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?

UK Software Distribution: Centered in Devon

Devon is located 4 hours by car from London to the Southwest. It’s something of a “vacation land” boasting a beautiful coast line and a national park (the Dartmoor) inland with higher evaluations and weather extremes.

Devon is a place where the devil visits the taverns and ghosts frequent abandoned mansions. (Could J.K. Rawling, who was educated at the nearby university in Exeter, have been inspired by these surroundings?) Our distributor for the UK, Sigma Software Distribution, is based in Devon and has a diverse cast. One speaks to the llamas in the hills (I don’t mean religious monks, but the glorified hairy beasts with long necks ). Another sports a long red coat and goes fox hunting during lunch (talley ho!). Another is a woman with 9 children who doesn’t live in a shoe, but after work marketing software by day operates an inn owned by her family (now that’s true manpower!). Another staff member greats you with a wide smile flashing large white teeth – he’s not a vampire, but a 5th degree black belt in martial arts. If ever there was a little town where the children are above average and the women are strong (the female managing director of Sigma Software distribution is a former army officer), is Devon not the "Lake Wobegone" of England?

Back to business with this cast of characters – Sigma Software Distribution represent a few good software brands including TechSmith, MindJet and now SmartDraw. All three softwares could be classified as “business productivity.” Sigma have worked magic with MindJet and TechSmith, driving sales at heavenly growth rates that can’t be matched by world-wide distributors such as Ingram Micro. One of their techniques for doing this is with the “funded head” a concept I had first run into 15 years ago with the now defunct distributor Tech Pacific in Singapore. The disty's pitch goes something like this.
a) We want exclusive distribution rights to your products
b) We want really good margins
c) We want you to pay for the advertising
d) We want you to pay us for allowing you to talk to our sales reps (well, the distributor doesn’t say that, but the resellers certainly say that!)
e) And now, we want you to pay our staff expense. (You pay us, and we’ll hire someone to sell your products.)
I always found this proposition troubling – because we were providing our distributors with more than enough margin to sell our product, promote it and to pay their staff. Look, if you’re going to ask me to pay so you can go and hire staff, I might as well hire the staff myself! Therein lies the challenge – hiring an employee in a European labor market where there is no "employment at will".

I allow the Sigma Sales Director (the self-described "thug" among this cast of characters with his fashionable bowling ball haircut) to make his pitch for the funded head, and he starts by talking about a 5 to 1 return on our investment. Now he’s got my attention, because the numbers make sense. What’s more, we can start with ½ a person, with an initial commitment of 6 months, paid quarterly, with a portion of the payment “earned” from achieving sales targets. So in our case, given our anticipated growth in UK reseller sales, the funded head makes sense, especially if we found a good person in Devon, at Devon wage rates. I wonder if this person will also talk to llamas, chase ghosts and go fox hunting?

London Revisited 31 Years Later: Distributing Software In The UK

London – The DSGi computer group invited their best customers – IT managers from leading companies, government and education institutions—to attend a series of lectures and see the latest software and computer products at a mini exposition in Weybridge, an affluent suburb southwest of London in the Surrey district. The venue is an old car race track from 100 years ago, which now hosts a museum of race cars, a mothballed Concorde supersonic jet [the 2nd Concorde I’ve seen today as I passed by one at Heathrow this morning on my arrival] and a car dealership, Mercedes Benz World. Not just a place to purchase vehicles, at Mercedes World a professional driver will take you an obstacle course testing the latest Mercedes vehicles’ ability to accelerate, stop in water (without skidding out of control) and to swerve around objects at high speed (without rolling over or spinning out). This was an added attraction for the attendees [and a good place for me to practice driving on the wrong side of the road]. I was there in a booth representing SmartDraw, the leader in business graphics software, along with our distribution partner in the UK Sigma Software Distribution. I found the quality of the attendees to be excellent and was equally impressed with Sigma’s ability to engage customers. They shared the same philosophy I do, that you might as well throw money on the ground for each attendee who passes by whom you don’t engage and tell about SmartDraw. That’s a polite way of describing “kick ass and take names.” It was quite refreshing to see that in a reseller – someone who actually works and hustles for business--and I believe that we obtained more leads than anyone else at the show (especially given our location near the back where there was less foot traffic). I’ll be following up with Sigma staff on Monday, calling and qualifying the leads, and bringing orders right into the hands of DSGi’s sales reps in an effort to further grow SmartDraw’s sales in the UK to at least 15%, or more, of US sales.
Headlines in the BBC news today are the 150th anniversary of the installation of “the bell” in the Big Ben clock tower, and newly released videos from the 7/7 July terrorist bombers saying goodbye to their families. The London Marathon is tomorrow, and I’ve walked at least half that distance today through London’s major streets, parks and alleys. Having travelled to many European and Asian capitals during the last quarter century except London, I find the central parts (Trafalgar Square, Covent Gardens) magnificent to view, and bustling with activity. No wonder the city is such a popular destination. Dinner Friday night is with Nick & Steven Thompson of Marinesoft, our reseller partner for more than nine years. The company name comes from their passion for sailing. Instead of taking me sailing across the English Channel, we head for Rules, London’s oldest restaurant, established in 1798, where I take revenge on a rabbit who has been splendidly roasted and stuffed. Nick gives me a lesson about English character and management styles. "Non emotional," he says. I tell him that also describes the culture of SmartDraw: decisions are made based on facts and reason. Back at the hotel an urgent message awaits from the home front 8 time zones away, “Caught a gopher and don’t know how to get the corpse out of the trap. What do I do!?”