Currently, FSC’s solar panel sales unit is made up of 20 salespeople and the sales manager. The idea of the proposal is to lay off the 20 salespeople and hire independent contractors instead.

According to both the sales manager and the HR manager, FSC currently only hires individuals with engineering backgrounds or experience for sales positions. All salespeople receive annual training covering technical specifications of the products, how to sell solar panels and related services, and how to respond to technical questions and queries from potential customers. FSC’s annual training expenditures average about $350,000, while sales-related travel and lodging expenses are about $1.5 million. 

According to the sales manager, “targets” for the number of customer calls made daily and revenues generated monthly are set for each salesperson, but in recent years these targets have not been met consistently. However, FSC’s customer “win rate” of sales proposals has been solid: 75% of proposals turn into sales which is higher than the industry average of about 55%. Salespeople are paid an annual salary of $80,000 plus benefits worth $17,000 and a commission equal to 0.5% of their sales (except for sales at the service desk of the manufacturing plants which account for 10% of total sales). Also, turnover in the sales unit averages about one salesperson per year. However, in the rest of the company, there is little turnover.

According to the HR manager, if the salespeople are terminated, FSC will have to pay a one-time total of $750,000 in severance pay.

If FSC outsources the sales unit, the standard arrangement with the outside contractors or sales agents will be based on a two-year renewable contract with a termination clause (either party can terminate the contract without cause with 30 days’ notice). The agents will be compensated by commission only at a rate of 1.75% of sales and will be responsible for all their auto, travel, meals, and related expenses.

On a monthly basis, the agents will invoice FSC for the commission earned for sales during the month: 50% will be paid to the agents within 30 days of the invoice date and 50% will be paid upon final collection of the customer accounts. Management of Accounts Receivable will remain FSC’s responsibility.

Finally, agents will be given exclusive regions and may sell other companies’ products but cannot sell products that compete directly with FSC’s products. In return for exclusive regional rights, an agent will be expected to make a set number of sales calls a month and undergo annual training that FSC will provide and pay for.

 

Questions

1. What would a financial assessment of the outsourcing proposal look like?

2. What would a strategic analysis indicate?

3. Finally, should FSC outsource its sales unit?