Trends in Proposed Contracts: Representative Viewpoint

Chuck Tanzola, CPMR
The Fusion Sourcing Group Inc.
ERA Chairman of the Board
ctanzola@fusionsourcing.com

by Chuck Tanzola, CPMR

(Foreword note: One of the observations I wrote about in my last article (“I Think, I Think”) was pandemic fatigue. Sadly, I could write about that again, but I’m not going to because it’s a different feeling of sadness that guides my writing today.

For me personally, it starts with the realization that I have recently lost three friends, some to COVID-19, some not — but all way too early. One of those friends was a fellow representative, Steve Alford. As I begin this article, I want to pay a special tribute to Steve and his contributions to the industry and the ERA, both in metro New York and nationally; and to me as a friend. Time and space limit the ability to detail my thoughts but suffice it to say that sometimes we worked together, and sometimes we competed; but at all times, I considered Steve a friend — a man of keen insight and the highest integrity — and I will miss him.)

On a professional level, I have had the opportunity to review multiple representative contracts over the years. Recently, I’ve noticed some alarming trends in proposed contracts that have frankly added to the melancholy, because no matter how good the manufacturer’s people, product or position are, signing a bad contract is not sustainable in the long term for anyone — and that’s sad. So, today, I thought I would address a couple of contractual topics in composite along with some observations.

As I bring these forth, I recognize they are probably not new, but I believe the trends I’ve seen warrant comment. I also fully understand that for every guideline there is an exception, and nothing I write changes that; but they are called exceptions for a reason.

Point 1. If the contract structures commission payments to control costs on some accounts, the contract should structure commission payments to provide ROI on all accounts. I’ve seen an increasing attempt to limit/regulate/control commissions paid as a regular component of the contract on accounts where success occurs. Whether it is adjusting commission rates, shortening terms of paying commissions or some other methodology, the premise that you can only be paid a limited amount by account is justified with the philosophy that “it doesn’t cost as much” to service that account as the commissions paid. So, what about all the efforts that don’t lead to commissions that exceed the perceived costs of servicing an account? How are those paid for? No manufacturer (or rep) can guarantee a 100% success rate at all accounts; but both are looking for overall ROI. The net result of the approach described above is to limit the rep’s ability to generate ROI; and will likely result in activity change — an unintended consequence. (By the way, if you can guarantee 100% close rate, please send your contract. We probably wouldn’t be too sad to sign it!)

Point 2. You cannot contractually manage an indirect sales force (i.e., independent, commission-based representative companies) the same way you manage direct salespeople, who usually have some component of salary in their compensation; and as a corollary, not every territory should be managed the same way. I see an increasing number of unrealistic “mandated activities and expectations” being added to contracts to try to guarantee activity, whether it is a productive and mutually profitable activity or not. My unscientific research suggests these are often included to try to prevent the reoccurrence of prior bad experiences. (For every action there is an equal and opposite overreaction.) These are typically applied in a “one-size fits all” approach for all representative companies, or all rep salespeople within a company, regardless of the contracted territory, or the salesperson’s account base. My experience also tells me that this approach invariably leads to unmet expectations, potentially with contractual financial penalties.

Point 3. Contractual one-sided cherry picking to compensate for unmet expectations is unfair, unwise and does not guarantee results. The argument is made that not every salesperson within a rep company performs the same (that’s true), so the manufacturer should be able to pick and choose whether to add additional reps for specific areas or accounts, or handle them directly. Does every one of a manufacturer’s products perform the same in the marketplace? (Not likely.) Would it not be fair then, for the rep to be able to cherry pick from a manufacturer’s products and find alternatives at specific accounts for those that don’t perform as well? The rep and the manufacturer are interdependent – growth and performance are the mutual responsibility of both; but cherry picking diminishes the team.

My father taught me to ask, “If I were on the other side of the deal being proposed, would I sign it?” If yes, then consider it a fair deal. Otherwise, it is not. My suggestion to manufacturers is to read the contract you are proposing from the viewpoint of the representative. Does it read like a series of methods to limit compensation? Or mandate activity without regard for compensation? Or does it present a framework for interdependence and the team approach, with opportunity for ROI and mutual benefit?

Now, I recognize that my approach to these topics is naturally biased from the representative’s perspective. I also realize that the representative must always provide value, and nothing in my comments relieves them of that responsibility. In the spirit of teamwork and candid discussion, I have asked my friend, Ken Bellero, president of Schaffner EMC and the manufacturers’ voice on the ERA Executive Committee to shed light on his viewpoint from the manufacturer’s perspective. Please read his insights on page 22.