Putting on a front

A better front-end margin is what resellers really want

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By  Andrew Seymour Published  March 14, 2010

If I was to say that a common complaint I hear from resellers is that the front-end margins afforded to them by vendors are still woefully inadequate then your response would probably be, 'tell me something new.'

Fair enough. Resellers have been moaning about margins ever since the first CPU was traded, and that isn't going to change anytime soon.

But in these uncertain times it is clear that those who perceive the channel to be persistently under-compensated are finding it harder to put up with the situation than they have done before.

What constitutes an inadequate margin can vary quite dramatically from one organisation to the next, but when resellers are talking in terms of just 2% or 3% you can't help but feel there are some serious discussions that need to take place between vendors and their partners.

Although the delicate topic of front-end and back-end margins has always existed in the Middle East IT market, it has really come to the boil during the past six months because the channel is desperate for some stability to be restored to the business.

In times like these, when the growth isn't as forthcoming as it was, front-end margins take on far greater significance. The channel is at a stage where it wants to see more predictability and less risk-taking in all components of its business, including the margins that can be made.

I think most onlookers will agree that in the days when sales growth came easily, vendors were drawn to compensation models that put far too much emphasis on delivering back-end margins. Their channel partners subsequently grew up on a diet of rebates and kick-backs, even adjusting their business models to reflect the nature of this arrangement.

That's not to say this strategy didn't work. It did. In many cases it still does. But such a model is more suited to a rapidly expanding market because all stakeholders know there is sufficient capacity to meet the quotas or exceed the targets that invoke the back-end reward.

Sure, there are some quarters where a partner might need to take on more than it can comfortably manage, but in an expansive market that does not pose an insurmountable problem. There will always be some way of absorbing it.

However, the one flaw of over-relying on this sort of compensation structure is that the whole system becomes vulnerable as soon as market visibility deteriorates or partners consistently come up short of their targets.

And as has become evident, if both factors happen at the same time, it creates a scenario that vendors cannot wash their hands of easily. The longer it gets left unaddressed, the more painful it becomes. Resellers or distributors unable to make their numbers don't qualify for their rebate, which reduces their capacity to book more orders, which leads to them doing less business. Suddenly it is not only the reseller that gets punished.

Even the argument that resellers need to step up to the plate and develop their own-front margins by focusing less on transactional volumes and more on value-added solutions is still disputed as too simplistic. As one major reseller said this week: "No matter how profitable the overall solution is, you still have to squeeze as much margin from the product aspect of the sale as you can."

Developing a compensation model that keeps everybody happy is an arduous task for any vendor, but those who refuse to give it the attention it warrants only risk damaging their own prospects in the long run.

In an ideal world, the most effective compensation models will contain a healthy blend of back-end and front-end components; margin that provides stability and margin that rewards performance.

Given market conditions are far from 'ideal' at the moment, however, vendors' time would perhaps be better spent manipulating their existing margin structures to offer a more satisfactory front-end incentive. It won't stop the complaints completely, but it certainly won't do any harm.

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