Ethical Dilemma No. 6: Subagent Circumvented

By Khali Henderson

The channel community has been discussing the topic of business ethics in its blogs, conferences, forums and backrooms. At the suggestion of master agent Josh Anderson, CEO of Telephony Partners LLC , PHONE+ is tackling the topic in a new and, hopefully, constructive way by presenting ethical dilemmas” that have happened in the indirect sales channel and seeking comment from suppliers and partners.

Our debut effort on channel pricing conflict was published in December 2009 as Ethical Dilemma No. 1. This month in Ethical Dilemma No. 6, we ask the question, must subagents be involved and compensated on subsequent sales to customers brought to a master agent?

Comments are from agents Bill Fuller, partner and co-founder of NPG Solutions, and Bill Leutzinger, president of TelecomMedic, and master agents Ted Schuman, CEO of PlanetOne Communications Inc., and Curt Allen, president of X4 Solutions.

Ethical Dilemma Scenario No. 6

A master agent that also has some direct sales reps was asked by a subagent to help him close a local service sale for a client. The subagent won the local business and was receiving commissions on the sale. Several months later, direct sales efforts by the master agent with that same client but for a different type of product with a different carrier resulted in an extremely large win. The initial subagent was not involved in any way and was not aware of the opportunity and as a result was not paid any commissions.

Is the master agency obligated to involve the subagent in additional sales to a customer that was brought to the master agent by the subagent? Would it make a difference if the carrier was the same as in the original sale?

Fuller: Yes. When a client is brought in good faith to a master agent by a subagent, any future business that is sold into that client should go to the subagent that brought the client to the table provided that: 1. the subagent is active and in good standing with the master agent, and 2. the subagent did not sign off on or agree to allow the master agent to market into his account with a direct sales force without commission credit for additional sales. More importantly, a joint effort between the master agent and subagent would have been much more professional in the eyes of the customer.

In addition, it makes no difference if the carrier is the same as in the original sale. It boils down to business ethics doing what is right.

Leutzinger: I think that once a subagent brings a customer to a master agent, that customer should be tagged to that particular subagent. I dont think it should make any difference who the carrier is same or different. Who cares, unless for some reason the subagent is not able to sell that particular carriers offerings due to a conflict or contractual obligation?

The fact is a good master agent/subagent relationship should be a two-way street. The subagent should be bringing new opportunities and helping with any issues that arise. The master agent should be taking advantage of the relationship that the subagent has with the customer, not working behind his/her back. In a sense, both parties have a responsibility to the other to handle the customer as a unit. Basically, both parties have a responsibility to the client that should consist of working together in all aspects of the account. In the scenario mentioned above both parties are at fault. The subagent should be close enough with the client to know what is going on, and the master agent should know its subagents relationship with the client and bring him/her in to help.

On a separate, but related and maybe more important, note, this type of scenario would never happen if the master agent didnt have its own sales force, and I will always advise subagents to be very cautious when signing a contract with a master agent that has an internal sales force as, invariably, conflicts of interest will arise.

Schuman: Frankly, this depends on the business model of the master agent and how its agreement reads with its subagents. Since we only have subagents at PlanetOne and knowing how agents feel about this sensitive issue, I can assure you subagents of a master agent are going to expect to be involved and paid on new revenue going to an account they brought to the table. A master agent is going to be hard-pressed to retain a strong partnership with its subagents if it is routinely doing end-arounds on their subagents. The same can be said when carriers try this with their direct sales forces.

One last comment: If the original subagent isn’t qualified to make the new sale and they had little to nothing to do with the new revenue and the master agent had to do all the heavy lifting, a modest and reasonable commission split is probably a fair and equitable compromise.

Allen: Absolutely, yes. In our case we have only indirect sales from subagents, so every customer we have is assigned to a subagent. Now, certainly we will lean on the subagent to support that customer when necessary and support the additional sales efforts. I do think this is why master agents that do not have direct sales resources are much less likely to run into this type of conflict.

Is the subagent due any commissions on the second sale even though they were not involved?

Fuller: Technically, yes. Heres why: Before the master agent direct marketed to the subagents client, it should have communicated this to the subagent. Even if the client unintentionally initiated correspondence directly to the master agent or intentionally went around the subagent, it still comes down to who brought the account to the table.

Leutzinger: This is a little harder question to really put to ethics. What is the contractual agreement that was signed by both parties? If the subagent was naïve enough to not make sure that he/she would be compensated for all sales into customers brought to the client whose fault is it? Ultimately, if the contract doesnt clearly state how this scenario is handled, then the fact is they arent legally owed. However, should the master agent recognize where the opportunity really originated? If the customer had never been brought to it by the subagent, would the master agent have even had a chance for the business? If the contract doesnt clearly state how this is handled, then I think that the master agent should compensate the subagent in some way, but I am not sure it is an ethical responsibility. Any good master agent that understands building a long-term business relies on its subagents would realize that it is short-sighted to not compensate the subagent. Doing so would incent the subagent and build loyalty thus increasing long-term profitability. A master agent that makes the decision to not compensate the subagent in this scenario is a master agent I would strongly advise against being in business with, and as we all know, word of mouth spreads quickly in this industry.

Schuman: Yes, they are and should be involved even if the master agent had to do all the work. It promotes integrity and honesty in the relationship and sends a very strong message to the subagent. The day a master agent (or carrier) starts running around its subagents, the relationship is heading in the wrong direction quickly. Additionally, once the new sale is closed the subagent should be enormously appreciative of the effort put forth to secure the new revenue and the best way to show their gratitude is by sending more business to the master agent that has truly partnered with him/her in trying to grow business successfully together.

Allen: The subagent that brought the customer originally in our model is in line to get paid unless the customer has indicated a desire to no longer work with that subagent. In that (very rare) case, we would discuss this with the subagent, keep them whole on their original deal and would look to another subagent partner to support the customer going forward. In that case, we have negotiated splits or other revenue-sharing models based on the level of support each subagent can provide. At the end of the day, we would never “take” the account as a house account because we are not a direct sales organization.

If the second sale was made by another subagent rather than the master agent directly, would the original subagent have any claim to commissions?

Fuller: Yes. The master agent should have controls in place to manage ownership of accounts. In the case where the subagent that originally brought and sold the account has not maintained a relationship with the client, he or she still should be contacted and made aware that the client has expressed interest in other services with another agent. This would permit the original subagent to communicate and negotiate with the new subagent as it relates to commissions. At least this would afford the original subagent the opportunity to decide whether or not to forgo participation in the new sale.

Leutzinger: This is where it gets tricky. I would have to say that the other subagent would get full comp here. The original subagent should have been involved with his customer enough to know about the second deal. This actually almost happened to me one time. The decision maker thought I brought the proposal to him when someone else did. I found out about it just in time and saved the deal for myself. Many times decision makers dont know or care who gets paid. They just want the best price/service. But, since I was deeply involved with the decision maker, I was able to keep the deal for myself.

It also depends how the other subagent became involved with the client. Did the master agent introduce them? If that is the case, then it is no different than the master agent using an inside sales force. I think the key is that once a master agent becomes involved with a customer, it should be very clearly defined how other business will be handled. Leaving these things to interpretation can only lead to bad feelings and eventually bad business.

Schuman: This is more an issue of how the customer is structured. Are there several locations around the country? Is there more than one buyer in the company? Do these buyers have the ability to act on their own independent of their headquarters? Are they separately owned franchises? We have had, on occasion, very large organizations with multiple agents selling into an account. It doesn’t happen often, but just because someone sells one circuit into an account doesn’t permanently lock out everyone else from trying to sell into it for some of the reasons I referenced above. If we are talking one location and one buyer, then the incumbent agent will prevail in almost all instances or unless there is some really good reason provided by the customer.

Allen: Per my comments above, we would keep them whole on their business or negotiate a split between the two subagents. The most important thing would be open communication with all parties.

In cases like this one where the subagent engaged the master agent for sales assistance, to what extent does the master agent gain ownership of the customer?

Fuller: The ramifications surrounding ownership, commissions and relationships of accounts between master agents and their subagents should be spelled out in detail within the master agent-subagent agreement. Having this type of situation covered in the original agreement and agreed to upfront can save a tremendous amount of heartache and potential legal fees down the road.

Leutzinger: I really dont think the master agent ever gains control of the customer. The subagent is the master agents customer. That is how it is supposed to be set up. Subagents use the master agent when needed. The master agent makes its percentage whether the subagent asks for help or sells it on his/her own through the master agent. I have an issue with master agents who do not share this philosophy, and I will not work with ones that think any other way. The only ownership” that the master agent has to the customer directly (unless the subagent has made it clear they want nothing to do with the customer anymore) is ownership in ensuring the customer gets the best possible service for all their needs and is not brought into conflicts surrounding who gets paid on what. Issues like this are a sure way to make a customer start looking elsewhere for help.

Schuman: This really depends on the business model and relationship of the subagent and master agent. Does the subagent provide front-line support? Would he prefer the master agent to do it? Does the subagent posses the skills necessary to keep the customer happy? In most cases the master agent will not control the relationship with the end user. That is normally the responsibility of the selling subagent. Again I stress that if the master agent is trying to circumvent the subagent and use its contract with the carrier to take higher ground with the client, the master agent is never going to gain the respect, trust or loyalty of its subagents. Period. 

Allen: Like all of our business, our “ownership” of that customer would be limited to our role in supporting the subagent.

If you have an idea for our next “ethical dilemma,” please contact PHONE+ Editor-in-Chief Khali Henderson at [email protected].