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Abuse in vendor channel incentive programs may be costing manufacturers up to $1.4 billion in lost profits each year, according to a white paper called, "When Channel Incentives Backfire," by Deloitte & Touche and sponsored by the Alliance for Gray Market and Counterfeit Abatement (AGMA).
The abuse of channel incentives, which chiefly involves VARs receiving special pricing for a specific customer but not selling all the products to that specific customer, also helps to fuel a still-thriving gray market, according to Deloitte.
"We see this as an industry-wide problem. A lot of companies want to move product through distribution partners and resellers and they're offering up various promotions and discounts, special pricing deals," said Brent Nickerson, a partner at Deloitte & Touche. "What we found is those programs are not monitored, not managed, and companies don't have controls in place to track veracious programs to their partner community which can lead to abuse."
Survey respondents, nearly half of whom came from large vendors with more than $25 billion in annual sales and indirect channel models, estimated that incentive abuse may affect up to 25 percent of all channel sales, according to the study.
In addition, half the respondents strongly agreed that incentive abuse is responsible for gray market activity.
The first area of vulnerability, according to the study, lies with the broad base of channel partners. Two-thirds of the vendor respondents count on more than 5,000 channel partners to bring their products to market, which increases the probability of abuse, according to Deloitte.
Further, more than half of all channel sales receive incentives, according to two-thirds of the companies surveyed. Special pricing, once used to help vendors and VARs secure big deals rather than lose them to a competitor, is no longer special.
"Channel incentives designed to boost sales and boost loyalty and motivate sales, are open to abuse. What's staggering is to look at our own member companies who don't realize the extent of the problem," said Scott Olson, spokesperson for AGMA regarding the study and vice president of global price and sales compensation management at APC by Schneider Electric.
Jana Arbanas, a senior manager at Deloitte & Touche, said more of an onus should be placed on vendors to create channel programs and controls strong enough to ensure that the right product gets to the right end user at the right price.
"Without proper controls, opportunities for channel partners to take advantage will continue. It's creating this unlevel playing field that causes channel partners to look for ways to circumvent because they need to compete at a lower price," Arbanas said.
The study could not ascertain whether much of the incentive abuse is being committed by a small number of partners or whether a large percentage of solution providers occasionally abuse the system, Arbanas said.
Channel abuse becomes a cyclical problem with both VARs and vendors blaming the other while the situation worsens, added Olson.
"If you've got poorly designed programs they will ultimately get abused. It creates channel animosity almost between partners, and manufacturer resentment," he said. "If I'm a VAR, I may be pleased if I'm able to take advantage of loop holes but it hurts you in the end because you compete against the same issues you were taking advantage of so to speak."