Busting Common Channel Incentive Management Myths, Part 1

Managing revenue streams in a high-tech company is no easy task. As technological advancements continue to expand into corporate and consumer realms, the channels needed to reach these diverse audiences have grown. Even with the emergence of e-commerce, the use of indirect channels continues to be both strategically and tactically important to companies as they seek to boost revenue.

The average high-tech company generates a large chunk of its revenue, about 25% to 75%, through indirect channels, such as distributors, resellers, original equipment manufacturers, and licensees. Yet the combination of decreasing product lifecycles, shrinking margins, fierce global competition, and rapid changes in end-user demands and preferences has added pressure to profit margins. Companies have invested billions of dollars in new customer relationship management (CRM) and partner relationship management (PRM) systems in order to support and grow these critical channel relationships.

While they continue to modify these select systems, most high-tech companies still rely on their 20-year-old revenue management processes. This dichotomy raises an obvious question: If the market and channel requirements have changed so much as to warrant new CRM and PRM systems, why haven't revenue management practices evolved in kind?

Five key myths prevent or discourage high-tech companies from adopting more advanced, relevant, and impactful revenue management strategies. Through this two-part series, I will address and dispel the most common myths of revenue management.

Myth 1: There is no problem
Perhaps the most common argument against improving revenue management practices is that there simply isn't a problem. Sales and finance executives might point to a recently approved audit, and use that as a measure for success. The reason for this laissez-faire attitude is that companies are often unable to produce any internal benchmark data around contract and agreement compliance rates, incentive performance, and the processing accuracy of rebate, discount, chargeback, and incentive claims.

As with any business process, you can't improve something if you can't measure it. In order for a company to assess revenue management processes accurately, it must be able to pull and analyze these metrics. By ignoring this data, companies put themselves at risk of serious revenue and margin loss due to ineffective contract, incentive, and compliance management. For example, channel incentive abuse costs the high-tech industry more than $1.4 billion in lost profits annually, including unearned incentives, margin erosion, service and warranty misuse, counterfeit products, and more. Additionally, less than 40% of channel incentives meet their documented objectives.

Bottom line: Denying that a problem with revenue management exists puts companies at serious risk of revenue loss. Despite investments in channel management, most high-tech companies simply cannot prove the effectiveness of their revenue management practices to support their current go-to-market business models.

Myth 2: The cost of doing business
Some high-tech companies simply deny the occurrence of revenue leakage. Most, however, simply dismiss it as a cost of doing business. This mindset only makes sense if contract, revenue, and incentive leakage is truly a very small percentage of total revenue, and if there's low industry margin pressure.

Unfortunately, margin pressure is very intense in the high-tech sector due to shrinking product lifecycles, rapid commoditization, volatile demand, and fierce competition. High-tech companies must eliminate even the smallest sources of revenue exposure and margin erosion in order to survive in the space.

According to Gartner, improper processing of just chargeback claims can impact gross revenue by up to 2%. Furthermore, up to 9% of gross revenue could be at risk due to ineffective creation of contracts, deals, incentives, and offers. 

Bottom line: There is no way to rationalize 2% to 9% of gross revenue loss as simply a cost of doing business. Instead, this is the scourge of out-of-date revenue management practices. Since most companies haven't invested the resources into quantifying the scope of potential revenue and margin leakage (see myth one), it's very convenient and easy for them to sweep aside any revenue management challenges as a cost of doing business (myth two).

Myth 3: Spreadsheets are good enough
Businesses love spreadsheets. From tracking contracts to modeling incentive performance to validating incoming rebate claims, high-tech companies rely on spreadsheets for all aspects of revenue management. Yet spreadsheets lack the standardization and detail needed to manage revenue accurately.

For spreadsheets to remain effective, companies must implement a long and stringent list of best practices for spreadsheet management that include documenting descriptions of financial accounts calculated, histories of changes, inputs, logic, interfaces, and much more.

The problem is that almost no business implements that degree of spreadsheet control, and as a result, spreadsheet usage typically grows in an ad-hoc, uncontrolled manner.

Another disadvantage of spreadsheet usage revolves around spreadsheet errors. Errors occur in 94% of all spreadsheets and the average cell error rate is more than 5%. Additionally, these types of errors cost a company between $10,000 and $100,000 per month.

Bottom line: The varying rate of market change, growing number of trading partners, increasing volume of incentives, and expanding product lines can overwhelm even the most sophisticated spreadsheet models. Companies that continue to rely on this manual, error-prone approach are garnering unnecessary operating expenses, risking inaccurate accruals and channel payments, and increasing their probability of both revenue loss and audit non-compliance.

 Breaking down the myths

In the brutally competitive high-tech market, companies can't risk revenue loss and margin erosion due to inefficient revenue management processes. The only way to counter and prevent these losses is by first admitting the flaws within current, ineffective revenue management systems, and then implementing a new system to better safeguard margins — one that integrates sales contracts, incentives, and compliance management.

To hear the remaining two myths of revenue management, be sure to read the next post in this series. Meanwhile, share your thoughts on the first three myths in the comments section below.

2 comments on “Busting Common Channel Incentive Management Myths, Part 1

  1. shahalam
    May 14, 2014

    I did not know about the  Busting Common Channel Incentive Management Myths. I am happy to find this post useful for me, as it contains lot of information. I always prefer to read the quality content and this thing I found in you post. Thanks for sharing


  2. Hailey Lynne McKeefry
    May 14, 2014

    @Shahalam, i'm glad you found it useful. Too often we resort to business as usual rather than looking for new ways to do things.

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