Having grown from a sales-department ‘slush-fund’ of 5% of turnover to over 20% of a typical supplier’s sales, trade-spend is now greater than cost-of-goods in many cases.
The global financial crisis having caused consumers and businesses to ‘deleverage’ by paying down debt, means there is less money available to spend, resulting in flat-line demand for the next five years, in most markets… As a result, companies have had to become increasingly focused on money management, especially in their dealings with customers.
In contrast with a £500k capital investment in the factory requiring a forty-page requisition, with regular updates on actual performance vs. promised efficiencies, trade-spend budgets of a similar scale are often waived through with barely two pages of rationale, minimal – if any – compliance-KPIs, and with NAMs too busy on the next promotion to submit any reviews after the event.
This situation was becoming unsustainable leading up to 2007, but the global financial crisis has changed the game fundamentally… The sums and the stakes are now so high that companies have to consider applying all of the disciplines of capital investment and the law of contract to the allocation of trade funds, or risk devaluation of the share price by investors, or worse…
In other words, trade-spend, this key selling tool, has become too important to be left to the sales department…
As a consequence, in order to prevent ownership of trade-spend moving over to the finance department, with NAMs in future having to go ‘cap-in-hand’ to the accountant for approval of any customer expenditure, it is vital that the sales department develop procedures that are sufficiently robust that they will comply with corporate financial disciplines and be compatible with other ways of allocating funds in the business…
This means that NAMs have to become more financially articulate. They do not have to be financial experts; they were never intended to be replacements for the finance department. A NAM needs to understand the fundamentals of how money works in business, what it costs to invest in a customer, and how to evaluate the impact on a customer’s P&L, minimum…
In practice this means adapting basic key elements of the capital investment model to trade-spend management. It also means being able to live with inadequacies in information-support in terms of inaccuracy and timeliness, with multiple sources and differing departmental agendas adding to the difficulties of making robust and defensible trade-spend and investment decisions. Essentially, the NAM’s basic task in developing customer potential is to clearly establish:
- Where are we now?
- Where do we want to be?
- How to get here?
Given the unprecedented nature of the current market environment, the use of historical data has become less relevant, making it necessary for NAMs to use personal judgment in making what have to be pragmatic decisions. Moreover, in unprecedented times, forecasting the future is now doubly difficult, but it can be made simpler by remembering that any promotional gain is now generally at someone else’s expense and is usually a reflection of relative competitive appeal.
However, it should be kept in mind that NAMs are closer to the customer and as a result are better placed than most to take a commercial view of the ‘cause and effect’ of promotional expenditure. Above all, the NAM should by definition be a good integrator of company and customer interests in ensuring that trade promotions meet joint objectives. This means working towards standardised metrics, effective information sharing, cross-functional and multi-level department collaboration, and collaborative processes, combining company functions with their mirror-departments within the retail customer.
Again all of this fails unless relevant KPIs are set as a basis for planning, compliance and assessment of the results of trade-spend investment in terms of adequate Returns on Investment for each party. The NAM then has to complete a Risk Analysis to assess the possibility of things going wrong, factoring in their likelihood and impact, with contingency plans worked through to minimise the downside.
The trade-spend approach thus defined will make the process more compatible with finance department needs, allowing for the fact that, deep down, finance do not necessarily want to take over the management of trade-spend, but unless ‘normal’ investment routines are followed, they may have to incorporate all trade investment into the capital expenditure process.
Finally, conducting an opportunity analysis, to assess the possibility of the trade-spend initiative going right, complete with financial impact on both parties’ P&L, will restore a positive element to the process, thus making trade-spend feel more comfortable in Sales’ hands.…
