Dovetail 8

Dovetail 8
Suppliers of Products and Services Discover Rep Firms via Mutual Interest and Relationships with Target Customers and Key Accounts

Saturday, May 5, 2012

Technology SalesReps are Breaking the Law

I am perplexed by the financial relationship of Technology Suppliers and their SalesReps.
The backbone of a market economy is the Law of Supply and Demand. It is the most fundamental economic principle. What is the next economic principle? I have no idea. When I encounter a puzzling financial situation, I apply the only economic law that I know. It's Supply and Demand

For more than a decade there has been an increase in the number of Technology Suppliers, while the sales resources to sell their products and services has declined. Many suppliers are fabless chip companies, while others develop products using new technologies.  Did the number and size of the electronics/technology rep firms increase to meet this demand? Apparently not. I continue to see an endless stream of postings that read, "Company looking for sales reps in (name of territory)."

Suppliers know full well that Manufacturer's Representatives provide immediate and effective sales representation. Additionally, a supplier can go to market at no-cost or low-cost. In the Linkedin Group, Technology Sales & Service Reps, a popular discussion is "Reps are free," which is a quote from the CEO of a young technology company. Utilizing manufacturer's rep firms preserves precious cash and the variable-cost rep model enables the supplier to survive the valleys of our cyclical technology industry. 

In the last economic downturn, rep firms got leaner - and they remain lean. The reason, I am told, is that rep compensation is still lean, i.e. lowered commissions, sliding commissions, split commissions and delayed commissions. 

Here is my quandary. If the number of Suppliers went up and the number of SalesReps went down, why didn't rep compensation go up due to the imbalance? Note: If anyone believes that distributors picked up the slack, I would like to hear from you. We all would. 
Is there another economic principle that I don't know about?  Keep in mind that I only know one economic principle - the Law of Supply and Demand.

Two years ago, I attended a forum held exclusively for Electronics/Technology Rep Owners. The purpose was to share ideas to improve rep businesses. I was surprised that reducing expenses dominated the discussion. Increasing compensation was not discussed. I concluded that Rep Owners have been squeezed so hard,  for so long, that they view the supplier compensation models as de rigueur. As they say, "You can't fight City Hall."  If a rep owner did, a supplier may choose another rep firm.

Collectively, Manufacturer's Representatives have the Supply (SalesReps) that Suppliers (Principals) are Demanding. Why then, is compensation defying the Law of Supply and Demand? How did this happen? What will it take to re-balance Supply - Demand - Compensation in the Electronics/Technology industry? 
Please share your insights and expertise. It upsets me when laws are broken.

2 comments:

  1. Corbitts Corollary, "Compensation in the supply chain is inversely proportional to the amount of people and the length of the supply chain."

    1. In the earliest days suppliers primarily had their own direct sales teams, and much of the manufacturing (fab's) were located in the United States. The suppliers primarily sold to, shipped to, and billed to end customers in the United States. "The supply chain was narrow, and short."

    2. As electronics distributors grew in size with national footprints they frequently participated in supporting franchised suppliers at major accounts.

    3. The introduction of the IBM PC ushered in the first large-scale, successful Contract Manufacturing (CM) with SCI in Huntsville, AL. Many more were to follow...

    4. A hybrid model developed with small direct sales teams, managing rep's in North America.

    5. As fabless suppliers emerged and grew, they frequently adopted the hybrid model.

    6. As suppliers looked to reduce manufacturing cost they began 'offshoring' more of the manufacturing and back-end operations.

    7. Many suppliers had their sales territories compartmentalized into North America, Europe and Asia Pacific. Frequently these sales teams were stand-alone, and US sales teams were not compensated for sales out of their territory. Those that could did compensate their US sales teams saw the time to pay commissions jump from 30-90 days to 90-180, or more. And, commissions were split.

    8. The customer design activity continued to be driven in the US, but with manufacturing occuring offshore by large CM's. The customer no longer placed PO's, took delivery of product, or paid invoices. "The supply chain had become very broad, and long."

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  2. I see several factors driving the [apparently] illogical econonomic equation you desribe.

    Right off, you make some assumptions about reps that are just plain unrealistic.

    Many reps, like many realtors, will just as soon cut each other off at the knees as they would buy each other drinks. If every rep demanded a 10% commission rate, then every manufacture would lead with a 10% commission rate. Period. But we know the reality of that situation.

    I've been privvy to hundreds (no exaggeration) of conversations where reps have derided colleagues, coveted lines, and strategized ways to poach lines without being completely obvious. I've even seen reps glibly speculate on the retirement or death of "brother rep" colleagues in their territories.

    In the first week of my first job in the rep business in 1984, I was taught the "brother-in-law" phenomenon of the rep game, that is, if the new sales manager at your principal has a rep brother-in-law in your territory, it's time to look for another line.

    This goes along with the tried and true rep precept that "we're all 30 days from being out of a job".

    Not very positive sentiments on which to build a business, yet widely agreed upon and accepted in the industry.

    Add to this long-time mentality, a propensity of manufacturer-rep relationships passing through the twilight of their mutually beneficial partnerships, and you have a recipe for systemic dissatisfaction on both sides of the relationship, as well as an ingrained assumption that these relationships are all temporary.

    How many times have we heard about long standing manufacturer-rep relationships that defy this logic? Plenty, I know. Like marriage in America, which fails half the time, we enter into these relatonships thinking "ours will be different". And then it's [usually] not. No surprise that the younger you are, the less likely your marriage is to survive, and that this age factors correlates to business relationships.

    Better, perhaps, to go in with eyes wide open, and a strategy for sustainability that a. doesn't depend on long term loyalty and b. assumes the principal will not value the relationship to the degree they should.

    Build your business around the reality of the situation, not the dream of what could or should be, and bitter disappointment will be replaced by peaceful prosperity.

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