The Power Of Three: The Benefits Of An Integrated Approach To Contract, Revenue, And Compliance Management

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1 A Forrester Consulting Thought Leadership Paper Commissioned By Revitas The Power Of Three: The Benefits Of An Integrated Approach To Contract, Revenue, And Compliance Management How Manufacturing And Technology Firms Can Boost Revenue And Improve Partner Relationships May 2013

2 Table Of Contents Executive Summary And Key Findings... 2 Current State: How Firms Are Managing Their Channel Relationships... 3 Drivers For Change: Firms Would Consider Evolving Current Approaches... 5 The Power Of Three: Integrating Contract, Revenue, And Compliance Management The Time Is Now: Benefits Of An Integrated Approach Key Recommendations: Take A Holistic View Of Sales Contracts, Revenue, And Compliance Management Appendix A: Methodology And Demographics Appendix B: Endnotes , Forrester Research, Inc. All rights reserved. Unauthorized reproduction is strictly prohibited. Information is based on best available resources. Opinions reflect judgment at the time and are subject to change. Forrester, Technographics, Forrester Wave, RoleView, TechRadar, and Total Economic Impact are trademarks of Forrester Research, Inc. All other trademarks are the property of their respective companies. For additional information, go to [1-LT7932] About Forrester Consulting Forrester Consulting provides independent and objective research-based consulting to help leaders succeed in their organizations. Ranging in scope from a short strategy session to custom projects, Forrester s Consulting services connect you directly with research analysts who apply expert insight to your specific business challenges. For more information, visit Page 1

3 Executive Summary And Key Findings Manufacturing and technology firms rely heavily on their channel partners. With significant incentives and promotions driving sales through the channel, companies see a large, and often increasing, percentage of revenue coming from their partners. At that same time, firms struggle to improve their control of and insight into the highly important relationships with channel partners. At issue are the three, often separate, processes that power channel partner relationships: agreeing on sales contracts, managing the post-sales incentives defined in those contracts, and then paying out on incentives quickly and accurately. In March 2013, Revitas commissioned Forrester Consulting to evaluate US manufacturing and technology firms expectations for the software to manage these three critical business processes. Forrester investigated the related issues these firms are currently trying to address, particularly in relation to managing post-sales incentives. Forrester also assessed firms interest level in adopting integrated solutions for contract, revenue, and compliance management as well as analytics. 1 Key Findings In surveying 71 US manufacturing and technology professionals and conducting follow-up in-depth interviews with executives, Forrester identified pain points with current, often aging, solutions for managing contracts, revenue, and compliance and discovered drivers that would lead firms to explore alternative solutions. This paper s key findings include: Manufacturing and technology firms are strong users of post-sales incentives. Fifty-one percent of respondents are using post-sales incentives in 50% or more of their channel sales deals, with 16% of respondents using the incentives in 80% or more of their deals. But there is no consensus on the preferred type of tools to manage post-sales incentives. Manufacturing and technology firms are using one or more tools, with enterprise resource planning software the most popular (49%), followed by spreadsheets (45%). Eleven percent of respondents are using third-party revenue management software. Errors in post-sales incentives calculations are costly. Thirty-seven percent of respondents estimate that their firms have experienced revenue losses of between 11% and 50% through overpayment of promotions, agreements, and incentives. Limited current solutions prevent firms from making improvements in channel results and relationships. The largest frustrations manufacturing and technology firms have with their current solutions are the limited type and volume of incentives they can offer partners along with the inability to respond to partners incentive questions in a timely fashion. Respondents are also very concerned that they have incomplete audit trails across contract and incentive payments. Firms may change their approach in order to improve revenue, partner relationships, and financial accuracy. Manufacturing and technology firms cite three top drivers that would cause them to reexamine their current approach to managing sales contracts, revenue, and compliance. The joint top two drivers are increasing incremental and new revenue (44%) and improving partner relationships (44%), followed by the ability to improve the accuracy, consistency, and reliability of financial statements (42%). A close fourth driver is the ability for firms to confidently apply analytics to their data (38%). Page 2

4 What does our current system do well? Not much. It s all loosely documented, which can be a problem for finance and internal audit. The system really slows everything down, and we need extra effort from our people to get things done. (Director of pricing, global manufacturer of water products) One of the biggest challenges we have is [knowing] what a channel partner is going to get regarding post-sales incentives. The data is just not that easy to get to, and the timeliness of response is problematic. (Product and channel marketing director, global network storage vendor) Current State: How Firms Are Managing Their Channel Relationships Manufacturing and technology firms are constantly searching for ways to incent their channel sales partners to sell more of their products, a particularly important endeavor given the sizable contribution partners make in helping to grow firms revenues. One key tool at their disposal is the use of post-sales incentives. With this type of incentive, a firm formally commits to pay its channel partners additional compensation for meeting or exceeding a pre-agreed-upon set goal relating to sales of the firm s products. In many cases, the firm shoulders most of the burden in terms of calculating the compensation and often has to validate the channel partners claims for payment. The importance of post-sales incentives can t be overstated. They are key tools for manufacturing and technology firms to use so that they can: Grow revenue. Motivate and retain existing channel partners. Attract new channel partners. Respond to competitive threats. Counter the impact of the shorter shelf lives of their products. Manufacturing and technology firms are strong users of post-sales incentives (see Figure 1). Fifty-one percent of survey respondents are using post-sales incentives in 50% or more of their channel sales deals, with 16% of respondents using the incentives in 80% or more of their deals. However, it s becoming harder for manufacturing and technology firms to manage incentives, because they have to: Deal with a wider variety of rebates and rules. Interface with a broader array of distribution channels. Enter new regions and/or verticals and onboard new channel partners. Understand which incentives work and which fail and then act on that knowledge. Many firms have yet to fully automate the processes involved so that they can map the terms and conditions of the incentives with the payment that is made to the partner and recorded on the general ledger. Firms are currently trying to manage these steps using a mix of manual and automated processes involving one or more tools (see Figure 2). According to survey respondents, there is no consensus on how best to manage post-sales Page 3

5 incentives. Enterprise resource planning (ERP) software is the most popular tool to manage post-sales incentives (49%), followed by spreadsheets (45%), homegrown solutions (28%), and third-party revenue management software (11%). All of these statistics suggest that many firms are expending significant internal resources to maintain their current solutions, in terms of business and IT personnel, particularly when systems are either homegrown or manual, such as spreadsheets. At the same time, the solutions that manufacturing and technology firms are currently using are aging. Sixty percent of respondents are managing post-sales incentives with solutions that are five years or older, and 21% of respondents are using systems that are more than a decade old. We use a variety of tools. We use heavily customized ERP, and we do a lot of the processes offline and through Excel that s a pain point. It s manual data entry. We normally export [post-sales incentives] data out of ERP, and someone has to key the information back in. (Director of pricing, global manufacturer of water products) At the moment, we re still dealing with PDFs, Excel files, Access databases, and ERP custom code. (Business manager, global consumer goods manufacturer) We use Excel and a homegrown solution we developed years ago. The process is not automated at all. (Product and channel marketing director, global network storage vendor) Our contract management is really handled in our legal department, our sales teams use CRM. And for revenue management, we have a kludgy amount of different reports to get information from. It is not elegant and is a very manual process. (Wholesale sales manager, global wireless communications company) Figure 1 Post-Sales Incentives Play An Important Role In Firms Deals With Channel Sales Partners Base: 71 US manufacturing and technology professionals with knowledge of their company s post-sales incentive management program Page 4

6 Figure 2 Firms Tend To Manage Post-Sales Incentives Programs Using ERP Or Spreadsheets Or A Combination Of The Two Base: 71 US manufacturing and technology professionals with knowledge of their company s post-sales incentive management program (multiple responses accepted) Drivers For Change: Firms Would Consider Evolving Current Approaches Firms need to get the balance right when juggling incentives to ensure maximum channel appeal. The trouble is that many firms are currently playing with a limited set of tools. When asked what kinds of post-sales incentives they typically offer, the most popular incentives firms use, cited by 80% of respondents, are the simplest kind to calculate discounts or rebates based on total value sold. In second place are discounts or rebates based on unit volumes sold (48%), followed by discounts or rebates based on membership in a brand promotion program (14%), discounts or rebates based on shelf space or floor space (13%), and discounts or rebates based on market share achieved (10%). Firms able to manage an ever-increasing range of sophisticated incentives effectively have more potential engagement points and rewards to offer existing and new partners, thus gaining a competitive advantage over their competitors. In addition to incenting partners around new product launches, driving brand loyalty, and clearing out inventory of aging products, firms are also looking to apply post-sales incentives to encourage specific changes in their channel partners behavior. For instance, a business development manager at a global storage vendor notes recent additions to the firm s incentive programs to encourage and reward channel partners focusing on emerging technologies, specific regions within geographies, particular verticals, and even microverticals. At the same time, firms are encountering a mismatch in their systems, with the post-sales incentive piece holding them back. A director of pricing at a global manufacturer of water products described his work over the past two years on simplifying the firm s pricing structure and the expectation that this work would then result in an increase in the complexity of rebates. The firm was hoping to have the ability to drive different channel partners behaviors through a broader range of incentives but has instead found itself stuck because it lacks the ability to report on its post-sales incentives data. The survey data echoes this point, clearly indicating that manufacturing and technology firms would dearly love to be able to be more creative with their post-sales incentives, but it s their current post-sales incentives solutions that are Page 5

7 holding them back (see Figure 3). The largest frustration manufacturing and technology firms have with their current post-sales incentive management solution, cited by 38% of respondents, is the limitation it places on them in terms of the type and volume of incentives they can offer their channel partners. For many firms, something of a vicious cycle has developed. As the director of pricing at a global manufacturer of water products described, the firm has neither the time nor the staff to develop more creative incentives in large part because the firm currently lacks insight into the impact of previous or existing incentives. The second largest frustration, cited by 35% of respondents, is the inability, with the current solution, to respond to partners incentive questions in a timely fashion. This response suggests that it s hard for firms to easily access the information to answer those concerns because the data either is held in several different systems (so it is difficult to aggregate) or hasn t been fully captured by the current solution. In third place (34%) is the lack of a complete audit trail across contract and incentive payments, opening firms up to potential risk. Other key concerns are lack of insight into which incentives were successful in generating revenue for the organization (25%) and concerns that the incentive reconciliation data contains errors (24%). Fifteen percent of respondents said that their current solution doesn t allow them to determine which partners qualify for which rebates, so they overpay, while 7% of respondents said that their current solution can t help them determine which partners qualify for which rebates, so they underpay. Firms and their channel partners have greater need of each other than ever before, and existing relationships are deepening. In order to make better, timelier business decisions, firms are looking for: More visibility into channels. More insight into the impact of incentives. More knowledge sharing with channels. More collaboration with channels. More harmonization across all channels. At the same time, firms are struggling with how to: Protect margins and ensure compliance with commercial terms and conditions (T&Cs). Enforce prices globally and across channels to reduce price erosion. Be more responsive to partners. Control and ensure that they meet commitments in agreements and promotions. Track and enforce pricing guidelines across their own sales force. It hurts when you re looking for partner recruitment, if with a new partner s first experience with us, it s taking eight weeks to pay them when it should have taken three weeks. (Product and channel marketing director, global network storage vendor) Responding to partners incentive questions in a timely fashion is a huge issue. For instance, now [April 2013], we re still paying 2012 rebates. Talk about a good way to tick people off. (Director of pricing, global manufacturer of water products) Page 6

8 Figure 3 Firms Current Solutions Limit Their Ability To Offer A Variety Of Post-Sales Incentives, Respond To Partners, And Audit Fully Base: 71 US manufacturing and technology professionals with knowledge of their company s post-sales incentive management program (multiple responses accepted) Overpaying or underpaying partners are serious issues for manufacturing and technology firms. A significant proportion of firms are losing revenue from overpayment to their channel sales partners (see Figure 4). While 49% of respondents put the percentage of lost revenue between 0% and 10%, 37% of firms are seeing revenue losses of between 11% and 50%. Being able to shore up such revenue leaks can significantly improve a firm s revenue, in the process plugging up any loopholes in their overall post-sales incentives program that may have been exploited internally by rogue staff or externally by partners that are able to game the incentive programs. Achieving consistency in post-sales incentives is a goal for many firms. The consequences of underpaying a channel sales partner can be substantial. The top concern manufacturing and technology firms have about underpaying a partner, cited by 80% of respondents, is that they damage their relationship with that partner. Other key concerns include creating an atmosphere of mistrust among partners as a whole (48%), losing the partner s business (38%), and gaining a bad reputation in the market (25%). The time and effort a firm has to expend to repair a relationship with a channel sales partner can be significant, and, in the case of underpaying post-sales incentives, is clearly avoidable. If we overpay, it s not very often someone comes back to you to say you paid them too much money. If you underpay, they ll be at your door 5 minutes later. It can end up being a stalemate, and we have to come to terms. Partners get irritated because it takes us a while to figure it out. If things aren t resolved to their satisfaction, Page 7

9 partners could indeed say, I m done, and go to one of our competitors. (Director of pricing, global manufacturer of water products) Underpayment could make the partner decide to go to another vendor. We re not the only player in our market. (Product and channel marketing director, global network storage vendor) Errors in calculating post-sales incentives can often be traced back to an organization s use of spreadsheets (see Figure 5). Spreadsheets quickly become unwieldy when they increase in size, involve highly complex calculations, and are changed frequently by a number of individuals since spreadsheets lack version control and don t facilitate collaboration. The top concern cited by 47% of respondents who use spreadsheets to manage their post-sales incentive programs is lack of an audit trail. Other concerns include the fear that errors made on the spreadsheet will end up on a firm s general ledger (41%) and ultimately in their published financial statements. Firms are also concerned about the lack of version control (41%). Manufacturing and technology firms additionally worry about the lack of financial controls on spreadsheets (22%), not being able to accurately accrue for future liabilities (22%), the inability to determine whether incentives actually worked (19%), and data being incorrect or out of date (19%). Sixteen percent of respondents worry about potential Sarbanes-Oxley (SOX) compliance risks. A firm could place its future in jeopardy due to unforeseen financial and legal risks. Errors in financial filings can result in a firm failing third-party audits or having to undergo lengthy audits. A firm may also find itself lacking compliance with market regulations and controls and could end up being fined. The additional consequences of financial errors could see a firm forfeit the confidence of its own staff, its partners, its customers, and its investors. Among firms that are using spreadsheets to manage post-sales incentives, 47% manually reenter the post-sales incentives data when transferring it to their ERP software. While 22% of respondents transfer data back into their ERP software every day, 12% do so every 15 days, 28% do so every 30 days, and 25% do it on a quarterly basis. Both manual reentry of spreadsheet data and long intervals between data transfers raise corporate risk levels. Excel is a very powerful spreadsheet tool, but it s all very limited in the control aspect of the documentation. There can be formula errors, data errors, and people failing to refresh or recalculate. Errors just happen, and they can be worrisome and troublesome. It requires extra people to be involved in the process versus extra people not being required if we use a more automated, rigorous tool. (Business manager, global consumer goods manufacturer) Version control is a big problem. On average, we have half a dozen people accessing the same spreadsheet. If someone pulls that spreadsheet across to their computer and makes changes, it can get pretty messy pretty quickly. (Director of pricing, global manufacturer of water products) Page 8

10 Figure 4 A Significant Proportion Of Firms Are Losing Revenue From Overpayment To Channel Sales Partners Base: 71 US manufacturing and technology professionals with knowledge of their company s post-sales incentive management program Figure 5 Lack Of Audit Trail, Errors On The Balance Sheet, And Lack Of Version Control Are Firms Key Spreadsheet Usage Concerns Base: 32 US manufacturing and technology professionals that use spreadsheets to manage their post-sales incentive programs (multiple responses accepted) Page 9

11 The Power Of Three: Integrating Contract, Revenue, And Compliance Management As we ve seen, for many manufacturing and technology firms, trying to efficiently manage the process of developing sales contracts, calculating post-sales incentives, and ensuring payment, reconciliation, and compliance of what was agreed upon is proving to be difficult to manage and a potentially risky operation. Firms are also unable to gain insight into what is typically a highly fragmented process. The solution is for firms to deploy a single solution that integrates the three key business processes sales contracts, post-sales incentives, and compliance management, which also links into CRM and ERP software and reuses the data from those systems. Firms using an integrated solution can then apply incentive-specific analytics to the data generated and use it as the basis for future decision-making. Taking this combined approach allows three key groups within a company the sales, finance, and legal departments which typically are involved in the process to be on the same page, accessing the same information and sharing a common user experience so that: The sales department can offer creative incentives to drive market share and outperform the competition. Sales can have insight into which incentives work and which don t. Sales can then also limit the risks of deals being lost or delayed or not renewed due to inefficient processes. The finance department can ensure that it has budgeted and accrued correctly for current incentives. Armed with full knowledge of what was agreed upon and written in the promotional agreement or sales contract regarding post-sales incentives, finance can make sure that payments on incentives are made accurately and on time to the channel and eliminate the risks of overpayment or underpayment. The process is also fully auditable. The legal department can feel confident that risk has been mitigated across the entire process. Legal feels secure in the knowledge that the entire process is fully auditable and that revenue leakages and rogue practices have been eliminated. Legal also has access to up-to-date information and can therefore verify that contracts have been properly executed and partners claims for post-sales incentive payments have been validated, paid, and reported. The Time Is Now: Benefits Of An Integrated Approach The survey data revealed compelling reasons for reexamining the current approach to managing sales contracts, revenue, and compliance. Namely, manufacturing and technology firms see that they can drive incremental revenue, improve partner relationships, and increase financial accuracy by leveraging an integrated solution that shares common information across these key business processes (see Figure 6). The top two drivers, each cited by 44% of respondents, are the ability to attract more incremental and new revenue as well as the ability to improve partner relationships. As we ve seen already, timely, accurate, and reliable data is the key to ensuring that firms aren t losing revenue by overpaying post-sales incentives to their channel partners or damaging partner relationships by underpaying incentives. Being able to apply specific analytics to post-sales incentives data can also help firms discover how to better position incentives in the future since they can gain insight into which incentives historically have proved to resonate with partners and boost revenue versus which incentives haven t struck a chord with partners. Page 10

12 The No. 3 driver to reexamine firms current approach, cited by 42% of respondents, is the ability to improve the accuracy, consistency, and reliability of financial statements, again speaking to the importance of trustworthy data and accuracy in calculating and paying post-sales incentives. A close fourth driver is the ability for firms to confidently apply analytics to their data (38%). Other important drivers cited by respondents are the ability for a firm to audit its data (32% of respondents), the ability to exert a greater degree of corporate oversight over the entire process (31%), the ability to enforce corporate consistency (28%), the ability to mitigate audit or compliance risk (27%), the ability to close deals faster (25%), and the ability to root out any rogue practices across the organization (25%). Having a complete audit trail and the impact on accuracy to our profit and loss (P&L) statement are the big drivers to changing our system. (Business manager, global consumer goods manufacturer) We want to improve partner relationships, and we want to improve accuracy in particular. We know the process has to change. From my point of view, we ve got to find a better way to do this process that doesn t take half a dozen people all year long to run. (Director of pricing, global manufacturer of water products) In general, we don t do any analytics (on post-sales incentive data). We sometimes try to gut-feel it, but we don t have time to do real hard analytics. We don t have the people on hand, and we can t rely totally on the data. We don t want to make a business decision based on bad data. (Product and channel marketing director, global network storage vendor) Figure 6 Improving Profits, Partnerships, Accuracy Will Drive Firms To Revisit Managing Contracts, Revenue, Compliance Base: 71 US manufacturing and technology professionals with knowledge of their company s post-sales incentive management program (multiple responses accepted) Page 11

13 KEY RECOMMENDATIONS: TAKE A HOLISTIC VIEW OF SALES CONTRACTS, REVENUE, AND COMPLIANCE MANAGEMENT Using an integrated solution for sales contracts, post-sales incentives, and compliance management is a best practices approach for manufacturing and technology firms looking to optimize channel sales performance and gain more control over and insight into their channel sales partnerships. As well as executing the entire process in a single end-to-end business flow, the integrated solution must hook into a firm s CRM and ERP software and share the data within those systems. The approach enables organizations to use post-sales incentive programs as a strategic business lever, while eliminating revenue leakage and improving brand loyalty among channel partners. The combination also helps ensure that post-sales incentive data is more complete and accurate so that manufacturing and technology firms can confidently apply analytics to gauge the effectiveness of their incentive programs and continually fine-tune them to evolving market conditions. It s really about designing the (sales contracts, revenue, and compliance management) process and the systems and having a system you can trust, which can take you all the way through the process. I d really like to be able to connect all of the dots in the process. Being able to connect all the dots from beginning to end mirrors how the process works in our industry. (Business manager, global consumer goods manufacturer) Making doing business with channel partners easier is worth the investment. You want to be easy to deal with when it comes to the channel. Partners will keep selling your stuff, if you re easy to deal with. (Product and channel marketing director, global network storage vendor) Page 12

14 Appendix A: Methodology And Demographics In March 2013, Revitas commissioned Forrester Consulting to conduct a study of changing customer demands for contract, revenue, and compliance management software. The study consisted of an online survey of 71 US manufacturing and technology professionals with knowledge of their company s post-sales incentive management program, in-depth phone interviews with five executives, and analysis and insights from Forrester analysts. Participants were self-selected into the survey but were screened based on their company size, their role in the company, and their decision-making, administration or use of sales contract, revenue, and/or compliance management software. The study began in February 2013 and was completed in March Quotes in this paper reflect statements made during in-depth interviews. In some cases, Forrester has altered quotes slightly for the sake of readability. Figure 7 Survey Demographics: Company Headcount And Industry Base: 71 US manufacturing and technology professionals with knowledge of their company s post-sales incentive management program Page 13

15 Figure 8 Respondent Demographics: Title And Responsibilities Base: 71 US manufacturing and technology professionals with knowledge of their company s post-sales incentive management program Appendix B: Endnotes 1 The term that Revitas uses for this integrated combination of contract, post-sales incentive, and compliance management and analytics is enterprise revenue dynamics (ERD). Page 14