1. The document discusses incentive management systems used by auto manufacturers to plan and launch marketing campaigns targeted at dealers. These systems help calculate appropriate dealer incentives to generate demand for select vehicles. 2. Key components of incentive management systems include dealer holdbacks, cash incentives paid to dealers for meeting sales targets, and rules-based systems for configuring marketing programs and calculating incentives. 3. The document provides a framework for auto manufacturers to establish or enhance their incentive management systems, outlining key components like planning tools, configuring marketing campaigns, and ensuring regulatory compliance.

1. • Cognizant 20-20 Insights
A New Framework for
Incentive Management
Executive Summary • Dealer holdback: This is a percentage of ei-
ther the MSRP (Manufacturer Suggested Re-
Incentive management systems are complex ap-
tail Price) or invoice price of a new vehicle (de-
plications that help auto manufacturers plan and
pending on the manufacturer) that is repaid to
launch multiple marketing campaigns targeted
the dealer by the manufacturer. The holdback
at dealers at the regional, national and interna-
is designed to supplement the dealer’s cash
tional levels. Using configurable rules, an incen-
flow and indirectly reduce “variable sales ex-
tive management system enables auto makers
penses” by artificially elevating the dealer-
to offer discounts that help generate demand for
ship’s paper cost. Manufacturers such as Ford,
select vehicles. This white paper lists various ele-
General Motors and Chrysler generally offer
ments of an incentive management system and
dealers a holdback equaling 3% of the total
discusses how these components interact with
sticker price of the car.2
each other. The overall incentive management
framework described here can provide useful in- • Cash incentives: Manufacturers use various
puts to auto manufacturers that are planning to marketing campaigns valid for a fixed time-
establish or enhance an incentive management frame. If the dealers sell cars that are eligible
system. It draws upon industry standard practices under a given campaign, then they are paid
and highlights various regulatory and compliance an incentive for each car sold. Manufacturers
issues that must be considered while conceptual- also set up dealer targets that, if exceeded, can
izing an incentive management solution. result in the dealer receiving higher discounts
per vehicle.3
Incentives Primer
Auto manufacturers offer various kinds of incen- Years ago, dealers purchased vehicles at some
tives targeted at customers or dealers to keep discount (15% to 17.5%) from the manufacturer.3
vehicles moving in their value chain. The overall The margin that each dealer made was depen-
incentive amount per vehicle that a manufacturer dent on its ability to negotiate a price with the
can offer depends on various factors. A mix of his- end customer. Now, incentives have become the
torical data, inventory levels, market elasticity of key source of income for dealers, and these in-
demand and product pricing helps manufacturers centives are contingent on the achievement of
determine the optimal level of incentives.1 sales targets. As dealer incentives have become
a key enabler for auto sales, it is imperative for
Dealer incentives can be cash-based or non-cash- any auto manufacturer to have control over the
based. Cash-based incentives generally cover incentives outflow associated with its marketing
dealer holdbacks and vehicle discounts. campaigns.
cognizant 20-20 insights | january 2011

2. To manage incentives accurately, auto makers need • Model 1: Dealer receives incentive through
a robust incentive management system (IMS). An the claims settlement process. In this model,
IMS can improve the accuracy of claims/payouts dealers are responsible for the submission and
and enhance the effectiveness of campaigns. tracking of claims (see Figure 1). If they have
a query related to the claim/status, they can
Typical Incentive Management Models raise it online. The manufacturer’s accounting
Organizations can follow various models for cal- system receives various claims and sends back
culating incentives and making payments to deal- confirmation to the dealers about the claims.
ers. Primarily, there are two different models used It also provides dealers with regular updates
by organizations: about the status of the claims as they flow
through the accounts payable process.
Incentive Payout: Claims Settlement Process
Eligibility Check Claim Submission Claim Settlement
Dealer checks the Dealer submits claims against Manufacturer settles
eligibility of the incentive program online. the claims against
vehicle for available eligible vehicles.
Dealer checks the claims
incentive programs.
status/submits query online.
Figure 1
• Model 2: Manufacturer determines the eligible hicles are then calculated based on the rules
vehicles and releases payments for dealers defined during the campaign launch. The pay-
associated with the vehicles. In this model, ment information is sent to the accounting
the manufacturer checks the details of the ve- team, which makes payments to the dealers.
hicles in the supply chain and identifies those The dealer also receives regular updates about
vehicles that are eligible for incentives (see the payments already made and the pending
Figure 2). The incentives against these ve- payments.
Incentive Payout Calculation & Settlement
Eligibility Check Payment Generation Payment
Manufacturer Manufacturer calculates Manufacturer sends
determines the vehicles incentives for the eligible the payment and
that are eligible for programs. payment information
incentives. to the dealer.
Figure 2
cognizant 20-20 insights 2

3. The incentive provided by the manufacturer to late the incentives to be paid to each dealer based
the dealer is generally not advertised.4 Howev- on vehicles sold.
er, there are Web sites that provide information
about dealer incentives to customers, such as Ed- Prevent revenue leakage
munds.com, cars.com and others. When multiple campaigns are running, it is pos-
sible that a given vehicle is eligible under more
Key IMS Drivers than one campaign. Hence, net incentive outflow
Over the years, incentive management systems can be more than what the organization may
have become necessary for auto manufacturers. have anticipated. By using an IMS, it is possible to
Some of the functions IMS systems fulfill include cap the level of incentive on a given vehicle. IMS
the following: helps in accurate calculation of incentives based
on pre-set rules, thereby ensuring that only the
Enable launch of marketing campaigns right level of incentives is paid to dealers.
Incentive management systems provide manu-
facturers the ability to configure various kinds Achieve regulatory compliance
of campaigns and control the incentive outflow Incentives outflow from the organization can add
associated with them. The U.S., Japan and many up to several billions of dollars per year. As these
European countries have introduced large-scale are financial transactions, auto makers need clear
scrappage programs during the global reces- workflow processes with checks and controls to en-
sion that began in 20085 as an economic stimu- sure Sarbanes Oxley (SOX) regulatory compliance.7
lus to increase market demand in the industrial Incentive management systems are typically SOX-
sector. As many of these programs have ended, compliant applications that provide checks and ap-
manufacturers will have to plan their marketing provals for the launch of a marketing campaign or
campaigns to prevent sales from declining while release of payments.
remaining profitable at the same time. Recent re-
calls6 of vehicles by various manufacturers have Cognizant Incentive Management
only necessitated the need for new campaigns, to System Framework
prevent a further sales decline. Over the years, we have worked with leading auto-
motive manufacturers in the incentive management
Support launch of new vehicle models area, enabling them to optimize their incentive
The prolonged global recession is causing manu- spend, stimulate sales and improve process effi-
facturers to rethink their product portfolios. As a ciencies and control. Based on our industry knowl-
manufacturer develops and launches new models edge and experience in the incentive management
into the market, a well-designed and executed in- area, we have developed a framework that helps
centive management system can enable it to con- auto manufacturers either enhance or set up a new
figure its marketing campaigns, as well as calcu- incentive management system (see Figure 3).
Enabling IMS
Incentive Management Systems - Framework
Drivers Enabling Planning Enabling Execution Enabling Collaboration Barriers
• Enable “what if” simulation • Configure marketing programs • Enable dealers to view
• Support launch of • Nonstandard practices of
• Create rule-based incentive running campaigns and
new vehicle models • Determine whether a given incentive generation across
setting and calculation determine eligibility of various geographies
• Prevent revenue vehicle is eligible under the
vehicle under any campaign
leakage marketing campaign • Establish workflow for approval • Complex rule-defining
of marketing campaigns as well • Provide payment process for enabling
• Forge strong • Calculate total incentive
as release of incentives generated information to dealers configuration of marketing
relationship with that will be paid for a
on timely basis campaigns
dealers vehicle under a given • Setup of overall incentive limits
campaign • Interface with OMS, MES & • Enable receiving of vehicle • Interfacing required with
• Adhere to
compliance payment systems for registration details from OMS, DMS, MES and
requirements the government agencies accounting systems, each
information flow
of which may vary across
geographies
Regulatory and Compliance: SOX Compliance; Motability Act
Industry Practices
Figure 3
cognizant 20-20 insights 3

4. This framework outlines various components, as available as COTS (commercially off the shelf),
well as key barriers and enablers of an incentive which can execute the defined rules in run time.
management system. It is based on the industry
practice of a manufacturer determining the eligi- • Workflow for the launch of campaigns: An in-
ble vehicle and generating incentives for dealers centive management system should enable a
(see Figure 2 on page 2). workflow for launching and executing any mar-
keting campaign to help organizations remain
Enabling Planning SOX compliant.7 A huge cash outflow associ-
A planning module is required to carry out a finan- ated with the marketing campaigns is at stake,
cial assessment of any given marketing campaign. so it is necessary that checks and controls are
Typically, these are simulation tools with the applied to the process of dealer payments.
ability to carry out a “what-if” As a best practice, both the marketing and
finance teams should get involved in campaign
As dealer incentives analysis. Business rules engines approval, as well as payment release.
available in the market have these
have become a features built into them. They If the existing process does not contain ad-
key enabler for can determine which vehicles equate checks and balances for incentive
auto sales, it is will be eligible if the campaign generation and approval, these roles will have
is launched and also calculate to be defined and the key resources must be
imperative for any the incentive outflow associ- identified for performing each of these roles.
auto manufacturer ated with it. The simulation re-
to have control sults can lead a manufacturer to • Interfacing with other systems: Incentive man-
apply a maximum incentive cap agement systems need inputs from the vehicle
over the incentives or make adjustments to the order system (dealer, customer, vehicle make and
outflow associated incentive level and scope of the model, etc.), the manufacturing system (order
with its marketing campaign. Thus, IMS can add status and other detail), as well as accounting
great value in the planning of a systems (vehicle prices and other information).
campaigns. marketing campaign.
Enabling Collaboration
Enabling Execution • Collaborating with dealers: Dealers need pro-
This module deals primarily with the configura- visions for confirming whether a given vehicle
tion of the marketing campaign based on multiple sold by them will be eligible for a discount
conditions that must be approved to roll it out. By under a given campaign. IMS should have a
setting up a rule-based incentives offering, manu- provision for providing this information to the
facturers can motivate dealers to push harder to dealers online. Dealers also need information
sell select vehicle models. about the payments that have been released
by the manufacturers against the vehicles.
• Configuring marketing campaigns: IMS Standard reports can also be provided to the
should allow campaigns to be configured dealers in a timely manner. Some dealers also
based on multiple parameters like vehicle, ve- require an interface with the incentive system
hicle model, geography, retail date of vehicle, for receiving information in their dealer man-
etc. It should also provide flexibility to adjust agement system.
incentive levels based on various conditions.
Sample scenarios include: • Collaborating with vehicle registration au-
thorities: Incentive management systems
> If dealers achieve sales targets or exceed should interface with the registration body of
them for a given period, then higher dis- the government for receiving vehicle regis-
counts on each eligible vehicle are provided. tration details. This can help dealers, as they
would not have to complete the task of getting
> If a dealer orders or sells select vehicle
vehicles registered.
models within a given time period or geog-
raphy, then a higher discount on each eli- Compliance and Regulatory Issues
gible vehicle is offered.
• Sarbanes Oxley compliance: As per section
The execution of the campaigns is facilitated by 404 of the SOX Act, “Issuers are required to
the rules engine (third party or custom), which is publish information in their annual reports
one of the key components of the IMS. Already, a concerning the scope and adequacy of the
number of third-party business rules engines are internal control structure and procedures for
cognizant 20-20 insights 4

5. financial reporting. This statement shall also geographies. If the organization has not stan-
assess the effectiveness of such internal con- dardized its processes and systems, implemen-
trols and procedures.” tation of an IMS can become cost prohibitive.
As incentive management systems result in a
How Cognizant’s Framework Helps
significant amount of cash outflow from orga-
nizations, they must comply with the SOX Act. Our framework can aid in performing a high-
These systems must have sufficient business level assessment of a manufacturer’s incentive
and system control over the entire process, management system to unearth improvement
from campaign launch, to configuration in the opportunities across planning, execution and col-
system, to payment release to dealers. laboration areas. It can also help auto manufac-
turers understand the key benefits that can be
• Other regulatory issues: There are various
realized by implementing an incentive manage-
other regulatory acts that need to be consid-
ment system, as well as the potential barriers in
ered to ensure the solution addresses all re-
adopting this solution. For ex-
quirements. An example is the Motability Act8
ample, we have leveraged this Our framework can
in the UK, which helps people with disabilities
framework in an engagement
acquire a vehicle. The disability allowance that
with one of the world’s larg-
aid in performing a
est U.S.-based automotive high-level assessment
is paid to the customer by the government
is directed toward the payment of the lease
manufacturers. We have been of a manufacturer’s
amount of the vehicle. Customers obtain ve-
able to provide significant im-
hicle leases at substantial discounts.
provements to the efficiency
incentive management
and transparency of its system to unearth
Key Barriers for the Incentive incentive management pro- improvement
Management System cess. Also, the engagement
• Non-standard practices of incentive genera- created a greater level of
opportunities across
tion across various geographies: The recent collaboration with dealers, planning, execution
spurt in merger and acquisition activities in the which resulted in a reduction and collaboration
automobile industry following the recent finan- in payment-related queries
cial meltdown has created a situation where from dealers.
areas.
newly formed entities must rationalize differ-
ing processes for incentive generation across Where the Rubber Meets the Road
all business units/geographies. To implement Incentive management helps auto manufacturers
one single incentive management system that push vehicles out of their inventory. By improv-
can address the unique requirements of each ing the accuracy of claims/payouts, preventing
region requires complex rules defining process revenue leakage and enhancing campaign effec-
and careful designing of the system. tiveness, incentive management systems play a
• Non-standard systems across geographies: vital role for automobile manufacturers. Incentive
Incentive systems require inputs to the order management systems can also enforce the checks
management system, vehicle information sys- and balances required by the manufacturer to
tem and various other systems. The incentives achieve compliance with government regulations.
are generally paid to dealers through the ac- Our incentive management framework can be of
counting system. Integrating all these applica- great value in enhancing an existing incentive
tions into one cohesive unit requires careful management system or helping an automaker
planning and a degree of standardization across create a new system.
cognizant 20-20 insights 5

6. Footnotes
1
Barbara Hendrickson, “Incentives and the Automobile Industry,” Design Incentives, Fall 2005,
http://www.incentivecentral.org/pdf/incentives_and_auto_ind.pdf
2
“Dealer Holdback,” Edmunds.com, January 2010, http://www.edmunds.com/advice/incentives/holdback/index.html
3
“Manufacturer to Dealer Incentives: Tips for Discovering this Hard-to-Get Information,” Helium.com,
http://www.helium.com/items/368994-manufacturer-to-dealer-incentives-tips-for-discovering-this-hard-to-get
4
Ozgun Caliskan Demirag et al., “The Effects of Customer Rebates and Retailer Incentives on a Manufacturer’s Profits
and Sales,” Wiley InterScience, December 2009.
5
Wikipedia, http://en.wikipedia.org/wiki/Scrappage_program
6
http://www.dft.gov.uk/vosa/apps/recalls/searches/search.asp
7
Sarbanes-Oxley Act, Section 404, http://www.soxlaw.com/s404.htm
8
“How the Car Scheme Works,” Motability, http://www.motabilitycarscheme.co.uk/main.cfm?type=CHSW
Reference
Tim Gutowski, “Explaining Dealer Incentives,” cars.com,
http://www.cars.com/go/advice/Story.jsp?section=inc&subject=incent&story=incDealer
About the Author
Santosh Kumar P. CSCP, CPIM, is an Associate Consultant within Cognizant Business Consulting, focusing
on the manufacturing and logistics domain. With over six years of industry experience, he has worked
across diverse consulting engagements with leading manufacturers and logistics providers. His key ar-
eas of expertise include supply chain consulting, business process modeling and requirements manage-
ment/analysis. Santosh holds a bachelor’s degree in Chemical Engineering from Bharathiar University,
India, and a post-graduate diploma in Business Management (Marketing/Operations) from the Institute
of Management Technology, Ghaziabad. He can be contacted at santoshkumar.p@cognizant.com.
About Cognizant
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