MIT 15.010/011
Sloan School of Management
Outsourcing Sales?
Susan stared in her glass of beer. This was the first time she was in charge of the whole
consulting project. Making it a success was a must.
Her client was a medium-sized television station. In a drive to cut costs, they were considering to
outsource sales. Susan had just participated in the board meeting in which the key contender
presented its proposal. The board had a positive impression but wanted to hear Susan's reaction.
According to the sales company's proposal, they would be compensated on a variable basis. In
particular, they proposed the following scheme:
- 10% on the first $400 million in sales
- 5% on the next $200 million in sales (i.e. on the part between $400 and $600 million)
- 2% on the sales above $600 million
The sales company argued that their sales force was much more effective: for similar clients,
their revenue generated per dollar spent on sales was about 30% higher than what the client
currently achieved.
The client had about $500 million in advertising sales and had no other sources of revenue. Their
fixed cost was $450 million, which went mainly to the purchasing of television programs and to
general overhead. Finally, they had $50 million in sales expenses, all of which was variable (in
function of the number of ads sold).
If you were Susan, would you advise your client to accept the proposal?