Interview: How Cloud-Based Channel Management is Automating Critical Business Processes for Large Technology Manufacturers
By Steve Prentice/CloudTweaks
Recently, I spoke with Chandran Sankaran, Founder and CEO of Zyme Solutions in Redwood Shores, CA. Before Zyme, he was Chairman and CEO of Closedloop Solutions, a senior consultant with McKinsey & Company, and also held engineering and management positions with Hewlett-Packard. He has a Masters’ Degree from Yale University, and a Bachelors’ in Electrical Engineering from the prestigious Indian Institute of Technology, Madras.
Q: What are the issues that channel management in the cloud solves for large corporations?
A: We started Zyme in 2004, in response to a mandate from the SEC regarding revenue recognition rules for manufacturers, which required them to report on inventory in the channel to avoid channel-stuffing accusations and be compliant with revenue recognition rules. As a result of that, the transparency and visibility of their sales transactions downstream in the channel went from being a “nice to have” to being a “must have.” That was really the trigger for us.
Then, we found ways to tap into important new data sources, with granular sales intelligence and an unprecedented level of visibility into a trillion dollar flow of commerce through global indirect channels for technology products. The opportunity was there for a transformational shift for large vendors in how they sell, how they market, and how they manage inventory. We could help enterprises smarten up and data-enable traditional business processes that have been suffering from an absence of data. When we started, only a small trickle of data was flowing from distributors and retailers to manufacturers, and today that has become a flood of data.
Q: How extensive is your reach today?
A: We’ve built out a large, cloud-based management platform and a network of reporting channel partners. We’re now aggregating data from over 180 countries, more than 40,000 data feeds a week. As our customers are trying to cope with the increased importance of this data and the failure of their internal systems, they’re looking into the solutions market and discovering that a third-party platform like Zyme is really the answer.
Q: Can you give an example of how your customers leverage your technology?
A: Let’s say that a customer, a large disk storage company, receives an order from Best Buy to ship 10,000 units of a disc drive to the Waltham Massachusetts warehouse of Best Buy. In yesterday’s world, when an order was placed, it was processed quickly because it was business, and the salespeople wanted the revenue. But in the new world of visibility into the channel, after management learns that there are 10,000 units unsold of a previous generation product, that order for new product is no longer going to be processed, with so much old inventory still sitting there. This results in a significant value creation for the vendor, by reducing the risk of inventory being written off six months down the line. This also adjusts the risk balance for the retailer, the channel participant, because they are not left stranded with old inventory. In order to capture the value, there’s got to be an understanding of how to use this new information transparency in core business processes.
Q: Do you have another example?
A: Sure. About ten percent of all sales in the technology channel today get paid out as back-end rebates, price protection, market development programs, and so on. They are paid back to the channel partner, and that’s an important source of money for them. The margins on tech products are typically quite low, and resellers look to make up the difference with the back-end programs. Then, a vendor who has clearer visibility into how many transactions were actually done in the channel at a much more finely-grained level has the ability to say, “I’m going to pay these back-end programs in a much tighter way linked to that information, as opposed to paying those back-end programs whether or not the sales were actually accomplished.”
With better information transparency, vendors are going to pay out incentives more smartly to the partners who are most deserving. They’re able to micro-target their resources to elite, successful, nimble partners rather than spreading them out in a less impactful way.
Q: So, is this all about optimizing how many products are where?
A: Yes, it’s about how much product is where at any given moment, in an industry with shortening cycles and inventory risk. But it’s also about understanding who is acting on your behalf. This whole premise of the indirect channel is that it’s a shared sales infrastructure for an entire industry, which means if I, as a vendor, am to be successful leveraging this shared resource, I’ve got to – without overspending – motivate the channel to act in my best interests. When a customer walks in the door, you want the reseller to sell my product, not my competitor’s product. The sales intelligence and how you link it back to the incentivization of the channel, and the flow of money into the channel that aligns to people behaving in a loyal and positive way towards you – I think it’s going to be quite different in the near future than the way it looked ten years ago.
Q: How do the channel partners benefit from this?
A: Well, several of our customers, large manufacturers, have begun offering favorable incentive terms to partners with higher information transparency. The logic is if you’re transparent about how you’re doing on my behalf, I’m going to favor you in the way I structure incentives and programs and price protection and payment terms and those kinds of things. So this is a non-trivial change that we’ve begun to see. It will have favorable impact on the early compliant movers among channel partners in the market. That’s one dimension.
The second dimension is in introducing information transparency of a really interesting sort into the market. For instance, a distributor might be able to see the geographic spread of their reseller network based on this data, which they may not be able to see today. Manufacturers and distributors alike are able to identify up-and-coming resellers who are worthy of added attention and investment.
Q: What kind of ROI do your customers experience?
A: The ROI falls into several buckets. Number one is seeing revenue opportunities sooner. This is about seeing, for example, an uptick in three resellers’ sales in the last two or three weeks and having your local account manager contact them and figure out what they’re doing differently and why. It’s also being able to see potential lost revenue before you actually lose it from resellers who have begun switching away from your products and being able to get in front of that.
Second, there is significant cost reduction for the vendor, in terms of leaky incentivizing. Because it’s a trillion dollar industry, a hundred billion gets paid every year in back-end rebates and programs, and we estimate about 15 to 20 percent of it is mispaid, either to the wrong reseller or in the wrong amount, and overpaid most of the time. What often happens is that a dealer claims a rebate, and you don’t have the mechanism to verify that they’re selling on your behalf, and you don’t want to sour an important relationship, so you pay it.
We have seen one of our customers save $7 million in one quarter, in one small region, by using this channel data. They were more selective about paying out all the incentives that were claimed, and were much smarter about what they paid out. There’s significant ROI there.
There’s also ROI associated with inventory risk, both for write-offs and stock-outs. One is revenue impacting and the other is meaningful cash and balance sheet impacting. Those are the sorts of ROI levers associated with the data, and we’ve identified six broad consumption areas in the business where there’s significant ROI as a result of this data, and we’ve done some value engagements based on this for some of our customers.
Some major industry analysts have interviewed our customers and discovered a very large ROI. For one tech company, a very conservative ROI of 200% was identified. While the ROI for the vendor is quite clear, the ROI for channel partners who are smart and early movers will be high too.
Q: With more visibility it seems that there is also more accountability.
A: Yes, business processes that don’t have adequate data and information transparency get cobwebby and stale. The channel has largely grown up in a non-information era. A lot of habits and processes have accumulated that are outdated, and those of us who have worked in the manufacturing and tech sector for a while have got used to “the way things are.” We memorialize this lack of visibility and transparency in terms like the “Bullwhip effect.” You can’t see what’s happening, and so you overcompensate and mistime your business actions. Because there’s been no visibility, we’ve all built processes – we call them approximations – to deal with the lack of data.
If you don’t have transparency, you’ve got to spread the wealth among your channel partners using more approximate methods that value historical relationship more than performance. I do think it’s really the classic visibility argument – add data transparency to let sunlight into old dingy processes, and you find all sorts of opportunities for improvement. The global management of the indirect channels arena is ripe for that, because the information flow itself is a relatively recent development.
Q: Okay, so you’re suggesting that companies “let more sunlight into dingy processes.” Can you expand on that?
A: Sure. It astonishes me how much value gets locked down in a business by virtue of having designed the company in an era when complete information about the business didn’t exist. When you don’t know how much inventory is in your channel, and you’re worried about it being depleted, what do you do? You make more inventory, right? And you buffer more. If, on the other hand, you are worried about how much of your channel inventory is going to be returned to you and what the exposure is, you record reserves and liabilities on your balance sheet to insure against the old stock that might come back to you from the channel. You build your business around approximations and insurance policies in the absence of real information flow. And then, the moment the information flow starts becoming available, and there is more sunlight, it frees up all those pockets of value that have been locked down in the business during the pre-information era.
This is the way I like to think about what Zyme is doing – we’re bringing in more light and enabling an information flow that injects more data into these corporations, to transform old business processes and puncture the airlock where all this value has been trapped, because people designed the businesses around a lack of information.
Q: So, when you have a better idea of what each channel partner is doing, you can manage them better?
A: Sure – and much more dynamically. For instance, if you didn’t know which of your channel partners have switched away from you in the last three months, and are now perhaps working with your competitors promoting their products, you would still be paying those partners who are no longer loyal to you, giving them incentive payments that you computed based on last year’s information, because you didn’t know that they have shifted to your competitors’ products. You do the best you can with the information you have, and all these business processes relating to the channel were designed around slow aggregated anecdotal information flow that results in a ton of value being locked in the enterprises that can be released and used to their advantage.
Q: In a sense, it seems that channel visibility is a new way of creating more sales intelligence for companies that didn’t have it before.
A: That’s right. Downstream sales intelligence is the most powerful penetrative information – it changes the way you market, changes your view of customers, changes your view of partners who are enabling that flow, changes your view of shifting market dynamics sooner, rather than later, and causes you to alter the course of your business. Indirect channel sales intelligence has been hard to come by, and the world has designed itself around slow-moving, inefficient aggregated information. This is a very transformative instrument – very, disruptive – and very value creating.
As an example, this visibility shines a spotlight on a potential billion dollar misallocation of marketing funds for the trillion dollar tech sector.
Q: How does all this fit with the broader trends of business intelligence we are seeing in enterprises?
A: One way of looking at that is to see where venture capitalists are investing. There are three or four private equity firms, and venture capitalists who are now investing only in firms that are driving what they call “data-enabled businesses.” These investors are looking for companies that are making transformations based on data enablement. The whole thesis here is business transformation with information. And companies that enable that are unlocking the next wave of value.