Selecting a Commission and Incentive Compensation System

Transcription

1 Selecting a Commission and Incentive Compensation System Corporations are increasingly looking for outside vendors to provide software products to manage commission, sales incentive, and bonus programs. Vendor products typically replace cumbersome spreadsheets, home grown applications, and manual processes with packaged solutions in order to gain control of an increasingly complex process. The number of companies offering solutions has grown dramatically in recent years, and there are currently a number of viable products in the marketplace - this whitepaper provides a framework for selecting the right one for your organization. What are you trying to accomplish? It seems like an obvious question, but taking the time to clearly define your goals and requirements is the proper starting point to ensure that 1) the project is actually worth pursuing from a process improvement and Return on Investment (ROI) perspective and 2) you select the vendor with a product, technology and operating philosophy that is best for you. What does it mean to gain control of this process? The most common goals are to reduce operational costs and increase accuracy through automation and tight workflow control. Other goals typically include ensuring compliance, increasing the flexibility of compensation plan definition, improving communication and of course, delivering ROI. What are the business requirements that any vendor product would have to support? What pains are driving the decision to replace your current system? Getting a high level understanding of all of the processes and players involved is the first step towards implementing a new system to improve execution. Information Gathering Prospective buyers should compile a list of potential vendors these can be located through popular search engines using key words such as enterprise incentive management, commission software, or sales incentive software. You can also search under B2B technology directories, such as KnowledgeStorm.com, Business.com, or B2BToday.com. Analyst firms and industry publications can also be a useful starting point, but you should always try to independently verify their statements due to the wide range of opinions being offered. Once a list of potential vendors is compiled these organizations should be contacted and provided with the high level requirements. Narrow the Field Detailed and potentially time-consuming evaluations should ultimately occur before a system is purchased and therefore it is critical to invite only credible players to your short list. There are a number of ways to build this list product white papers, written and verbal question-and-answer sessions, and corporate overview presentations can all assist in this process. One of the best options is to conduct a high level internet-based demonstration which will allow you to get a basic understanding of the product s capabilities and the skills required to use it. There are several areas to consider when narrowing your list, such as:

2 o Does the product meet your broad functional requirements? What is the vendor s approach to closing functional gaps and creating enhancements to meet your future needs? o How difficult is it to set up the product? How easy is it to re-configure as your requirements evolve? What are the skill sets and training requirements users need to maintain the system? o Is the technology compatible with your IT strategy? Do they offer a hosted alternative? Show Me Once your short list is finalized a detailed functional evaluation should always occur salespeople will often try to pressure you into arriving at a decision based on PowerPoint slides, customer lists, and expert analyst evaluations this is the time to separate the steak from the sizzle. Detailed evaluations can take the form of scenario-based demonstrations, proof of concepts, or hands on interactive sessions. All of these approaches can be effective, but the key is to have the vendor prove that their product will not only support your requirements, but do so in a way that is simple, efficient, and does not require users to have extensive training or technical skills. Tricks of the Trade Following are some tips to ensure truth in advertising : o Ask vendors to process transactions and calculate results during their presentation. Ask them to change some simple variables to ensure that back end software manipulation has not occurred. o Ask them to build and modify simple business rules while you watch. o There is no way that an out-of-the-box software product can optimally manage every requirement for every organization - therefore a salesperson can not know that their product is perfect for you until they know exactly what it is you do. How interested is the vendor in learning the details of your operation? What is their reaction if gaps are uncovered? Managing Gaps Should we issue an RFP? Traditional procurement processes relied heavily on formal Request for Proposals (RFP). While these can be a useful information gathering tool they are time consuming and expensive to prepare and review AND prospective vendors can easily interpret the questions and spin their answers regardless of your original intent. A less formal Request for Information (RFI) can achieve the same purpose for less time and expense. The detailed evaluation will often uncover functional gaps in which the vendor product is either 1) not fully capable of handling some aspect of your requirements, or 2) supporting the requirement requires complex setup and maintenance by highly trained users. Given that long term success requires that you rely on the vendor to continually enhance their product through future releases, understanding the process of closing these gaps can be very valuable.

3 Does the vendor solution lend itself to rapid application development and thus rapid enhancement? Is the product design innovative enough to support the enhancement process? How does the vendor approach closing gaps from a financial perspective (who pays)? What impact might these gaps have on the timing of the implementation project? Is the vendor defensive in their stance towards their product, or open to learning more about your business and detailed requirements? This process will also be helpful in getting a sense of what it will be like to work with a vendor over the long haul and can also help to ensure that there is a sense of reality in the implementation project both from a timing and cost perspective. How Much Will this Cost? The costs of the different solutions can vary widely, but the basic pricing components are generally the same and consist of 1) the software itself, 2) services to get the project installed and set up, and 3) ongoing support and other long term service costs. You will see many different flavors of these three basic components and a good way to compare proposals is to calculate the total costs across five years to get a consistent benchmark. Software License License fees represent the cost of the actual software product you are purchasing. Most companies in this market base their license pricing on the number of individuals whose incentive compensation is being calculated by the system (referred to as the number of payees ). Typically, the price per user decreases as the number of users increases, which makes these solutions more cost effective for organizations with higher numbers of payees. Many vendors offer software as a service models, where customers are charged each month they use the software instead of an upfront fee. Some vendors offer different models in different situations, such as basing the fee on transaction volumes, or offering different rates to different industries. The key is to work with a vendor who is willing to be flexible to ensure that your project delivers strong ROI. Implementation Services Installing an incentive compensation system is not the same as installing Microsoft Word there is more to it than putting a CD into your computer and clicking Next. Implementations can run from a few weeks to more than a year and involve requirements analysis, system design, product and server configuration, extensive testing, and training. Implementation fees are another differentiator between vendors. Many vendors will provide estimates but base final pricing on the actual cost of all time and materials related to your project. While this is a more comfortable approach for vendors, it may result in unforeseen cost overruns that in some cases can be quite substantial. It is far better to work with vendors capable of offering fixed fee work in which they are paid on deliverables and not the amount of hours expended. This results in better alignment of client and vendor goals and eliminates unnecessary scope creep that can greatly impact the timing and cost of your project. Also, make sure the vendor has developed a detailed understanding of your requirements before they offer you firm price quotes and timelines. Promises made based on an

4 incomplete understanding of what is involved can lead to cost and timing overruns it is much better to develop a realistic picture up front and plan accordingly. Ongoing Services No matter how easy a product is to use, at some point you are going to need to engage with your vendor to help resolve an issue, request an enhancement to support a new requirement, or simply to get the newest version of their product. Typically vendors will charge an annual maintenance and support fee for these services. Some vendors offer additional ongoing services such as application hosting or even plan management, which is the equivalent of outsourcing your incentive department. In some cases these services are provided by the vendor and in others they are offered through a third party partner. While most companies prefer to keep incentive compensation management in house, you should consider these options if you have limited internal resources. Strategy vs. Operations, and ROI Many vendors choose to talk about the strategic potential of their products. Strategic benefits for incentive compensation solutions involve driving revenue and profitability by optimizing compensation programs, and these systems assist in this by o providing comprehensive reporting and analysis of performance and incentive results; o providing the ability to quickly adjust compensation plans based on analysis of these results and evolving market conditions. On the tactical or operational level, benefits include reducing costs through increased efficiency and accuracy, and ensuring compliance with Sarbanes Oxley, IRS, and licensing regulations. Automating and centralizing plan management can yield significant productivity gains across many departments and groups including the plan administrators, IT, and the producer / sales force. There is no doubt that it is more exciting to talk about cascading strategic objectives than to review how a software application can annualize a transaction, allocate it across multiple payees, and apply it to a tiered commission table. But your bottom line is simple you need a product to help you manage a process, and the product which best helps you execute this process will be the same product which best supports your company strategy. Tactical Hard Dollar Benefits Decreased operational costs through automation, workflow control and the elimination of overpayments. Compliance with SOX and other legal and financial regulatory mandates. Strategic Soft Dollar Benefits Increased revenue from increased sales productivity. Increased profitability by focusing incentives on higher margin products. Internal ROI calculations should focus on operational gains that represent hard dollar savings, because it is impossible to prove that deploying a sales incentive system can

5 ultimately be responsible for any subsequent increase in revenue or profitability. Stay focused on the nuts and bolts and you will ultimately have a much better chance of getting funding for your project, picking the right vendor, and ultimately for sponsoring a successful project that delivers tangible results. Summary Concepts such as performance management and pay for performance have gained popularity and sales and marketing executives have been devising increasingly complex ways to use incentive compensation more aggressively. Many firms have emerged to support this trend and many of these offer quality products which can deliver a solid ROI. Buyers should focus on selecting the product and vendor which can best meet the day-today realities of managing incentive programs. Potential vendors should ultimately prove their products viability by conducting detailed demonstration with live set up and processing. Key evaluation factors are: o features and functions of the software to support current requirements; o how easily the software can be re-configured to meet new requirements; o ability of the vendor to provide ongoing support to your day-to-day operations; o vendor s approach to rolling out new features in response to new requirements; o capacity of the vendor or their partner to successfully understand your requirements and implement their solution in your environment; o the technology platform utilized. Third party testimonials and PowerPoint presentations are not appropriate means of demonstrating that a software product will meet your expectations and deliver value the responsibility rests with you.