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?

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?

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?