IBM: Measuring end-to-end costs

IBM has embarked on an ambitious project to measure the end-to-end cost of its seven main routes to market from direct telesales to direct face-to-face sales and from working with big IT consultancies through to the traditional reseller channel.

This involves breaking down all the processes in the sales cycle and costing them, says Martin Beckwith. "Almost all sales processes involve an identifier who spots the opportunity, a closer who wins/gets the business and a fulfiller who delivers the solution.  Who should we be using at which stage in the process?"

The aim is to ascertain which is the most appropriate route to market for each customer and each type of business, and so enabling IBM to answer questions like "When should we be using internal telesales?" or "How much does it cost us to go to market through traditional resellers?" 

This should enable IBM to maximise its customer satisfaction and competitiveness.

HP: Finding cost savings

What do you do when your major competitor’s cost of going to market is apparently less than half of yours?

This is the invidious situation faced by HP’s Commercial Channels business, which sells $12bn of PCs, printers and enterprise systems through business-to-business channels in EMEA, according to finance director Etienne Rouvillois. He says: "Dell claims a cost of 8-9%. If you include the costs incurred by our distributors and resellers, as well as by HP, ours is in the range 15-20%."

These figures have provoked a major study of end-to-end costs, through all the channels used by HP – direct, two-tier and single-tier. Rouvillois says: "We wanted to study in detail precisely where and on what we and our distributors and resellers are spending money.  For instance, how much are we jointly spending on product returns?"

There were two aims: "Firstly, we wanted to identify areas of duplication where we could save large amounts of money.  Secondly, we wanted to find out precisely where our channel partners were adding value so we could reward it and market it." HP needs to do all this if it is to succeed in its aim of moving to a new channel model where partners are rewarded for added value, rather than for simply reselling products. 

Rouvillois firmly believes that the comparison with Dell is unfair to HP and its channels: "I am sure we are adding value in many ways whilst Dell is effectively passing on costs to the end-user. It is probably more expensive to buy from Dell than it is from HP.  For instance, we have better availability on a wider range of models than Dell."

The study is in two phases.  The first, at a macro strategic level, used samples of distributors and dealers to find out what the real costs are and where they are incurred.  This data will be used to plan HP’s channel strategy, to plan incentive schemes for partners and to spot where HP and its channel is delivering value.

In the second phase a system will be constructed to monitor channel costs on an ongoing basis. This will enable HP to measure the profitability to HP of individual partners. This data will be used internally. HP also plans to reward its most profitable partners. So far HP has completed the first phase of the project.

All this is quite a tall order.  Rouvillois notes that: "From the merger with Compaq we inherited two accounting systems, neither of which measured channel profitability. Compaq looked at profitability at the level of its national subsidiaries. HP looks at the profitability of product divisions."  This means that getting a clear idea of HP’s own internal costs is sometimes even harder than getting a clear idea of how partners are spending their money!

In the first phase, consultants visited HP’s top distributors and a sample of their customers – small resellers who sell mainly to small- and medium-sized businesses. 
 
Rouvillois says that HP has many partners who are prepared to throw open their books to HP. "They trust us and they know that the more we know about channels, the better we can run them. They also know that we plan to reward them partly on their profitability.  Obviously, there are confidentiality agreements."

Initial findings are encouraging. "We have identified certain areas such as claims handling where there is duplication and where it would make much more sense for the entire process to be handled by one party, rather than partially by all three of us."

Rouvillois says the exercise has also highlighted end-to-end functions, such as sales-force deployment, where HP and its channels appear to spend too much money. He promises: "We are going to launch some very specific programmes to address these."