By Kelly Baig, Revitas
If your business is like many, it earns more than half of its annual revenue through an ecosystem of channel partners. A study conducted by The 2112 Group and commissioned by Revitas found that 61 percent of companies with more than $1 billion in revenue earn 60 percent or more of their revenue through the channel. In fact, 24 percent of organizations of this size earn more than 80 percent of their revenue from the channel.
Obtaining visibility into channel revenue is a challenge for any organization. Multi-level channel systems with intricate relationships among manufacturers, distributors and resellers increase the level of complexity. Yet organizations depend on their channels to increase market reach, build customer relationships and expand revenue. Somehow, financial teams within these organizations must find a way to gain greater visibility into the channel and bring related revenue operations closer to the financial professionals working with enterprise resource planning (ERP) systems.
Incentive programs are the lifeblood of the channel because they drive channel sales. Yet, the most common categories of channel revenue operations that remain invisible to traditional ERP implementations are all tied to incentive management, including incentive calculations and payouts, Sales Promotion Incentive Funds (SPIFFs), rebates and chargebacks, and financial accruals on incentive programs.
The sheer volume of these incentive calculations and payouts in the channel make them hard to manage. According to Accenture, as much as 10 percent of an organization’s indirect incentives are overspent. This means, for example, that a $1 billion organization with 80 percent indirect revenue is investing, on average, $32 million on channel incentives – and losing between $1.6 million and $3.2 million because of overspending in the process.
With that much revenue at stake, you might think that more organizations would be focused on projects that connect their ERP solutions with channel incentive operations, but this is not the case. Most organizations still rely on spreadsheets, email and conversations over the phone to manage their channel processes, placing companies at risk of mismanagement and overpayment.
Financial accruals, which are estimated to cover the cost of incentive programs each quarter, add to the problem. Financial teams are accustomed to relying on product-line-of-business people or channel sales and marketing teams in these environments in order to estimate the payouts that will be needed to cover the anticipated claims from channel-trading partners. The accruals process, in effect, is an estimation process -- one that ties up ready cash.
In this case, over-accruing is nearly as bad as under-accruing, as the organization’s ability to fund other important activities is compromised. Yet in the manufacturing industry, companies have simply not implemented automated systems to improve this.
Building a Better Incentive Budget
The problem with providing visibility into channel payouts and accruals is not actually a gap in the ERP system itself. Financial professionals and certified public accountants are served very well by their systems, albeit with a lack of visibility into the channel. When companies have to pay trading partners in the channel, the ERP system works well to make the payment. What’s missing, though, is a process to validate the payment itself.
Likewise, ERP systems function well in accruing and reporting on channel revenue and incentive costs. What is missing, however, is a closed loop that connects the functional teams that manage channel sales to ensure what’s accrued and reported is accurate. With a closed loop, accrual estimates are avoided in favor of hard numbers. These numbers are in complete alignment with the budgets approved for incentive programs. Forecasted incentive spending could also be compared to the actual utilization and trends.
Analyzing Cost of Sales
Imagine the frustration of a chief financial officer tasked with analyzing the cost of sales through the channel. Data missing from current systems often includes the information required to answer pressing C-level questions, such as:
- What channel sales were tied to spending on incentive programs?
- Which incentive programs caused more sales? Caused fewer sales?
- Which incentive programs should be funded for the upcoming period? Which should be discontinued?
- How much sales productivity are we really getting out of our investments on channel incentives? Why do we spend so much, year after year, without really knowing our return on investment?
- What would the revenue impact be if we decreased our incentive spending on the channel? Can we cut it by 10 percent and still get the same sales production by shifting investments?
Without this type of business analytics, organizations are flying blind when it comes to revenue operations that support their channel businesses. This is also why organizations tend to repeat the same level and types of incentives, year after year, without really knowing if they’re getting their money’s worth.
Choosing a Channel Management Tool
To close the gap, firms like Accenture recommend that organizations invest in modern tools for channel management. Forrester Research recommends the same, citing the adoption of channel management tools as a way to automate and validate payouts to trading partners. Most importantly, the analytics capabilities these tools provide financial teams can help expedite financial reporting to assist in critical business planning, speed up accurate channel payouts, and avoid inaccurate accruals.
The type of channel management tool required is known as a channel revenue management solution. Key capabilities include:
- The ability to not just pass-through a payout figure, but to validate that the payout has been accurately calculated and that the partner is eligible to receive the payment. Eligibility includes ensuring the partner is of the appropriate category to receive the incentive, ensuring the incentive was offered for the product claimed, and ensuring the incentive was offered in the time period associated with the claim.
- The ability to appropriately estimate accruals.
- The ability to historically collect and track data for analytics purposes.
- The ability to provide analytics views with custom reporting and visualization
Analyst firms, such as Forrester, have begun reporting on channel revenue management capabilities and can answer inquiries on best-in-class solutions for interested organizations.
Kelly Baig is director, Industry Development – Commercial Markets for Revitas and a blogger for the Revitas Blog. She has more than 20 years of experience in marketing and product management for high technology software, storage and services.