Sunday, December 13, 2009

Funded Head Experiment Yields Positive Results

Last year I wrote about the advantages, disadvantages and my skepticism about use of a "funded head" at a distribution/reseller partner. The term "funded head" refers to paying a portion of a sales rep's salary at a partner with that person functioning as a surrogate employee. To review, the advantages are: no employment contract, lower cost than hiring your own person, increased mindshare from the sales partner and a way to incrementally invest in a market with a lower budget. The disadvantages: less control, less loyalty/focus than hiring your own person and less equity accrual to the manufacturer/publisher.

As an experiment, we went ahead and signed a contract with Sigma Software Distribution in the U.K. for a partial funded head. (My client, a software company with a long history as a leading Internet driven sales & marketing company, had never done this before but was interested in selling larger licenses through international channels.) We paid a portion of a sales rep's salary on a quarterly basis and in return the Sigma sales rep focused a commensurate percentage of his time on our software evangelizing resellers and assisting them upsell larger licenses to corporate and government accounts. Because of our investment in Sigma and willingness to put "skin in the game" we gained increased mindshare from Paul Jackson, Sigma's talented and experienced Head of Business Development (who guided the more junior Funded Head) and Sigma's executive management.

The results: although the U.K. saw a double-digit decrease in sales from our client's pay per click on-line sales during the last 12 months, Sigma (with the Funded Head) increased sales of the software by 40%. While the client's on-line sales are mostly to individual end users and consumers, Sigma's growth came primarily from an increase in the number of corporate and government accounts sold to by resellers, and follow-on upsells of larger licenses to accounts the Funded Head penetrated more deeply. The sales increase was approximately 5X the cost of the Funded Head. In other words, the Funded Head's cost was 20% of the increased revenue. No other marketing expenses were paid by the client for Sigma during this time, so growth is attributed primarily to Sigma's and the funded head's activities. Although a cost to revenue ratio below 10% would have been preferred, given the overall decline in the UK market in the last year for software products in general and the client's software, the return on investment was favorable and supported a profitable business model.

Another important "control variable" in this experiment is the client's other U.K. reseller, which received neither support for a funded head nor marketing funds. This reseller was able to maintain its level of sales compared to the previous year, but unable to significantly grow its business.

For anyone using or considering a funded head, I strongly recommend treating the surrogate as you would any other member of your sales team with respect to training, providing sales resources such as WebEx and employing your standard metrics and analytics to measure the sales pipeline and performance.

In conclusion, the investment in funding the partial salary of a distribution partner's sales rep yielded a positive return without cannibalizing or interfering with the client's core on-line business.

What has been your experience?


Melissa W. said...

I was at a big software reseller for 12 years. Funded heads are a good investment for a manufacturer in most cases. You have someone "on the inside" that knows how the reseller functions and can represent you, find opportunities and create relationships. You get much more mindshare than you otherwise would. To ensure that you are getting the most value, find get someone that is self-motivated and that has speaking ability. If they can go around educating people inside the reseller and finding opportunities to wedge themselves in, you get extra productivity.

M. Wheeler said...

As with any hire, I've found success with funded heads comes from having clear objective setting and engagement/development as if they work as an extension of your own team located in a remote office. In corporate resellers, I've found the role connects the sales teams to create improved pipeline visibility and enhance the value of large deals. In a well known online retailer, they were able to make a measurable difference to our page merchandising which resulted in higher conversion rates and improved up-sell/cross-sell.

As with any commercial relationship, I think its important to ask a business partner to meet you half way on such an investment and support the mutual aims of the relationship. They may - for example - contribute a dedicated sales rep who might follow-up on your company's inbound web inquiries if you have a channel centric business model. We achieved this by automatically routing our web inquiries through which being cloud based made it easy to extend to partners.

Craig Justice said...

Melissa, did you have ROI expectation for your funded head programs? What would you expect for a reasonable ROI % for using FH's with large North America resellers?

Melissa W. said...

Here's a way to look at it. Let's say the head costs you $100k fully burdened, then that head needs to bring in $100k of profit to break even (maybe $300k of revenue). Then really you want a multiple of revenue - so if you had a 5X return, that would be $1.5 million in revenue that would need to happen on top of the normal run rate as a result of that person being there. Then each year it should increase. The big variable here are the marketing dollars. Got to play the marketing game with the resellers to get anywhere. The most economical way for a manufacturer to work with resellers is to take existing marketing budget that you would use for branding and promotion, and just direct it through resellers. You get the same number of impressions or more for the same dollars, but you buy tons of name recognition with the reseller. Costs you no more. Most manufacturers don't get this - especially their VP of Marketing. They have two marketing budgets - one run by marketing and then measly dollars allocated to the channel. Big waste of money.

J. Walker said...

I’ve experienced both sides of the funded head count. (1) Distributor and (2) Re-seller. If the run rate of sales is healthy, the funded head count may help enhance the sales results and sales performance moving forward.
I would not consider the funded head count (partially funded or 100percent funded) if the run rate of sales are poor to unhealthy.
I would consider the distributor option over the re-seller option given the choice of two.
Unless, there are some mind blowing historical volume sales at the re-seller level for the business you wish to fund, that at best, may have dipped due to loss head count on premise you can replace.

The position (funded head count) is more complex when the business is new or the channel partner is new to the business. In this case, I would recommend that you interview, screen, hire the person. And more importantly, they are able to participate in the exact sales training as if they are hired by you directly.
Overall, I think it is a good investment program. Like anything, you have to get the right person, with the right skills, the background, and the expertise. If you leave it up to the program participant to identify this person, chances are, something critical will get over looked once the contract is signed. Thus expectations will not be met on many levels.

J. Hansen said...

I have experienced this on both sides of the coin; at a distributor and large reseller (with as many as 30 funded heads on my team) as well as on the OEM side. Assuming you find the right person (biggest key to success), the other two variables are:

1. Access. If the funded head has full access to the sales team and the sales team has full access to the funded head, it can be a great win for both sides. They have to sit near the sales floor if there is a strong tele-sales aspect. If not, don't bother.

2. Your product's current value in the partner's revenue/activity stream. If you are an unknown or very small part of the partner's current process - if opportunities aren't coming to the sales team from customers or prospecting already, a funded head is a very expensive investment. If, on the other hand, your company's products are well known or have some strong momentum in the market, the funded head can help the partner sales team scale, win new opportunities, etc. In particular, it depends on the partner's place in the market - if they are a distributor or large reseller, there is less ability to influence the sale so a funded head that is meant to drive new opportunities may not have as much leverage as those placed with solution providers who have much more direct impact on the customer sale.

I agree with Mark's assessment to ensure the partner co-invests; having some skin in the game ensures they will push that resource, not just you. I also agree with Jon's comment about getting the right person - insist that you have final say (or even lead) on the new hire. I also agree with Mark's inference that you can use these resources inside the partner for more than just personal sales enablement - driving online consistency, cross-sell/upsell, etc. is equally as important given the mix of online sales for any channel partner today (but make sure you get to define how much time is spent where via a common set of objectives and metrics that you and the partner report on and measure each month/quarter).

L. Rodriguez said...

I always had my doubts, VAR reps motivations once on the job may differ from the Manufacturer. Sales people behave according to their sales comp plan. If the rep comp plan include others things that are not the manufacturer product line, the rep will sale whatever he can in regardless of the ''intended" goal. A critical factor for success in my opinion is for the rep to be 100% dedicated to that product line, no hunt, no kill, nothing to eat. Simple.

D. Stratton said...

It totally depends on the person you get and often you and your company are not part of the selection process. Get a good one, sales increase, get a clock watcher and it is business as usual.

F. Hurtte said...

I have used this arrangement on a number of occasions. I have seen it from three separate angles. 1) As Manufacturer 2) as distributor and 3) as a consultant.
There are a number of points that need to be addressed. Many companies fall victim to poor planning on the front side. The deal needs to be good for both manufacturer and distributor. It needs to have safe guards in place to prevent abuse. Finally, there needs to be a migration path.

G. Pillay, VP Category Marketing, PC Mall said...

The success of a funded head really depends on the manufacturer. Clear goals are important and so are demand generating activities. The funded head has access to a lot of information the manufacturer otherwise would never get - such as open quotes and sales pipelines. If he or she can followup on those and maybe offer a SPIFF you will see tremendous sales growth. It is the best ROI we as a reseller can offer.

Craig Justice said...

Frank, what migration paths would you propose?

Frank E Hurtte, River Heights Consulting said...

You asked for a reply. There has to be a migration plan
What’s a migration plan? I believe it’s the answer to a number of questions about the future. Here are things that need to be developed:
 What happens if the person selected just does not work out?
You hope it doesn’t happen. You go through a great deal of pain to prevent it, but sometimes we make hiring mistakes. What happens if the person doesn’t meet expectations? Since the supplier has a financial hand in this person, both distributor and supplier need to preload some expectations. Remember, no surprises…
 What happens in one year (or two or three)?
Does the funding go away? Are there ways it can be extended – growth goals, new account conversion etc. Defining this saves frustrations.
 What happens to the employee once the program ends?
Ideally the distributor will reach the point where the person is a good investment for their organization and keeps the employee “plugged in” continuing to chug out results for the supply partner. All too many times, these programs are used to “warehouse” employees for some other use. This probably isn’t what the supplier has in mind.
 What can be expected of the distributor for taking part in the program?
Again expectations are critical. These need to be ironed out before the fact to remove emotions should something happen.

Before we head down the road…
I am an ardent supporter of a scientific sales process. Plus, I am the leading proponent of using distributor specialists to drive the sales process. Throughout much of this article, I waxed on as though you are adding a generic salesperson. For some distributors this may work. However, for a good many distributors and their suppliers, adding a funded head specialist makes far greater sense. Our research shows that upper quartile distributors – the ones who out performed 75% of their peers – apply specialists to drive the sales of a selected supplier or technology group. Funded Specialists will impact the dynamics of distribution.

David Gordon said...

I've seen the approach be successful in a number of "construction trade" industries and it can work real well as product or application specialists. Sometimes it gets funded with $, sometimes rebate monies and other times product discounts.

A challenge at times is when the manufacturer's management changes. Frequently they then want to change the program (funding) and the distributor, out of loyalty to the person and (hopefully) success, absorbs the entire compensation.

I've also seen where multiple manufacturers may fund an application specialist (when the sale really requires multiple types of projects - i.e. lighting where a fixture, lamp and a ballast manufacturer may jointly fund the role).

Funded headcount can also be done for non-sales positions. I know a national electrical distributor that employs a number of marketing people that are dedicated (funded) to/by specific manufacturers, and the manufacturers have seen a significant return on their investment.

It all comes down to getting an increased share of mind as "share of mind captures share of market."

T. Serino said...

The program was very successful for your distributor. Think how much money they made. Their top goal was acccomplished. With margins at or near an all time low, distributors have to find ways to increase their top and bottom lines. I don't know much about your company but it is probably a noise-level relationship for the distributor. I don't have a good answer for you except to say it is hard to serve 2masters ... and your funded employee's master was the distributor. I worked for a large distribtuor for 14 years and am in my 15 year running a channels consulting/business development company ... so I am speaking first-hand. T. Serino

D. Oliver said...

There has to be clear objectives and resources for the funded head to be successful. There are many different reasons for vendors to have them: Technical Resource, Program and Product Request, Proactively Marketing and Selling to the customer base.

J. Dardick said...

My experience is from a distributor, VAR/SI, and DMR perspective. A few keys points:
1. Clear job description with metrics
a. The resource must be managed by the reseller, not the oem
b. Too easy to fall into the trap of it is not costing me anything, so reduced expectations and management of resource
2. Role and performance alignment with OEM or distributor, depending on who is providing funding
3. How is it funded? Fixed $ or %, variable - rebate on performance or revenue, etc.
4. Is the funding taking away from other oem investment opportunities with greater returns to the business?
5. End of program plan

Alignment is the greatest challenge. You may be at cross purposes. OEMs are trying to grow overall demand and you are striving for that along with transition business, growing your share of the pie.

At the end of the day it can improve competitiveness, reduce costs, grow revenue all while hopefully increasing margin/ROI.

Shar Carpenter said...

Hi Gertrud - It's been awhile since we last spoke but I saw your note. I've seen funded heads at DMRs, LARs, VARs and distributors both domestically and internationally be the best budget spend. In my experience success is often based on how savvy that funded head is at the organization (I've always preferred internal hires if I have a say) and how well the manufacturer/company engages with that funded head so he or she is empowered, has the right resources/support and has input into how the manufacturer/company can move the needle. In ideal situations I've seen them added to the team and then the revenue numbers double. But I've also seen it fail miserably when a manufacturer/company hires someone and thinks he/she alone can do it all.

Charles Portnoy said...

Shar, you may not realize how right you are. I have been the funded head on a few occasions. One was a failure as there was not support from the corporate entity once I had gained mind share of the sales team I was working with. The other was quite successful as I had a team of supporters back at corporate that crossed all avenues of the company including marketing, tech-support and executive management.

As you and others in this string have noted to have a successful funded head there needs to be support from both organizations. The head needs a body.