MDF Best Practices - An Executive Review

Bill KellyU.S. Managing Director & Global [email protected] 13, 2013

MDF Program Best PracticesAn Executive Summary

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Agenda

| © 2013 Birch Worldwide All Rights Reserved

Program Evolution

Common Program Elements

Classification of Expenses (SOX)

JMF Investment Benchmarks

Effective Governance for Program Compliance

1

2

3

4

5

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Program Evolution


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How Programs are Evolving

4

regular exceptions

entitlement practices

driven by shipment volumepartner brand

high expiry

little or no measurement of ROI“my money" attitude

less entitlement more discretionviewing the activity as a joint investmentcontra vs. marketing expenseusage inconsistentbudgets shrinkingmore focuscontrol vs. engagementvendor moneyfocus on ROI

invest in highest returnsauctioning investment

Vendor brand needs

economies of scaleconsistent visibilityeffective measurementmuch less budgetsinvestment in channel behaviorssize does not overcome quality

driven by Partner brand needs Past

Present

Future

© 2013 Birch Worldwide All Rights Reserved |

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Common Program Elements


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6 Essential Program Features

1. Have a plan of what you want to achieve – createjoint plans with your partners.

2. Good quality data ‐ know your partners and yourmarketplace. Systems are only as good as the data.Engage in market intelligence sharing.

3. Approve and manage all investments, ensure approval is real.Deliver brand focused marketing through the channelwith maximum effectiveness.

4. Coordinate messaging with the right message to the right people at the right time.

5. Easy to follow processes for requesting, approving and claiming funds.

6. Program reporting that gives everyone access to management information not just data.


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From Our Experience We Know

Vendor’s biggest mistakes.

Difficult, complicated, unclear or overly restrictive guidelines.

Too much control over how the funds are used.

Failure to effectively distribute/ communication the program terms and conditions.

Cumbersome, lengthy claims process and procedures.

Poor or inadequate follow up on requests.

Lack of access to available funds, historical data and reports.

Failure to target the “right” Partner(s) with the funds.

Flexibility is key. One size does not fit all.

• Clear, concise accessible guidelines (kept it simple and sales friendly).

• Provide online access to available funds and historical usage sales data.

• Provide more input from the channel rep during fund usage decisions and marketing material creation.

• Timely follow up and communications on requests.

• Remove the administrative burden.

• Share vendor’s corporate initiatives and how this will help.

• Make the program and other sales support tools “functionally” available.


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Classification of Expenses


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SOX Concerns: Contra or Opex


Income StatementRevenueGross sales

Less sales returns and allowances

Net sales

Cost of SalesBeginning inventory

Product DiscountsVolume RebatesSales IncentivesPrice ProtectionDeal Protection

Trade‐in ProgramsReturn Policies

Training & CertificationDemo EquipmentFunded Headcount

Plus goods purchased/manufactured

Total goods available

‐ Less ending inventory

Total cost of goods sold

Gross profit (loss)

Operating ExpensesSelling

Salaries and wages Advertising (web, print, broadcast)Catalogs

Direct mail, email, e‐newslettersSeminars & webinars

TelemarketingCustomer eventsSales meetingsSponsorships

Commissions

Advertising

Depreciation

Total selling expenses

General/Administrative

Salaries and wages

Employee benefits

Payroll taxes

etc…

Total General/Administrative expenses

Net Income (Loss)

Above the Line

Below the Line

Contra Revenue

Operating Expense

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Revenue Reduction or Operating Expense

The general consensus is that cash consideration (including a sales incentive) given by a vendor to a Partner is presumed to be a reduction of the selling prices and should be characterized as a reduction of revenue (aka Contra Revenue).

This presumption is overcome to the extent that, both of the following conditions are met:

1. The vendor receives, or will receive, an identifiable benefit (e.g. services or advertising) in exchange for the payment. However, the identified benefit:

a. must be sufficiently separable from the Partner’s purchase of the vendor’s products such that the

b. the vendor could have purchased the benefit from somebody other than one of its Partners;

2. The vendor can reasonably estimate the fair value (e.g., cost) of the benefit (e.g., proof of cost/performance).

Here are a couple of examples:

Partner Advertising ‐ You receive from the Partner an identifiable benefit (advertising) in return for the MDF. That benefit is sufficiently separable from the Partner’s purchase of your products because you could have purchased that advertising elsewhere. Therefore, the first condition of the model is met. As long as the fair value of the advertising is equal to or greater than the MDF payment, the payment should be characterized as an operating cost.

Funded Head ‐ The first condition of the model is not met because you receive no identifiable benefit in return for the payment that is sufficiently separable from the arrangement to sell products to the Partner. That conclusion is based on two facts: (1) any benefit received by you cannot be separated from the arrangement to sell goods to the Partner and (2) you could not enter into such an arrangement with a party other than a reseller of your products. The funded headcount payment therefore should be characterized as a reduction of revenue.


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JMF Investment Benchmarks


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General Guidelines

Accruals range from 1% to 6% with ⅔’s of programs between 1.5% and 3%.

ISV/OEM:

• 2‐3% of sales is a reasonable marketing budget.

• Budgets for these partner categories are built up basedon activity, not simply accrued based on sales.

VAR/SP

• 4% of sales is a reasonable marketing budget.

• There is an expectation that this will bematched by partner funds (4%+4%=8%).

• Additional 2% for rewards andrebates for attainment ofprogram levels based on partnercommitment.


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Investment Benchmarks


Marketing Activities Focus Partner Types % of

RevenueTypes of Funds

Fundedby

Marketing Through / With Partners

LeadGeneration

Solution Provider 5% MDF

50% ‐ Contra50% ‐Mkt OpExPartner to match

funds

Distributor1% to 5% based on performance (avg.

2.5%)

MBORebate 100% Contra

Volume Reseller 2.5% Investment 100% Mkt OpEx

OEM5% MDF OpEx

18% Rebate Contra

Global Alliances N/A Investment Corp & Mkt

Resellers 1% (Silver)2% (Gold) Co‐op Mkt OpEx

Marketing to PartnersEnablement, Awareness & Motivation

All 1% Partner Summit, Incentives Various

Other Infrastructure All 1% Investment Corp & Mkt

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Effective Governancefor Program Compliance


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Establish Compliance Checkpoints


Program Website

Program rules

Eligibility and access

Budget management

Authorization routing

Activity planning

Request amount

Activity start & end dates

Communications and notifications

Reporting and measures

Program Managers

Activity Authorizations

Authorization limits

Budget approval

Audit Team

Internal authorization

Submission deadlines

Activity dates

Proof‐of‐performance

Proof‐of‐expense

Available funds

Escalations

Checkpoints

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Avoid These 5 Common Mistakes

Mistake #1: Payments processed against insufficient or inappropriate proof‐of‐performance.

Mistake #2: Ineligible activities/items expensed with claims.

Mistake #3: Escalated exceptions to policy approved by “Channel Managers” and/or not documented.

Mistake #4: Payments made to non‐partner entities without due diligence to ensure their legitimacy.

Mistake #5: Payment made to beneficiaries (e.g., 3rd party vendors) other than eligible partners (if not allowed).


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10 Best Practices

1. All agreements and contracts include a “right to audit” clauses

2. Policies are clearly written(requirements, expectations,and consequences for non‐compliance)

3. Monitor and assessvalidity of partnerreporting and relatedcompliance activities

4. Non‐compliant transactions/activities are identified andreported

5. Use audits for high risk activities and continuously monitor data

6. Establish a formal escalation review process to handle out‐of‐ policy requests.

7. Conduct formal training programfor channel partners andchannel managers

8. Establish ROI measures to assess the effectiveness of investments and partner usage of funds

9. Communicate process andcontrol procedures

10. Have resources for best practicesadvice


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European Office:Unit 16, Ilex,Mulberry Business Park,Fishponds Road,Wokingham, Berkshire, United Kingdom, RG41 2GYPhone: +44 1189 121200

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Questions?Questions?


MDF Best Practices - An Executive Review

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