Channel Promotional Allowances The Importance of Financial Controls

Channel Promotional Allowances
The Importance of Financial Controls

SUMMARY
Promotional allowance programs (such as MDF and co-op programs) are the most popular programs that vendors offer their
channel partners. What’s more, these programs often represent the largest single expense line item across the broad range
of channel programs offered. If not properly administered, these programs can needlessly cost vendors thousands, or even
hundreds of thousands of dollars due to: over payment, incorrect balances that overstate available funds, missed expiration dates
for funds, and inefficient management. The problem is often exacerbated when CRM or SFA applications are adapted to meet
the needs of promotional allowance programs because these applications do not have the financial controls in place to help
minimize the aforementioned risks. This white paper outlines the areas of inefficiency and waste inherent in the management of
promotional allowance programs without the appropriate financial controls in place—and more specifically, where the software
and services offered by CCI streamline administration and improve management accuracy.

www.channelmanagement.com

Channel Promotional Allowances: The Importance of Financial Controls

INTRODUCTION
In addition, there are administrative inefficiencies that
Promotional allowance programs have been around
can create waste (time and money) which may act as
since the early 20th century. They were initially put in
a disincentive for channel partners to participate in a
place by the Warner Brothers (a manufacturer of feminine
program. These include:
undergarments) to provide additional incentives for
retailers to feature their products in their advertising efforts.
Lengthy claim management or reimbursement
These early programs were accrual based (what many refer
processes
to as a co-op program), although other methods of funding
Inability to get a quick response on program
have appeared since then. As programs have evolved
questions or issues
and become more complex, so too have the systems and
Time-consuming report development
processes required to accurately administer them. Today,
Long delays on plan or request approval
there is a movement to reduce program complexity and
streamline administration of all channel program types. To
CCI provides the systems and processes to address these
help minimize complexity when managing co-op and MDF
issues by eliminating fund mismanagement, ensuring
programs, many channel marketers create ad hoc software
program compliance (to the program guidelines), freeing
systems that are incorporated into their partner portal
your staff to perform more strategic tasks, and improving
or added to their CRM/PRM platform. These are often
partner relationships.
paired with in-house administration of these programs by
personnel who are not dedicated to the role. As a result,
many of these organizations who believe they are saving
money with this approach are unknowingly wasting money
by not having the correct processes and controls in place.

Below are some examples of unnecessary waste that may
be experienced with the management of promotional
allowance programs without the necessary safeguards:

Errors in payment (settlement of claims or
deductions)
Over expenditure of funds (payments greater than
exceeding the allocation)
Inaccurate management of expired funds—
particularly in accrual programs or rolling programs
Mismanagement of funds—due to errors in approval
or submission of duplicate request
Errors in fund reconciliation—due to intentional or
accidental deletion of old requests when expenses
have been applied against them
Poor understanding of program ROI due to the
inability to monitor which activities are getting
the biggest bang for the buck and which activities
should be eliminated
Cumbersome or inaccurate accounting of expense
categorization (operational expenses or contra
revenue)
No collection on proof-of-performance
documentation required for expense classification

1


THE CCI INCENTIVE MANAGEMENT
SOFTWARE PLATFORM
To limit over-commitment of funds to partners,
At the heart of the CCI software is a financial application
a program administrator may chose to debit
designed specifically to improve accounting accuracy of
the available balance—or reserve funds—when
all fund requests and reimbursements. Similar to your
funding request forms are approved for use (but
own checking account, each participating channel partner
not yet claimed). Alternatively, administrators
maintains an unique account that reflects an accurate
may choose to reduce only the available balance
fund balance as a result of maintaining a comprehensive
upon reimbursement. This may prove to be a more
record of all debits and credits designated throughout the
practical option for some programs.
life of the program. Each transaction type has embedded
If funding for a program is calculated as a
characteristics that force program guideline adherence,
percentage of monthly sales, the CCI rule set
such as expiration date for funds or submission due
might allow partners to overspend (not overpay,
date for claims. Each partner account is accessible only
but over-request) their current available funds to
through designated permissions that often align with
fund a claim—knowing that their balance will be
an organizational hierarchy. All actions that may result
replenished with the following month’s funding
in a debit or a credit (such as claim reimbursement) are
allocation. Alternatively, administrators may choose
perpetually linked to that fund—and cannot be deleted by
to automatically reject that same claim as a result of
users at any step in the process. This perpetual assignment
insufficient funds.
ensures reporting accuracy, and facilitates accurate internal
In some programs, funding might only be allotted
audits throughout the life of the program. Therefore, like a
to the partner once a request is approved, with no
checking account, the transaction history of that partner’s
balances residing in individual partner accounts,
fund will remain in balance—and so too will the fund
but instead maintained in a master account. Other
balance as that partner’s account rolls up through the
programs allow partners to view an available balance
hierarchy (such as territory, region, and overall). Because
to allow partners to plan against a designated
the CCI Incentive Management platform is designed as a
budget.
financial application, it supports all relevant GAAP, FASB,
and SOX regulations. In addition, the CCI solution has
There are instances where any combination of these
received SSAE 16 Type II certification (formerly a SAS 70
options is appropriate. The CCI rules engine provides
Type II certification).
designated administrators with the flexibility they need to
easily configure the financial controls necessary to support
In addition to providing accurate accounting of all funds,
their unique program while remaining compliant.
your solution will benefit from the following financial
controls as appropriate:

Access to all balances and processes are role dependent,
so users only have access to financial data on a need-to-
know basis—there is no direct access to overall program
financials or that of an individual partner or user account
without designated permissions. The number of unique
roles you can define is unlimited.

Administrators can easily manage the fund liability. In
general, the “available balance” of a promotional allowance
account is calculated as an opening balance less credit
and debit transactions made to that account as a result of
normal program activity. However, how and when those
transactions are booked may vary between programs. Here
are some examples:

2


CCI SOFTWARE SIMPLIFIES THE
ACCOUNTING OF CONTRA-REVENUE AND
OPERATIONAL EXPENSES
all budgets designated for use in op-ex versus contra
Considered a type of incentive program, promotional
activities.
allowances are generally classified as contra-revenue.
All required proof-of-performance documentation
However, under certain circumstances promotional
that qualifies an activity as an operational expense
allowances may be classified as operational expenses
can easily be uploaded to each claim by the channel
(op ex)—a desirable option for companies who want to
partner, and the documentation perpetually stays
maximize income reporting. Promotional allowances can
with the claim in the event of future audits (with no
qualify as an operational expense (op-ex) per the FASB
data storage surcharge).
ruling 01-9, if the following conditions exist:
In addition to the above, when the program is
administered through CCI, the CCI Client Services
The payment covers a service by the partner that
team ensures accurate compliance of each claim, and
offers a clear benefit to the manufacturer;
that the appropriate documentation is provided.
The benefit is clearly separable from the sale of
the product;
Values are frozen upon approval. Comprehensive
The benefit could be purchased by the manufacturer
financial controls mean that users have limited ability
from a source other than the partner; and
to alter the requested value once a request is approved.
The manufacturer has obtained proof of
Administrators have a choice of when and how they
performance and is able to reasonably estimate
allow the original approved request to be changed. For
true costs.
example, some administrators choose to allow designated
approvers to increase or reduce the request value as
Practically speaking, these constraints limit the activities
more information is known. Others require the request
reimbursed by promotional allowance programs to
to go through the approval process with any requested
outbound marketing programs that also support the
change in value. However, once claims are received and
manufacturer’s brand. For example, media costs in a
paid against a request, the claim cannot be canceled or
partner’s advertising program may qualify for contra-
modified, thus ensuring accurate account balances and
revenue because those efforts are considered an extension
fund reconciliation.
of the program provider’s own brand marketing efforts.
However, that alone is not enough. Extensive proof-of-
performance (POP) must be associated with the expense
that substantiates that the program provider not overpay
for that activity. Overpayment is evaluated relative to the
market rates that could have been available had the activity
been purchased directly from the program provider. To
validate rates, an invoice or affidavit is typically issued by
the media provider, which substantiates the market rate—
net of any mark up that may be added by the channel
partner (often charged as a management expense).

The CCI Incentive Platform assures compliance of
operational expenses in a number of ways:

To simplify financial reporting, all activity types that
qualify for op-ex can be grouped—isolating those
reimbursements to simplify reporting. To further
isolate all costs for op-ex reimbursements, unique
funds may be created that contain only all the op-ex
related activities. This option allows more control of

3


MULTIPLE FUNDING MODELS AVAILABLE
Promotional allowance programs are continually evolving—and so have the funding models that provide the basis for
how funds are allocate to partners. CCI software supports all funding models in use today. Many clients choose to offer
multiple programs, and each program may use a different funding model to support the variety of activities that are
available for reimbursement.

Accrual-based funding models:
Most often referred to as co-op programs, this funding model is calculated as a percentage of sales from a prior period—
monthly, quarterly, or annually. This funding model is often used to support traditional advertising and lead generation
programs. There are a variety of options that may be associated with this model. For instance, rolling programs typically
expire funds monthly (called roll-offs) as new funds are added. Funds are used on a FIFO basis, and unused or unclaimed
funds roll off based on program guidelines. Typically, funds are available for six to twelve months after they are earned.
Managing the expiration of these funds is difficult without specialized software that can accurately assign and expire
unused funds accurately. The CCI solution provides clients with the ability to choose how roll-offs are managed for each
promotional allowance program, either through expiration or shifting the expired funds to new funds for alternative uses.

Discretionary funding models:
Rather than issuing funds to partners based on percentage of past sales, funds may be assigned to partners based on
future potential. These programs are most often referred to as Market Development Funds or Business Development
Funds (MDF or BDF respectively). CCI software facilitates the ability to administer this funding model as well. As a
budget is assigned to each partner, these allocations show up against a debit to an overall budget (or “Fund” in the CCI
system). This ensures that the funds are not over allocated—thereby ensuring compliance across the life of the fund. The
administrator can choose whether these funds are assigned in advance, or plan based—requiring the channel partner to
submit a request for approval in advance of assigning the funds. The advantage of a plan based funding model is that it
minimizes any preconceptions of these funds as an “entitlement” by the partner, and ensures any spending by the partner
is directed to approved activities only. The use of either model is at the client’s discretion, and can vary between any two
programs when multiple programs are offered.

Waterfall (or cascade) funding models:
Waterfall funding models are similar in design to discretionary spending (outlined above), but differ only in that an
administrator doesn’t assign the funds directly to a channel partner. Rather, the responsibility of assigning funds
to individual partners is delegated to regional (or local) account managers. This type of funding model is growing
in popularity to support global partner programs or for other instances where local channel managers possess P L
accountability of partner performance. In these instances, the integrity of the fund remains intact with each transfer
(for example, global program administrator, to regional administrator, to in-country manager) to ensure a reconciliation
of fund transfer at each step, as well as to facilitate an accounting of funds as claims are ultimately made by the channel
partner for local marketing activities.

4


GLOBAL CURRENCY MANAGEMENT
The CCI platform was designed to support global programs—and provides flexibility to address all of the complexities
related to global currency management.

Partner-centric or Program-centric based currency models.
Working with global programs that often include payments in multiple currencies, the program provider will ultimately
have to choose whether they or their channel partner will absorb any difference in financial value that fluctuating
exchange rates generate. Often between the times the fund request is made and the payment is issued, the exchange
rate has changed. A partner-centric model maintains the partner’s local currency as a constant throughout the process
while the overarching base currency will fluctuate with the market—this allows the partner’s currency to remain constant.
In the partner-centric model, the program provider accepts the liability or asset of currency fluctuation. Conversely, the
program-centric model maintains consistency at the base currency as defined by the program provider and their partner’s
currency fluctuates with the exchange rates. The CCI platform provides the flexibility to support either model.

Exchange rates may be managed by CCI using a daily feed, or using periodic rates that are client defined.
Many companies traditionally fix exchange rates to simplify financial management across a variety of transaction types
involving multi-currency. These exchange rates are evaluated periodically and adjusted as necessary—often quarterly or
annually. In today’s dynamic market, however, exchange rates fluctuate regularly. Therefore, in order to maintain financial
accuracy of all partner transactions, updating exchange rates on a daily basis may be preferred. CCI also makes available
a daily exchange rate (from XE.com) that allows for the most updated exchange rates whether your program is structured
as partner-centric or program-centric.

Exchange rates are frozen upon payment.
Regardless of the preferences selected above, the exchange rate for a given transaction is frozen upon payment at the
true cost of the exchange. This facilitates accurate banking reconciliations, and ensures reporting accuracy across the life
of the fund.

ROI:
QUANTIFYING THE BUSINESS VALUE OF PROMOTIONAL ALLOWANCE PROGRAMS

The available CCI Joint Marketing Planner (JMP) allows partners to create and submit comprehensive marketing
programs in advance of funding approval. The marketing program assigned to each planner can include one or
more activities as needed to achieve an overall business objective. What’s more, the JMP facilitates an analysis of
“Forecast” versus “Actual” performance of each plan to include the plan costs and program performance.

The CCI Joint Marketing Planner captures forecasted business metrics or goals for each campaign—which we
define as the overall business impact of the program. These metrics are client defined, but typically align with
established business goals to include measures such as sales (dollars or units) or the number of new customers.
Actual business impact is then updated at any time by the partner or channel account manager until a planner
is closed and metrics are validated by the channel account manager. Comprehensive reporting allows users to
monitor ROI of all their programs, as well as analyze campaign performance versus plan.

5


PROGRAM ADMINISTRATION: FINANCIAL
CONTROLS REQUIRE MORE THAN
SOFTWARE
on a continual basis and audited to very strict standards
Many of the issues contributing to fund misuse are
that extend beyond established service level agreements
related to the manual processes that exist with program
(SLAs).
management—usually associated with inaccurate
compliance auditing of claimed activity.
CCI SERVICE LEVEL AGREEMENTS
The CCI client services team helps to reduce the financial
In addition to errors and delays in payment, poor
burden of program administration, and ensures prompt
administrative practices can create an excessive burden
response to inquiries. This service frees your staff for
on team members. This can result in increased costs, and
other tasks, and ensures that your partners will continue
can also inhibit productive program use by the partners.
to embrace the program—rather than experiencing
Partners will not use a program if they cannot get a prompt
frustration.
response on questions or issue resolution, or if they don’t
feel they are getting reimbursed promptly once a claim
Below are the standard SLAs established by CCI for program
has been submitted. CCI’s seasoned client services team
administration and partner support. These SLAs may be
addresses these issues a number of different ways:
appended based on the needs of individual clients:

COMPREHENSIVE AUDITING PROCESSES
PA approval - 1 business day
CCI client service teams ensure program compliance with
Claim audit - 2 business days of date supporting
every claim through a carefully honed audit process that
documentation is received
includes:
Payment – 10 business days (if weekly payment
batch is set up; some clients prefer a bi-weekly or
Reviewing the charges on each claim to ensure
bi-monthly payment batch)
that the advertiser’s fair cost of advertising is not
Email and phone response – 1 business day for client,
exceeded (especially important for all activities that
2 business days for client customer
qualify as operational expenses)
Phone response - 1 business day for client, 2 business
Implementing specific audit practices to protect
days for customer (most calls to client are returned
against duplicate, inflated, inaccurate, fraudulent, or
within 4 hours)
incomplete claims
Verifying all rates submitted (such as newspaper
rates, distribution costs, and insert costs)
Determining the appropriate reimbursement
amount to be remitted to the reseller
Capturing and tracking data for management
information reports
Comparing to programs guidelines with rules and
guidelines for each activity type
Tracking warnings to channel partners for non-
compliance with guidelines
Suggestions to the client for guideline changes
for repeated non-compliance items (for example,
establish logo guidelines document and place
on website if there are problems, create quick
reference guide if documentation is missing on claim
submission)

What’s more, to ensure complete compliance that claims
meet program requirements, CCI conducts regular audits
of our auditors. Random batches of claims are sampled

6


PROFESSIONAL SERVICES

Like the blueprint for a new home, the level of satisfaction
in the outcome is dependent upon the proper program
design. That’s where CCI’s Professional Services team
adds value to your program. Each Professional Services
representative can leverage over 30 years of best practice
experience to help design a program to meet client
objectives efficiently and effectively. What’s more, that
professional services representative works with their client
throughout the program life-cycle to analyze program
performance versus goal—making recommendations for
program enhancements as needs evolve. Members of the
CCI Professional Services team average 10 years of channel
marketing experience, and have proven their value on
dozens of client programs. The result: a program that is
optimally designed from the onset, and continues to meet
or exceed expectations throughout the life of the program.

ABOUT CCI

CCI delivers comprehensive incentive solutions to optimize sales channel performance. As an enterprise software
and services solutions provider, CCI enables channel marketers to manage and measure sales and marketing
incentive programs throughout their demand chain, resulting in greater spending efficiency and improved
program effectiveness. CCI provides a combination of on demand software, professional services, and program
management. CCI’s Professional Services team applies best practices to define and deploy programs that meet your
business goals. Equally powerful is CCI’s software. Delivered as SaaS, CCI automates your channel programs and
partner activity for increased visibility, measurement, and ROI. Once deployed, CCI Program Management delivers
services such as contact center support, auditing, and payment services to ensure program operational efficiencies.

CCI is proud to work with market leading companies in technology, telecommunications, and entertainment. For
more information, visit www.channelmanagement.com or contact us at info@channelmanagement.com.

CCI: Channel Management Solutions
7250 Redwood Boulevard Suite 214
Novato, CA 94945 USA
415.472.5100
info@channelmanagement.com

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