Global Channel Finance: Exchange Rate Management
There are several challenges associated with the design and management of a global channel program; among them is assigning the burden of exchange rate fluctuation. For financial managers in companies conducting international business, exchange rate management is a key component of accurate financial reporting. These companies typically roll all financial and transactional data up to a common currency for reporting purposes. Consolidating global revenue and expenses to a common currency applies to channel marketing transactions as well; MDF and incentive programs among them.
As stated in an earlier post, all channel marketing is local. For channel managers, the point here is that the partner typically conducts his or her business and promotional efforts in local currency, and that partner is often challenged when dealing with vendors who require that certain transactions be conducted in the vendor’s own base currency. You see, when a business entity is forced to deal in multiple currencies, the eventual fluctuation in exchange rates will rear its ugly head and there will be a winner and loser when the actual payment has to be made. The last few years have been witness to broad fluctuations in exchange rates, and the impact of those fluctuations can be dramatic for channel marketers and their partners.
Here is an example of the impact of exchange rates for vendors and partners:
MDF is a common channel program that channel marketers offer their partners around the globe, yet MDF is probably the most impacted by exchange rate fluctuations in that time between when a request is approved and the claim is made. In general, MDF is designed to reimburse the partners for the actual expense of an activity—and that expense has often been pre-approved. In a typical MDF program, weeks or months may lapse between funding approval for an activity, and the eventual reimbursement for that activity through the claiming process. Over the last couple of years, the USD/EURO exchange rate has varied as much as 12% over a six-month period. We’ll apply this variance to a practical application: Let’s say a given marketing request of €6,800 was made by a channel partner located in Italy for a US-based vendor who requires all MDF processes be managed in USD. At the time of the request, the value of the desired activity in Euros equated to $10,000 USD. So, whether the Euro amount or USD amount was entered on the approval form, the vendor accepted the request and locked the approved value of that request at $10,000 accordingly. And, as usual, the partner conducted the activity and submitted a claim for reimbursement several months later. However, at the time the claim was made, the partner’s request for reimbursement remained at €6,800, but the value in USD was now $11,200, due to exchange rate fluctuation beyond the control of either the partner or the vendor—a difference of $1,200. This is a real-world example. In this example, who is going to be liable for this $1,200 difference? The channel partner who was consistent in his request for €6,800, or the vendor who only approved $10,000 for reimbursement?
In a partner-centric financial model, the partner would be reimbursed the full €6,800 originally approved and the US-based vendor would have to expense the extra $1200 it costs to fund that reimbursement in USD. Conversely, in a program-centric model, the $10,000 as originally approved would be the constant, and the partner would actually receive 12% less, or about €6,000.
As most of you reading this blog are channel managers by profession, it would be easy for me to predict that your emotion would be in favor of the partner-centric model to ensure the partner gets what he is owed. However, in practice, most channel programs offered by global channel marketers are in fact program-centric. This model is not always bad, because what goes up must come down. As a result, there are times when the partner actually benefits when the exchange rate shift is in the other direction (when the USD is devalued). But, as channel managers you never hear about that, do you? And in general, the US dollar is gaining strength as the US economy is growing faster than most of the world. So this may be a source of partner backlash for vendors practicing a program-centric policy for exchange rates.
Ease of doing business is of growing importance to progressive channel marketers. Exchange rate management, particularly as it applies to MDF and other incentive programs, is often overlooked when trying to streamline business processes and improve partner relationships. As a channel manager, perhaps this is something you may want to look into more closely. To learn more about your options, see the CCI white paper entitled, “Financial Considerations for Global Channel Programs,” found at http://www.channelmanagement.com/thought-leadership-access/white-papers-ebooks/).