Follow The Money – Part 2 : Assurance for Commissions and Sales Compensation Plans

datePosted on 01:27, April 1st, 2010 by admin

In a previous article, I discussed the issue of revenue assurance and our involvement in the assurance of sales channels. As we considered in that article, it was clear that even though sales channels might be considered off the beaten path for the typical revenue assurance team, more and more telcos are realizing that:

a)     Breakdowns in sales channels can have an enormous negative effect on revenues.

b)    Revenue assurance teams are exceptionally good at addressing those risks.

As we said in that article, the decision to include Sales Channels within the charter of a revenue assurance group is not a spurious one, but when it is made, it is critical the revenue assurance team be prepared to do a good job.

The Role of Sales Commissions in Revenue Recognition

A naïve observer might propose that sales commissions and the payment of sales reps and channels for their activities are far removed from what we know as revenue assurance. Indeed, in the classical sense, the payment of commissions is simply a “cost of doing business” with no direct correlation with the delivery of the service.

That may have been true in the “old days”, but in today’s tight margin, highly competitive environment, sales commissions and channel incentives have become a major component in the overall strategy of how telecoms are run. If paying a channel an additional 5% for their efforts will yield an additional 30% in sales it makes good sense to do it. Unfortunately, as seductive as that simplistic logic is, it does not take into account the many perversions of logic that can creep into the organization.

As organizations get more creative in their compensations schemes, and as sales channels learn how to best “manipulate” the system, major revenue leakages can be generated. For example: assume we decide to offer a program that allows for sales channels to be paid $10 for every new sim card they sell. The marketing people do some quick math and say that since an average customer generates $100 (at $.10 per minute) in a year, then paying $10 bonus will be a good business activity. (We simply lower our margin by 10%).

  • 1 customer = 1,000 minutes in a year. At $0.10 per minute that should result in a revenue of $100
  • I give a commission of $10 for the sale.
  • I now get 1,000 minutes in a year, but receive only $90 – meaning that I have reduced my revenue by $0.01 per minute.

Revenue went down a bit, but it is still good business and not a revenue assurance issue. What happens when I make this deal, but the customers that are attracted do not generate 1000 minutes? What happens when I offer this deal and the sales reps bring in customers who end up using only 100 minutes? (How can this happen? Easily–customers churn all the time based on aggressive sales promotions). I now have a customer who generates 100 minutes of traffic – which brings $10 of revenue. But, I paid the sales rep $10 for the commission. So now, is there even any revenue? No.

And taken to the extreme, you have cases where sales reps learn how to “fake” the activations to get the commissions resulting in a negative margin. In other words, you lose money on every sale. In this situation, the solution is a correction. Change the policy so that reps are not paid for the sale of a Sim, but for actual minutes delivered and paid for. While perhaps a bit extreme, our example demonstrates the problem a revenue assurance manager must face when asked to assure the sales commission area.

There are actually two things that revenue assurance needs to be concerned about:

  1. The commission programs themselves.
  2. The commission program accounting and crediting procedures.

Commission Program Assurance

Accounting for and assuring the composition of commission programs fits squarely under the domain of Marketing and Margin Assurance. (Readers are referred to the GRAPA standards, body of knowledge and certification training modules for details about these domains.) The foundational groundwork in the performance of market and margin assurance is for the revenue assurance professional to perform a complete “risk assessment” of every single program based upon the 6 major risk dimensions. These include:

  • Subsidy Risk
  • Network Risk
  • Market Risk
  • Sales Risk
  • Billing and Assurance Risk
  • Partner Risks

Once each of these risks is considered, a Revenue Model for the marketing initiative is prepared. This Revenue Model explains each of the assumptions that make up the marketing proposal, requires the marketer to provide forecasts along each of these dimensions, and defines the “controls” that need to be in place so the marketing manager can be warned when their forecasted levels are not being met.

It is the development of these models, and the initiation of these controls that define the revenue assurance professional’s job. Tracking the programs and responding to errors is the job of the marketing manager responsible for the program.

So how does this relate to Sales Commissions?

Simply stated, one of the principle “sales risks” to be considered is, “What happens if the sales that occur do not meet the conditions specified by the model”. In other words, if my marketing plan expects that each sale is going to be worth $100 in revenue, and that is how I justify the commission, then I need to be sure that I create some controls that make sure that this assumption ($100 in revenue) is the result.

The definition of the control involves:

a)      Measuring and tracking to make sure the assumption is actually happening.

b)      The definition of an alarm and thresholds that will notify the program manager when the assumptions have gone seriously wrong (when the failure of the assumption threatens the revenue in a significant way).

c)      Defining “remedies” and “adjustments” to be made when an alarm is triggered.

Sales Commission Plan Assurance: Summary

The first sub-domain under Sales and Commission Assurance is the Assurance of the Plan itself.
The purpose of the assurance activity is to provide management with clear information about:

  1. The risk to revenue that the commission plan represents.
  2. The establishment of objective measures that track the assumptions.
  3. The creation of alarms and triggers to make everyone is aware when revenues are seriously jeopardized.

Commission Accounting Assurance

The other major area of assurance for commissions is concerned with the accuracy of the commission (and sales tracking) and the accounting process itself. The best sales and commission program will be worthless if it does not accurately track the sales and services delivered, and provide for the accurate and timely assignment of compensation.

While the vast majority of issues concerning Sales and Commission accounting are a straightforward accounting function, revenue assurance will become involved when management has decided to use the sales and accounting system as the method for managing the sales and commission tracking controls. If sales and commissions accounting is not going to house and manage revenue assurance market and margin controls and alarms, then there is no reason for revenue assurance to be involved.

If, however, this system is going to be the way management automates these controls, then revenue assurance participation becomes critical. The ability of the sales and commission system or process to track the items and variables defined in the commission plan (the things being tracked in the forecast, triggers and alarms) is clearly going to define how well the revenue assurance controls will work in this environment. It will therefore, be up to the revenue assurance professional to get involved to the point where he is sure that they are in place.

Providing this assurance will be completely dependent on how the overall market/margin assurance process is managed. What the revenue assurance professional will need to do is:

  1. Assure that those things identified within the Sales Risk component of the marketing model are being accurately fed into the commission/compensation system.
  2. Assure that the method of computation for the compensation defined in the model is the method being utilized within the compensation / commission system.

If the revenue assurance practitioner has done these things, they will have met their responsibilities.

Summary:

Sales commissions are becoming a critical ingredient in the diverse “innovative new marketing schemes” being created by marketers and product developers. Assuring that these “crazy schemes” are viable, that they contribute positively to revenues, and that they are being accurately executed can make the difference between success and failure, profit and loss and negative vs. positive revenue margins.

As the industry increasingly puts its faith in these innovative strategic approaches, the ability of the revenue assurance team to get involved, and apply a strenuous revenue focus on these programs will be key.

That’s about enough for this installment, so until next time; this is Rob Mattison saying take it easy and…. Be SAFE.

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