•     Cognizant 20-20 InsightsA New Framework forIncentive Management   Executive Summary                                 ...
To manage incentives accurately, auto makers need          •    Model 1: Dealer receives incentive througha robust incenti...
The incentive provided by the manufacturer to                                          late the incentives to be paid to e...
This framework outlines various components, as               available as COTS (commercially off the shelf),              ...
financial reporting. This statement shall also          geographies. If the organization has not stan-    assess the effec...
Footnotes1    Barbara Hendrickson, “Incentives and the Automobile Industry,” Design Incentives, Fall 2005,    http://www.i...
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A New Framework for Incentive Management


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Cognizant offers a framework for auto manufacturers planning to establish or enhance an incentive management system.

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A New Framework for Incentive Management

  1. 1. • Cognizant 20-20 InsightsA New Framework forIncentive Management Executive Summary • Dealer holdback: This is a percentage of ei- ther the MSRP (Manufacturer Suggested Re- Incentive management systems are complex ap- tail Price) or invoice price of a new vehicle (de- plications that help auto manufacturers plan and pending on the manufacturer) that is repaid to launch multiple marketing campaigns targeted the dealer by the manufacturer. The holdback at dealers at the regional, national and interna- is designed to supplement the dealer’s cash tional levels. Using configurable rules, an incen- flow and indirectly reduce “variable sales ex- tive management system enables auto makers penses” by artificially elevating the dealer- to offer discounts that help generate demand for ship’s paper cost. Manufacturers such as Ford, select vehicles. This white paper lists various ele- General Motors and Chrysler generally offer ments of an incentive management system and dealers a holdback equaling 3% of the total discusses how these components interact with sticker price of the car.2 each other. The overall incentive management framework described here can provide useful in- • Cash incentives: Manufacturers use various puts to auto manufacturers that are planning to marketing campaigns valid for a fixed time- establish or enhance an incentive management frame. If the dealers sell cars that are eligible system. It draws upon industry standard practices under a given campaign, then they are paid and highlights various regulatory and compliance an incentive for each car sold. Manufacturers issues that must be considered while conceptual- also set up dealer targets that, if exceeded, can izing an incentive management solution. result in the dealer receiving higher discounts per vehicle.3 Incentives Primer Auto manufacturers offer various kinds of incen- Years ago, dealers purchased vehicles at some tives targeted at customers or dealers to keep discount (15% to 17.5%) from the manufacturer.3 vehicles moving in their value chain. The overall The margin that each dealer made was depen- incentive amount per vehicle that a manufacturer dent on its ability to negotiate a price with the can offer depends on various factors. A mix of his- end customer. Now, incentives have become the torical data, inventory levels, market elasticity of key source of income for dealers, and these in- demand and product pricing helps manufacturers centives are contingent on the achievement of determine the optimal level of incentives.1 sales targets. As dealer incentives have become a key enabler for auto sales, it is imperative for Dealer incentives can be cash-based or non-cash- any auto manufacturer to have control over the based. Cash-based incentives generally cover incentives outflow associated with its marketing dealer holdbacks and vehicle discounts. campaigns. cognizant 20-20 insights | january 2011
  2. 2. To manage incentives accurately, auto makers need • Model 1: Dealer receives incentive througha robust incentive management system (IMS). An the claims settlement process. In this model,IMS can improve the accuracy of claims/payouts dealers are responsible for the submission andand enhance the effectiveness of campaigns. tracking of claims (see Figure 1). If they have a query related to the claim/status, they canTypical Incentive Management Models raise it online. The manufacturer’s accountingOrganizations can follow various models for cal- system receives various claims and sends backculating incentives and making payments to deal- confirmation to the dealers about the claims.ers. Primarily, there are two different models used It also provides dealers with regular updatesby organizations: about the status of the claims as they flow through the accounts payable process.Incentive Payout: Claims Settlement Process Eligibility Check Claim Submission Claim Settlement Dealer checks the Dealer submits claims against Manufacturer settles eligibility of the incentive program online. the claims against vehicle for available eligible vehicles. Dealer checks the claims incentive programs. status/submits query online.Figure 1• Model 2: Manufacturer determines the eligible hicles are then calculated based on the rules vehicles and releases payments for dealers defined during the campaign launch. The pay- associated with the vehicles. In this model, ment information is sent to the accounting the manufacturer checks the details of the ve- team, which makes payments to the dealers. hicles in the supply chain and identifies those The dealer also receives regular updates about vehicles that are eligible for incentives (see the payments already made and the pending Figure 2). The incentives against these ve- payments.Incentive Payout Calculation & Settlement Eligibility Check Payment Generation Payment Manufacturer Manufacturer calculates Manufacturer sends determines the vehicles incentives for the eligible the payment and that are eligible for programs. payment information incentives. to the dealer.Figure 2 cognizant 20-20 insights 2
  3. 3. The incentive provided by the manufacturer to late the incentives to be paid to each dealer basedthe dealer is generally not advertised.4 Howev- on vehicles sold.er, there are Web sites that provide informationabout dealer incentives to customers, such as Ed- Prevent revenue leakagemunds.com, cars.com and others. When multiple campaigns are running, it is pos- sible that a given vehicle is eligible under moreKey IMS Drivers than one campaign. Hence, net incentive outflowOver the years, incentive management systems can be more than what the organization mayhave become necessary for auto manufacturers. have anticipated. By using an IMS, it is possible toSome of the functions IMS systems fulfill include cap the level of incentive on a given vehicle. IMSthe following: helps in accurate calculation of incentives based on pre-set rules, thereby ensuring that only theEnable launch of marketing campaigns right level of incentives is paid to dealers.Incentive management systems provide manu-facturers the ability to configure various kinds Achieve regulatory complianceof campaigns and control the incentive outflow Incentives outflow from the organization can addassociated with them. The U.S., Japan and many up to several billions of dollars per year. As theseEuropean countries have introduced large-scale are financial transactions, auto makers need clearscrappage programs during the global reces- workflow processes with checks and controls to en-sion that began in 20085 as an economic stimu- sure Sarbanes Oxley (SOX) regulatory compliance.7lus to increase market demand in the industrial Incentive management systems are typically SOX-sector. As many of these programs have ended, compliant applications that provide checks and ap-manufacturers will have to plan their marketing provals for the launch of a marketing campaign orcampaigns to prevent sales from declining while release of payments.remaining profitable at the same time. Recent re-calls6 of vehicles by various manufacturers have Cognizant Incentive Managementonly necessitated the need for new campaigns, to System Frameworkprevent a further sales decline. Over the years, we have worked with leading auto- motive manufacturers in the incentive managementSupport launch of new vehicle models area, enabling them to optimize their incentiveThe prolonged global recession is causing manu- spend, stimulate sales and improve process effi-facturers to rethink their product portfolios. As a ciencies and control. Based on our industry knowl-manufacturer develops and launches new models edge and experience in the incentive managementinto the market, a well-designed and executed in- area, we have developed a framework that helpscentive management system can enable it to con- auto manufacturers either enhance or set up a newfigure its marketing campaigns, as well as calcu- incentive management system (see Figure 3).Enabling IMS Incentive Management Systems - Framework Drivers Enabling Planning Enabling Execution Enabling Collaboration Barriers • Enable “what if” simulation • Configure marketing programs • Enable dealers to view • Support launch of • Nonstandard practices of • Create rule-based incentive running campaigns and new vehicle models • Determine whether a given incentive generation across setting and calculation determine eligibility of various geographies • Prevent revenue vehicle is eligible under the vehicle under any campaign leakage marketing campaign • Establish workflow for approval • Complex rule-defining of marketing campaigns as well • Provide payment process for enabling • Forge strong • Calculate total incentive as release of incentives generated information to dealers configuration of marketing relationship with that will be paid for a on timely basis campaigns dealers vehicle under a given • Setup of overall incentive limits campaign • Interface with OMS, MES & • Enable receiving of vehicle • Interfacing required with • Adhere to compliance payment systems for registration details from OMS, DMS, MES and requirements the government agencies accounting systems, each information flow of which may vary across geographies Regulatory and Compliance: SOX Compliance; Motability Act Industry PracticesFigure 3 cognizant 20-20 insights 3
  4. 4. This framework outlines various components, as available as COTS (commercially off the shelf), well as key barriers and enablers of an incentive which can execute the defined rules in run time. management system. It is based on the industry practice of a manufacturer determining the eligi- • Workflow for the launch of campaigns: An in- ble vehicle and generating incentives for dealers centive management system should enable a (see Figure 2 on page 2). workflow for launching and executing any mar- keting campaign to help organizations remain Enabling Planning SOX compliant.7 A huge cash outflow associ- A planning module is required to carry out a finan- ated with the marketing campaigns is at stake, cial assessment of any given marketing campaign. so it is necessary that checks and controls are Typically, these are simulation tools with the applied to the process of dealer payments. ability to carry out a “what-if” As a best practice, both the marketing and finance teams should get involved in campaignAs dealer incentives analysis. Business rules engines approval, as well as payment release. available in the market have these have become a features built into them. They If the existing process does not contain ad- key enabler for can determine which vehicles equate checks and balances for incentive auto sales, it is will be eligible if the campaign generation and approval, these roles will have is launched and also calculate to be defined and the key resources must be imperative for any the incentive outflow associ- identified for performing each of these roles. auto manufacturer ated with it. The simulation re- to have control sults can lead a manufacturer to • Interfacing with other systems: Incentive man- apply a maximum incentive cap agement systems need inputs from the vehicle over the incentives or make adjustments to the order system (dealer, customer, vehicle make and outflow associated incentive level and scope of the model, etc.), the manufacturing system (order with its marketing campaign. Thus, IMS can add status and other detail), as well as accounting great value in the planning of a systems (vehicle prices and other information). campaigns. marketing campaign. Enabling Collaboration Enabling Execution • Collaborating with dealers: Dealers need pro- This module deals primarily with the configura- visions for confirming whether a given vehicle tion of the marketing campaign based on multiple sold by them will be eligible for a discount conditions that must be approved to roll it out. By under a given campaign. IMS should have a setting up a rule-based incentives offering, manu- provision for providing this information to the facturers can motivate dealers to push harder to dealers online. Dealers also need information sell select vehicle models. about the payments that have been released by the manufacturers against the vehicles. • Configuring marketing campaigns: IMS Standard reports can also be provided to the should allow campaigns to be configured dealers in a timely manner. Some dealers also based on multiple parameters like vehicle, ve- require an interface with the incentive system hicle model, geography, retail date of vehicle, for receiving information in their dealer man- etc. It should also provide flexibility to adjust agement system. incentive levels based on various conditions. Sample scenarios include: • Collaborating with vehicle registration au- thorities: Incentive management systems > If dealers achieve sales targets or exceed should interface with the registration body of them for a given period, then higher dis- the government for receiving vehicle regis- counts on each eligible vehicle are provided. tration details. This can help dealers, as they would not have to complete the task of getting > If a dealer orders or sells select vehicle vehicles registered. models within a given time period or geog- raphy, then a higher discount on each eli- Compliance and Regulatory Issues gible vehicle is offered. • Sarbanes Oxley compliance: As per section The execution of the campaigns is facilitated by 404 of the SOX Act, “Issuers are required to the rules engine (third party or custom), which is publish information in their annual reports one of the key components of the IMS. Already, a concerning the scope and adequacy of the number of third-party business rules engines are internal control structure and procedures for cognizant 20-20 insights 4
  5. 5. financial reporting. This statement shall also geographies. If the organization has not stan- assess the effectiveness of such internal con- dardized its processes and systems, implemen- trols and procedures.” tation of an IMS can become cost prohibitive. As incentive management systems result in a How Cognizant’s Framework Helps significant amount of cash outflow from orga- nizations, they must comply with the SOX Act. Our framework can aid in performing a high- These systems must have sufficient business level assessment of a manufacturer’s incentive and system control over the entire process, management system to unearth improvement from campaign launch, to configuration in the opportunities across planning, execution and col- system, to payment release to dealers. laboration areas. It can also help auto manufac- turers understand the key benefits that can be• Other regulatory issues: There are various realized by implementing an incentive manage- other regulatory acts that need to be consid- ment system, as well as the potential barriers in ered to ensure the solution addresses all re- adopting this solution. For ex- quirements. An example is the Motability Act8 ample, we have leveraged this Our framework can in the UK, which helps people with disabilities framework in an engagement acquire a vehicle. The disability allowance that with one of the world’s larg- aid in performing a est U.S.-based automotive high-level assessment is paid to the customer by the government is directed toward the payment of the lease manufacturers. We have been of a manufacturer’s amount of the vehicle. Customers obtain ve- able to provide significant im- hicle leases at substantial discounts. provements to the efficiency incentive management and transparency of its system to unearthKey Barriers for the Incentive incentive management pro- improvementManagement System cess. Also, the engagement• Non-standard practices of incentive genera- created a greater level of opportunities across tion across various geographies: The recent collaboration with dealers, planning, execution spurt in merger and acquisition activities in the which resulted in a reduction and collaboration automobile industry following the recent finan- in payment-related queries cial meltdown has created a situation where from dealers. areas. newly formed entities must rationalize differ- ing processes for incentive generation across Where the Rubber Meets the Road all business units/geographies. To implement Incentive management helps auto manufacturers one single incentive management system that push vehicles out of their inventory. By improv- can address the unique requirements of each ing the accuracy of claims/payouts, preventing region requires complex rules defining process revenue leakage and enhancing campaign effec- and careful designing of the system. tiveness, incentive management systems play a• Non-standard systems across geographies: vital role for automobile manufacturers. Incentive Incentive systems require inputs to the order management systems can also enforce the checks management system, vehicle information sys- and balances required by the manufacturer to tem and various other systems. The incentives achieve compliance with government regulations. are generally paid to dealers through the ac- Our incentive management framework can be of counting system. Integrating all these applica- great value in enhancing an existing incentive tions into one cohesive unit requires careful management system or helping an automaker planning and a degree of standardization across create a new system. cognizant 20-20 insights 5
  6. 6. Footnotes1 Barbara Hendrickson, “Incentives and the Automobile Industry,” Design Incentives, Fall 2005, http://www.incentivecentral.org/pdf/incentives_and_auto_ind.pdf2 “Dealer Holdback,” Edmunds.com, January 2010, http://www.edmunds.com/advice/incentives/holdback/index.html3 “Manufacturer to Dealer Incentives: Tips for Discovering this Hard-to-Get Information,” Helium.com, http://www.helium.com/items/368994-manufacturer-to-dealer-incentives-tips-for-discovering-this-hard-to-get4 Ozgun Caliskan Demirag et al., “The Effects of Customer Rebates and Retailer Incentives on a Manufacturer’s Profits and Sales,” Wiley InterScience, December 2009.5 Wikipedia, http://en.wikipedia.org/wiki/Scrappage_program6 http://www.dft.gov.uk/vosa/apps/recalls/searches/search.asp7 Sarbanes-Oxley Act, Section 404, http://www.soxlaw.com/s404.htm8 “How the Car Scheme Works,” Motability, http://www.motabilitycarscheme.co.uk/main.cfm?type=CHSWReferenceTim Gutowski, “Explaining Dealer Incentives,” cars.com,http://www.cars.com/go/advice/Story.jsp?section=inc&subject=incent&story=incDealerAbout the AuthorSantosh Kumar P. CSCP, CPIM, is an Associate Consultant within Cognizant Business Consulting, focusingon the manufacturing and logistics domain. With over six years of industry experience, he has workedacross diverse consulting engagements with leading manufacturers and logistics providers. His key ar-eas of expertise include supply chain consulting, business process modeling and requirements manage-ment/analysis. Santosh holds a bachelor’s degree in Chemical Engineering from Bharathiar University,India, and a post-graduate diploma in Business Management (Marketing/Operations) from the Instituteof Management Technology, Ghaziabad. He can be contacted at santoshkumar.p@cognizant.com.About CognizantCognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business process out-sourcing services. Cognizant’s single-minded passion is to dedicate our global technology and innovation know-how,our industry expertise and worldwide resources to working together with clients to make their businesses stronger.With over 50 global delivery centers and more than 100,000 employees as of as of December 1, 2010, we combine aunique global delivery model infused with a distinct culture of customer satisfaction. A member of the NASDAQ-100 In-dex and S&P 500 Index, Cognizant is a Forbes Global 2000 company and a member of the Fortune 1000 and is rankedamong the top information technology companies in BusinessWeek’s Hot Growth and Top 50 Performers listings.Visit us online at www.cognizant.com for more information. World Headquarters European Headquarters India Operations Headquarters 500 Frank W. Burr Blvd. Haymarket House #5/535, Old Mahabalipuram Road Teaneck, NJ 07666 USA 28-29 Haymarket Okkiyam Pettai, Thoraipakkam Phone: +1 201 801 0233 London SW1Y 4SP UK Chennai, 600 096 India Fax: +1 201 801 0243 Phone: +44 (0) 20 7321 4888 Phone: +91 (0) 44 4209 6000 Toll Free: +1 888 937 3277 Fax: +44 (0) 20 7321 4890 Fax: +91 (0) 44 4209 6060 Email: inquiry@cognizant.com Email: infouk@cognizant.com Email: inquiryindia@cognizant.com© Copyright 2011, Cognizant. All rights reserved. No part of this document may be reproduced, stored in a retrieval system, transmitted in any form or by anymeans, electronic, mechanical, photocopying, recording, or otherwise, without the express written permission from Cognizant. The information contained herein issubject to change without notice. All other trademarks mentioned herein are the property of their respective owners.