3 min read

Channel incentives leads to billions in losses

Abuse of these programs has a serious impact on the market value of products and the IT channel as a whole

Despite the significance of channel incentive programs to a business’ success, abuse of these programs is having a serious impact on the market value of products and the IT channel as a whole, according to a recent report from the Alliance of Gray Market and Counterfeit Abatement (AGMA).

“When Channel Incentives Backfire: Strategies to Help Reduce Gray Market Risks and Improve Profitability” is based on research conducted in November 2010 by Deloitte and Touche LLP and AGMA, a California-based non-profit organization dedicated to brand protection issues.

The report, based on surveys and interviews with leading high-tech executives, suggests that these companies’ incentive programs are actually contributing to the IT gray market, the unauthorized sale of products diverted from the legitimate distribution channel.

AGMA estimates that this type of gray market problem can cost high tech companies $1.4 billion in lost profits each year, especially considering the major role channel partners have in companies’ profit gains.

The report suggests that 25 per cent of companies surveyed derive more than 75 per cent of their revenue from their channel partners. Sixty-seven per cent of companies use more than 5,000 channel partners, according to the survey.

One problem can arise when unethical partners order more product than they actually sell, then sell a portion of it on the gray market. “Generally we see price erosion,” says Jana Arbanas, a senior manager with Deloitte. Legitimate channels are forced to lower the products’ price, and products lose their value, she says.

“When you see this kind of behaviour it becomes a vicious cycle,” says Scott Olsen, vice-president of global price and sales compensation management for tech manufacturer APC by Schneider Electric. His company receives 70 per cent of its business through its channel partners, he says.

“It starts to disrupt the channel and the brand,” he says of gray market activity. Channel partners begin to complain that they aren’t receiving the same benefits as other partners who are gaining from false numbers and an unlevel playing field is created.

“In reality, maybe even more than unethical resellers, it is really that the vendors need to have the right tools,” says Peter Hlavnicka, an AGMA representative.

“You do have to incentivize but any time you do have incentive programs you should bear in the back of your head that you need the right tools to monitor,” he says.

According to two thirds of the surveyed companies, 50 per cent of all channel sales are incentivized.

AGMA recommends companies create globally consistent policies for channel management, but perhaps most importantly, interact with partners more consistently.

But that’s easier said than done. “A lot of the channel incentive programs are very decentralized,” says Brent Nickerson, a partner with Deloitte. Programs are run by various parts of a company-for example, marketing divisions, sales operations or a channel management division itself. A lack of communication among these departments, mainly because of limited resources, can mean an inability to follow up thoroughly.

That’s why AGMA additionally recommends a more centralized approach. It also recommends that companies require self-assessments from their partners and conduct their own remote and on-site compliance inspections, along with requiring annual recertification of compliance with a given company’s policies.

AGMA suggests companies are clear in their contract terms and conditions. Another crucial step for companies to take is to include unique serial numbers on all products, including subcomponents and maintain strict records of those numbers.

Companies should increase communication with channel partners as much as possible, through Web site content, newsletters and e-mail updates. AGMA also advises monitoring the Internet and promotional materials for anomalies in product pricing. Eventually, companies should work toward developing systems that track and analyze all instances of non-compliance.

“For us, it means that as a vendor we have to assure that we have a strong program with strong requirements,” Olsen says. “Ultimately I look at this as a win-win for both us and the channel partners,” he says. “We can take that money that was in a poorly functioning program and reinvest it.”