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IBM partners to gain 23% profit with new reward plan

By Wendy Lee, ACC on July 10, 2000

Summary

IBM Malaysia Sdn Bhd's compensation strategy for its channel partners has been significantly changed to enable them to obtain higher margins in recognition of the value they contribute when closing deals.

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KUALA LUMPUR--IBM Malaysia Sdn Bhd's compensation strategy for its channel partners has been significantly changed to enable them to obtain higher margins in recognition of the value they contribute when closing deals.

The company said partners stand to gain at least 23 percent in profitability compared to the eight percent they used to earn under the previous compensation strategy, said IBM Asia Pacific software channels (SMB/ISV) executive Richard J Smith.

"Previously margins and rebates were focused on fulfillment transactions alone but now, it's based on the incremental value during each phase of the sales cycle and market focus. We're going after the high growth opportunities in the mid-market segment by leveraging partners as our primary channel," he said.

Smith said the small to mid-market segment has the highest growth opportunity amongst all of IBM software business sectors.

"Based on International Data Corporation figures, the estimated compounded annual growth rate of this segment in Asia Pacific, is 37 percent for the period 1999 to 2003. Worldwide, it is about 32 percent," he said.

IBM defines the mid-market segment as companies with 1,000 employees or less while business partners consist of distributors and resellers.

Based on Smith's elaboration and an IDC bulletin, the new plan consists of the following areas:

• Market Growth Rebate program--this is a new program that provides additional compensation to IBM business partners--both distributors and resellers--who sell and fulfill software to small and medium-sized enterprises (SMEs).

• Changes to the existing Performance and Value Rebate programs--IBM will continue to offer a performance rebate which rewards partners for reaching revenue growth targets, and a Value Rebate which rewards only distributors that make investments in staffing and infrastructure that support resellers. IBM will start to reward partners on value-based activities (such as pre-sales assistance, training and technical support to resellers) and reduce emphasis on fulfillment transactions.

• Increased focus on the Sales Assistance program--this program rewards IBM and Lotus partners that influence software sales to end user customers. These partners--who do not maintain IBM product inventory--would need to register with IBM a sale opportunity that arises and provide proof of the sale once it takes place.

• Reduce available discount for fulfillment--this is in line with IBM's strategy to shift business partner compensation to a value-based model. It could have the effect of reducing the margins of partners that focus on only fulfillment transactions.

Smith said the company expects to spend an incremental US$500 million to US$600 million worldwide to compensate partners under the new scheme over the next 12 months.

In Malaysia, IBM has five distributors--Pericomp-Sistech, AIT, Autocomp, First Tech Pacific and Computer 2020. Its resellers (for IBM and Lotus products) number is more than 100.

IBM claimed to be the first vendor in the industry to introduce such a value-based compensation plan.

IDC, in the bulletin, said IBM's initiative is undoubtedly an important step but believes this is only the beginning. The research firm believes more vendors will inevitably launch value-based partner incentives after waiting a brief period to learn form the IBM experience.

"As software product margins continue to shrink, software vendors make the transformation to e-businesses, and customers turn to various forms of service providers to help provide a "broader" solution, it becomes increasingly important for vendors to develop value-based partnering models that accommodate the needs of influence partners," IDC said.

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