Sales Conundrum: Hire a W2, Independent Rep...Or Is There Another Solution?
By DAVID STONE
Partner, Excelerant Consulting
[August 9, 2024] – Say you’re a small- to mid-sized healthcare organization and you’ve got a medical innovation on the verge of commercialization. It’s time to build a sales force that can maximize your product’s potential, and grow your company’s profits in a meaningful manner. You’re right there!
But you need “feet on the street” to make that happen. How do you go about building a world-class sales team, one that can accelerate your journey to profitability? Let’s look at your options:
Hire a team of W2 employees to execute your Sales Plan and a Director of Sales who may be able to secure a few contracts with Group Purchasing Organizations [GPO] and/or Integrated Delivery Networks [IDN] if timeallows. You’ll pay them all a base salary, bonus and benefits.
Source a small army of independent 1099 sales representatives, pay them on a commission-only basis with no benefits and provide oversight on your own while occasionally being able to secure a GPO or IDN contract.
Which route should you choose …? It’s a fair question and you’re not alone if you find yourself toggling back and forth from one option to the other. After all, there are plusses and minuses [and economic realities] attached to each. Let’s break them down and see if I can help you make the best decision for your company.
OPTION 1 – W2 Employees
Using Floodgate Medical’s 2023 Medical Device Compensation Guide as a resource, let’s see what it will cost to build a 17-person sales team made up of Sales Reps, Regional Sales Managers, Directors of National Accounts, and a VP- Sales. We’ll include average base salary, bonus and fully burdened cost of benefits [i.e., medical/dental/vision insurance, life insurance, company car, 401k match, Paid Time Off, travel expense reimbursement, office expenses/overhead, etc.] for each position.
Sales Rep
Avg. Base Salary $ 96k
Avg. Benefits/Bonus $ 93k
Avg. Total Comp. $189k [Avg. Annual Base Salary Increase +5.5%]
Regional Sales Manager
Avg. Base Salary $140k
Avg. Benefits/Bonus $ 84k
Avg. Total Comp. $224k [Avg. Annual Base Salary Increase +4.1%]
Director of National Accounts
Avg. Base Salary $192k
Avg. Benefits/Bonus $123k
Avg. Total Comp. $315k [Avg. Annual Base Salary Increase +14%]
VP- Sales
Avg. Base Salary $210k
Avg. Benefits/Bonus $150k
Avg. Total Comp. $360k [Avg. Annual Base Salary Increase +6.7%]
Based on these numbers, let’s look at your total outlay for Salary + Bonus/Benefits in Year 1 for your Sales Team, assuming you start small with:
12 Sales Reps $ 2,268,000
2 Regional Sales Managers $ 448,000
2 Directors of National Accounts $ 630,000
1 VP-Sales $ 360,000
TOTAL $ 3,706,000
So … have you got $3.7 mil to kick around in your first year? Maybe so, but probably not.
OPTION 2 – 1099 Reps
With Option 1 now not looking so great, you turn towards outsourcing. One way to outsource is to contract with independent, commission-only sales people, saving you pricey base salaries and costly benefits. In fact, it’s the cheapest way to go.
But … these people obviously do need to be compensated so you can expect their sales commissions to be significantly higher than commissions paid to W2 employees. Non-employee commissions start at about 15% and many companies pay more than that to lure the best 1099 sales talent available. Another thing to consider is most 1099 independents are contracted with multiple companies and if you’re not paying one of the higher commissions, guess what, your place in the pecking order will sink to the lowest level.
Further complicating matters is the restless nature of sales people. They get bored quickly and motivation wanes if things aren’t hopping and commission checks aren’t flowing. In today’s healthcare industry, the sales cycle has been drawn out to 6 to 9 to 12 to sometimes 18 months, depending on what medical product or service you’re selling, product demand, availability, back-orders, supply chain issues, access to decision-makers, etc. That can become an interminable wait for an independent.
Also, some healthcare systems have a multi-tiered approval process with Value Analysis Committees and/or Clinician Input Committees which adds more time and complexity to the sales cycle. It’s understandable that a once-hard-charging independent can quickly become bored and disinterested in promoting your product. In these cases, there’s a higher probability you won’t see much of an ROI on an independent rep. Companies these days are churning and burning through independents.
If I’m a VP of Sales and I choose to go the independent route and only pay commissions, not only do I have to manage my sales team without any real authority, I have to accept the reality there are no guarantees [nor should there be] since they’re only being compensated for closed sales. Like so many things in life and business, the cheapest option is seldom the best. Meanwhile, there’s still an unmet need for Directors of National Accounts to coordinate the 1099 field sales efforts when targeting IDNs, as well as regional and national GPOs.
So, pick your poison -- W2 or independent sales force? But maybe …
[Not-So-Obvious] OPTION 3 – Outsource
If Option 1 is too expensive and Option 2 carries with it too much uncertainty, you should give serious thought to a third [less obvious] option that may ease your woes: Engage a proven, quality consulting firm to not only source and oversee a 1099 sales organization, but function as your Corporate Accounts Team and execute a vertically integrated sales plan which allows you to focus on high-level strategic initiatives to grow your business. This frees you up to go after the “bigger fish”, so to speak, meaning GPOs and IDNs.
But …
You may be thinking you can’t afford a consultant, right? In reality, you can’t afford not to. Especially considering a Director of National Accounts and VP-Sales will cost you nearly $675,000 annually. Let me explain...
Time and money are finite and results can and should be defined. What do I mean by that? Well, you have a set budget you need to work within and a specific time window for getting your innovation to market and generating meaningful profits. Those milestone dates and sales goals can be defined.
If this is the option you select, no work is initiated until all parties have agreed on a detailed Scope of Work, often including sales goals that are sometimes quantifiable with key milestone dates. Your agreement also includes a specific start date and an agreed-upon monthly fee with additional rewards as sales thresholds are achieved [sometimes called “Success Fees” for good reason].
There’s no ambiguity, everything is defined, there are no surprises. In a word, you get assurances. Everybody clearly understands the mission ahead and moves in the same direction, efficiently and collaboratively. When this type of arrangement is in place, success and profitability tend to come sooner. And the more you succeed, the more the consultant succeeds. It’s a win-win and great success is your shared motivation.
You also have no costly W2 benefits to cover with this option and, if you find the arrangement isn’t working to your satisfaction or the journey to market is taking longer than expected, you can pull the plug at any time with no costly separation package or threat of post-employment litigation.
A Collective Braintrust
Engaging a proven, quality consultant also means you’re gaining access to and harnessing the collective brainpower and experience of an entire team. In the case of Excelerant, each Partner has a minimum 30 years’ experience in healthcare with their own unique backgrounds, specialties, skills and knowledge which comes in very handy. If you are in a strategy meeting with one consultant and ask a question that cannot be answered on the spot, other expert colleagues and trusted partners are just a phone call away.
Another key differentiator at Excelerant is that it is not like many consultancies that meet with you, draw up a plan telling you what they think you should do, collect a check, and leave with a “Best of luck!” farewell. Excelerant consultants will sit with you and listen lavishly. They will identify realistic goals and dates, and help you craft a plan everyone agrees to [sales strategy, including targets, a national accounts plan, sales management, timelines, etc.].
If you need assistance building an Independent Sales Rep program, Excelerant can assist you with that. Our consultants know where and how to source these people and later manage them. They have the ability to oversee day-to-day operation of sales efforts and serve as your fractional VP-Sales. Trust us, you really don’t want to take on the arduous task of sourcing “feet-on-the-street”. It’s extremely time-consuming and not all independents are equally skilled. Do you really want to herd those chickens …?
Meanwhile, Excelerant is also at your side at the corporate level, serving as your National Accounts Team making key introductions on your behalf at targeted regional and national GPOs and IDNs. It can help you identify, position, promote and articulate your unique Value Proposition to this critically important audience.
A final note …
Today’s economy is a day-to-day roller-coaster. More than ever, every dollar matters. Stubborn high inflation, as well as several recent bank failures and resultant liquidity tightening for funding, have roiled America’s financial waters. A proven, quality consultant can help you make the most well-informed and cost-effective hiring/staffing decisions on your journey to market commercialization and profitability.
If you still believe you can’t afford to engage a consultant, you may need to hear it again: “You can’t afford not to”. Let’s chat.
info@excelerantconsulting.com
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ABOUT DAVID STONE
David has a proven, multi-disciplined background in sales, sales management, national accounts and national accounts team management. His areas of expertise include: clinical laboratory diagnostics, remote patient monitoring, surgical device, advance wound care, medical disposables and clinical nutrition.
David has spent more than three decades creating and cultivating key relationships within the U.S. healthcare industry, including Group Purchasing Organizations, Integrated Delivery Networks and Regional Purchasing Coalitions. He facilitates executive-level introductions and provides assistance with value proposition design, strategy, strategic account segmentation, market development plans, product launch, field sales optimization, offer development, and contract negotiation.
Most recently, David has worked at Coloplast, Mölnlycke Health Care, and Medtronic. His primary focus at Excelerant is to apply his wide-ranging background to help client-partners experience meaningful growth and margin enhancement.
ABOUT EXCELERANT CONSULTING
Excelerant Consulting is the go-to organization for med-tech companies that need to position products and services successfully for value analysis committees, contract acquisition, and sales modeling and execution to commercialize the launch of medical devices or services with Group Purchasing Organizations [GPO], Integrated Delivery Networks [IDN], or Regional Purchasing Coalitions [RPC]. Our clients rely on us to enhance their product positioning, navigate corporate contracting opportunities, and provide sales support to accelerate growth and profits.
For more info, contact Excelerant Consulting at info@excelerantconsulting.com.