Employee relationship management may not trip off the tongue, but businesses are losing vast amounts of money through poorly managed sales commission systems - paying up to 5% over the odds. It doesn't take a genius to work out that over-paying commission on this scale could cost a company serious money over a period of time.
The errors are being attributed to an array of labour-intensive, costly to maintain bespoke or manual commission systems that, according to US analyst the Aberdeen Group, cost companies about $1,500 (£1,040) a year to track and report the compensation for a single sales person. Multiply this by the number of staff in a company and you start to get a picture of excessive administration costs to add to the actual over-spending on commissions. In short it sounds an expensive mess that companies have been prepared to live with, as there has been no alternative.
Given this background, the arguments for software to manage incentive commission schemes becomes compelling. The packages are often referred to as Enterprise Incentive Management (EIM) and they integrate with enterprise resource planning (ERP), human resource and payroll systems and automate the commission management process. The software takes sales transactional data from the ERP system and calculates commission for each sale processed based on pre-defined criteria regarding individual and group targets. This data is then passed onto payroll.
While systems vary depending on the supplier - and there aren't that many in Europe at the moment - most seem to offer Web-based access to the system through company intranets. Most EIM systems are multilingual and multicurrency and enable department managers to set up commission plans and bonus schemes through templates. Another key feature is modelling for predictive analysis and forecasting as well as analysing current statistics.
In fact most analysts describe incentive compensation systems as more than just a layer that sits on top of various databases and sales systems calculating commissions. Analysts believe that by automating this area of internal administration companies can analyse sales and plan strategy more efficiently. "Incentive compensation is the single most effective lever for aligning sales performance with business goals," says Catherine Jones, analyst at the Aberdeen Group.
Her view is well supported. Joe Galvin, analyst for the Gartner Group, predicts that by 2004 "75% of sales organisations will significantly change sales compensation strategies to align sales behaviour and corporate objectives, improve retention of key sales resources and achieve growth targets".
Richard Gerson, of US-based Gerson & Goodson, says, "While most companies are urged to focus on customer relationship management, few - if any - spend time, money and resources on an equally important relationship: the one with their employees."
It's a point echoed by most analysts in this sector. US consulting firm Culpepper is a keen advocate of incentive compensation management and its role in the wider employee relationship management market. "Any firm bent on growth has to make sure its sales compensation plans are competitive as well as motivational," says Warren Culpepper. "The plans need to be understandable and manageable. If the right balance is achieved, the result is higher sales productivity as well as higher profits."
While this is undoubtedly an emerging area in the UK, commission management software has already gained considerable momentum in the US. Major software houses, such as Oracle, SAP and Siebel, include EIM capabilities within existing ERP and database software, although the specialists, such as Callidus Software and Incentive Systems, provide off-the-shelf software with more features to tackle the payment calculations issue.
Windsor-based Practique Associates stands almost alone in the UK market, although Callidus is leading the field of US-owned suppliers having set up office here.
Practique is winning plaudits for its Inca incentive management system that was launched in March 2001 and ranks Tektronix and enterprise integrator SeeBeyond among its client base. According to CRM specialist the Hewson Consulting Group, the incentive compensation market in Europe "will potentially be worth $1bn by 2004 and Practique's Inca may be the best-adopted product for the complex European market".
But will companies really be interested in taking the plunge on commission systems? "We are seeing an increasing number of customers and potential customers who are looking to spend to save, especially given that we can offer a rapid return on investment," says Practique managing director Joe Walker.
"Incentive compensation management systems offer companies accurate statistics on compensation payments and plans, for the first time. How can companies know they are paying over-budget if they have no visibility of the compensation statistics?"
Walker adds that the software should be central to sales planning since it can provide modelling and what-if predictive analysis of sales strategies. She also points out that the accuracy of the data removes the need for "shadow accounting" by staff, whereby a previously inherent distrust of commission payment systems led to sales people spending time calculating their commission when they should have been working.
In the US, David Thomas, Tektronix's manager for sales IT, says Practique's commissions system has replaced a custom-built application based on a Vax computer. The old Vax system was clumsy, he adds, and the sales staff never trusted it to calculate their commissions accurately.
"The sales team spent hours checking their payslips to make sure they had been paid the right amount of commission at the end of every month," Thomas says. "With the current commissions system from Practique there is full trust. No one spends time checking that they've been paid the right amount any more because they now have faith in the system. That means they can spend more time selling and less time checking payslips."
In the UK Tektronix has also seen huge benefits from installing an incentive compensation management system. The impact has been company-wide and not just concentrated on getting the sums right. "Whether the numbers were reliable or not, couldn't be checked," says Russ Cockburn, Tektronix's European IS applications manager referring to the company's previous bespoke commission management system.
"The [bespoke] spreadsheet was created by a business unit manager and he was the only one with the knowledge to support it. There was no documentation, the IT department couldn't support it and any changes that had to be made could only be done when he was around. With the new software we are now in a position whereby we can validate the numbers. We can automatically match order numbers with sales people and the system works out the compensation for payroll. We can now track our top sales people while all the staff have compensation statements and forecasts which they access via the intranet."
There is also flexibility within commission management systems that enables managers to create incentive schemes to suit different objectives - some companies offer points for prizes or Air Miles - within a company or even with sales partners such as distributors and dealers.
David Blume, UK country manager for Callidus Software, says this is proof that incentive compensation management is more than just sound accounting. He equates it to being the automated glue that so many companies have had to live without even through recent efforts to develop e-business strategies. How can any company attempt to transact through e-business media when their own house is not in order?
"The impact on business is real," says Blume. "Inaccurate figures are bad for business and when this is extended to third party partners, it can be extremely damaging. We have more than anecdotal evidence of a mobile phone dealer that is threatening to sue a mobile operator because it didn't receive the correct amount of sales commission. The mobile operator initially contested the claim but ended up paying because its records were inaccurate."
Callidus pushes its Truecomp product into businesses selling on the third-party sales channel angle as much as on the internal management one. It's had great success and the company includes Nike, Sun Microsystems, Veritas and Credit Suisse on its list of clients.
This, says Blume, is indicative of the types of companies that are initially interested in incentive compensation management - typically large organisations in financial services, telecoms, retail and distribution, and IT.
For IT departments the impact is apparently minimal and removes much of the support burden for bespoke systems. Walker says all you need is a dedicated server, 40 deployment days and one person to administer the system. The software is based on an open architecture owing to the need to cross over with ERP, HR, payroll and potentially customer relationship management systems. This is key to avoiding the duplication of data within a company.
"Incentive compensation management is a business problem first but it does have a big impact on IT," adds Blume. "Many corporations do not have the IT resource to implement and maintain such a system but as EIM is a minimal support burden, IT managers need not worry about finding extra support staff or soaking up large chunks of IT budget. It is also based on recognised application technologies and can sit with Oracle, SAP, even a bespoke in-house billing system."
The bottom line on commission management systems is that it should not be ignored. Here is a software application that offers rapid return on investment, promises to cut out expensive over-payment errors and reduce administration overheads. It also provides business managers with the ability to plan ahead and align sales objectives with business goals. With sales the lifeblood of so many companies, surely selling should be a more accurately accountable process? And surely this process should form the basis of a company's overall objectives?
Calculating the return on investment of EIM systems
Commission management systems can save companies considerable amounts of money. When compared with home-grown spreadsheet or bespoke solutions, Inca from Practique Associates, according to the Hewson Group, shows a rapid return on investment (ROI), particularly given Practique's policy of rapid deployment.
If you take a 200-user system, involving an initial investment of about £150,000 in Inca, a first-year saving could be as much as £200,000 over a home-grown system. Subsequent year savings would be much higher, at up to £300,000.
"This implies a rapid ROI, well within the first year and with considerable project lifetime cost savings," says Hewson's report. "These figures are sustainable, in fact they are rather conservative."
Savings are made by reducing readily accessible cost items. These include software maintenance and enhancement, overheads in supporting complex home-grown or bespoke systems, and shadow accounting whereby employees spend time checking their entitlement, which according to Hewson can be as much as 5% of sales time.
- Enterprise incentive management will save money on over-payment of incentive compensation management software as it integrates seamlessly with existing enterprise resource planning, human resources and payroll systems
- It will reduce administration and IT support costs associated with bespoke systems
- It enables managers to report accurately on sales statistics either by department or individual and offers predictive analysis to help formulate sales strategies
- Accuracy of compensation payments breeds staff trust. According to Gartner this has helped in staff retention.