Report: 5 to 10 percent of channel incentives are abused

A recent report by the nonprofit organization Alliance for Gray Market and Counterfeit Abatement in partnership with accounting and consulting firm Deloitte has found that abuse of channel incentive programs could cost high tech companies up to $1.4 billion in profit losses each year.

Vendors presently often annually spend $500 million on channel incentives such as end-user pricing, channel program discounts and volume rebates, according to CRN. Most of them estimated that 5 to 10 percent of incentives are abused. Brokers buying into partners' deals and purchasing products for sale on the gray market were found to be the most common abuses.

The results of the report, titled When Channel Incentives Backfire: Strategies to Help Reduce Gray Market Risks and Improve Profitability, were gathered via a quantitative survey and a series of one-to-one interviews with executives of leading information technology vendors. A variety of different channel incentive abuses were highlighted, including profit margin erosion, service and warranty abuse, disruption of distribution channel environments to a non-level playing field across channel partners, negative brand impact, increased presence of counterfeit products, payment of unearned incentives and reduced customer satisfaction.

"Channel incentive abuse is a growing problem that potentially affects more than 25 percent of sales in this category, yet it often goes largely undetected due to a lack of internal controls," said Brent Nickerson of Deloitte and Touche LLP's Contract Risk and Compliance practice. "Though this misuse can be very detrimental to a company's bottom line, its effect can be reduced. The key to successful channel incentive programs lies in creating consistent processes to administer, monitor and support compliance, while enforcing protocols when dealing with non-compliance."

The implementation of channel incentive management programs was highly recommended in the report as a way to aid companies in reducing their exposure to the gray market in addition to recapturing profit. Increasing interaction with channel partners, enabling ongoing compliance monitoring, working with businesses to make improvements, establishing consistent policies and understanding the incentive program universe were all highlighted by the study as steps that companies can take in order to help mitigate abuse, as well as maximize their customers' potential for return on investment.

"Effective planning, execution and management of channel incentive programs are needed to support the success of brand owners and channel partners alike," said Ram Manchi, president of AGMA.