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The phone call a New Jersey solution provider got from one his vendors was not atypical. The regional channel account manager had a quota to meet, so he was calling around to registered partners looking for new business. In his bag was a special weapon – incentives. If partner sold a certain number of units, they would receive a price break and rebates.

Such incentives are the underpinning of channel sales and marketing. Vendors provide special pricing, rebates, padded margins, SPIFFs and other monetary and non-monetary rewards to partners if they meet or exceed certain thresholds. But, they don’t always work. In the case of this New Jersey solution provider, who declined to have his name used, the incentives weren’t enough to get him to break from his business plan.

“What they wanted us to do just isn’t our business model. It just wasn’t worth it,” the solution provider said.

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And that’s the problem with vendor incentive programs – they are often inconsistent and ineffective. According to a new report by Channelinsight, a partner relationship management software vendor, only one-third of vendors are satisfied with the performance of their channel incentive programs. The inefficiencies in administration and lack of appeal to partners often results in unnecessary expenses and overpayments to partners, the company reports.

“Vendors aren’t satisfied with their programs they’re running. They’re spending about 10 percent of their overall revenue on channel incentive programs and only one-third of such programs have a definable ROI,” says Channelinsight CEO Mark Geene.

In some cases, incentive programs just fail to appeal to partners. As with the case of the New Jersey solution provider, special pricing and rebates meant nothing since its sales model was based on embedding its vendor’s hardware in its branded solution. To capitalize on the incentives would require it to break from its model and start pushing the vendor’s servers separately.

Geene says vendors often lack transparency into their channel community, which inhibits their ability to effectively tailor incentive programs to partners that have a higher probability of engaging. According to Channelinsight’s research, 39 percent of the vendors surveyed are satisfied with the customer and partner data they have available to craft incentive programs.

In inability of vendors to target, monitor and administer channel incentive programs also leads to abuses by partners. Vendors know full well that some partners are gaming the channel programs to maximize possible incentives and even make money to which they are not entitled. A certain amount is tolerated as a cost of doing business. However, new research finds that some solution providers are manipulating vendors’ channel incentive systems to inflate margins and, in some cases, divert products to the gray market.

A new report commissioned by the Alliance for Gray Market and Counterfeit Abatement (AGMA) and Deloitte found solution providers are “stacking” incentives to augment their channel benefits and discounts. In certain cases, solution providers are overstocking product to receive incentives, and will then dump the excess inventory on the gray market for a profit.

AGMA estimated that as much as 10 percent of partners abuse vendor incentive programs. While it’s a fraction of the total channel community, AGMA says the 10 percent represents a significant dollar amount – approximately $1.4 billion annually.

“Surprisingly, [vendors] have not done a great job with incentives. They’re not staffed well and not administered as well as they should be,” says AGMA spokesperson Scott Olsen.

In many cases, Olsen says, solution providers are doing nothing wrong. They are simply taking advantage of systems with rules ill-devised by vendors to their maximum benefit. The lack of controls and insights by vendors causes these abuses to happen.

Forty-two percent of vendors suspect poor incentive programs and partner abuses are causing products to end up in the gray market. Partners will order products at steep discounts through incentive stacking, then sell them to used and refurbished equipment brokers at a slight markup. The partner wins because they make money on the discounts and the resale, and the gray market broker gets new product for virtually pennies on the dollar.

“Typically the gray market is a product with a lower price in one region being imported to a higher priced region. But we vendors were surprised to find the gray market happening right in front of us,” Olsen says.

Vendors are constantly reassessing their channel management and incentive programs to motivate partner sales, reward performance and target opportunities. What the Channelinsight and AGMA reports show is the inefficiencies that lead to abuses and waste are a result of lack of systems and governance on the vendors’ part. Vendors may be the source of technology solutions, but they are often inept in crafting solutions to simplify the management and oversight of their own channel programs.

From a solution provider’s perspective, these reports reflect the inconsistency in channel program application and administration. Vendors change their programs because they’re ineffective in driving performance to their goals. Rather than fixing their systems, they craft new programs with the hope of driving a different result.

The bottom line: More work needs to be done to improve channel analytics and administration by the vendors.

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Lawrence M. Walsh is CEO and president of The 2112 Group, a technology business advisory service that specializes in optimizing indirect channels and partner relationships. He’s also the executive director of the Channel Vanguard Council. He is the former publisher of Channel Insider and editor of VARBusiness Magazine. You can reach him at lmwalsh@the2112group.com.

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Larry Walsh:@lmwalsh2112| Channelnomics: @channelnomics

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