Abuse of Channel Incentive Programs Costs IT Companies Up to $1.4 Billion Annually

The Alliance for Gray Market and Counterfeit Abatement (AGMA), a non-profit organization attempting to bring gray market fraud to light whose members include Cisco Systems Inc., Hewlett-Packard Co. and Microsoft Corp., said that findings from its new study indicate that abuses associated with channel incentive programs can cost high tech companies up to $1.4 billion each year.

AGMA, which also addresses counterfeiting, software piracy and service abuse of technology products worldwide, with Deloitte & Touche LLP jointly produced the report, entitled "When Channel Incentives Backfire: Strategies to Help Reduce Gray Market Risks and Improve Profitability."

According to the authors of the study, channel incentive programs, which include initiatives such as SPIFFs, product promotions and channel partner discounts, have long been a way for vendors to motivate resellers to sell more products and boost loyalty.

But the report's findings indicated that such programs might open a door to lost profits and contribute to the gray market. Abuses such as payment of unearned incentives can erode profits, disrupt channels and, correspondingly, lower customer satisfaction.

While incentive program abuse may affect up to 25 percent of all channel sales and result in significant lost profits, the real danger is that such activities often go undetected owing to an absence of active program management and ineffective internal controls on the vendor's part. 

What can be done? According to the AGMA/Deloitte report, effective channel management programs, which help IT companies gain more visibility into how their incentive programs are used and establish uniform policies worldwide, can work to identify and arrest deceptive practices and gray marketing.

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