CO-OP CASH - GOING DUTCH

Are you getting all you can out of vendor co-op funding? No? Then whys, but many dealers don't take advantage of the cash which is available. Is it apathy or simply a lack of awareness that's to blame? not?

Here's part of a brief email dialogue about co-op funding that took place between one reseller and PC Dealer:

PC Dealer: What do you think of vendor co-op schemes?

Reseller: Irrelevant - they have never worked for us.

PC Dealer: How much use do you make of co-op schemes?

Reseller: None.

Although some resellers are as dismissive of co-op funding as the one above, not all feel this way. Darron Antill, sales and marketing director at reseller Ultima Business Systems, is a firm supporter and user of co-op funds. The first thing to get straight, he says, is to make sure that the available money is spent wisely: 'Whether it is vendor funds or a reseller's own marketing money, it is always important that we look for better ways of spending the cash.'

Ian Summerfield, managing director of reseller P&I Data, is also a fan of co-op funding. He says the quality and profile of schemes vary, but where they are visible, they are very useful. 'We try to maximise the co-op schemes we are aware of and all our strategic partners offer funding of some description, whether it be two per cent of the turnover or one-off amounts for specific joint ventures. We use the schemes for joint direct mail campaigns, seminars and hospitality.'

It is important to create the right impression with a client, he adds. Marketing does that and Summerfield says matching the investment is always worthwhile: 'Without the funding, we would have to foot the whole bill ourselves.'

Co-op funding is usually objective or volume-based and paid retrospectively. It is rarely available until something has been sold, but some vendors will grant additional funds to support specific initiatives that are not already justified by sales performance to kick-start turnover.

Most co-op funding schemes have traditionally been based on a percentage of sales revenues being made available for marketing activity. But in a market with strong margin pressure, it has tended to be regarded by some resellers as a way of adding more money to their bottom line. Les Francis, channel analyst at Romtec, says it is corporate resellers that tend to look at the co-op scheme as a means to take advantage of the marketing funds.

'The bigger players often invoice the vendor for the value of the fund without declaring any specific activity, effectively achieving additional margin,' he adds.

But Andrew Boddington, sales and marketing director of Keltec Progress, which is a Compaq and Sun Microsystems reseller, believes resellers that do this are being short-sighted. 'Dealers that regard co-op funding as just extra margin are taking a very short-term view and are not looking at true business development,' he says.

'We've got a separate marketing team of four people - many resellers don't have this and that leads to marketing being subordinated into "something that gets done by sales in their spare time".'

That's a mistake, he argues, because without the commitment to marketing, funds will not be spent effectively. Summerfield agrees, insisting there is 'no way' that P&I would use the funds to cushion margins.

Those resellers that regard it as a top-up are not usually as strategically aligned with the vendor, adds Oliver Stephens, head of marketing at software house Sage.

'It's true that sometimes co-op funding is viewed as a margin top-up, but only if the relationship with the vendor is distant,' he says. 'The success of our own co-op scheme depends on the personal involvement of our regional sales managers, who work with resellers to build targeted local marketing campaigns that integrate with Sage's national campaigns.'

However, the trouble with an approach that matches local marketing with national marketing is that if the local scheme does not fit in with the national strategy, it may not gain approval. It has to work for the vendor as well as the reseller. This can be a problem, since the vendor is simply interested in selling software packages, network cards or monitors, while resellers often have a broader objective.

Vendors of products that are not essential to system sales have to keep this in mind, says Keith Simpson, UK country manager at Hitachi's monitor operation. 'We don't tend to go for brand schemes - we usually ask resellers what they want to do and then part-fund the event.'

This ad-hoc approach can result in initially grand ideas being scaled down because of budget restrictions, but, nonetheless, this method tends to favour the smaller reseller because of that limitation, he adds.

'If Computacenter comes to us, we are starting at #250,000 - we haven't got that sort of money. Smaller dealers tend to be keener, more creative and use it a bit more.'

Out of about 40 resellers that Hitachi works with closely, half make use of funds, he adds. Some don't always realise they are using it - the company invites user guests along to events that are co-op funded on behalf of the reseller.

A lack of understanding of what the co-op fund is for and how it works seems to be at the root of most of resellers' problems with vendor schemes.

Just as it should not be regarded as extra margin, the co-op fund should not be seen as a pot that has to be spent on something, no matter what.

Boddington argues resellers should concentrate on marketing objectives, rather than how much funding is available.

But it is not just the resellers that get it wrong - vendors do as well, he adds. 'My biggest frustration with co-op funding is if the manufacturer has unrealistic expectations of what the fund can do.' Also, vendors shouldn't apply stricter criteria on their external resellers than they do on their internal marketing teams, Boddington says.

Vendors typically insist on certain conditions. These are usually things such as the numbers responding or attending events and agreed sales and volume targets. Manufacturers also tend to be too focused on the cost of the activity, says Francis, and too cynical about the reseller's ability to come up with good schemes and to execute them well.

'Many vendors have the mistaken belief that they can buy marketing activities at a better price than the reseller community and, as a result, insist on all programmes being delivered through their selected agencies. Many resellers either have in-house capability or can call upon their own suppliers.'

3Com operates a discretionary fund. Jill Burton, UK marketing manager at 3Com, says every scheme is judged on its merits. Sales revenues are taken into account and any plan must be realistic if 3Com is to provide co-funding.

'A lot of vendors say resellers waste money but our scheme avoids that because nothing happens unless it has been agreed,' she explains. 'If we are going to do it jointly, it's got to be good. A lot of schemes tend to give you one per cent and then ask you to go away and put a plan together which the vendor can approve or veto.'

This is a good point - it is no use wasting time putting together a marketing plan that won't be approved by the vendor. But having said that, most companies that run percentage-based programmes do talk to their resellers in advance about plans.

The discretionary approach has its advantages, though. One of the problems many resellers have with funds based on percentages of revenues achieved on a quarterly basis is finding enough sales in the first place to generate any sort of marketing fund.

For example, a scheme that provides three per cent of revenue on quarterly sales of #100,000 would generate only #3,000. Because the majority of programmes run on a 50-50 split, the total available fund would be #6,000 - and that doesn't buy very much advertising space, graphic design work or telemarketing. At least with the discretionary schemes there can be some variation, although vendors will still be watching the relative investment.

Volume counts where product vendors are concerned, but some are beginning to modify their approach. 'Understandably, manufacturers are encouraging those who are already doing well to sell more,' says Boddington. 'However, this method does not recognise resellers that are new to their channel, or that are working to develop markets, and so most manufacturers sensibly have some other funds that can be used for market development in different areas.'

Keltec Progress has received fund support from Compaq to develop sales of high-performance systems into focused markets, as well as funds from Sun to develop key markets. Most vendors will make some money available on a discretionary basis for the development of markets - a market development fund rather than a business development fund.

Although vendors almost always insist on having a veto on co-op funded schemes, they are becoming more open to different ideas. Burton claims there is hardly anything 3Com will rule out immediately, but what it's really after is demand generation and development activity - schemes that either increase its sales or improve its ability to sell the products.

Many vendors now encourage the use of co-op funding for training.

Some vendors want schemes to go even further. Stephens says occasionally the 'joint activity' nature of the scheme is misunderstood by resellers - but that's the fault of the vendor, not the reseller.

'Any co-op activity should dovetail with the vendor's national campaigns to have real value, so there can be a truly integrated drive,' he adds.

'This requires a further time investment to guide and advise the reseller and a clear understanding on the part of the reseller that this is a fund to help both businesses grow to their joint advantage.'

Boddington says co-op funding is important to Keltec Progress, but it also requires a good working relationship with the manufacturer's marketing team. 'Only then do we, as a reseller, get maximum return from our marketing,' he adds. 'By keeping in step with the manufacturer's brand and message, we can reinforce our own.

'But any joint marketing must take account of the need for the reseller to differentiate itself from the rest of the channel. This is sometimes difficult for the manufacturer's marketing staff to understand as they can't see how it benefits their own business.'

Vendors can be myopic about reseller marketing schemes and ignorant as to what the channel really needs, Francis believes. Too little time and thought is given to the evolution of complete business development programmes, such as bundles and special offers aimed at specific audiences. He adds there should be more backing for co-op schemes in the form of national and IT press advertising and more marketing support for the channel.

What vendors are always concerned about, of course, is achieving return on their investment. The trouble with marketing is that it is notoriously difficult to measure its effects. It often comes down to intuition and preference. Hitachi, for example, finds events such as golf days much more effective than mailshots and the company will happily part-fund such events if deemed appropriate.

Yet mailshots have not been ruled out entirely. Hitachi is currently running a controlled mail campaign with Westcoast and a group of 10 resellers and will endeavour to measure the response by taking feedback from each one, says Simpson.

Francis argues that vendors do need to measure marketing effectiveness as well as provide distributors and resellers with proof of advertising and direct mail pieces so they can be tailored and used by the partners locally - in parallel with the national campaign - and drawing down from the co-op fund to cover the costs.

He also points out that for co-op programmes to work well, the process for claiming funding must be easy to follow and painless. All too often, as Burton intimated, it is far from that.

The success of co-op funding - whatever form it takes - ultimately depends on the vendors believing in it and promoting it. If resellers are going have any chance to develop, vendors must invest in their future.

Ts&Cs: A TYPICAL CO-OP FUND

Data General's (DG) co-op funding scheme for partners is a typical example of the conditions set out for how funds are allocated and used. But not all vendors always stick to the rules.

- Partners have to achieve #100,000 of business per annum before funding begins

- Resellers receive one or two per cent funding, depending on revenue

- The 'kick-start' co-op fund programme is available for new partners and is evaluated on a case-by-case basis

- Resellers have to use co-op funding for marketing and promotional activities and not as extra margin

- The aim is to spend the fund on a quarterly basis

- Operates on 50-50 basis - reseller and DG put forward the same amount

- Focus of the funding is to co-ordinate marketing with joint projects and joint commitment

- Funding can be more speculative if the right opportunities arise

- Customising the funding is possible.

One partner has negotiated to use the fund annually for one main event that is very effective and generates a lot of leads

CASH IN YOUR HANDS

Some resellers tend to regard the extra percentage points available through co-op funds as additional or 'soft' margin. Would it be better if this was what the vendor offered to the reseller, rather than the complex array of marketing support, collateral, training and services?

A few vendors have made their co-op pure soft margin. UPS manufacturer Chloride, for example, offers resellers a quarterly rebate on sales that is, in effect, cash in their hands. But most vendors want funds to be used to develop sales and limit the ways they are used.

'Past experience has confirmed that the fund needs to be managed by the manufacturer,' says Gerry Toms, vice president and managing director of Hansol UK. 'All activities would need prior approval before they can be committed.' Funds will only be released when the invoices they relate to have been paid in full.

It is easy to see why some resellers would prefer the extra margin but it tends to be the bigger ones that have this attitude, says Mike Briercliffe, joint managing director of distributor Sphinx CST. 'Larger resellers that can predict it and have a bit of muscle often are not dealing through distribution and will tend to look at it as soft margin, although smart vendors manage to avoid it by controlling allocations.'

He adds that smaller resellers usually make much better use of funds because, for them, a considerable effort has to go into the planning of the task at hand and distributors can often help them to bring several vendors together to run a single scheme that benefits everyone involved.

DEVELOPMENT IN DISTRIBUTION

Distributors can do well out of co-op funds but they have to juggle figures and work hard to get the benefit.

Network Peripherals (NPI), for example, runs a scheme under which, in addition to offering co-op money at two per cent of net sales to distributors for promoting its brand name, also provides a potential 18 per cent for market development funds (MDF).

The funding tends to be used mainly for exhibitions, trade shows, reseller seminars and road shows, but can also be used to fund a dedicated NPI head in the distributor, to offer special pricing, or as additional discount.

MDF accruals must be paid out within three months. Half is paid out at the time of the event, the other half is provided as a bonus that is paid when the partner reaches a pre-defined annual target. NPI believes the scheme encourages distributors to be innovative in their selling, set themselves apart from the rest and also have some fun.