At the Core of Channel Partner Compliance
Combating revenue leakage throughout semiconductor distribution channels
Each year, semiconductor companies pay out hundreds of millions of dollars in incentives to
third-party channel partners. When channel partners fail to comply with the terms of agreements related to incentive claims — or they fail to provide accurate and timely sales & inventory reporting back to semiconductor companies — relationships with channel partners are strained and margins are eroded. What are some of the major areas of risk along the semiconductor channel partner value chain and in particular, what can finance and/or internal audit professionals do to protect their margins?
Meet our subject matter experts
Channel Compliance Audit Director
Deloitte & Touche LLP
Semiconductor Practice Leader
Partner, Deloitte & Touche LLP
Scott Angel: Each year, semiconductor companies pay out hundreds of millions of dollars in incentives to third-party channel partners. When channel partners fail to comply with the terms of agreements related to these claims, or they fail to provide accurate and timely sales and inventory reporting back to the semiconductor companies, relationships are strained and margins are eroded.
What are some of the major areas of risk along the semiconductor value chain and in particular, what can finance or internal audit professionals do to protect their margins?
Luis Castro: Each step in the complex semiconductor value chain brings its own unique financial and compliance risks. A standard semiconductor life cycle is characterized by movement of product all the way from manufacturing through ultimate distribution to end customers. Within this life cycle, a number of processes are typically outsourced to channel partners, such as distributors, resellers and retailers.
Many companies still struggle to combat the same abuses that have been on their radar for years, but even for those companies with established compliance controls in place, there are still some new risks that are eroding margins.
For example, early in the value chain, a supplier did not provide "Most Favored Customer" pricing to a semiconductor company. Pricing anomalies and instances of noncompliance to MFC terms and conditions were identified which totaled over $6 million in overcharges to the company.
At the distribution stage in the life cycle, a distributor made purchases from unauthorized sources, over-claimed on price protection, submitted other erroneous pricing incentive claims and misreported inventory and sales. This resulted in overcharges and noncompliance penalties of over $3 million and adjustment to sales records.
In another example, a licensee of company product was audited and the review noted underreported royalties and other risks. In addition, the review identified unreported tax withholding issues that resulted in tax savings to the company. Total overcharges were $70 million.
While risks like these are diverse and complex, companies can mitigate the risk throughout the life cycle by creating or enhancing their channel audit compliance program.
There are a number of strategies, technologies and controls that are well within reach. Firstly, leading semiconductor companies today are using advanced data analytics technologies, such as D-Scan. These solutions provide a way to increase population reviewed to 100 percent of records as well as provide the ability to run customized scripts. This tool has helped identify millions of dollars in overcharges to companies as compared to manual reviews which have limited scope and capability.
Companies can also consider the implementation of a robust channel compliance program to include performing reviews, such as channel risk assessment and full audits over high-risk partners such as distributors, resellers and retailers, as well as implementing revenue leakage strategies to help improve processes and mitigate controls. When it comes to monitoring the bottom line and costs from channel partners, companies should consider both technology and a robust methodology.
Scott Angel: With many leakage points throughout the semiconductor value chain, compliance and financial risk associated with channel partners are a pervasive problem for semiconductor companies looking to compete in the challenging and changing market landscape.
Companies that are diligent in their channel compliance audit efforts are more likely to transform these threats into opportunities to capture lost revenue.