“Grow the pipeline and convert deals!” is the clarion call of C-level leadership everywhere. While sales personnel are key to fueling growth, they are also among the first to be laid off when firm growth stalls.
Even though sales growth is fundamental to firm value, there is surprisingly little research on how sales force downsizing affects financial market performance or the conditions that may influence this relationship. Our new study, published in the Journal of Marketing, seeks to shed light on these impacts. Our goal is to help C-level leaders and HR teams avoid “flying blind” while making sales force decisions that have unexpected punitive outcomes.
In our exploration of past research, we identified three critical gaps. First, firms that lay off sales staff chiefly prioritize operations-focused decision criteria, such as reducing costs, without considering the impact on financial-market performance. Second, firm leadership may also underestimate how investors use information screening cues to interpret layoffs as signals of the firm’s inability to secure future cashflows. Third, managers need a way to address investors’ uncertainty and fulfill their information needs, because investors may view sales layoffs with skepticism.
To address these gaps, our research team conducted a study of 314 publicly traded U.S. companies from 2001 to 2012, using screening and signaling to contextualize the link between the size of a firm’s sales force downsizing and firm-idiosyncratic risk. We focused on firm-idiosyncratic risk because it is a clear measure of investor uncertainty, used in stock price valuations, and widely accepted by managers, financial analysts, and investors. In fact, firm-idiosyncratic risk accounts for up to 80% of total stock risk.
Key findings include:
- Sales force downsizing leads to increases in investor uncertainty as measured by firm-idiosyncratic risk, a new finding.
- Investors use a variety of information cues, including product market fluidity (degree of future competitive threats) and accruals management (level of transparency in their financial reporting), to screen downsizing firms. A stronger presence of these cues, combined with sales force layoffs, increases investor uncertainty about a firm’s future performance, thus increasing firm risk.
- Sales force layoffs driven solely by cost management concerns can have unintended consequences that offset any potential short-term cost gains. Thus, the sales force should be a critical component of a firm’s risk management and financing strategy.
- A one-standard-deviation decrease in sales force size (7.5%) increases daily firm-idiosyncratic risk by .076%. This represents a 6.7% influence, substantial enough to influence a firm’s cost of capital by as much as 17 basis points in yearly borrowing rates. Conversely, if a downsizing firm had maintained its sales force, it could have avoided a 0.46% increase in risk or an extra 102 basis points in yearly borrowing rates.
- Executives can weaken the effects of downsizing on firm risk by signaling a commitment to growth (via advertising) and by formally communicating their external strategic focus to Wall Street in the MD&A section of their 10-Ks.
In conclusion, sales forces are perceived as strategic drivers of firm value, so layoffs send mixed signals about a firm’s future prospects to investors. Leaders that don’t provide investors with information that addresses their growth concerns may find themselves buffeted by stock market gyrations and a higher cost of capital.
Managers can use our research to strategize the impact of sales force downsizing on firm value, provide targeted messaging to investors in the event of unavoidable layoffs, and make more informed resource allocation decisions for managing cost of capital. As interest rates rise, competition increases, and the stock market experiences more turbulence, our research can help firms deepen connections with investors and preserve their value during difficult transitions.
Read the authors’ slides for sharing this material in your classroom.
From: Nikolaos G. Panagopoulos, Ryan Mullins, and Panagiotis Avramidis, “Sales Force Downsizing and Firm-Idiosyncratic Risk: The Contingent Role of Investors’ Screening and Firm’s Signaling Processes,” Journal of Marketing, 82 (November).
Go to the Journal of Marketing