Channel Promotional Allowances The Importance of Financial Controls


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romotional allowance programs (such as MDF and co-op programs) are the most popular programs that vendors offer their channel partners. What’s more, these programs often represent the largest single expense line item across the broad range of channel programs offered. If not properly administered, these programs can needlessly cost vendors thousands, or even hundreds of thousands of dollars due to: over payment, incorrect balances that overstate available funds, missed expiration dates for funds, and inefficient management. The problem is often exacerbated when CRM or SFA applications are adapted to meet the needs of promotional allowance programs because these applications do not have the financial controls in place to help minimize the aforementioned risks. This white paper outlines the areas of inefficiency and waste inherent in the management of promotional allowance programs without the appropriate financial controls in place—and more specifically, where the software and services offered by CCI streamline administration and improve management accuracy.

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Channel Promotional Allowances The Importance of Financial Controls

  1. 1. Channel Promotional Allowances The Importance of Financial ControlsSUMMARYPromotional allowance programs (such as MDF and co-op programs) are the most popular programs that vendors offer theirchannel partners. What’s more, these programs often represent the largest single expense line item across the broad rangeof channel programs offered. If not properly administered, these programs can needlessly cost vendors thousands, or evenhundreds of thousands of dollars due to: over payment, incorrect balances that overstate available funds, missed expiration datesfor funds, and inefficient management. The problem is often exacerbated when CRM or SFA applications are adapted to meetthe needs of promotional allowance programs because these applications do not have the financial controls in place to helpminimize the aforementioned risks. This white paper outlines the areas of inefficiency and waste inherent in the management ofpromotional allowance programs without the appropriate financial controls in place—and more specifically, where the softwareand services offered by CCI streamline administration and improve management accuracy.
  2. 2. Channel Promotional Allowances: The Importance of Financial Controls INTRODUCTION In addition, there are administrative inefficiencies that Promotional allowance programs have been around can create waste (time and money) which may act as since the early 20th century. They were initially put in a disincentive for channel partners to participate in a place by the Warner Brothers (a manufacturer of feminine program. These include: undergarments) to provide additional incentives for retailers to feature their products in their advertising efforts. Lengthy claim management or reimbursement These early programs were accrual based (what many refer processes to as a co-op program), although other methods of funding Inability to get a quick response on program have appeared since then. As programs have evolved questions or issues and become more complex, so too have the systems and Time-consuming report development processes required to accurately administer them. Today, Long delays on plan or request approval there is a movement to reduce program complexity and streamline administration of all channel program types. To CCI provides the systems and processes to address these help minimize complexity when managing co-op and MDF issues by eliminating fund mismanagement, ensuring programs, many channel marketers create ad hoc software program compliance (to the program guidelines), freeing systems that are incorporated into their partner portal your staff to perform more strategic tasks, and improving or added to their CRM/PRM platform. These are often partner relationships. paired with in-house administration of these programs by personnel who are not dedicated to the role. As a result, many of these organizations who believe they are saving money with this approach are unknowingly wasting money by not having the correct processes and controls in place. Below are some examples of unnecessary waste that may be experienced with the management of promotional allowance programs without the necessary safeguards: Errors in payment (settlement of claims or deductions) Over expenditure of funds (payments greater than exceeding the allocation) Inaccurate management of expired funds— particularly in accrual programs or rolling programs Mismanagement of funds—due to errors in approval or submission of duplicate request Errors in fund reconciliation—due to intentional or accidental deletion of old requests when expenses have been applied against them Poor understanding of program ROI due to the inability to monitor which activities are getting the biggest bang for the buck and which activities should be eliminated Cumbersome or inaccurate accounting of expense categorization (operational expenses or contra revenue) No collection on proof-of-performance documentation required for expense classification1
  3. 3. Channel Promotional Allowances: The Importance of Financial Controls THE CCI INCENTIVE MANAGEMENT SOFTWARE PLATFORM To limit over-commitment of funds to partners, At the heart of the CCI software is a financial application a program administrator may chose to debit designed specifically to improve accounting accuracy of the available balance—or reserve funds—when all fund requests and reimbursements. Similar to your funding request forms are approved for use (but own checking account, each participating channel partner not yet claimed). Alternatively, administrators maintains an unique account that reflects an accurate may choose to reduce only the available balance fund balance as a result of maintaining a comprehensive upon reimbursement. This may prove to be a more record of all debits and credits designated throughout the practical option for some programs. life of the program. Each transaction type has embedded If funding for a program is calculated as a characteristics that force program guideline adherence, percentage of monthly sales, the CCI rule set such as expiration date for funds or submission due might allow partners to overspend (not overpay, date for claims. Each partner account is accessible only but over-request) their current available funds to through designated permissions that often align with fund a claim—knowing that their balance will be an organizational hierarchy. All actions that may result replenished with the following month’s funding in a debit or a credit (such as claim reimbursement) are allocation. Alternatively, administrators may choose perpetually linked to that fund—and cannot be deleted by to automatically reject that same claim as a result of users at any step in the process. This perpetual assignment insufficient funds. ensures reporting accuracy, and facilitates accurate internal In some programs, funding might only be allotted audits throughout the life of the program. Therefore, like a to the partner once a request is approved, with no checking account, the transaction history of that partner’s balances residing in individual partner accounts, fund will remain in balance—and so too will the fund but instead maintained in a master account. Other balance as that partner’s account rolls up through the programs allow partners to view an available balance hierarchy (such as territory, region, and overall). Because to allow partners to plan against a designated the CCI Incentive Management platform is designed as a budget. financial application, it supports all relevant GAAP, FASB, and SOX regulations. In addition, the CCI solution has There are instances where any combination of these received SSAE 16 Type II certification (formerly a SAS 70 options is appropriate. The CCI rules engine provides Type II certification). designated administrators with the flexibility they need to easily configure the financial controls necessary to support In addition to providing accurate accounting of all funds, their unique program while remaining compliant. your solution will benefit from the following financial controls as appropriate: Access to all balances and processes are role dependent, so users only have access to financial data on a need-to- know basis—there is no direct access to overall program financials or that of an individual partner or user account without designated permissions. The number of unique roles you can define is unlimited. Administrators can easily manage the fund liability. In general, the “available balance” of a promotional allowance account is calculated as an opening balance less credit and debit transactions made to that account as a result of normal program activity. However, how and when those transactions are booked may vary between programs. Here are some examples:2
  4. 4. Channel Promotional Allowances: The Importance of Financial Controls CCI SOFTWARE SIMPLIFIES THE ACCOUNTING OF CONTRA-REVENUE AND OPERATIONAL EXPENSES all budgets designated for use in op-ex versus contra Considered a type of incentive program, promotional activities. allowances are generally classified as contra-revenue. All required proof-of-performance documentation However, under certain circumstances promotional that qualifies an activity as an operational expense allowances may be classified as operational expenses can easily be uploaded to each claim by the channel (op ex)—a desirable option for companies who want to partner, and the documentation perpetually stays maximize income reporting. Promotional allowances can with the claim in the event of future audits (with no qualify as an operational expense (op-ex) per the FASB data storage surcharge). ruling 01-9, if the following conditions exist: In addition to the above, when the program is administered through CCI, the CCI Client Services The payment covers a service by the partner that team ensures accurate compliance of each claim, and offers a clear benefit to the manufacturer; that the appropriate documentation is provided. The benefit is clearly separable from the sale of the product; Values are frozen upon approval. Comprehensive The benefit could be purchased by the manufacturer financial controls mean that users have limited ability from a source other than the partner; and to alter the requested value once a request is approved. The manufacturer has obtained proof of Administrators have a choice of when and how they performance and is able to reasonably estimate allow the original approved request to be changed. For true costs. example, some administrators choose to allow designated approvers to increase or reduce the request value as Practically speaking, these constraints limit the activities more information is known. Others require the request reimbursed by promotional allowance programs to to go through the approval process with any requested outbound marketing programs that also support the change in value. However, once claims are received and manufacturer’s brand. For example, media costs in a paid against a request, the claim cannot be canceled or partner’s advertising program may qualify for contra- modified, thus ensuring accurate account balances and revenue because those efforts are considered an extension fund reconciliation. of the program provider’s own brand marketing efforts. However, that alone is not enough. Extensive proof-of- performance (POP) must be associated with the expense that substantiates that the program provider not overpay for that activity. Overpayment is evaluated relative to the market rates that could have been available had the activity been purchased directly from the program provider. To validate rates, an invoice or affidavit is typically issued by the media provider, which substantiates the market rate— net of any mark up that may be added by the channel partner (often charged as a management expense). The CCI Incentive Platform assures compliance of operational expenses in a number of ways: To simplify financial reporting, all activity types that qualify for op-ex can be grouped—isolating those reimbursements to simplify reporting. To further isolate all costs for op-ex reimbursements, unique funds may be created that contain only all the op-ex related activities. This option allows more control of3
  5. 5. Channel Promotional Allowances: The Importance of Financial Controls MULTIPLE FUNDING MODELS AVAILABLE Promotional allowance programs are continually evolving—and so have the funding models that provide the basis for how funds are allocate to partners. CCI software supports all funding models in use today. Many clients choose to offer multiple programs, and each program may use a different funding model to support the variety of activities that are available for reimbursement. Accrual-based funding models: Most often referred to as co-op programs, this funding model is calculated as a percentage of sales from a prior period— monthly, quarterly, or annually. This funding model is often used to support traditional advertising and lead generation programs. There are a variety of options that may be associated with this model. For instance, rolling programs typically expire funds monthly (called roll-offs) as new funds are added. Funds are used on a FIFO basis, and unused or unclaimed funds roll off based on program guidelines. Typically, funds are available for six to twelve months after they are earned. Managing the expiration of these funds is difficult without specialized software that can accurately assign and expire unused funds accurately. The CCI solution provides clients with the ability to choose how roll-offs are managed for each promotional allowance program, either through expiration or shifting the expired funds to new funds for alternative uses. Discretionary funding models: Rather than issuing funds to partners based on percentage of past sales, funds may be assigned to partners based on future potential. These programs are most often referred to as Market Development Funds or Business Development Funds (MDF or BDF respectively). CCI software facilitates the ability to administer this funding model as well. As a budget is assigned to each partner, these allocations show up against a debit to an overall budget (or “Fund” in the CCI system). This ensures that the funds are not over allocated—thereby ensuring compliance across the life of the fund. The administrator can choose whether these funds are assigned in advance, or plan based—requiring the channel partner to submit a request for approval in advance of assigning the funds. The advantage of a plan based funding model is that it minimizes any preconceptions of these funds as an “entitlement” by the partner, and ensures any spending by the partner is directed to approved activities only. The use of either model is at the client’s discretion, and can vary between any two programs when multiple programs are offered. Waterfall (or cascade) funding models: Waterfall funding models are similar in design to discretionary spending (outlined above), but differ only in that an administrator doesn’t assign the funds directly to a channel partner. Rather, the responsibility of assigning funds to individual partners is delegated to regional (or local) account managers. This type of funding model is growing in popularity to support global partner programs or for other instances where local channel managers possess P L accountability of partner performance. In these instances, the integrity of the fund remains intact with each transfer (for example, global program administrator, to regional administrator, to in-country manager) to ensure a reconciliation of fund transfer at each step, as well as to facilitate an accounting of funds as claims are ultimately made by the channel partner for local marketing activities.4
  6. 6. Channel Promotional Allowances: The Importance of Financial Controls GLOBAL CURRENCY MANAGEMENT The CCI platform was designed to support global programs—and provides flexibility to address all of the complexities related to global currency management. Partner-centric or Program-centric based currency models. Working with global programs that often include payments in multiple currencies, the program provider will ultimately have to choose whether they or their channel partner will absorb any difference in financial value that fluctuating exchange rates generate. Often between the times the fund request is made and the payment is issued, the exchange rate has changed. A partner-centric model maintains the partner’s local currency as a constant throughout the process while the overarching base currency will fluctuate with the market—this allows the partner’s currency to remain constant. In the partner-centric model, the program provider accepts the liability or asset of currency fluctuation. Conversely, the program-centric model maintains consistency at the base currency as defined by the program provider and their partner’s currency fluctuates with the exchange rates. The CCI platform provides the flexibility to support either model. Exchange rates may be managed by CCI using a daily feed, or using periodic rates that are client defined. Many companies traditionally fix exchange rates to simplify financial management across a variety of transaction types involving multi-currency. These exchange rates are evaluated periodically and adjusted as necessary—often quarterly or annually. In today’s dynamic market, however, exchange rates fluctuate regularly. Therefore, in order to maintain financial accuracy of all partner transactions, updating exchange rates on a daily basis may be preferred. CCI also makes available a daily exchange rate (from that allows for the most updated exchange rates whether your program is structured as partner-centric or program-centric. Exchange rates are frozen upon payment. Regardless of the preferences selected above, the exchange rate for a given transaction is frozen upon payment at the true cost of the exchange. This facilitates accurate banking reconciliations, and ensures reporting accuracy across the life of the fund. ROI: QUANTIFYING THE BUSINESS VALUE OF PROMOTIONAL ALLOWANCE PROGRAMS The available CCI Joint Marketing Planner (JMP) allows partners to create and submit comprehensive marketing programs in advance of funding approval. The marketing program assigned to each planner can include one or more activities as needed to achieve an overall business objective. What’s more, the JMP facilitates an analysis of “Forecast” versus “Actual” performance of each plan to include the plan costs and program performance. The CCI Joint Marketing Planner captures forecasted business metrics or goals for each campaign—which we define as the overall business impact of the program. These metrics are client defined, but typically align with established business goals to include measures such as sales (dollars or units) or the number of new customers. Actual business impact is then updated at any time by the partner or channel account manager until a planner is closed and metrics are validated by the channel account manager. Comprehensive reporting allows users to monitor ROI of all their programs, as well as analyze campaign performance versus plan.5
  7. 7. Channel Promotional Allowances: The Importance of Financial Controls PROGRAM ADMINISTRATION: FINANCIAL CONTROLS REQUIRE MORE THAN SOFTWARE on a continual basis and audited to very strict standards Many of the issues contributing to fund misuse are that extend beyond established service level agreements related to the manual processes that exist with program (SLAs). management—usually associated with inaccurate compliance auditing of claimed activity. CCI SERVICE LEVEL AGREEMENTS The CCI client services team helps to reduce the financial In addition to errors and delays in payment, poor burden of program administration, and ensures prompt administrative practices can create an excessive burden response to inquiries. This service frees your staff for on team members. This can result in increased costs, and other tasks, and ensures that your partners will continue can also inhibit productive program use by the partners. to embrace the program—rather than experiencing Partners will not use a program if they cannot get a prompt frustration. response on questions or issue resolution, or if they don’t feel they are getting reimbursed promptly once a claim Below are the standard SLAs established by CCI for program has been submitted. CCI’s seasoned client services team administration and partner support. These SLAs may be addresses these issues a number of different ways: appended based on the needs of individual clients: COMPREHENSIVE AUDITING PROCESSES PA approval - 1 business day CCI client service teams ensure program compliance with Claim audit - 2 business days of date supporting every claim through a carefully honed audit process that documentation is received includes: Payment – 10 business days (if weekly payment batch is set up; some clients prefer a bi-weekly or Reviewing the charges on each claim to ensure bi-monthly payment batch) that the advertiser’s fair cost of advertising is not Email and phone response – 1 business day for client, exceeded (especially important for all activities that 2 business days for client customer qualify as operational expenses) Phone response - 1 business day for client, 2 business Implementing specific audit practices to protect days for customer (most calls to client are returned against duplicate, inflated, inaccurate, fraudulent, or within 4 hours) incomplete claims Verifying all rates submitted (such as newspaper rates, distribution costs, and insert costs) Determining the appropriate reimbursement amount to be remitted to the reseller Capturing and tracking data for management information reports Comparing to programs guidelines with rules and guidelines for each activity type Tracking warnings to channel partners for non- compliance with guidelines Suggestions to the client for guideline changes for repeated non-compliance items (for example, establish logo guidelines document and place on website if there are problems, create quick reference guide if documentation is missing on claim submission) What’s more, to ensure complete compliance that claims meet program requirements, CCI conducts regular audits of our auditors. Random batches of claims are sampled6
  8. 8. Channel Promotional Allowances: The Importance of Financial Controls PROFESSIONAL SERVICES Like the blueprint for a new home, the level of satisfaction in the outcome is dependent upon the proper program design. That’s where CCI’s Professional Services team adds value to your program. Each Professional Services representative can leverage over 30 years of best practice experience to help design a program to meet client objectives efficiently and effectively. What’s more, that professional services representative works with their client throughout the program life-cycle to analyze program performance versus goal—making recommendations for program enhancements as needs evolve. Members of the CCI Professional Services team average 10 years of channel marketing experience, and have proven their value on dozens of client programs. The result: a program that is optimally designed from the onset, and continues to meet or exceed expectations throughout the life of the program. ABOUT CCI CCI delivers comprehensive incentive solutions to optimize sales channel performance. As an enterprise software and services solutions provider, CCI enables channel marketers to manage and measure sales and marketing incentive programs throughout their demand chain, resulting in greater spending efficiency and improved program effectiveness. CCI provides a combination of on demand software, professional services, and program management. CCI’s Professional Services team applies best practices to define and deploy programs that meet your business goals. Equally powerful is CCI’s software. Delivered as SaaS, CCI automates your channel programs and partner activity for increased visibility, measurement, and ROI. Once deployed, CCI Program Management delivers services such as contact center support, auditing, and payment services to ensure program operational efficiencies. CCI is proud to work with market leading companies in technology, telecommunications, and entertainment. For more information, visit or contact us at CCI: Channel Management Solutions 7250 Redwood Boulevard Suite 214 Novato, CA 94945 USA 415.472.5100 info@channelmanagement.com7