kpmg channel mgmgt

8/13/2019 KPMG Channel Mgmgt

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Leading practices in

effective channelmanagement

kpmg.com


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b | Leading Practices in Effective Channel Management


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Leading Practices in Effective Channel Management | 1

Executive summaryFor 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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2 | Leading Practices in Effective Channel Management

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 ofgray 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.

Channel life cycles

Channel strategies

& programsPartner onboarding Transactions reporting

& incentivesMonitoring

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.

Strong channelmanagement helps

create and maintaincustomer loyalty

while strengtheningthe channel partner

relationship.


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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 ofthe 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 thevendors management


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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 eachregion 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

Channel strategies and programs

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



Vendors can beneby designing and

modeling specificmarketing and

incentive programs

to drive desiredbehavior.


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Partner onboarding

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 canprovide 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 relatedparties (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.

Potential benefits of partnerOnboarding

Identifies the right strategically

valuable partners

Careful selection process limitscannibalization of existing partner-

customer 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)

Channel strategies



Vendors may beable to identify and

appropriately responto potential channel

partners with a history

of poor performance o

partners that engage inunacceptable business

practices.


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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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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 auser-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 transactionsreporting

Transactions reporting incentives must

be timely, complete, and accurate to

be effective. As a result, companiesmust 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

Transactions reportingand incentives

Channel strategies



One leading practiceis to use a third-party

specialist that acts asan interface between

the channel partnersand the vendor.


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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

Monitoring

Channel strategies



One key aspectof monitoring

activities is toensure compliance.


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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.

Recovery of

inappropriate

incentives

Improved relations

with partners

Enhanced future

revenue stream

Independence and objectivity

A nonadversarial approach and attitude

KPMG Objectives

Focus on enhancing partnering

relationship & trust

Focus on greatest risk areas of

cost efficiency to client

Close attention to both accuracy

and completeness

Professional

skepticism

Channel partnerreviews can send

a clear messagethat monitoring and

marketing integrityis a critical part of

a vendors channelrelationships.


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ConclusionActive 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.

Active channelmanagementbenefits both the

vendor and thechannel partner by

helping to grow

revenue and protect

margins while

maintaining the

go-to-market strategy.


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Sweden

Canada

USA

South

Africa

India

BrazilAustralia

Singapore

Japan

Hong KongChina

United Kingdom

Germany

ItalySpain

Netherlands

Ireland

NorwayFinland

France

Latin America

supported by

CCS US

Argentina

Centers of Excellence

DenmarkSwitzerland

Malaysia

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 LLPKPMG LLP is the audit, tax, and advisory firm that turns knowledge intovalue for the benefit of its clients, people, communities, and the capitalmarkets. Its professionals work together to provide clients access to globalsupport, industry insights, and a multidisciplinary range of services. KPMGLLP (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 bringingdedicated professionals to help with their business needs.

Our Audit and Advisory services help clients manage risk so they canfocus on their core businesses. By intimately understanding each clientsbusiness, we can convert information into insights to uncover the hiddenopportunities that can help cl ients improve efficiency and performance.


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International). KPMG Internationals member firms have 140,000 professionals, including more than 7,900 partners, in 146 countries.

2011 KPMG LLP, a Delaware limited liab ility partnership and the U.S. member firm of the KPMG network of independent member

firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. Printed in U.S.A.

The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International. 23974NSS

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or

entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as

of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate

professional advice after a thorough examination of the particular situation.

Contact us

For more information about this

white paper, please contact:

Matt H. Behan

Principal

Contract Compliance Services

T: 650-404-4741

E: [email protected]

Tom Lamoureux

Principal

Global Advisory Sector Leader

Electronics, Software and Services

T: 650-404-5052

E: [email protected]

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