Rebate Terms and Considerations for Reseller Engagement

For efficient management of commodities/categories, especially for tail spend, we often consider working through resellers.

With several benefits, this decision is easy but negotiating terms with them can become tricky. There are different models like cost plus, annual rebate, annual flat fee & so on. In this article, we will discuss provisions and considerations surrounding annual rebates. 

When negotiating rebate terms, few things to keep in mind are:

• Scope: Every reseller has wide offerings. That’s when we need to streamline the scope of engagement and carefully draft the agreement language along with definitions. Questions worth asking:

1.Are we considering resellers only for low spend items or even high and strategic spend is within the scope?

2.Will rebates apply to a particular product line or any and all purchases irrespective of the nature (examples: hardware, software, professional services) will be considered for rebate calculation?

3.Will the calculation be done under the same rebate pool or there are separate rebate buckets for each spend type?

4.Is there any specific vendor or service that is out of scope? 

• Exclusivity: It depends on organization preference. But, many times, having a non-exclusive arrangement helps as that creates competitive spirit amongst preferred resellers. 

• Tiered rebate structure: endeavor to keep the initial tiers small so that the estimated spend will fall under subsequent tiers with better rebate percentage. 

• Legal T&C: Ease of document closure is very important. Few resellers are very difficult to deal with, while others come across as accommodative. Nowadays, with technological complexities, their terms are usually generic with reference to primary vendor’s terms such as SaaS or EULA. In that case, we must ensure that such references are carefully reviewed and okayed by lawyers. 

• Retroactive applicability: Sometimes we initiate negotiations which take months to close but during the negotiation period, we start giving them business. At the very start of the engagement, try to have an understanding with them that all spend (including retroactive) falling under the negotiation period will be considered and a language to that effect will be included in the paperwork. 

• Rebate applicability: Using invoiced or actual paid amounts for calculation is fair and sensible. However, don’t shy from pushing for PO amount being used for calculation, even though, probability of success is low.  

• Financial strength: Reseller’s financial strength plays a pivotal role while making decisions. For example, a reseller with strong financials may be able to offer a flexible payment schedule even if the direct vendor did not agree. They make upfront payment on our behalf in exchange for the overall business that they get from us. 

• Quote turnaround SLA: One of the crucial factors to consider is how much time a reseller takes to generate the first quote once they have all the relevant details. Difficult to negotiate but good to have. Many times, we keep waiting for ages because of slow response from our resellers. 

• Availability: This is difficult to gauge at the very start. But, as the engagement starts, we can assess how prompt resellers are. That shows how important we are to them and forms a yardstick for termination or during renewal. 

• Payment mode & frequency: There is no right or wrong choice. However, for accountability and periodic checks, quarterly or semi annual reconciliation and payment works out well versus year end reconciliation and payment. Payment mode should either be cash or anything that can be easily converted to cash (example: credit note). In case of expected requirements for professional services, future service credit offerings may work out well.