Why, every year, do certain suppliers make what appear to be completely irrational decisions?  Why do they decide to sell to a large reseller at below break-even? Or bankroll a distributor who is clearly going bust?

More mundanely, why do some apparently good supplier/partner relationships chug along at a superficial level?  And why do others deepen to generate sales growth and consumer satisfaction?

Often the problem is that suppliers have no objective way of measuring the strength and value of partner relationships.  Most suppliers run their channels on very little data.  Decisions are taken on the basis of accounts’ past sales and, sometimes, past profitability.  This gives a view of what has happened, but it is not necessarily a very good way of forecasting the future (see Why financial data is not enough).

Financial numbers are then coupled to personal hunches about the sales potential of different partners, often based upon the strength or weakness of personal relationships. Often the account manager will have little real idea of the partner’s real business goals.  More alarming still, he or she may not realise this!

Who has not sat through meetings in which account managers defended the performance of "their" accounts?  By the very nature of most organisations, accurate comparisons between accounts run by different, and competing, account managers are probably impossible.  Planning future channel strategy on this sort of information is a subjective process.

This is not a satisfactory combination for Charlene Olson, worldwide channel development manager at Hewlett-Packard’s Imaging and Printing Group: "You sit in on account planning or channel meetings and you end up with circular arguments, a lot of emotion and subjective judgements. It can get very frustrating."

Perhaps this explains why channel strategy is often so strangely incoherent.

Tarek Sherazee, a director at management consultancy VIA International, says: "Suppliers run channel and account strategy rather like a driver with a frosted windscreen using his rear-view mirrors, the past financial data, to decide where to go next."  He argues that what is needed is a good view of the road ahead, using binoculars, which can show obstacles and opportunities.

Past financial numbers are, of course, of vital importance!  But there are many problems with them.  For Olson at HP: "The big issue is that financial numbers are so powerful that other drivers are ignored.”

For HP, the answer was to come up with an objective way of measuring the value that each channel partner creates for the supplier.  For help, they turned to VIA.

The challenge, says Sherazee, was to "develop a system which objectively measures the drivers that will create or destroy value in the future."  This means scoring the relationship, the partner’s understanding of its customers and a host of other variables.  These value drivers are then combined with financial data to provide a vehicle with binoculars at the front and crystal clear rear mirrors.

What would such a system look like for, say, wholesale distributors?  Sherazee says: "The broad categories of value drivers might include productivity – where we would measure the fill rate, inventory management and the speed with which the distributor delivered the product, etc. 

The relationship itself would be another category.  Here we would measure the distributor’s commitment to co-market, access to decision-makers and, maybe, the strategic alignment between the distributor and the supplier.

A third category could be demand growth.  Does the distributor have end-user insight?  What services do they provide to help resellers go to market?"

Each category is broken down into a series of drivers, which should be limited to a select few, to make the process manageable.

What does this leave us with?  For any important driver, say end-user insight, the system allows the supplier to state what degree of end-user insight the account has and also its willingness to share that information with the supplier.  A supplier is ultimately looking for an account that performs well in all the categories, as there appears to be a strong correlation between these and above-average performance.
 
Olson at HP says the real power comes from combining the value drivers with financials to form a two-dimensional matrix.  "This combination shows where the real strengths and weaknesses lie."  She says that: “HP sales teams have been surprised by what such matrices uncover."

So how do you implement such a system?
Firstly, how do you decide on what drivers to measure? Olson says that it is vital that this should be done with channel partners.  "You have to ensure that these drivers are not subjective.  They have to be really important to both the supplier and the partner." 

But ultimately she adds: "Our selection of drivers evolves from many sources: channel research, understanding of business models, and partner feedback, but mostly from the ability to collect quantitative data."

Secondly, objectivity is all-important.  Sherazee says: "Everything has to be measurable.  The scoring itself should, where possible, be based on quantitative data; however, where there is an element of subjectivity, scoring criteria are used to ensure consistency across accounts."

All this, of course, begs the $64 million question: How do you actually score such an apparently complex system?

“An account may be destroying value in a number of ways.”

In practice, a skilled account manager can have a good stab at scoring each account in around half an hour.  This is because breaking the relationship and roles down into four categories with 10/20 drivers each makes it relatively simple and easy to measure.
 
This internal approach should be enough to start the ball rolling.  Olson says: "It gives account managers a much better understanding of the account.  The system forces them to look at deeper drivers."

You can also attempt to put a score on aggregate partners within a specific channel.  Such an exercise may help you to see where, say, mail-order or specialist retail is adding value, and where it is not.  You can use this approach to identify hot spots and urgent areas.  Why does the score for distributor Y differ so much so from those for distributors A, B and C?

But, to really score the relationship, you need to get the partner involved as well.  This can often take the form of a three-hour meeting in which the two companies score each other and analyse the relationship.  Typically, this looks both at the relationship between the partner and the supplier, and at the relationship between the partner and the customer.

Sherazee: "You measure the value created at both ends: value that the channel partners create for the supplier and value that the supplier creates for the channel partners." 

But how do partners react to this sort of in-depth exercise?  Olson says: "Once they grasp what we are doing, they are very enthusiastic. They say things like: ‘At last, I don’t have to constantly explain why I am different from other partners.’" Once barriers are down, a common platform will typically emerge, with clear areas where each side has potential that the other never knew about.  The exercise uncovers good win/win strategies.

So far, HP has rolled out the approach slowly.  Olson says: "We decided very early that we needed to pilot the concept so the design of the model, which includes combining value drivers with financial data, would be used effectively."  The approach has been deployed in divisions where senior management is most receptive to the big idea.  Olson adds: "Salespeople are receptive to new ideas, but you do have to convince them of the benefits of something which takes some time to implement.  You have to win their consent."  And she says: "Of course, not all partners want this sort of deep relationship."

So what are the benefits of using this method?

Firstly, forward planning becomes much easier when you have an objective measure of the value that the various partners create.  Olson loves the way that it is made possible to compare contributions from different partners.  "Before, people used to come to me and give me four or five figures from a particular account.  They’d say: ‘Look at these figures, aren’t they great?’ And I’d say: ‘What is a great number?’ Now we have something to benchmark against." 

Secondly, this process makes it easier to spot the areas where investments are worthwhile.  For instance, the partner may have potentials that you simply didn’t realise existed.  Alternatively, says Olson: "An account may be destroying value in a number of ways.  By using value drivers we were able to identify these accounts and work out ways of turning things round."  For HP she says: "It allows us to make tough choices about where to deploy resources, and to explain those choices to our partners."

She reckons it also removes a huge area of subjectivity.  "An objective questionnaire  helps to remove emotion."

"It allows us to make tough choices about where to deploy resources.”

Thirdly, Olson says it automatically deepens the relationship.  "It forces you to have a deep discussion about your goals and your partners’ goals, and to see the areas where you diverge."

Sherazee says: "This approach allows you to go beyond the humdrum, day-to-day, low-level conversations which so often characterise the relationship between suppliers and even quite large partners."

This method also empowers the account manager.  An alternative approach is to carry out sporadic market research on how you are viewed by channel players.  Instead, by using value drivers, the information is garnered by the account manager, the person charged with overall responsibility for the account.  He or she owns it, and so is more likely to appreciate its real worth.

So what is Olson’s verdict?  "I would say this approach is still in test mode, but that the benefits are proven."  She says HP had three goals: firstly to allocate sales and marketing resources better; secondly to select channel accounts with which HP can really pursue deep strategies, and, thirdly, to guide account teams on how to increase the value of accounts to HP.  Olson reckons that value drivers will help HP to meet these goals.

Measuring partner potential

This graph enables the supplier to see both the financial value of an account, plus, by scoring value drivers, the potential it offers for the future.

The two axes plot the account against its contribution margin to the supplier and also the cost to serve the account for the supplier as a percentage of sales.  Generally speaking, one would expect the accounts which contribute more to be more expensive to serve.  But the exercise often highlights low contribution accounts, which cost a lot of time and money to serve.

The inner circle measures the current value of the account – in other words, its overall profitability.  This is revenue minus the cost to serve, the cost of the goods and the cost of capital.  The outer circle measures how the account scores by future value drivers.  This is the potential it offers for the future and the aggregate measure of the "non financial" value added by the account. 

Obviously the calibration depends upon what the individual supplier wants. But, typically, an account which understands potential customers, which can drive you into new markets and with whom you have a good relationship would score highly, whilst an account which did little more than take orders and send out products to existing markets would score poorly.

Why financial data is not enough

Past sales, past profitability and product mix are all important drivers that should be carefully considered in planning channel strategy.  But perhaps they are relied on far too often by suppliers.

At best, financial data can only give a rear-mirror view of the world. And, all too often, the rear mirror gives a pretty smeary view.  Normally, the financial data is incomplete.  For instance, Professor Malcolm McDonald at Cranfield Business School in the UK reckons that 85% of suppliers do not measure channel partners’ profitability at all, relying on sales and product mix instead. 

This is a major failing.  How can you improve your channel profitability without measuring profits?  Account managers often think they know the underlying profitability, but Pat Bailey, finance director at the sales division of Electrolux Europe, found that their hunch was right only half the time.
Setting aside the issue of whether you are measuring channel profitability, exclusive use of financial data to plan channel strategy has three critical failings.

Firstly, low-volume sales channels may be of critical importance in engaging with early adopters or boosting your brand image.  Sherazee explains: "If you simply look at sales volumes, you may well conclude that a particular channel is of low importance to the business.  It is easy to fail to invest in the small specialist who is the demand creator but who is, apparently, not making money for the business."

This doesn’t simply militate against the small partners.  The fact that a retailer has profound customer insight, whilst its competitors have no interest at all in their customers, does not appear on a balance sheet.

Secondly, an approach based on past sales levels does not encourage real engagement with the account.  You end up starting the conversation along the lines of "We want the same again, with a 15% uplift, please".  The almost exclusive use of financial data in future channel planning also leads to obsession with short-term goals, such as quarterly sales numbers.

If you plan on the back of past sales volumes you are unlikely to innovate or seek out new ways of engaging with the channel and, ultimately, the end users. 

Thirdly, at a deeper level, all suppliers ultimately live or die on the experience of their end customers.  As Olson puts it:  "Sooner or later, senior management in most companies become interested in the total customer experience.  They simply can’t measure that or see it by simply looking at the financial data.  It can tell you stock turn, product mix, sales and profitability, but it can’t tell you about the customer experience or create a deep level of account engagement."