E-commerce has manufacturers re-thinking their channel relationships with dealers and distributors - as well as their incentive strategies.

Not long ago, a generation of architects scoffed at the notion of shifting their entire industry from pencils and slide rules to CAD software. They were still standing on the tracks staring into the oncoming headlights when the e-railroad ran over them.

Today, the Internet threatens to do the same thing to the incentive business, as traditional distribution channels shift and morph and consumers of products ranging from annuities to automobiles bypass distributors - a.k.a. brokers and car dealers - to buy directly from the Web.

"This is a pseudo-hot potato," says Gartner Group analyst Karen Peterson (www.gartnergroup.com), who is based in Stamford, Conn. "It is raising the bar for distributors - not necessarily disintermediating them, but requiring them to re-think their current value propositions."

As manufacturers rewrite the rules when it comes to their relationships with dealers and distributors, one question is whether there will be implications for distributor incentives. With 72 percent of incentive programs tied to the distribution channel (according to research done by the Incentive Federation), the answer is, "How could there not be?"

An Old System, a New Economy Pre-technology distribution systems were manufacturing-oriented, dictated in many cases by long production runs. Building a car took five days; now, it takes five hours. Carrying inventory was not necessarily as costly or viewed as negatively as it is today. Transactions were performed locally.

The new economy is everybody's marketplace, so it no longer makes sense for a product to be bought and sold repeatedly before it gets to the final purchaser. "Every buying and selling transaction adds costs and delays and potentially leads to inventory buildup," says John Farrell, senior director of channel marketing for the Minneapolis-based Carlson Marketing Group (www.carlsonmarketing.com). "Multi-tiered distribution channels were primarily designed for the convenience of the early 20th-century manufacturer - not for the convenience of the 21st-century customer."

Today, online annuity brokers such as AnnuityScout.com (www.annuityscout.com) offer several companies' products to consumers directly, at a distribution cost that's about a tenth of what it would be using a broker. Ford Motor Co.'s ConsumerConnect e-initiative (www.ford.ca) has just started to allow Canadian consumers in two test markets to be the first in the world to complete a new car purchase online, right down to customizing features; then they can track the vehicle through the manufacturer's plant to the dealer's door. And in the travel industry, a mega-site known as T2, funded by a reported $100 million investment by the five major airlines and including participation by 200 hotel companies, 44 car rental companies, and all the major cruise lines, could redefine the way travel is purchased.

Which industries have the most potential for this "disintermediation" of distributors?

"Anything that can be digitized," says Peterson. "If I can digitize the interactions, if I am not adding service and information on top of that, then I think that is where you are going to have a huge challenge."

The Human Factor Despite all this, many observers agree that the way that customers buy - for now - will continue to be driven by how they prefer to do business. "People still don't want to buy a million dollars' worth of something with a click of the mouse," says Bruce Bolger, president of Irvington, N.Y.-based Selling Communications and online publisher of the Sales Marketing Network and Info-Now.com (www.info-now.com).

At the end of the day, he believes that buyers will find an online source and then use old-fashioned technology - the telephone - to place an order.

Bob Czekanski, who was, until recently the director of Cambridge, Mass. - based Surgency (www.surgency.com), formerly Benchmarking Partners, agrees. "In the B2B space, what generally happens is that a large contract is negotiated. Perhaps through e-mail, but ultimately face-to-face. If you've got a new product coming online and you've got to buy a few million dollars worth of sheet metal, you may use the Internet to collect data about who has it, but you'll still have telephone or face-to-face meetings. Then the Internet will be used to execute the contract, to signal the release of product from one factory to another."

In the insurance industry, which is another good example, Mark Trencher, vice president of insurance industry research at Conning Corp. in Hartford, Conn. (www.conning.com), reports "a relatively small percentage of consumers going out to the Internet to shop or to get price quotes before they buy. And an even smaller percentage go out there and buy online." That's because, once again, buying insurance products is more complicated than selecting a book at amazon.com, and most people want to deal with a real person who can answer questions.

Channel Conflict - and Cooperation Trencher reports that many insurance companies are concerned that the Internet could upset the agents handling their product in more traditional channels. That's in line with recent research done by Carlson Marketing Group, which surveyed 50 manufacturers about the biggest issue they faced in selling online. Sixty-six percent said it was "channel conflict" - far more than any other concern.

As an example, Trencher points to Allstate Insurance (www.allstate.com), perhaps the most aggressive insurance company on the Web. "They recognize that there is competition selling direct, and they recognize that there are some people who perhaps want to buy direct. If you buy direct from Allstate, you will be assigned an agent, and an agent will get a commission on that sale even if he or she was not involved." It will be a smaller commission, he notes - but Allstate is trying to maintain the agent link.

Trencher has published two studies on how insurance companies use the Internet, and will soon release a third. He says that the goal of most insurance companies' B2B sites has been primarily to expand their channels, with the option of making a wholesale shift later.

"A company might say, `We have an agent channel that is our major channel; we are looking for the Internet to support the existing channel.' They can do that by generating leads. People go to the insurance company's Web site, leave their name and address, and click a button that says `Call Me.'"

Insurance companies can also support the existing agent channel by giving agents continuous access to information. The agent can tell a prospective client, "Check out our Web site for product literature."

Take John Hancock's site (www.johnhancock.com), which is designed to provide whatever supply channel the customer desires: an in-home or in-office visit by an agent, online product information, or online purchasing. It aids existing distribution, and it creates new distribution.

This channel cooperation is evident in many other industries. 3M, for example, is partnering with its dealers to create eShowrooms, and making a broader product line available to dealers than what it sells online. Hewlett-Packard is using its dealers to deliver and service all product sold online. And not long after Ford launched ConsumerConnect, it launched FordDirect.com, a retail site to help customers find Ford vehicles among its 4,200 dealers nationwide; and Dealer Web Hub, a centralized communications center for dealers through which they can obtain everything online, from sales training to recall notices.

"We're extremely committed to our dealer-base system of sales and marketing," said James C. Coufin, CFO of ConsumerConnect, in a recent interview in Executive Edge magazine. "The Internet is a tool for them as well."

In fact, the very powers that could hurt dealers and distributors can also help them by leveling the technological playing field. "As technology gets less and less expensive, they should be able to compete more ably with bigger companies," says Bolger. He believes the smart distributors in particular will use the Internet as an ally and a means of automating their own processes.

W.W. Grainger (www.grainger.com), a Chicago-based major distributor of machine maintenance, repair, and operating supplies, is often held up as an example of how a distributor can maintain industry leadership through its e-commerce strategy. In addition to continuing to add physical outlets to its 577 distribution centers in the United States, the company has transformed itself into an online powerhouse, with four different B2B sites, the first of which was begun in 1995 (which, in Internet time, is practically prehistoric). These include www.orderzone.com, a B2B marketplace for which Grainger partnered with other distributors in noncompetitive industries. By offering extensive choices and 24-hour customer service, Grainger has substantially strengthened its position in the supply chain.

New Goals for Incentives No one can say for sure how these changes will eventually filter down to manufacturers' dealer/distributor incentives, but observers like Farrell expect that they will. He uses the example of one of his clients in the computer peripherals industry that traditionally rewarded its channel based on sales accomplishments. The company has added a direct-sales component via the Internet, so end-users can now buy product without having to go through a dealer. The dealers still deliver the product, training, and service. But the company's incentive programs are now based on the timeliness of that delivery, the accuracy of the training, the efficiency of the service, and overall customer satisfaction.

Dealer/distributor incentives will have to change like this, he predicts, with "new measurements to reward the behaviors that are driving the new economy." The distributor will have to become more of an expert resource and less of an order taker. He or she will have to be more service-oriented, more consultative, and provide more product knowledge. The game in the future is going to be all about adding value - and incentive structures will reflect this.

It comes down to designing incentives that do what we need them to do. "Incentive programs work because they are a sound business investment," Farrell says. "The day they stop doing that is the day they will no longer be effective."

Will B2B Change Everything? A former executive vice president and CEO of the Society of Incentive & Travel Executives, Bob Vitagliano started his own consulting firm, V Associates (www.fource.org/pages/vitagliano.html) in San Juan Capistrano, Calif., last year. Count him as someone who thinks the Internet and B2B will change everything when it comes to incentive houses - the "middlemen" of the incentive business.

"On the good side, we will have a much bettereducated consumer. ... On the negative side, I fear a loss of creativity, especially in the travel end of the business. When we start selling the incentive product on the Internet, I think it will be very predictable, and that is a concern. It loses its exclusivity. It loses its specialness."

Jim Dittman, president of Dittman Incentive Marketing Corp. (www.dittmanincentives.com) in Edison, N.J., has been in the incentive marketing business for almost 25 years. So far, he sees the Internet less as the competition and more as a tool.

"More than anything, we use the Internet to promote our programs. Once we get a program that is up and running, and the qualifying period has begun, we use the Internet to launch and promote the program on a continuing basis. We then use it to improve the efficiency of the fulfillment process."

Arnold Light, president of The Light Group Inc., uses his Internet site, www.incentivesmotivate.com, as what he calls his "capabilities brochure," to which he refers clients in lieu of sending a print brochure. He also runs a secondary site, www.PromoLight.com, where clients can order imprinted merchandise such as T-shirts or baseball caps, and www.CyberCentives.net, where his clients put their entire incentive programs online.

"We do programs that are not online more often than not," Light says, "but I can see us really moving in this direction. ... We are now becoming e-tailers, so to speak. It opens up all kinds of doors for us. We have the know-how; we have the marketing expertise, the technology, and the fulfillment operations all under one roof."

Light says that incentive companies must think a little harder about where they fit into the whole supply chain. "We didn't wake up one morning and say, `Boy, I think we ought to offer this to our clients.' It has taken me about six years to get us to the point where we are now - and we're just starting to take off."