Leading practices in effective channel management

kpmg.com

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Executive summary
For IT vendors (vendors), sales and marketing programs are generally the second highest expense after the cost of manufacturing because they often include additional costs to support channel partners that sell their products. Effectively managing channel partner investments can help vendors control these costs, such as designing incentive programs that drive desirable behaviors aimed at increased revenue, lower costs, and improved profits. Some vendors focus more on sales and incentives programs, such as special pricing and promotions, than they do on ensuring that their channel partners are working with them in both of their best interests. This also includes when they are providing value-add solutions (such as both products and service/support) to the end customer. As a result, effective channel management can be overlooked, potentially resulting in incentive abuse, gray market issues, counterfeit products, lost revenue, inefficient services, noncertified technical support and, most importantly, lower margins. Channel management is about managing the relationship between a vendor and the third parties it uses to get its products into customers hands while ensuring quality post-sales service and support. The channel can be one tier, where the vendor is selling directly to a reseller, or a two-tier relationship, where a distributor exists between a vendor and its third parties. Done well, channel management can help increase revenue and margins for vendors by incentivizing channel partners to promote a vendors products while enabling channel partners to promote their own branded services and support offerings and achieve the right level of overall pricing to end users.

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Strong channel management helps create and maintain customer loyalty while strengthening the channel partner relationship.

Strong channel management can help protect brand value, allowing vendors to sell their products at a premium, while enabling the channel to up-sell the proper services and support offerings that meet the customers needs. Channel management can also control price reductions, which can slow price erosion (a major issue for IT companies). In addition, it can extend a vendors visibility over products and services through the channel to prevent diversion and the risk of gray marketing, where products are leaked or diverted outside of the authorized channel. Perhaps most importantly, strong channel management helps create and maintain customer loyalty while strengthening the channel partner relationship by protecting the investment in the vendors products and the partners post-sales service and support.

This white paper highlights leading channel management practices developed through KPMGs extensive experience working with the worlds top IT companies. KPMGs proprietary Channel Management Model (see sidebar) outlines the steps in the channel life cycle that vendors can use to strengthen channel relationships, enhance value, reduce gray and counterfeit marketing, and ultimately enhance revenues and margins Four key steps to effective channel management include: Channel strategies and programs Partner onboarding Transactions reporting and incentives Monitoring We have included examples of how KPMG helps clients by comparing leading practices mentioned in this white paper to their current processes to develop strategies to close process gaps.

Channel life cycles

Channel strategies & programs Partner onboarding Transactions reporting & incentives Monitoring

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KPMGs Channel Management Model KPMGs proprietary Channel Management Model is designed to help: Identify compatible partners who can support the vendor strategy while exploiting respective strengths in the market Determine the best role for that partner with the vendor to extend key objectives such as sales pipeline, solution portfolio, and delivery capability Assess the legal terms and conditions executed by both the partner and the vendor to govern the relationship Establish a sales plan that is compatible with the sales programs and culture of the partner and the vendor Codevelop action plans for each participant across all aspects of the relationship (sales, delivery, marketing, etc.) that can be frequently tracked and measured Develop standard offers or methodologies for the market that leverage the partners products and services to accelerate time to market while simultaneously reducing cost to support through standardization Manage contracts with preestablished joint policies and protocols in place such that client issues and escalations are addressed promptly and service level agreements are maintained Establish a common set of metrics to monitor across the relationship that can guide corrective action and serve as a reporting mechanism to the vendors management

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Channel strategies and programs

Vendors can benefit by designing and modeling specific marketing and incentive programs to drive desired behavior.

We have observed leading companies employ the following activities when developing channel strategies and programs. First, leading vendors develop and align their sales, channel strategies, and any vendor-led post-sales services and support arrangements with their corporate goals. This can include defining the partnering approach, such as multiple parties in each region versus a few global relationships, or formal versus informal partnerships, with first- and second-tier relationships. During this phase, vendors can determine if channel partners will be primarily focused on sales or solutions. Second, vendors define their sales strategy, and where possible, model the impact. This will allow them to ensure that products and services are effectively allocated to the right channels, for example, to direct original equipment manufacturers (OEM) or through vendor distribution channels, regardless of whether they are single or two tiered. Third, vendors can benefit by designing and modeling specific marketing and incentive programs (such as price protection, special pricing, volume targets, etc.) to drive desired behavior. This includes developing clearly defined program terms and conditions, and reporting and claims verification and payment processes. Fourth, vendors develop service and support programs that enable value-added resellers (VARs) and value-added distributors (VADs) to sell their own branded or the vendors brand of services and support to the end customer. And finally, competitive vendors develop and enforce channel partners policies, which may include: Defining reporting requirements (e.g., POS or sales out and level of detail) Defining channel segments (direct versus indirect) Policies and expectations aimed at decreasing gray marketing and counterfeiting Communicating expectations related to compliance with applicable laws and regulations, and expected ethical behavior Defining periodic partner reviews to test compliance and to demonstrate the importance of maintaining a level playing field for its partners Requiring periodic reviews to effectively monitor service and support quality

Potential benefits of strategies and programs Establishes metrics and targets to evaluate (and reward) requisite channel performance Timely distribution of product to partners and to customers Drives customer demand to create or strengthen partner and customer loyalty Creates a deeper value proposition with partners and ultimately with customers Sets a baseline for compliance expectations and consequences

Channel strategies & programs

Partner onboarding

Transactions reporting & incentives

Monitoring

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Partner onboarding

Vendors may be able to identify and appropriately respond to potential channel partners with a history of poor performance or partners that engage in unacceptable business practices.
Potential benefits of partner Onboarding Identifies the right strategically valuable partners Careful selection process limits cannibalization of existing partnercustomer sales relationships Helps to ensure partner awareness of crucial contractual matters or concerns from the beginning of the relationship Early identification of risk areas to be addressed or amended before partner onboarding or monitored throughout the relationship Enhances accuracy and reliability of new partner POS/inventory reporting Demonstrates the emphasis placed on channel integrity and willingness to collaborate to resolve process issues to the new partner from the beginning of the relationship (i.e., defining the right tone and expectations)

Completing a thorough channel partner vetting or due diligence process can help lower the risks inherent in a partnering agreement. Vendors may be able to identify and appropriately respond to potential channel partners with a history of poor performance or partners that engage in unacceptable business practices. For instance, a vendor may incur significant fines if its channel partner is discovered selling products in an embargoed country. Additionally, having the right penalty terms in the contract can provide some protection by allowing the vendor to terminate the partner immediately upon breach of the partnering agreement. A robust due diligence process typically encompasses procedures for partner identification, evaluation, and selection. The process should be designed to provide significantly more information about the potential channel partner than what is typically available through mere financial checks. This process may include gathering information on ownership and their other related parties, credit checks, service and support qualifications, and market intelligence through channel press and other relationships. In addition, some vendors conduct precontract reviews to evaluate potential partners ability to meet reporting, performance targets, and other contractual requirements. Due diligence reviews typically include: Understanding the processes and controls relating to the proposed business Discussing the general sales and business development strategy of the potential partner Reviewing the potential partners accounting, CRM and ERP systems, and reporting capabilities (e.g., daily POS/inventory, electronic data interchange (EDI) capabilities, etc.) Reviewing their services and support operations and associated processes Assessing inventory controls (both physical and reporting, e.g., serial numbers) Obtaining background information on the company ownership and related parties (i.e., to check that they are not going to cannibalize the existing channel). Numerous sources should be used such as Dun and Bradstreet, and other subscription-based (or paid) and publicly available sources.

Channel strategies & programs

Partner onboarding

Transactions reporting & incentives

Monitoring

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When onboarding a new partner, further areas for consideration include: Obtaining agreement or commitment by partner to the vendors business (e.g., training, marketing plans, etc.) Creating and enforcing operating procedures for day-to-day relationship/business management (including basis of market development, such as joint vs. solo, quarterly business revenues, etc.) Once the partner has been selected, efficient onboarding processes should be supported by adequate technology such as setting up EDI and other reporting mechanisms to receive information required to monitor and reward the channel partners performance. Leading vendors have developed automatic processes to validate and pay incentive programs claims or create metrics by which the channel partner can be monitored, measured, and rewarded as appropriate for both product and support-service performance. Finally, the actual contracting process takes place, allowing the vendor to regulate day-to-day business as well as enforcement of terms and conditions as required (via usage of an audit clause).

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Transactions reporting and incentives

One leading practice is to use a third-party specialist that acts as an interface between the channel partners and the vendor.

Information received from the channel, such as POS, inventory, support service renewals, and customer support activity is used by multiple business process users, including: Finance (for credit purposes and revenue recognition, etc.) Sales (to understand the customer base, segmental analysis, track growth, attach rates, etc.) Sales operations and marketing (to analyze pricing trends, partner profitability, program payments and effectiveness, etc.) Service and support (to review service and support activity and manage quality) Supply chain (to trigger manufacturing just-in-time requests based on channel inventory or demand levels and manage product returns/warranty) Governance (including channel integrity, data integrity and trade compliance, etc.) One leading practice is to use a third-party specialist that acts as an interface between the channel partners and the vendor. The specialist can also serve as an intermediary to receive POS/inventory reporting and to cleanse and import the information into a user-friendly dashboard. The potential benefits of this arrangement include: Streamlining the reporting process to help ensure timely information is available Allowing partners to report in different formats; the third party combines all partner submissions into a common format or dashboard Validating that reporting is received timely and is complete (i.e., all required fields, etc.) Validating that sales by different partners can be analyzed across the data sets by allocating a specific ID to each customer Creating dashboards that business users can customize for their specific purpose

Potential benefits of transactions reporting

Transactions reporting incentives must be timely, complete, and accurate to be effective. As a result, companies must consider the following aspects for potential benefits:
Automated POS/inventory reporting can help reduce the risk of manual data manipulation and other errors resulting from manual data manipulation Enhanced efficiency of payment/ claims of sales program and payments (which is appreciated by the partner) Enables effective management of services and technical support activity and associated attach and/or renewal rates Creates cost savings by eliminating multiple internal applications and subscriptions Helps ensure linkage to the supply chain systems to allow effective replenishment of channel inventory

Channel strategies & programs

Partner onboarding

Transactions reporting & incentives

Monitoring

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Monitoring

One key aspect of monitoring activities is to ensure compliance.

Monitoring systems help vendors identify potential red flags such as incomplete reporting sales spikes, sales in/sales out discrepancies (versus reported inventory), below target attach rates, inefficient support performance, and unique customers (which can be a potential indicator of fictitious or manipulated data). Vendors track and follow up on these red flags, depending on their severity or risk or monitor over time to identify trends. Vendors often use a scorecard to quickly view and assess multiple variables to allow for efficient and timely actions. This allows review of ongoing performance, which can help companies consider changes to the channel strategy, including potential rationalization. One key aspect of monitoring activities is to ensure compliance. Leading vendors develop programs to perform channel partner reviews to ensure they are monitoring their channel and testing the self-reporting elements of POS/inventory, quality of services, and support. The lack of these reviews may lead to behavior in conflict with the vendors desired goals, such as incentive program abuse and leakage of product into the gray market. Partners may be selected for review by using either risk-ranking models or on a rotational basis. Partners also set clear management steps with clear consequences to deal with issues, such as misreporting, underperformance, or if they find deliberate manipulation, incentive abuse, or gray or black marketing, i.e., counterfeit practices. Leading companies typically use the following monitoring activities: Use of data analytics to identify red flags related to potential errors/abuse of incentive programs Development of a robust risk ranking process, which takes disparate information (location, level of revenue, support performance, invention, attach rates, sales spikes, type of customers, etc.) to select partners for review Use of third parties to perform a channel partner review (see chart) that includes a detailed analysis of POS data versus actual sales data sourced from the partner, services and support performance, plus other substantive and analytical procedures (both off-site and on-site) to identify misreporting and other contractual violations A defined consequence management policy (supported by all parts of the business) that considers potential issues and helps ensure equitable and consistent treatment of partners Promoting training for its internal teams and also its partners to communicate and clarify the expectations of working together to ensure channel compliance

Potential benefits of monitoring Validates completeness, existence, and accuracy of reported POS/ inventory data used for financial accruals, incentive payouts and internal analysis Helps partners understand processesss business, and controls, including ERP/CRM system plus linkage to reporting Allows discussion and clarification of agreement or program terms and conditions that may be unclear Increases partner transparency and actually may enhance relationships Identifies potential noncompliance with contractual obligations and performance targets, which can help: Reduce gray/black market activities Protect product and service margins and sales territories (by identifying cross-geographic price arbitrage/movements of products and services) Protect against sales and services program abuse Enhances future channel compliance Can help protect return on investment (ROI) and provide a level playing field for all partners to compete

Channel strategies & programs

Partner onboarding

Transactions reporting & incentives

Monitoring

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Channel partner reviews can send a clear message that monitoring and marketing integrity is a critical part of a vendors channel relationships.

Channel partner reviews often result in significant enhancements to the companys channel control environment. The reviews may also help the vendors identify and recover incorrectly paid incentive compensation. Other benefits have included improved services and support performance. The reviews can send a clear message that monitoring and marketing integrity is a critical part of a vendors channel relationships.

KPMG Objectives Focus on enhancing partnering relationship & trust Professional skepticism

Recovery of inappropriate incentives Improved relations with partners Enhanced future revenue stream

Focus on greatest risk areas of cost efficiency to client

Close attention to both accuracy and completeness

Independence and objectivity

A nonadversarial approach and attitude

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Active channel management benefits both the vendor and the channel partner by helping to grow revenue and protect margins while maintaining the go-to-market strategy.

Conclusion
Active channel management is critical to help vendors mitigate risks, enhance revenue, and drive total value-add solutions to their partners and ultimately to customers. It can help ensure they are dealing with the right partners and driving the requisite behavior, which can benefit both parties. A structured process can also help compel accurate, complete, and timely reporting required by internal users. In some cases, vendors are receiving the return on investment from their incentive programs as well as providing a predictable (and timely) return on capital and services for partners. Active channel management can also help maintain the integrity of the channel by clearly communicating and demonstrating that action will be taken when vendors identify potential issues or misreporting by their partners. Finally, active channel management can help protect margins and grow revenue by mitigating these risks and help vendors be vigilant about gray products, unauthorized services and support, and counterfeit market sales that may damage the authorized channel. Ultimately, successful channel relationships are based on a true partnership between the vendor and the channel.

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KPMGs Contract Compliance Services We are leaders in compliance with a global reach We were the first of the Big Four accounting and advisory firms to set up a dedicated Contract Compliance Services (ccs) practice We have approximately 650 full-time contract specialists deployed across the world among our network of member-firms. As well as our Centers of Excellence in the United States, United Kingdom, and Australia, we have teams across Europe, Africa, Asia Pacific, and Latin America. Integrated international team Over the last decade, KPMG has developed an integrated international team which focuses on intellectual property and contract compliance issues. Cross-cultural team Our global team offers a diverse set of language and cultural skills Multidisciplinary team Unlike some who build workforces exclusively around auditors, our team also combines the skills of professionals from a variety of disciplines such as forensic accounting, information risk management and complex data analysis individuals. Nonadversarial approach Our nonadversarial approach helps avoid mistrust and confrontation, ultimately leading to quicker, more successful settlements; trust but verify. Facts, not opinions KPMG can give you facts, not opinions, enabling you to conclude negotiations with your partners in a matter-of-fact manner. Our reports and advice can be structured with an issue resolution approach with the critical details that are required to reach resolution.
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About KPMG LLP

KPMG LLP is the audit, tax, and advisory firm that turns knowledge into value for the benefit of its clients, people, communities, and the capital markets. Its professionals work together to provide clients access to global support, industry insights, and a multidisciplinary range of services. KPMG LLP (www.us.kpmg.com) is the U.S. member firm of KPMG International. KPMGs Information, Communications & Entertainment (ICE) practice is devoted to understanding our clients unique issues and risks and bringing dedicated professionals to help with their business needs. Our Audit and Advisory services help clients manage risk so they can focus on their core businesses. By intimately understanding each clients business, we can convert information into insights to uncover the hidden opportunities that can help clients improve efficiency and performance.

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Contact us For more information about this white paper, please contact: Matt H. Behan Principal Contract Compliance Services T: 650-404-4741 E: mhbehan@kpmg.com Tom Lamoureux Principal Global Advisory Sector Leader Electronics, Software and Services T: 650-404-5052 E: tlamoureux@kpmg.com

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