RTM:  I guess this all presupposes that the managers inside the intermediaries understand what makes their own businesses tick! Do they?

TS: Increasingly the answer to that is yes, particularly the larger ones. But you still come across a lot of misunderstandings.

RTM: For instance?

TS: Well, for example, some intermediaries lump services and products together. Really they should look at them as separate businesses with separate dynamics, because you can’t apply the same measurements to each. A services arm should be making 15% to 80% gross margin, whilst a product arm might manage on 5 to10%.  If you don’t recognise that they are different business models, then you risk cross-subsidising them – which leads to huge instability and ultimately risks the business as a whole.

RTM: So how do you develop these insights into your partners’ business models? I mean they are hardly going to throw open their books to their suppliers, are they?

“The days of double-digit growth and high margins are over.”

TS: If you approach them in the right way, we find that is precisely what many of them will do!

Essentially, you have to demonstrate that you understand what their business is about but that you need a little bit more knowledge. I know one account manager who said: "I know you need to grow your business. And I know that my products have an impact on your working capital. But I don’t know if our product portfolio is performing well or badly for you. Shall we try and find out?"

So it is about asking questions that relate to their whole business and stepping away from your personal objectives to maximise total returns.

To do this, suppliers need to educate their account managers, to ensure that they understand channel models and how they affect them. So it is something that can be learnt and which needs to be constantly looked at and discussed internally.

As they become more and more familiar with it, so they naturally start discussing it. You may need some formal training up front, because account managers are sometimes very reluctant to become this engaged.

RTM: I guess you also sometimes need to educate the channel.

TS: Yes, but you have to be very wary of being condescending. Intermediaries do not like it when suppliers tell them how they should be running their business.

RTM: How do you get round that one?

TS: One way is by getting your intermediaries involved in planning the curriculum and contents. 

RTM: I suppose such courses are only of value when channels are very immature and the entrepreneurs who are running them do not really understand the underlying business models.

TS: Clearly it is useful then. But channels undergo huge changes. For example, in many wholesale channels margins have dropped from 10–15% to 4–5% in a few years. That means that everyone in that channel is having to reinvent the wheel. I would argue that good suppliers should be in there digging into that debate.

RTM: So ultimately you would argue that this is about survival?

TS: For the intermediaries, yes.  The days of double-digit growth and high margins are over: intermediaries need to understand where the value is being created in their business, which products, categories and customers are improving their overall performance and which ones are destroying it.

Suppliers must be in a position to understand who are going to be the winners in the channel, and to engage with them in a way that improves both businesses. A prerequisite of this is the need to understand the businesses’ models and the impact that the vendors have on them.