Improving Channel Margins with Channel Revenue Management

WhitepaperHigh Tech

High Tech manufacturers (Semiconductor, Electronic Component, and OEM) that sell through highly evolved distribution channels rely on these selling partners to achieve revenue goals. Most companies lack the visibility and controls needed to effectively manage the complex transactional aspects of their distributed business. As they struggle to realize the revenue potential that these channels represent their costs soar, their compliance risks build up, and their revenues and margins are substantially eroded.

Three independent surveys of U.S. High Tech manufacturers conducted by Yankee Group, KPMG, and Simply Direct have revealed that High Tech companies lose 2% to 4% in gross margin due to the following challenges in managing channel business:

Almost 50% of respondents to these surveys indicated they lack adequate tools to manage their channel business as one continuum and claim their needs are not met through legacy ERP / CRM solutions.

This white paper provides insights into the state of the industry as well as the main challenges around Channel Revenue Management and how to address them through a combination of technology and best practices. In addition, the white paper provides case studies illustrating how industry innovators have revamped their Channel Revenue Management processes to improve margin and market reach.

• Poor visibility into demand• Misaligned incentive programs that do not distinguish between demand creation and fulfillment• Inaccurate validation of rebate payments• Overpayment of credit claims posted against inaccurate point-of-sale (POS) data• Poor controls over price concessions• Inadequate inventory tracking and reconciliation

Introduction

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Channel Revenue Management in the High Tech manufacturing industry is often a messy web of different functions, roles, processes, and systems. Channel pricing and quoting functions are often disconnected from channel contracts, which in turn is disconnected from channel inventory and channel incentives.

However, when looking at channel revenue as a whole, these processes significantly impact each other. By failing to align these processes towards the common objective of higher margins, many manufacturers are suppressing earnings and shareholder value.

The key drivers behind revenue and margin loss in the channel business include:

Poor visibility into demand across channels and regionsHigh Tech Manufacturers leverage indirect sales through various channels to drive revenue growth and new business. These channel relationships must be managed effectively to identify end customers and allocate resources to new opportunities. To do this, companies need global visibility across all their channels.

Key Business Drivers for Channel Revenue Management

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Inability to distinguish between demand creation efforts by the channel vs. mere fulfillment in order to adjust incentive programs to drive desired behaviorComponent suppliers leverage their distributors to get their components designed into OEM products. Any distributor that gets a component secured in an OEM design is supposed to be compensated for this design win. In most cases,

suppliers reward distributors by giving them a higher gross margin on sales of the designed-in component. But, if the supplier is unable to track design wins, then they may end up giving away that margin to a distributor who is only doing fulfillment because they are unable to enforce margin agreements that are associated with design registrations.

Inaccurate validation of rebates and eligibility to participate in various rebate programsComplex agreement structures and difficulty in determining customer and partner eligibility are obstacles to effective incentive rebate management. The result is often a rebate shortfall or overage. Inefficient, often manual

rebate processes can produce inaccurate calculations and poor turnaround time. When channel partners aren’t getting back all the money they should, they can become dissatisfied with their manufacturer relationship. If they are being overpaid on rebates, the manufacturer bleeds revenue. Poor channel rebate management is a lose-lose situation.

Inaccurate reconciliation of credit claims with debit record and POS dataPOS, inventory, debit claims, and other related data from the channel is often inaccurate and received late. Channel business processes around cleaning, normalizing, enriching, and aggregating POS, inventory, and claims data are often managed by spreadsheets and in-house point applications. When sales operations, finance, audit and compliance, and marketing systems are not integrated, many High Tech manufacturers simply pay the claims without validating their authenticity. This often leads to an overpayment of up to 10% on all claims submitted.

Poor controls over price execution and discounting on a global and regional basisCompanies that do not have a single global pricing and quoting system, or those that have decentralized pricing organizations, are vulnerable to sophisticated customers with multiple purchasing entitles that are able to discover and exploit regional and organizational differences in opportunity management, pricing, quoting, and contract management capabilities. In extreme cases, it can lead to arbitrage and gray market opportunities.

Slow turnaround time on special price requestsIn most companies, a high percentage of channel transactions require special pricing approvals, which prolongs the quote cycle and reduces ease of doing business between manufacturers and channel partners. Since historic pricing, current quotes, and orders and shipment information are not readily available to marketing and sales personnel, they are pressured into making pricing decision with limited real-time information, causing further margin loss.

Poor inventory tracking and price concession analysisMany High Tech manufactures do not have automated systems to manage channel inventory. Instead they use complicated spreadsheets and manual processes that are outside of the company’s financial systems. This lack of control has a big impact on revenue recognition schedules, making the creation of company’s financial statements a labor- intensive and error-prone job that ends up being undocumented and hard to audit. Some concrete examples of this issue include:

Companies need global visibility across all their

channels.

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• Poor inventory tracking: Inefficient visibility into inventory impacts both the ability to trace gray markets as well as entitlements to incentives based on inventory levels, i.e. if gray market products are sent back using right of return, significant value is lost.

• Product list price reductions: The introduction of new products that render in-stock products obsolete presents a difficult task for channel managers who struggle to analyze the true revenue implication of price changes to the value of channel stock and price protection agreements. Incomplete analysis can lead to unfortunate downstream financial implications.

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The aforementioned Yankee Group benchmark survey assessed the current state of the industry and what issues are top of mind for High Tech manufacturers. The survey data presented in Figure 1 below shows that companies are still struggling to manage the growing number of channels, especially regarding inventory levels and price protection programs.

When asked which solutions organizations are currently using to study pricing and revenue performance, 80% of respondents stated they use spreadsheets and email. Only 20% indicated that they had business intelligence or OLAP applications in place to monitor channel reporting for unexplained sales spikes or atypical end customers.

Benchmarking the Current State of the Industry

Figure 1: Most Critical Revenue Management Challenges for High Tech Manufacturers (ranked in order of importance)

Source: Yankee Group

Ensure Accurate Payments to Partners

Visibility to Profitability at Customer Level

Track Channel Inventory

Channel Price Protection

Ensure Regulatory Compliance

POS Validation

Reconcile Invoice Deductions and Incentives

Cross-channel Price Erosion

Rebate Calculations

20% 40% 60% 80% 100%

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Channel Revenue Management is no longer limited to the realm of early technology adopters and innovators. Over the last few years, over 100 semiconductor and electronic component manufacturers, OEMs, pharmaceutical, biotech, and medical device companies in the U.S. have adopted Channel Revenue Management solutions and achieved significant and measurable returns on their investments.

Regardless of what percent of revenue is derived from channel business, the following points tend to be true in the High Tech industry:

• Channel partners provide infrastructure and fulfillment abilities that extend manufacturers’ ability to meet customer demand

• Channel partners provide the means to drive business growth in territories and markets where the manufacturer may not be well entrenched

• Channel partners can serve hundreds of thousands of customers, allowing manufacturers to focus on the most lucrative piece of the market and reduce the cost of doing business

• A close analysis of channel business demonstrates that more often than not the channel produces better gross margins than direct business, as the channel often has less clout than strategic customers in driving hard price negotiations

For these reasons, companies are prioritizing Channel Revenue Management as a means to improve gross margins.

Prioritizing Channel Business

The majority of respondents felt strongly that their company needed improvements across the entire revenue life cycle, from ongoing analysis and visibility to profitability, tracking and enforcing volume commitments, ensuring compliance and audit trails, reducing overpayments, and eliminating bidding against themselves across various channels.

Looking deeper into the survey data, it can be concluded that:

• Companies have defined key performance indicators (KPIs), but half of the survey respondents feel they lack the tools to improve their ability to accurately track the necessary data • Managing inventory continues to plague many companies with indirect channels. Although 43% of companies

provide online access to data, only 15% have self-service portals for channel partners to access.

The current state of the industry, as captured in the benchmark survey, highlights the concerns High Tech manufacturers have related to maximizing the profitability of their business. The Yankee Group survey estimates that companies are losing 2-4% of gross margin every year due to:

• Price erosion driven by sales conflicts and poor enforcement of pricing policies • Inadequate tools to manage analytical price negotiations on special pricing requests • Overpayment of channel incentives such as rebates, POS / credit claims, and commissions

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Model N Channel Revenue ManagementModel N’s Channel Revenue Management solution, part of its integrated, domain-specific High Tech Revenue Management Suite, improves visibility into channel sales activity, enabling companies to more easily assess demand and business success with end-customers and to protect transactional margin by eliminating internal bid wars and enforcing contract terms. By automatically reconciling POS data to debits, Channel Revenue Management reduces over-payment of channel incentives and facilitates compliance with revenue recognition policies. And, Channel Revenue Management increases the ease of doing business with partners by streamlining commission calculations and validating inventory levels.

Model N Channel Revenue Management has been selected by market leaders such as Dell Inc., Bristol-Meyer-Squibb, STMicroelectronics, Marvell Semiconductor, Medtronic, Avago Technologies, Atmel, ON Semiconductor, Pfizer, Microchip, Linear Technology, Micron, Cypress and more than 70 other companies. All implemented the solution within months and successfully integrated it with ERP, CRM, and other legacy investments.

The Model N Channel Revenue Management footprint includes the following advanced capabilities:

Design Registration — enables manufacturers to quickly and easily approve and track design opportunities registered by distributors or partners, providing a real-time, comprehensive view of registered opportunities, wins, losses, and pending deals.

Debits Processing — reduces sales transaction costs by automating debit authorization and response based on pre- established business rules and by providing debit data tracking.

POS — automatically reconciles channel sales data against debits, enabling companies to identify end customers and assess purchasing patterns, reduce margin erosion caused by overpayment of channel incentives, and meet requirements for financial reporting compliance.

Rebate Management — allows organizations to configure and track incentive programs payable to any party. Model N rebates supports multiple qualification conditions and payout calculations and can accrue incentives based on direct sales, POS data, or custom information.

Channel Contracts — increases contract value and margin by reducing invoice and order pricing errors, improving controls over price concessions, and enhancing customer compliance tracking.

Stock Rotation — automates the governance of stock rotation periodicity, eliminates discrepancies between approved rotational levels and return material authorization (RMA) requests, and validates that correct inventory levels are being maintained.

Price Protection — enables companies to accurately determine which distributors and inventories are eligible for credits when revising published pricing, and analyze in advance the impact (amount of credit to issue) of price changes on channel inventory and backlog.

All of the above work seamlessly with Model N Deal Management and Global Price Management solutions to assure manufacturers’ ability to maximize value and margin.

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Channel Revenue Management: Model N Customer Success Stories

Case Study: Micron Reduces Revenue Leakage with Channel Revenue Management SolutionMicron, a $5.6B company based in Boise, ID, is one of the world’s leading semiconductor companies with DRAM components and NAND Flash memory products that are used in everything from computing, networking, and server equipment, to consumer, mobile, automotive, and industrial applications.

Micron concluded its existing legacy systems will not meet its business requirements and that they needed a consistent way to manage their global quoting volume with dynamic price changes. Its goal was to offer a secure portal in which channel partners could interact with Micron in a secure and automated way.

With Model N Channel Revenue Management, external partners are able to enter quotes directly into the system via a Web interface, saving time and resources. This automation reduced quote cycle time from days to hours. It also provides partners with the ability to submit POS and inventory reports that are automatically reconciled with debits and orders, enabling Micron to report accurate POS data by the EOD every Monday. By implementing automated controls, Micron was able to prevent a $1.2M profit leak per year by eliminating channel overpayments.

Case Study: Microchip Positioned for Growth with Improved Global Channel ManagementMicrochip, a $1B company based in Chandler, Arizona, is a world leader in the microcontroller market and sells a variety of microcontrollers, development tools, analog and interface products, and memory products to the automotive, communications, computing, consumer, and industrial control markets.

To support its growth ambitions, Microchip needed to expand its channel sales organization, but was unable to handle its current quote volume. Moreover, with 60 to 70 percent of design activity in the U.S. but almost 80 percent of revenue coming from outside the U.S., it needed a better way to track its global business. With Model N, it was able to dramatically improve visibility into demand, and increased its quote volume by 70 percent while at the same time reducing quote cycle times by 50 percent. The company’s margin improvement as a result of reduced price erosion funded a 25 percent increase in its direct sales force.

Case Study: Zilog Expands Market Reach with Channel Revenue Management SolutionZilog, a veteran semiconductor manufacturer based in San Jose, CA, has evolved its expertise beyond core silicon to include SoCs, single board computers, application specific software stacks, and development tools that allow embedded designers quick time-to-market in areas such as energy management, monitoring and metering, and motion detection.

The executive management team made the decision to grow the business even in an economic downturn. To achieve the growth desired, the team decided to change a few go-to-market strategies, particularly how the company interacted with and leveraged its distribution partners. By creating new distribution programs and implementing Model N, Zilog was saw a 300% growth in their channel demand creation funnel, with more than one-third of distributor quotes being automatically approved based on design wins and contract pricing within the first six months after go-live. The company also gained the ability to easily catch discrepancies in POS and ship and debit claims.

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The channel is an often underutilized avenue for High Tech manufacturers to expand market reach and enable better margins. Effective channel management requires adopting a combination of best practices and technology. By creating attractive, targeted channel programs and then leveraging integrated, domain-specific solutions to manage those programs, High Tech manufacturers can improve their channel relationships, boost gross margins, and drive shareholder value.

Conclusion

Channel Revenue Management Best Practices

Although technology alone is a vital component of effective Channel Revenue Management, it’s through a combination of technology and best practices that manufacturers will realize optimal results. Below are some important Channel Revenue Management best practices to follow:

Reward demand generationCreate specific programs for different components of the distribution network – global distributors, catalog distributors, and regional distributors – that can be consistently and accurately enforced. When distributors are confident that they will be rewarded for their design efforts they are more incented to work on your product line. Provide resellers and VARs with revenue goals combined with a market or key account penetration matrix to drive desired behavior.

Execute prices globally correctly and quicklyEnsure consistent and accurate pricing across channels and geographies by automating quote responses according to pre-established price books and contract terms based on customer, end customer, channel, and geography. Provide reviewers and approvers with tools and data to analyze price concessions quickly and effectively to protect margins.

Reduce cross-channel competitionEnable effective visibility into demand across channel partners and design houses to avoiding duplication. Duplicate opportunities can occur when a single end-customer approaches multiple channels for a product. These competing channels in turn may approach different regional offices of the same manufacturer. Without the ability to triangulate customer, end-customer, and program, manufacturers run the risk of bidding against themselves through competing channels, thereby eroding price and margin.

Create channel incentives to promote sales, reduce overpaymentsTo improve partner satisfaction, establish contract rebates then calculate and manage rebates as they accrue to ensure that eligible partners receive timely and accurate payments.

Reduce cost of inventoryLower total costs of supply and delivery by leveraging channel partners’ ability to manage inventory and logistics to reduce costs, improve order cycle times, and enhance asset transfer and utilization.

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Model N Headquarters 777 Mariners Island Blvd., Suite 300San Mateo, CA 94404 Phone: +1 (650) 610-4600, Fax: +1 (650) 610-4699 sales@modeln.com | www.modeln.com | © 2018 Model N, Inc. Improving Channel Margins with CRM Whitepaper