Wednesday, May 21, 2008

Distributor Funded Head: The Pros and Cons

The “funded head” concept – where a manufacturer or software publisher pays the cost of employing a staff member at a distributor—is raising its head in my current work space and is a worthy topic of discussion.

The question comes down to this: is paying the cost, or the partial cost, of a distributor’s employee an effective and economical way for growing companies to increase sales in new markets?

I’ve seen the situation from both sides. At Mitsubishi Trading Corporation in Japan in the mid-1980s, it was common among U.S. companies looking for access to the Japan market to form a joint venture with us. We would contribute the local staff; the U.S. firm would contribute the technology or the product. In this case, the venture was able to employ local staff quickly. But there was sometimes a question about loyalty – was the staff’s loyalty to the success of the new venture, or to the parent company from which they were on loan?

At Alliance International Trade & Investment Group, Inc. our marketing pitch when recruiting supplier partners to represent in overseas markets was this: “Let us represent and sell your products and you only need to pay us a commission on what we sell.” The appeal of that approach is there’s no risk for the vendor. No sales = no costs.

From the vendor’s perspective, I was always skeptical if a distributor asked us to pay for the costs of a person they wanted to assign to manage our product. Here’s why:

· I'm giving you a large discount (margin) to profitably run your business
· I'm giving you marketing support
· I’m usually giving you exclusivity, to help protect your investment, if your commitment is significant and the market is new for us
· And now you want me to pay for your staff? That’s what the margin is supposed to be for, right?

Give me a break!

I recently met with our partner Sigma Software Distribution in the UK and was presented with a funded head proposal. This one was different. It was focused on ROI, with a return of 5 to 1 for our investment. Now this was a proposal that caught my attention, and is under serious consideration. It represents a way for us to quickly deploy concentrated attention in the U.K. market, without the risks of employing a UK national and the accompanying UK employment regulations.

Then, just a few days ago, I was approached on the same topic for the U.S. market by one of our U.S. distribution partners, considering a plan to offer funded heads from $35K (part time) - $120K (full time). After expressing my initial skepticism, I’ve been giving it a bit of theoretical consideration as a mental exercise.

One selling point which came to mind is location. For small companies based on the West Coast, a funded head strategically placed on the East Coast offers reduced travel costs to East Coast resellers such as SHI, Programmer’s Paradise, PC Connection, PC Mall in Montreal, etc. for working the sales floor and call out days. (As we know, out of sight = out of mind. Those who are in front of resellers are going to get their products sold more often.)

The distributor with a funded head could also hold out access to major resellers as a carrot. For example, their pitch might be: “Sign up for a funded head, and we'll get you into CDW.” Typically, powerful resellers like CDW only deal with large vendors. Access would definitely be a benefit.

Moreover, if the proposed funded head is an experienced sales executive who knows the sales reps at the resellers, that would be a true value added proposition.

Still, it comes down to two issues for me:

· Whose interests does the Funded Head have at heart (mine, or the distributor’s)?

· Why don’t we just hire the person ourselves?

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