TEC’s I&CM Evaluation Center (Slowly but Surely) Gaining Traction - Part I

A number of earlier TEC articles and blog entries have analyzed the nascent sales performance management (SPM) or enterprise incentives management (EIM) software market, which has also been one of those areas with a significant uptake of on-demand deployments.

Indeed, companies of all size increasingly use software packages for sales compensation and other incentives management, to more accurately and strategically model and forecast commissions and other incentive-based costs and benefits, calculate commissions and bonus earnings, and gain more real-time visibility into employees' performance metrics.

Broadly speaking, SPM is an area of performance management focused on incentive compensation calculation and management, quota planning, territory management and performance analytics. As "pay for performance" programs continue to grow in importance, incentive pay remains one of the largest variable expenses for organizations. To that end, SPM spans across many groups of individuals receiving variable compensation such as sales force, management, employees, distribution channel, etc.

Yet today most SPM processes and technologies remain used in a standalone manner. Namely, corporate performance management (CPM)/business performance management (BPM) solutions that are focused on profitability are administered by the finance department, whereas the human resource management system (HRMS) that focuses on employee information is administered by the HR department. Also, the customer relationship management (CRM) system that focuses on contacts and leads is administered by the marketing staff, while sales reporting and analytics tools that focus on revenue (top line) are administered by the sales and support departments.

EIM/SPM represents the next generation of software category and best practices for filling the wide gap between all these departments. Its advent has prompted TEC to publish the pertinent Incentive and Compensation Management (I&CM) Evaluation Center. As discussed in my earlier series of articles entitled “Thou Shalt Motivate and Reward Workforce Better,” current incentive compensation issues are largely based on use of inadequate spreadsheets and in-house systems.

The idea of incentive compensation may seem very simple: pay "X" for achieving "Y." Yet in practice each company has its own specific approach to compensation plans, managing approvals, resolving disputes and paying out compensation earned. Spreadsheets, custom coding, and simple commission calculation engines automate these processes to some degree, but do not address the increasing sophistication and complexity of many of today's incentive plans and processes.

That inadequacy then translates into incorrect payments (many analysts estimate that four to six percent of incentive compensation doled out by businesses is wrong, according to CFO.com), delayed plan development and payments, and increased ongoing administration and maintenance burdens (whereby direct costs can exceed $1,500 per commissioned employee, according to Aberdeen Group).

Other unfortunate consequences are the failure to keep up with business strategies, the lack of adequate financial controls, and insufficient modeling, reporting and analysis capabilities. In fact, according to PricewaterhouseCoopers (PwC), 30 to 90 percent of all spreadsheets suffer from at least one major user error.

In a nutshell, today’s manual and spreadsheet-based incentive compensation calculation processes are slow, rigid, error prone and thus plagued by  overpayments and errors, whereby sales folks don't trust the system and create their own “shadow accounting.” These recurring payment disputes consume significant time and effort (besides costing internal trust and goodwill).

Furthermore, in addition to too much time and effort being wasted to administer and maintain SPM processes, there are limited ad-hoc reporting and analysis capabilities. This means that managers cannot analyze the impact of proposed plans, cannot accurately forecast incentive pay and revenues, and cannot keep “tight” links between incentive pay, sales territories and quotas/business metrics.

Enter Varicent Software

This “green field” market opportunity has created a number of relatively “young” vendors and solutions. The latest entry in TEC’s I&CM Evaluation Center is Toronto, Ontario, Canada-based Varicent Software. Since its founding in 2003, the company has been offering its flagship product, Varicent SPM [evaluate this product].

The privately-held company has been on an ascending path since its inception, with four consecutive years of triple-digit revenue growth. In 2004 the company developed the first release of Varicent SPM and signed its very first customer.

In 2005, Varicent SPM 2.0 was launched with a new quota planning module, and the vendor recorded triple digit revenue growth. While this might not be a big deal for a weakling company at the time, Varicent currently has approximately 100 direct employees and a growing partner network of global consulting firms and technology partners.

To that end, 2006 seemed to be a banner year, marked with a consulting partnership with Watson Wyatt and business performance management (BPM) technology partnership with Applix (now part of IBM Cognos). In the same year, Varicent launched Varicent SPM 3.0 as the first complete SPM suite (in terms of its current functional footprint) and introduced on-demand offering. Additionally, the company signed the first Fortune 500 customer, Starwood Hotels and Resorts (NYSE: HOT), and the first Fortune 200 customer, Waste Management (NYSE: WMI).

2007 was not a quiet year either, given the launch of Varicent SPM 4.0, the launch of the first mobility solution for the SPM market (in a partnership with Vaultus), and integration with Salesforce.com CRM. The company then also contracted its first overseas reseller, Tridant Pty in Australia, expanded its management team, and landed the first Fortune 100 customer.

Today, Varicent has approximately 100 customers ranging from mid-size to Fortune 500 customers. Varicent SPM is a horizontal application, sold and marketed primarily to organizations with about US$200 million in annual revenues and up.  Some smaller companies with complex incentive compensation programs, global needs and other unique business requirements might also be a good fit for Varicent.  Customers' payee numbers typically range from several hundred to tens of thousands.

While Varicent’s customers currently represent a variety of industries, there is a concentration of customers in high-tech, health care, insurance, financial services and a few other verticals. Some other high-profile customers that use Varicent SPM for managing their complex variable compensation programs across a variety of vertical industries would be: KLA-Tencor (NASDAQ: KLAC), Rogers (TSX: RCI), About.com (a New York Times company), AAA, Sonus Networks, Manpower, American Century Investments and Pacific Blue Cross.

Varicent SPM – Surprisingly (or not) a Comprehensive Solution

Due to the financial background and focus of its founders (and of many Varicent employees), the Varicent SPM suite aligns sales performance with strategic objectives through its pay-for-performance footprint that spans across sales, employees, managers and channels. The broad EIM solution natively encompasses the following modules:

  • Territory Management;

  • Quota Planning;

  • Incentive Compensation Management; and

  • Performance Analytics.

This footprint is rare in the EIM market. Namely, even the presumptive market leader (in terms of revenues and public trading visibility) Callidus Software had to recently partner for the territory management functionality.

In other words, Varicent SPM delivers technology that automates the assignment of territories, the collection and approval of quotas, the administration and calculation of incentive compensation plans, and then examines sales performance and evaluates the effectiveness of incentive programs.

From a strategic value aspect of revenue generation, integrating and optimizing territories, quotas and incentive plans leads to more effective market coverage and steady increases in sales. According to Gartner, companies currently lose nearly 10 percent of total sales through poor fiscal management of territories, quotas, incentive and compensation plans.

Part II of this blog post will continue with Varicent’s most recent developments, its product architecture and competitive positioning. Your views, comments, opinions, etc. about Varicent and abut the EIM/SPM category per se are welcome in the meantime.

We would also be interested in hearing about your experiences with this nascent software category (if you are an existing user) or your general interest in evaluating these solutions as prospective customers.
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