It's no wonder that in mid-2006, the results of a enterprise incentive management (EIM) market sizing study conducted by Evalueserve showed that the overall worldwide market for EIM solutions was estimated at $3 billion (USD) in 2005, although one has to note that this market mainly consisted of homegrown solutions (91 percent). The global third party packaged software market for EIM solutions is expected to grow at a compound annual growth rate (CAGR) of 30 percent, from $275 million (USD) in 2005 to $1 billion (USD) by 2010. The research suggests that pure-play EIM vendors which have focused on providing the capability to manage highly complex compensation systems will be well positioned to take advantage of the major growth projected in the EIM market. Indeed, prospects for this market outstrip those of other enterprise applications markets, such as customer relationship management (CRM) and enterprise resource planning (ERP).
Part Five of the series Thou Shalt Motivate and Reward Workforce Better.
For background information on incentives and compensation, see Thou Shalt Motivate and Reward Workforce Better, Are Sales Incentives Even in tune with the Corporate Strategy?, What Makes Incentives and Compensation So Tricky?, and Enter Enterprise Incentive Management and Incentive Compensation Management.
Evalueserve has examined EIM market growth rates by geography and industry, as well as industry fit. Highlights from the research of industry-specific projections show impressive growth rates and opportunities for leading industries using EIM solutions, but also show the need for EIM providers to show industry savvy. The industries examined in this note are insurance, retail banking, retail, high tech, telecommunications, and life sciences.
EIM For Insurance, Retail Banking, and Retail
There is a 34 percent growth prediction in the insurance industry, where EIM solutions are primarily driven by bonus and commission payouts, but there is also a projected increase of insurance sales agents through 2014 that should boost EIM expenditures. Distribution channel management has become a key differentiator for insurance companies in the current difficult investment and claims environment.
Namely, the insurance industry has become increasingly focused on brokers and alternative distribution channels over the past twenty years, leading to complex and often convoluted distribution chain relationships. Insurers require channel flexibility and support for an ever-widening portfolio of products to meet broker and consumer expectations, while concurrently demanding process efficiency, data accuracy and transparency, and information technology (IT) cost savings. Recently, insurerbroker relationships have come under close regulatory scrutiny, requiring insurance companies to provide detailed information about broker behavior and compensation. Unfortunately, most insurance companies are unable to show a consistent and consolidated view of the insurerbroker relationship, due to the multiple roles brokers play in the insurance industry, and the legacy technology used to manage them.
As regulators continue to examine the insurerbroker relationship, consolidated distribution information transparency becomes critically important, while the nature of the insurerbroker relationship will likely evolve rapidly over the next several years. Insurance companies are thus expected to implement enterprise-level processes and technology to manage distribution information and incentives, thereby ensuring proper compliance with existing and new industry regulations. They seem to have several main business challenges:
- managing a shifting portfolio of traditional and alternative distribution channels covering a variety of markets;
- driving cross-selling initiatives within the existing customer base through both existing channels and multi-channel team structures;
- satisfying an increasingly stringent financial regulatory environment through accurate payments, transparent information, and clear, auditable processes; and
- reducing the operational and IT costs associated with distribution management, and reducing the risks associated with outdated, inaccurate and inflexible systems.
Consequently, an EIM package for insurance must be designed to meet the needs of today's insurance distribution management, supporting complex distribution channel hierarchies and the expansion of existing distribution channels, and more roles within in each channel (meaning brokers and consultants). Such a package must also support flexible, effective-dated compensation plans; detailed information about all incentive and fee-based payments; and multi-tiered compensation plans, including commission, incentives and management and wholesaler overrides. It must help distribution management respond to changing channel and market demands quickly and efficiently through user-configurable compensation plans and web-enabled, secure compensation reports, while remaining compatible with both current and legacy insurance architectures, and enabling easy integration with multiple policy administration systems, as well as downstream financial systems.
This combination of controlled processes (via auditable, accurate payment of incentives in compliance with established corporate guidelines); flexible modeling and implementation of plan changes (new incentive plans to meet the needs of a changing regulatory environment); and distribution information transparency, should help insurance companies meet the challenges of a rapidly changing insurance marketplace
Somewhat related to insurance (under the financial institutions segment), retail banking is widely regarded as the growth engine for the banking industry today, whereby branch offices are becoming more valuable as a prime face-to-face selling environment. In order to capitalize on this opportunity to maximize customer share of wallet (SOW), banks are paying incentive compensation to branch managers, tellers, and other customer-facing employees. In addition, mergers and acquisitions (M&As) offer their own challenges—as banks merge and offer a wider array of products and services to clients, the sales structure becomes more difficult to track, audit, and analyze. The pace of M&As within banking, and across all financial services businesses, demands a more focused view of sales strategies and their impact on corporate goals. Thus, a banking EIM package must help manage incentive compensation for branch and call center employees, successfully motivating them to raise the value of customer interactions. They must also integrate easily and quickly with other business process systems, smoothing the way for effective compensation plan management in a complex multi-product, multi-channel sales environment.
Evalueserve also reported a 26 percent expected growth in the retail industry for EIM solutions, owing to increasingly complex supply chains, a large number of transactions, and the growing number of retail salesperson jobs. Lately, big-box retailers such as Wal-Mart and Tesco have dramatically changed the business environment for all retail businesses. The ability of major chains to cut costs and improve distribution allows them to dominate multiple retail segments, making them a powerful competitive juggernaut that other retailers must contend with in the marketplace. In tandem with competitive pressures, retailers are also grappling with increasing rates of employee turnover—as high as 87 percent in some segments. At the same time, increased pressure to comply with labor regulations is complicating store operations for many retailers.
Retailers' common business challenges are to align store operations to achieve bottom-line results and improve store productivity, while concurrently focusing on customer experience and increasing transaction amounts. To that end, a retail-oriented EIM package has to help retail executives analyze real-time sales performance, and change compensation strategy in order to react quickly to changing market conditions. It should also automate many compensation management processes that drain away staff resources, allowing retail employees to focus more on selling, and less on administrative tasks. Forecasting tools also help sales executives perform what-if scenarios for labor dollars across the company.
EIM for High Tech, Telecommunications, and Life Sciences
The anticipated 25 percent growth in the high tech industry is supported by the implementation of EIM solutions in many companies, due to complex distribution structures and compensation plans, and growing sales forces. Thin profit margins, tough price competition, short product life cycles, and the need to optimize inventory require manufacturing companies to keep a close watch on ever-changing sales strategies and compensation expenses. In addition, frequent new-product deliveries and introductions create the need for fast-changing, short-term sales incentives, whereby the challenge is to carefully manage discount practices. The appropriate EIM solution has to take the guesswork out of launching compensation programs by allowing managers to model new plans before rollout, while sales and compensation staff should be able to see at a glance how well sales strategies are working via alerting and portal applications. The solution also has to be able to associate incentive pay to specific discount practices, product mix, or other profitability measures to help maximize sales performance.
A projection of 11 percent growth in the telecommunications industry is resulting from increased sales forces, retail outlets, and a variety of tariff plans complicating incentive payment management. As telecommunications companies have increased the number of products and services they offer to the market, competition has intensified, resulting in lower prices for the consumer. Given these declining prices for products and services, telecommunications companies must increase their total number of customers to drive revenue and profit growth. The value of each customer has risen, indicating that customer retention (reduced customer churn) is imperative. Sales teams and retail outlets are compensated not only for signing up new customers, but for signing customers who keep their services activated for at least six months or longer. In addition, sales representatives and distributors are rewarded for up-selling and cross-selling additional products and services to customers. Other notable business challenges include improving customer service capabilities to bolster customer satisfaction, developing new products and services and business models to protect against competitive threat from new technologies (such as voice over Internet protocol [VoIP]), and implementing strategic partnership models to expand distribution capabilities
An EIM solution for telecommunication should thus provide the flexibility such companies require to keep compensation plans in line with continually changing, competitive market conditions. Using the process model, telecommunications providers must be able to quickly and easily implement compensation plans with multiple performance measures to address business issues such as customer retention and product mix.
Stepping-stair matrices can be used to reward sales teams for selling product bundles, where each additional product included results in a higher commission rate. The alerting and reporting applications should enable providers to share performance and compensation payment data with sales teams and retailers, securely and frequently via the web, thereby motivating the sales force and distribution channels to reduce service deactivations, and to up-sell additional products and services.
Last but not least are the life sciences industries, with great EIM growth projections of about 30 percent. Life sciences sales representatives are offering more products to their sales targets, but are spending less time with each physician. Sales representatives must continually sharpen their go-to-market strategies and product pitches to stay ahead of the competition, whereas sales teams have to deepen their knowledge of each medication or medical device, while learning how to communicate the benefits more crisply.
In the future, life sciences companies may better use longitudinal data, such as patient demographics, in addition to traditional EIM data when devising sales and marketing plans. Incentive compensation programs are critical to the sales efforts in this industry, since rewards and contests are commonly used to supercharge a new product introduction and to drive competitive wins and market share gains. Territory management is vital to ensure the proper coverage models for categories of medications and groupings of physicians. Often, as many as seven different sales representatives from one company call on the same doctor, which makes managing territorial splits and account reassignments crucial. Another business challenge stems from the need to maintain an auditable record of drug sales to comply with government regulations.
With detailed visibility into business activities and sales performance, an EIM package should allow life sciences companies to create and implement compensation plans that meet their unique corporate goals. Sales and compensation staff should thereby also be able to drill down into performance for specific plans and sales sectors, customizing and refining strategies for precise target markets, while an automated rule-based system should allow compensation staff to easily manage programs for many product lines across complex territories, meeting the demands of fluid sales structures.
The full-blown EIM and incentive compensation management (ICM) systems discussed in this series are not without their challenges. There is a general realization that although the upper-range EIM solutions are designed to roll out new plans to the largest sales forces in a matter of weeks, the downside of a full-grown EIM solution is its hefty costs. However, designing a homegrown solution for sales teams of over a few hundred is irrational, whereas the chances are a tool offered by a customer relationship management (CRM) or enterprise resource planning (ERP) provider will not have the functionality to handle the complex sales plans and transaction volume. In general, full-blown EIM solutions can amount to a few hundred thousands of dollars in license fees, but one should also account for the supporting technology, since most large EIM deployments require the customer to purchase a scalable back-end database server and a reporting tool to support it. Then there is the customary software maintenance and support agreement, which typically adds an additional 15 to 25 percent of the software and hardware expenses, depending on the vendor.
Finally, companies must consider solution upgrades, and when one is upgrading a technology that involves an organization's payroll and direct deposits, there is a great deal of parallel testing that needs to be done. For more pertinent information, see Is There a Panacea for Enterprise Software Pricing Yet?. These complicated environments also lead to major implementation costs, since the rollout of a complex EIM solution can cost another few hundreds of thousands of dollars and take up to a year, having some pundits suggesting that companies should in principle consider upper-end EIM solutions only when they have the financial assets and requirements for a solution capable of handling the multitude of sales complexities needed to go to market.
Summary and User Recommendations
Human capital management (HCM) is a holistic business strategy that should make every employee a competitive asset to deliver better operating and financial results. In other words, the lessons learned from managing trading partners (suppliers and customers) should be likewise applied to better managing employees. The bottom line on EIM systems (being closely related to HCM) is that their potential should not be ignored, since this software category promises to generate a fairly rapid and tangible return on investment (ROI), outline expensive over- and under-payment errors, and reduce administration overheads. It also provides business managers with the ability to plan ahead and align sales objectives with business goals. With sales being indisputably the lifeblood of virtually any company, selling should without a doubt be a more accurately accountable process forming the basis of a company's overall strategic objectives.
For the sales and marketing, field service, accounting, information technology (IT), and human resources (HR) departments to become more strategic within any organization, companies should investigate deploying EIM tools in order to free all managers from time-consuming, yet tactical, record-keeping functions. They should ensure that all stakeholders are committed, since the realization of EIM benefits depends on IT departments implementing the appropriate infrastructure; HR, sales, and finances need to communicate the goals of their programs and reengineering the processes for improved output; and employees and managers must change their approach to the way they conduct administration.
To be successful, vendors must provide strategic HCM solutions that deliver integrated compensation and performance management with readily available knowledge and coaching for both employees and managers. In summary, strategic HCM solutions (including EIM) should allow organizations to cascade goals and objectives from the corporate level through to managers and individual employees. The ultimate winners will be the enterprises that understand the connection between people and corporate performance, that know how to manage changes within the organization, and that have applied processes and systems to connect their employees to corporate strategic initiatives.
Still, given that there are "different strokes for different folks," the question is how much EIM does any given enterprise truly need, and in what shape and form. Maybe some companies can get by with simpler payment methods, whereby merit bonus plans are preferable to commissions, because they are easier to administer, and because they keep cost-of-sales and cost-of-labor in check. Profit sharing ties payout to corporate results like growth in revenue or profit, whereby several percent of base salary can be allocated for additional payout purposes—but it might fail if participants view the program as an entitlement (which yields modest satisfaction for payouts in good years and significant dissatisfaction for no payouts in bad years). Conversely, sales compensation plans (commissions) tie performance measures to individual or sales teams' efforts, as these plans provide a base salary plus an at-risk component that is paid based on the person's ability to reach a predefined goal. Other similar add-on programs reward employees with a specified dollar amount or a percentage (often between 5 and 10 percent) of base salary for achieving pre-established goals. While effective, too many duplicate plans, excessive payments, inappropriate goals, and inconsistent eligibility criteria can weaken their value.
To help minimize compensation overhauls, managers should keep performance measures down to only a few key metrics, and they should be easy for employees to understand. To establish the most appropriate metrics, compensation experts should interview senior management to determine future sales objectives; they should talk to corporate-level staff to learn what is currently working and what areas need improvement; and they should consult with field sales management and sales personnel for their understanding of the existing program and their suggestions for improvement. After gaining input from the appropriate employees, the user enterprise has to create new sales metrics that are in line with both corporate goals and sales professionals' aspirations. The sales metrics should be challenging yet achievable goals (beyond merely standard) that at least half of the sales force should be able to achieve (although meeting mere standard should not be rewarded), and that an additional fraction (10 percent to 15 percent) of the sales force should exceed.
There should be no automatic selection decisions for add-on modules favoring incumbent ERP, CRM, sales force automation (SFA) or HCM providers; rather, a defendable list should be developed of EIM requirements that every contesting vendor has to demonstrate. Of course, learning about new features and attractive pricing is beneficial, at least for information and for leverage with other vendors. We suggest evaluating the fancy "bells and whistles," price, reference sites within the user's industry, and the corporate viability of other vendors as well, before making a selection. ERP providers are offering much deeper EIM functionality than ever before, and should be given a serious look by both current and prospective customers, bearing in mind that some best-of-breed EIM vendors may still excel with depth and experience in their horizontal and vertical niches. Companies need to determine how complex their territories are, how much overlay is involved, and so on, and choose a vendor based on that information. Companies with more than 500 employees on complex incentive compensation plans should certainly evaluate an EIM solution, especially if they are subject to regulatory compliance and scrutiny.
In addition to the traditional on-premise perpetual license model, a host of providers offer a per-module/per-employee/per-month fee that can minimize up-front costs (and deployment times), and scale as needed. Customers should explore how such services integrate with internal systems and with other outsourced services they may rely on. With sales incentive tools, there is always a high degree of integration required, with such systems as SFA, ERP, and HR and payroll. The advantage should be given to vendors and system integrators demonstrating flexibility to add data sources and targets, efficient use of system resources, automatic system deployment and maintenance, secure application and data access, and the ability to leverage in-house technologies and expertise. Shared services, increasingly in a hosted mode, might be an especially effective strategy for businesses that vigorously pursue M&A opportunities.
It goes without saying that prospective customers should vigorously demand contesting EIM vendor references of appropriate size and industry. Also, the selected vendors should have to demonstrate skills with staff at major system integration firms, and training and support for knowledge transfer to the user enterprise's staff. These EIM providers should be tested in handling the most complex compensation plans (for instance, in managing changes affecting closed [or future] periods, as well as changes effective mid-period; tricky credit calculations; custom territory definitions; non-standard management roll-ups; and business units on different calendars or pay periods, etc.), possibly by using mock-up data from a prospective user's systems (closely resembling reality).
The Final Recap
An effective EIM solution must be rich with features that help all business departments tap into the wealth of data inside compensation management systems. On the most basic level, EIM should save money on over-payment and errors, as it should integrate seamlessly with existing enterprise systems. It should reduce administration and IT support costs associated with customized legacy homegrown systems. Furthermore, improved auditing and tracking and user self-service for reports and disputes should allow for better accuracy of compensation payments that, in turn, should breed staff trust and goodwill, and help in staff retention. The ability to allow a sales or service employee to see a close date, enter a probability, and calculate what the commission is going to be, anytime during the sales cycle, is a great motivational tool.
These kinds of savings of typically between 3 to 5 percent of the compensation spend, while certainly not to be sneezed at, are not the most exciting. But on a higher (operational) level, EIM should enable managers to report more accurately on sales statistics, either by department or individual, and offer predictive analysis to help formulate sales strategies. They should thereby better understand linkage between plans and results, deliver new compensation plans more quickly, and handle complexity and change, which could all boost savings to over 10 percent of the total compensation spend. When the tool has strong modeling and reporting capabilities, management can see which territories, products, and representatives are selling the best, and make decisions accordingly.
However, the best value proposition might be on a strategic level, where the goal is revenue (the top line) growth on top of curbing costs (the bottom line), with key benefits being increased profitable sales, penetrated new markets, increased market share, and competitive advantage. To that end, companies should make sure to adopt a tool that allows managers to model plans quickly and efficiently for strategic analysis. This lets executives create a new compensation plan, run mock transactions against it, see the results, and compare it against a company's financial plans to calculate costs and commissions. This ability to track, report, and analyze metrics for the sake of early indications of misalignment, trend identification and investigation, impact analysis prior to changing plans, and so forth, enables products and their corresponding incentive plan to hit the market soon instead of much later. With this ability for long-term planning based on current information and past trends, new strategies can be implemented much more quickly and easily.
This concludes the series Thou Shalt Motivate and Reward Workforce Better.