional risk that many of these deals pose to companies, I think that’s a major problem.

Pande: And the same sort of analogy can extend to other pieces of areas that we would [unintelligible] want more rigor. I think David talked about pricing and relationships. We’ve looked at that, even the simple question as, how is the deal going? The question usually gets answered by, “Oh, we think we’re going to win,” or, “We think we’re doing well, we had a good presentation.” And typically the questioning stops there.

We found that you probably want five or seven levels of more detailed questions that would actually get you to a more fact-based point.

For example, right, where are we at on the relationship? We’ve just talked about that. There should be another line of questioning around the solutions. How distinctive are our solutions? How much of the company’s portfolio are we bringing in over here? Who do we know on the client side? What kind of contracting mechanisms are we giving? What kind of solutions are we trying to put into place beyond the initial contract?

Our view is that many of these second-order, third-order questions are being missed when we’re asking simple questions like, where are we at on the deal? And in our mind, that rigor is a critical element of making sure that you can create the transparency to knowing whether the deal’s actually heading towards a win or not.

Micalizzi: Let’s translate this for our listeners. What do they need to be focusing on? When they walk away from this episode, from the small business perspective as well as large enterprises, what do they need to do to get themselves moving in the right direction?

Levitch: And I think the points are equal for whether it’s a large business or a small business or anywhere in between, which is the first is just understanding the deal forensic. How are we actually doing in this deal? Very rigorous, that second- and third-level order of questions. Can we actually win this deal or not? And what are the five or six actions we need to take? Versus just, hey, it’s a big deal, that last meeting went really well.

The difference between the second is the difference between pricing and engineering. So how do we actually ensure that the solution matches what we need to give them? And it might be a minimal viable solution, right? We need to get in on price, then we can upsell. Or you know what? This is self-sourced. We can expand the solution. We can give them exactly what we want.

But making that decision and then sticking to that decision. A view of relationships and actually understanding who are the decision makers, who are the contributors, all the way down to the engineers that are working for that company you’re selling to and understanding what motivates them, what’s their goal, not just the CFO, not just the CEO.

And then really, again, whether you’re a small company or a big company, as an executive, taking a deep understanding and really a deep push into the deal to ensure that everything is coming together, so really being in the details.

And then, finally, I think there’s a future on post-loss activity that we haven’t talked about, which is we’ve seen it in about 20% of these deals, where when a client stays engaged post-loss, there’s actually significant revenue and significant upside that can come post-deal. And so there might be a deal you know you’re going to lose, and actually coming out in that order, we do it that — do we actually switch it to more of a marketing campaign? We’re going to pull away sellers. We’re going to pull away time and effort. And we’re going to stay close to the executive team to actually push this deal.

So I think really taking, understanding, will we win or won’t we, and even if we won’t, what are the activities we want to do to give ourselves a better position moving forward or to give our competitors a more challenging position moving forward?

Pande: Maybe just to summarize, I’d say that companies have to start by acknowledging that a big deal is different from a smaller deal. It is not something you stumble upon. While it’s not high in volume it is very high in terms of company economics and company profitability.

It requires a level of discipline that is not commonly seen for the smaller deals. And it does require the senior C-Suite to take an active role and get personally involved.

And without repeating all the things David said around deal forensics, relationships, pricing, I think it’s critical that a number of elements come together for companies to be able to win these larger deals.

Micalizzi: Before we wrap up, though, I want to ask you both my lightning-round question. So, David, if you could take all of your knowledge and experience you have now, go back to the beginning of your career and give yourself one piece of advice, what would you tell yourself?

Levitch: If I had to go back and actually the beginning of my sales career, with everything I’ve learned now, I think now that I’ve actually worked on the sourcing side as well, how much these companies that are actually out there making the purchases, heads of procurement, actually need the services that our sellers are selling to them.

I don’t think I understood how challenging they find it to actually find the right answer, to find the right solution, to drive innovation into their companies. They really do need to partner with sellers. They really are looking for sellers to bring the best of their company forward.

And I just wish I’d had a better understanding of how critical it is from a sourcing perspective, not just a selling perspective, to have those partnerships and those long-term relationships between the companies.

Pande: I think I would say that the two things that I would … I think buyers value the most is actually the obligation to dissent and the obligation to innovate. And it’s much more than what sellers of services, especially in large deals, understand or acknowledge or are willing to be able to move towards. — if they would be willing to tell the buyers the things they should or shouldn’t actually be asking for or the things they should be changing.

And then on the innovation side, the amount of change that the buyer should be willing to incorporate around architecture, around business process.

I think if more sellers would be willing to dissent more and innovate more, it would change the game and the dynamics of the whole industry.

Micalizzi: Fantastic. So I just want to thank you both for taking the time to join us today.

Pande: Wonderful. Thank you for having us.

Levitch: Thanks for having us. It was great.

Micalizzi: And, Tiffani, as always, thank you so much for joining me.

Bova: Great, Kevin. Thank you for having me. It was a wonderful conversation.

 
 
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