This is our second post in our series “U.S. Market Entry for Italian Enterprises” covering the establishment of direct and indirect sales channels. This series follows a sequential methodology arranged in accordance with the level of risk which each market entry modality presents to the Italian enterprise. Accordingly, each subsequent market entry modality will exhibit a higher level of risk as well as reward.
Establishing either a direct or indirect sales channel within the U.S. marketplace presents a lower risk level profile in terms of capital deployed. Although certainly significant cost and expense may be expended in terms of deploying these sales channels within the U.S., the associated capital deployed is not permanently invested and can be withdrawn as opposed to where either licensed technology or capital is brought onshore. Thus, a successful onshore sales channel often precedes and provide justification for establishing at a later stage a permanent establishment on shore.
Before however any sales channel is deployed onshore, the Italian parent presumably would have studied the U.S. market carefully and may have benefited from the marketing results and studies of its representative office or branch office. Alternatively, it may have previously established a robust direct U.S. export market which serves as evidence of viable onshore market for its products or services and the time is now ripe to invest in onshore sales resources.
The Direct Sales Channel. Once the decision is made to build an onshore sales force, then the issue of whether to deploy a direct sales channel or erect from scratch an indirect sale channel[1]. A direct sales channel connotes the Italian parent organization directly engages with and hires a U.S. based sales force. As such, the sales force will either be direct employees of the Italian parent or the U.S. based operating entity and as such, applicable employment taxes apply and govern here, as well as the need to provide insurance coverage and necessary sales materials and tools. Direct sales personnel will be under direct control of the Italian parent or tis U.S. operating entity and will be subject to a training regimen and be responsible for implementing the relevant U.S. sales plan and budget and will usually report to a regional sales director or directly to the main home office. Most sales plans are carefully crafted and offer a base salary with an incentive plan with sales commissions tied to achieving certain sales targets such as gross revenue or gross margin percentage.
Direct sales personnel should be subject to a written employment agreement which sets forth their respective duties, obligations, territories assigned and/or customers and eligibility to participate in any sales incentive plan. Moreover, terms of termination should be carefully drafted with attention paid to any post-termination compensation and means of dispute resolution.
The Indirect Sales Channel. In contrast, an indirect sales channel is comprised of independent contractors who govern and control their own respective sales agency. Thus, the Italian parent is not responsible for the costs of operating an indirect sales agency as all costs are the responsibility and liability of the indirect sales agent. As such, the indirect sales agent dictates its respective manner of work and cannot be managed directly by the Italian Parent organization.
By far, the most difficult challenge in constructing an indirect sales channel is identifying and securing qualified and experienced sales agents. We have found a good place to start is for the Italian organization to attend conferences and trade shows in the US focused upon the relevant products or target markets. These events are often attended by indirect sales agents who are seeking to add new product or services to their respective line cards. Moreover, the Italian parent may invest in displaying a trade booth where it can showcase its products or services to the entire trade show and its attendees. Also, we would recommend contacting the various Italian government trade offices in the US who offer consultative services in locating potential sales agents and distributors
Once a prospective indirect sales agent has been identified as a possible channel partner candidate, there is no substitute for a thorough due diligence of the channel partner’s operations. This entails visiting the channel partner at its home office, interviewing staff and verifying customer references. Should the investigation prove the channel partner to be a qualified member of the sales channel, then the parties should proceed to a definitive sales channel partner agreement. This agreement should address the following;
- Defined sales territory (exclusive or nonexclusive)
- Term of Agency (advise to limit to one-year terms)
- Authorized products or services in the line card
- Excluded products, service or key customers if applicable
- Sale Rep Duties
- Milestones and sales targets defined
- Italian organization duties
- Provide support, materials and training
- Sales commission plan
- Product warranties
- Insurance and Indemnification
- Nondisclosure obligations and Intellectual property protection
- Defined terms of termination
- Post termination compensation term
- Duties to return all materials and cease sales activity
- Dispute Resolution (preferably arbitration) and Choice of Law
This post addresses basic principles and terms of the direct as well as indirect sales channel without any reference to any particular type of products or services.
Our next post will address sales and distribution channels for technology centric products and services.
[1] For purposes of this post, the term sales channel as used herein encompasses both sales agents as well as distributors as many features of these two modalities are the same. Of course, a distributor will engage in the buy-resale of the product whereas a sales agent does not take title of the product but rather refers the product order to its principal for fulfillment. . In many instances, a sale channel partner may act in both capacities as commissioned sales agent as well as directly buying from its principal and then reselling onto the end-user.
