Revenue Cycle Management (RCM) is not just for OEMs anymore. With up to 90 percent of OEM revenue coming from value-added resellers (VARs) or other channel partners, B2B solution vendors need to properly handle the middlemen that directly touch their end customers. Otherwise they risk losing control of the top line of their enterprises.
The question is what can B2B OEMs do to administer their VARs for optimal performance. Maybe a better question is which VARs should OEMs concentrate on for their revenue.
“Vendors are fighting for the top 20 percent of partners,” says Kevin Rhone, director, channel acceleration practice, Enterprise Strategy Group (ESG), an IT industry analyst research firm. In discussing the revenue split that OEMs generate from VARs, Rhone says that the “80-20 rule is alive and well,” meaning that a typical OEM will originate 80 percent of its revenue from 20 percent of its channel partners. He goes on to say that tier one OEMs like NetApp, EMC or Cisco will generate 50 to 90 percent of their revenue from the channel in some way.
But how do they do it? Incentives play a large part.
Tracking and obtaining all the incentive payments that the partner is eligible for and to maximize profits is a top channel challenge, according to Kelly Baig, director, industry development, commercial markets, Revitas, a provider of revenue acceleration solutions. “The larger the organization, the more reps and sales it makes, the more products and manufacturers it works with, the more difficult this becomes,” she says.
Seeing that traditional 10 net 30 payment terms VARs and other OEM partners used to rely on have largely gone by the wayside, they have had to restructure their businesses. “This is exacerbated by slow payment cycles from manufacturers,” Baig says. That is because it takes some OEMs from 45 to 90 to as many as 180 days to pay their partners after deals close, according to Baig. “The cost of doing business combined with that lag puts financial pressure on VARs,” she says.
Importance of RCM for payments, incentives
Part of the solution for VAR revenue woes could be RCM. With RCM, VARs can obtain accurate, validated and expedited processing of incentive payments from manufacturers. “So VARs can rest assured they receive the benefit of the incentives for which they are eligible,” Baig says. “And that they receive them in a timely manner.”
And OEMs that discount the role VARs play need to think twice about how they treat these business partners. “VARs are an integral part of the ecosystem, as they generally own the customer relationship and are the end customer’s trusted adviser,” says Kamal Ahluwalia, chief marketing officer, Apttus, provider of enterprise-class SaaS applications. “However, they operate on very thin margins and therefore need to have very clear incentives to produce.”
So it is imperative that these incentives are completely transparent to both OEM and VAR. “The full lifecycle must be tracked from order, through fulfillment, billing, customer payment and finally end payment to the VAR,” Ahluwalia says, “with both parties—OEM and VAR—having full visibility at all stages.”
Therefore, all companies in the sales channel need to take command of their ends of the bargain. “OEMs and VARs alike need to adopt increasingly creative contracting and incentive strategies across direct and indirect sales channels and adjust to the rising sophistication of the purchasing channel,” says Shail Khiyara, senior vice president and chief marketing officer, ModelN, provider of revenue management cloud solutions.
Transparency, traceability and analytics in the channel
Key to any solution for RCM of the VAR channel is the need for transparency and traceability of payments and incentives made to VARs. Business intelligence analytics in this area provide critical insights that OEMs need. “Gaining actionable intelligence to assist planning for business, marketing and sales is a large challenge in the channel,” Baig says. “Most often, manufacturers do not have business analytics to inform their planning and investments in the channel, which makes it impossible for them to provide meaningful insights and guidance to channel partners.”
Not only are these analytics necessary for payments and incentives but also for other revenue-tied vehicles such as rebates and spiffs. “Program transparency and tracking tools are paramount in the rebate management space,” Ahluwalia says.
VARs and OEMs must clearly understand their program relationship. “Partner eligibility for rebates must be clear throughout the process; it starts with the quote,” Ahluwalia says. “Partners must have an easy way to measure their participation and track it accurately all the way through payment.” If kept consistent, trust between OEM and VAR strengthens over time, according to Ahluwalia.
With available RCM solutions, this process has been made easier. “Incorporating solutions such as Model N’s revenue management solution allows customers and VARs to track incentive payments across the value chain and gain actionable intelligence,” Khiyara says, “into volume commitments and increase channel effectiveness by integrating and using consistent information in every phase of the process.”
But make sure to look for testability in any RCM solution for the B2B channel. A good incentive program is easy to measure and utilizes A-B testing to judge program performance, according to Ahluwalia.
Maximizing VAR participation in programs
As VARs prosper so do the operations of B2B companies. So it is in the best interests of OEMs to maximize VAR participation in the programs they offer to stimulate sales. “Anything that allows vendors to increase performance of VARs will allow them to capture full value of incentives and benefits,” Rhone says.
For example, RCM solutions that leverage incentive payment data with analytics and reporting can be used by channel teams to evaluate sales performance and profitability for specific incentive programs, products and partners, according to Baig. “Partners can benefit with insights on their performance over time, within program category, region, market segment and product lines,” Baig says. “They can also evaluate their participation and utilization of offered incentive programs, including marketing development funds, discounts, rebates and other programs.”
And there is much room for improvement in the channel because almost 60 percent of companies don’t have integrated pricing, contracts and POS settlement processes within their revenue management programs, according to Khiyara. “As they struggle to realize the revenue potential that these channels represent their costs soar,” he says, “compliance risks build and revenues and margins are substantially eroded.”
To prevent such problems from happening with VAR programs, RCM solutions should contain functionality to address these issues. Some functions can be automated. Revenue cycle management has always been important for VARs, Ahluwalia stresses. “What’s different today is that it has never been easier to automate the revenue cycle. Payment gateways make it simple to obtain credit card and ACH data, allowing you to collect recurring payments from customers as they come due.”
However, other aspects of VAR management require a genteel approach on the part of B2B OEMs. For example, OEM reputation management could be as or even more important than revenue management to VARs. “If a manufacturer gains a reputation of being hard to work with for payments, it can cause resellers to disengage,” Baig says, “and focus their sales efforts on other products from other manufacturers, including competitors.”
Overall, the cost of dysfunctional VAR programs should not be underestimated. Based on three independent surveys of U.S. high tech manufacturers conducted by KPMG, Simply Direct and Yankee Group reveal that high tech companies lose 2 to 4 percent gross margin due to misaligned incentive programs and other factors.
For more on RCM, read this previously published report.
Photo of Kelly Baig courtesy the author