Using a team of Sales Development Representatives (SDR) to generate qualified leads for your sales executives is a proven method of driving predictable, sustainable revenue.
However, the cost of instituting an SDR team is often miscalculated. The decision to build or outsource an SDR team must consider the full cost of hiring, training, managing, and employing a team of reps.
According to the article, “How Much Does An Employee Cost?” by Joe Hadzima, there are a handful of unforeseen costs that accompany the hiring of an employee. He cites Basic Salary, Recruiting Expenses, Taxes, Benefits, Space, and Equipment as the main external factors to consider when hiring an employee. Each comes with its own challenges and associated costs to consider during your employee search.
Often, the costs mentioned in this article are overlooked, resulting in a misassesment of value. This article will discuss expenses to consider when building out a team of SDRs, and how much you should expect to spend if you build the function in-house.
The numbers below have been gathered by infoAnalytica and represent the national salary and employment cost averages in the tech space.
Three Reps: Salary = $59,250 OTE (X3)
An obvious cost that everyone recognizes – you must pay your reps. And it’s not just their base salary, but their On-Target Earnings (OTE) as well. This figure includes extra costs like their commissions, winnings from contests, incentive programs…it can rack up quickly – especially if you have a good rep (which you want – it’s expensive to hire bad talent!).
Manager Salary: $91,500
Most often companies have two options when it comes to managing their SDR team. They can 1) Hire an Inside Sales Manager to provide continuous support and maximize the results of the SDR team, or 2) Use the (far more expensive) time of a VP or Director to manage the team in addition to his or her vast responsibilities. Whether hired or promoted internally, hiring a manager is a necessary cost to maximize the success of your SDR team.
Hiring Costs (~40% of salary): $107,700
Employment taxes, health benefits, payroll costs, workspace, computers, phones–these are hard costs that are unavoidable when hiring. In addition, attracting the right talent to your organization is no small cost. Recruiting expenses coupled with the time-consuming interview process can be pricey. Considering it is still necessary to train these new reps means paying for a training program, and taking time away from current employees to train new SDRs.
Sales Tools: $10,200 / rep / year
The modern sales stack is chock full of technology: CRM platforms, high-quality data services, outreach tools, sales intelligence technology… they’re all necessary expenses when building an SDR team. If you want your reps to succeed, then you’re going to have to provide them with the tools to do so.
All these costs add up quickly. Coming in at a bit over $400K you can expect some sticker shock – especially when you might have first budgeted ~$200K to build out your team. Hidden expenses like workspace/equipment, manager’s salary, sales enablement tools, etc. drive that number up. Often you’re picking between spending actual money (buying tools, equipment, hiring a manager) or the opportunity cost of existing resources (using current employees to train new hires, giving managers double duty). Either way, it’s not an enviable position to be in.
Alternatively, a standard three rep program with demandDrive costs under $300K / year. With over $100K in immediate savings, organizations can reallocate funds to improve their product/solution and catalyze growth. Cutting overhead costs (and the headaches that come with them) and outsourcing can be a viable (and healthy) alternative.
It only gets more attractive from here…
What Happens When You Hire the Wrong Employee?
The scenario above outlines a situation with a “perfect” SDR and 100% retention. Accounting for poor performance and turnover naturally, increases the Total Cost of Ownership sum.
According to research done by the UndercoverRecruiter, investing in hiring, onboarding, and firing a new employee can end up costing around 30% of their first-year earnings. These bad hires also negatively impact total sales opportunities – on average, a failing SDR loses 10% of their total sales opportunities compared to a strong rep. To compound this point, when you replace a poor hire with a new hire, you can expect your existing team to lose 40% of their time to hiring, onboarding, and training.
Let’s assume the average salary in a given company is $50,000 per year. If the cost of turnover is 150 percent of salary, then the cost would be $75,000 per departing employee. For a company of 100 employees with a 10 percent annual rate of turnover, the annual cost of turnover would be an estimated $750,000. – Katherine Graham-Leviss, The Perfect Hire: A Tactical Guide to Hiring, Developing, and Retaining Top Sales Talent
Turnover is a constant battle when it comes to hiring and onboarding new employees – it’s virtually unavoidable if you continue to hire internally. There will always be SDRs looking to advance their careers, individuals who aren’t great fits culture-wise, and people who do not live up to interview day promises. No matter how much money you funnel into your recruiting and training programs, you will always have employee turnover – it’s an unfortunate reality. Add that to the price of hiring and onboarding reps and the total cost of an internal team grows steadily higher.
Outsourcing hiring to an agency allows you to have a constant rotation of SDRs at your disposal. The outsourced company must deal with turnover as well, but based on the nature of the business, they’re better equipped to promptly hire or replace a failing SDR. By eliminating the downtime of looking for a new rep, you can focus your efforts on other aspects of your business.
How a Wrong Hire Can Drain $$$
When you make a “bad” hire, it not only impacts the short-term productivity of your team but impacts long-term success as well. The reverberations of a bad hire sound into the future, as current employees must shirk their own work to train/onboard a new (new) hire, while absorbing the responsibilities of the failed one.
Instead of uncovering sales opportunities, your current SDRs are going through the training process with the new hire to get them up to speed. Your sales managers are giving the new hire the same workshop they just gave to the old “new hire,” and are less hands-on with the current team. Recruiting isn’t building a talent pool, but instead depleting it to cover rapid turnover.
Credibility Loss: You want your brand represented in the best possible light, and one or two bad experiences with prospects can set you pretty far back. A bad rep can damage more than just your pipeline, they can hurt the name and brand that you’ve worked so hard to build.
Slippage: Work that isn’t being done has an associated cost. The time it takes for other reps to pick up the slack from bad/fired employees takes away from their own activity, and this means less closed deals or appointments booked. The opportunity cost of your top reps picking up the slack can spoil your sales process.
Ripple Effect: Just because one employee leaves/lazes around doesn’t mean others won’t be impacted. All it takes is one bad egg to ruin the basket, and when the basket is ruined it can be costly to replace/freshen up.
Knowing all of this means it’s imperative that your team focuses on hiring the best possible reps it can – otherwise it hurts your bottom line. As Joe Hadzima says in his article, How Much Does An Employee Cost? “be sure to devote the time to make sure that your hires are as close to perfect “10’s” as possible. Anything less will be a drag on your business.”
Addressing False Stigmas of Outsourcing
Daniel Paul, Managing Director, demandDrive, addresses some pre-conceived notions on outsourcing and where people find cause for concern.
Technology companies are familiar with the idea of outsourcing aspects of their business. There are many prominent Business Process Outsourcing (BPO) firms that provide both back office functions like HR, accounting, and finance, as well as front office functions like customer service. The benefits are well documented, as companies can leverage experts who have built businesses around these specific processes (and who can often provide them at lower costs), so they can focus on perfecting what makes their business great.
While the idea of outsourcing is not new, many companies are reluctant to employ outsourced vendors in sales, particularly in sales development. There are many reasons for this, however, businesses may be overlooking a great opportunity.
A sales development rep is often the first point of human interaction a prospect will have with your brand, and the importance of representing your brand the right way is paramount. For that reason, it’s understandable that companies may be a bit hesitant to trust a third party with such an important function.
That said, many of the same companies are very comfortable working with creative marketing agencies or PR firms to help define and represent their brand. These agencies draw on decades of experience and are experts in the design and execution of your brand strategy. They also allow companies to leverage larger teams on an as needed basis, rather than carrying an abundant headcount in the creative department.
The same can be true with the right Sales Development partner. Experts in the Sales Dev space draw on years of experience building and managing teams in many different markets. As a result, guidance on how to represent your brand and the appropriate channels to do so comes from a deep pool of knowledge that might not exist internally.
Security & Control
Another reason a tech firm might think twice about outsourcing their SDR function is concern over security and an overall lack of control. Why would you give a third-party access to and control over extremely sensitive client & prospect data? That sounds like a huge risk.
Companies are now so used to the SaaS model and its benefits that it’s difficult to imagine doing business prior. Imagine maintaining the infrastructure, software updates, and the giant IT closets filled with servers. So 1990.
The flexibility, and scalability of the SaaS model far outweigh any perceived risks related to security. The same is true when working with a quality outsourced services provider. With a proper contract structure, the security risks of working with a third-party vendor will often be minimal compared to an in-house team.
When you hear of a company outsourcing a function like a call center or IT development, it usually conjures up two assumptions: it will cost less, and the quality will be lower than an in-house team. And that can be true but with sales development, it’s a different story. With the right firm, it will cost you less to outsource an SDR team than building it internally, and the quality can increase with the right training and experience. Companies commonly outsource to offshore developers with an obvious hit in quality. Why then, does a stigma exist surrounding Sales Dev, when it is likely cost will decrease, and quality will improve?
It’s time to shed the stigma associated with sales development outsourcing and begin to realize the many benefits it provides.
Hadzima, J. (2005). How Much Does An Employee Cost? Boston Business Journal, 1-3. Retrieved June 28, 2017, from http://web.mit.edu/e-club/hadzima/how-much-does-an-employee-cost.html
Deering, S. (n.d.). The Cost of Bad Hires & How to Avoid Them. Retrieved June 28, 2017, from http://theundercoverrecruiter.com/cost-bad-hire-avoid/
Sundberg, J. (n.d.). What Is the True Cost of Hiring a Bad Employee? Retrieved June 28, 2017, from http://theundercoverrecruiter.com/infographic-what-cost-hiring-wrong-employee/
Graham-Leviss, K. (2011, September 15). The High Cost of Sales Team Turnover. Retrieved June 28, 2017, from https://www.entrepreneur.com/article/220310
Moran, G. (2011, September 10). The Hidden Costs of Employee Turnover. Retrieved June 28, 2017, from https://www.entrepreneur.com/article/220254