If you could hire only one more person for your organization this year, where would you make that hire? Sales? Marketing? Finance? Somewhere else?
For many executives battling through economic headwinds in emerging markets, the answer tends to be wherever they think someone will provide the strongest boost to top-line growth, which usually means hiring an additional sales or marketing manager to support the commercial front lines.
But according to research conducted by my company, Frontier Strategy Group (FSG), the best additional hire for most multinational corporations (MNCs) looking to grow in emerging markets is not in sales or marketing but in channel management, which is the function responsible for overseeing all sales made through distributors and other third-party channel partners. When we surveyed over 160 global executives, we found that companies who hired a dedicated channel manager to manage their third-party distribution relationships within the last five years reported a 11.1% average increase in top-line revenue growth as a result of that hire.
The commercial impact of hiring a dedicated channel manager is not surprising, given that, based on our analysis, indirect sales through distributors tend to represent 41%–72% of emerging market revenues for most MNCs, depending on the region. However, despite the relative importance of indirect sales, many MNCs continue to rely on sales managers with responsibility for overseeing both direct sales teams and indirect channel partners to do the bulk of the heavy lifting when it comes to managing relationships with distributors. This is a problem for several reasons.
First, managing distributors is an inherently tricky business, with much of a distributor’s behavior often outside the control of the manager responsible for that relationship. Given that most sales managers are incentivized on overall commercial performance, they are more likely to invest their time in the commercial outcomes that they are better able to control, such as the efforts of their direct sales force. This means that distributors are nearly always undermanaged vis-à-vis direct sales when the manager has a dual mandate.
Asking a sales manager to do the job of a channel manager alongside her other duties is likely to yield a poor outcome. The capabilities and qualities that make someone a great sales manager are not the same as those that make an effective channel manager. Understanding where those skills overlap and diverge is essential for executives looking to cultivate the next generation of channel management talent within their organizations.
Based on our research, the best channel managers tend to have more in common with great general managers than with great sales managers, especially when it comes to three areas:
Strategy. Thinking strategically about competitive positioning in a defined territory is table stakes for any good sales manager. But channel managers must take this capability one step further, coaching and collaborating with distribution partners to build their own competitive strategies. This requires a degree of knowledge of strategic planning processes that even the most experienced sales managers may not have.
Finance. The level of financial acumen required of an effective channel manager is substantially higher than that of a sales manager. Sales managers must of course be concerned with revenue targets, contract profitability, currency fluctuations, and customer payment terms. However, a channel manager needs to be able to keep track of all of the above in addition to tracking demand forecasts, cash and inventory management, partner payment terms, and the overall financial health of distribution partners.
Coaching. At the end of the day, the job of a channel manager is all about developing the capabilities of distribution partners so that they can more effectively sell and service your offering. These capabilities transcend a simple mastery of sales fundamentals and require proficiency in things like logistics efficiency, value-added services, and regulatory compliance. In order to add value to a distribution partner in these areas, channel managers must possess a holistic understanding of how their distributors run their businesses and what “good” looks like in a variety of management disciplines.
These differences imply that the most-successful MNCs will be the ones who not only carve out dedicated roles for their channel managers but also take the time to think carefully about the necessary skills and experience of those individuals.
That said, the opportunity to leverage a dedicated channel manager to drive outsized commercial performance doesn’t stop at finding hires with the proper capabilities and giving them a focused goal. How channel managers approach their roles can make a big difference as well; FSG’s research has identified two channel manager behaviors that drive substantial improvement in commercial outcomes for MNCs but that remain relatively uncommon.
The first is the consistent use of focused, capability-based distributor management scorecards to measure the performance of distribution partners, as opposed to relying solely on commercial KPIs. These types of scorecards enable channel managers to measure the forward-looking inputs to commercial results (i.e., the behaviors of your distributors), rather than simply backward-looking commercial results (i.e., sales). This practice is still relatively rare, with only 20% of the MNCs surveyed by FSG regularly using capability-based distributor management scorecards, but companies that do it report operating margins that are eight percentage points higher than those who do not.
The second is the use of a status-based incentive program for distributors, with different tiers of benefits and consequences based on clearly published criteria. The closest analogy for this is an airline status program where you earn status based on whether you engage in a defined set of behaviors or achieve certain goals (e.g., flying over 100,000 miles per year). MNCs whose channel managers use this type of incentive program are 36% more likely to be in the top quartile when it comes to top-line growth and tend to have operating margins that are 11 percentage points higher on average than those that do not.
Interestingly, as with the use of capability-based scorecards, the use of status-based incentive programs is also fairly uncommon, with only 13% of surveyed companies deploying the practice. This likely relates to the reliance on sales managers to manage indirect distributor relationships, as the rebate programs typically employed to incentivize distributors are close cousins of the standard sales compensation plans that most companies use. The challenge is that complex organizations like distributors are motivated by different factors than individuals, and so distributor incentive programs must reflect that difference.
Given the pressure executives are facing to find new ways of generating sustainable gains in top- and bottom-line growth in emerging markets and the clear commercial benefit associated with hiring a well-qualified channel manager, it is likely that the conventional wisdom around where companies should add more staff will shift. In the meantime, executives should get ahead of the trend and seize this critical lever for boosting their commercial performance.
By Ryan Brier