Where contracts are concerned, leakage is the difference between the value expected from a contract and the value realized in its implementation. For sell-side contracts, this is usually termed revenue leakage, since the goal of the relationship is to make money by providing goods or services. (Procurement or buy-side contracts experience leakage in terms of value or savings, the chief goals for contracts negotiated with suppliers.)
A newcomer to contract management might find the notion of revenue leakage surprising. After all, the contract should make clear the goods or services to be delivered and the price of those goods and services. Indeed, contracts often include additional provisions if things go wrong to protect both parties from loss and make value and revenue as predictable as possible.
However, the path to contract fulfillment is uneven. Contracts vary in their terms, undergo change during negotiation, are amended over their lifecycle, and require cooperation from the whole organization in their management. Hundreds or thousands of agreements become a challenge to manage properly, and money is lost through errors in fulfillment, billing, or missed opportunity.
Here are three simple ways to reduce revenue leakage with the help of contract management software.
Make Sure Contracts Have Owners
In a contract management system, contracts can be assigned to owners, contract managers with responsibility for their fulfillment. Within the central electronic repository, these contract owners and other stakeholders can see the contracts’ terms along with deliverables, due dates, price books, billing terms, and remedies. Importantly, contract owners can be assigned tasks to ensure that services and goods are delivered as agreed, that client service meets contractual expectations, and that pricing follows the contractual rates. A contract owner’s timely management can prevent or end revenue leakage before significant loss occurs. Some examples:
- Ensure that obligations are met on time. Late or missed delivery often carries a financial penalty, and always creates client dissatisfaction. In IACCM’s member surveys, 77% of organizations report leakage in the form of project delays or cost overruns making it a leading cause of revenue loss.
- Manage all changes and amendments. Many long-term contracts include change orders and adjusted pricing over time. A contract owner can insure that changes are authorized, recorded, signed – and carried out. An electronic contract management system relates all changes to the original contract record. The owner can then prevent loss of revenue due to unauthorized changes or activity outside the contract.
- Stay ahead of renewals. As contracts near expiration, a contract owner can receive electronic notice and a task to prepare for renegotiation weeks or months in advance. Seeing how the customer has purchased goods and services under contract provides the contract owner with a guide to upsell or side sell, or negotiate terms to increase sales while offering a better deal for the client.
Provide Meaningful Visibility into Pricing and Billing
In contracts, pricing is seldom a static set of numbers. Prices differ across product and service levels. Discounts are applied for higher volumes, whether purchased all at once or over a defined period. Buyers may receive discounts for prompt payment and rebates for late or unacceptable deliveries. And pricing may differ across hundreds of contracts and clients, including specially negotiated terms. As written, these pricing terms should be mutually advantageous. In practice, with inadequate management, selling organizations can lose money. Discounts are often applied inadvertently, or by default regardless of buyer purchasing behavior.
A contract management system can help contract managers and the billing personnel avoid revenue leakage in many ways. Here are a few:
- Track all pricing information across customers. Managers can easily see the correct, current pricing terms for dozens or hundreds of customers in a single electronic repository.
- Avoid underpricing and unearned discounts. With access to the contract record’s price book, Accounts Payable has the information needed to bill clients correctly based on purchasing volume and history. Integration of the billing system with the contract management system can reduce manual cross-checking, saving time and money. The contract owner can perform spot checks and audits to catch billing errors that cost the company.
- Remote access clarifies billing for service calls. Service personnel doing work on site often need an OK from the customer when problems are spotted and repairs are needed. In-house service delivery teams can face the same situation. Access to a cloud-based contract management system puts customers and technicians on the same page, showing exactly what the contract covers and allowing for informed decision-making and correct billing.
Insure Visibility of Deliverables
The best of intentions cannot protect all projects from scope creep and disagreement over what exactly is to be delivered. Contracts leak revenue when the supplier of goods or services spends more time and money fulfilling the contract than anticipated. Disagreement between buyer and seller about what was originally agreed to and what changes were approved wastes further time. A contract management system greatly reduces this wasted time and lost revenue by giving stakeholders clear access to the following:
- Non-standard terms. Whether to get a deal done or to address unique client needs, some contracts include non-standard terms relating to product approvals or acceptable delivery. A contract management system can alert managers and fulfillers to non-standard terms from the get-go so that work is delivered as specified, and disagreements are reduced.
- KPIs. For custom manufacturing or professional services, key performance indicators allow client and seller to agree on the standards a deliverable must meet. Access to KPIs in an electronic system helps jobs stay on schedule and meet client expectations on delivery. Timely payment without penalty is the result. In other cases, access to KPIs make it clear when the client is seeking additional work beyond what was agreed to. Without access to the contract’s terms, unbilled extra work to keep a client happy can occur. With access to the contract’s terms, formal change to the deliverable with appropriate billing meets the client’s expectations and adds revenue.
Some Additional Steps to Reduce Revenue Leakage
Assigning owners to contracts, making pricing terms visible, and giving stakeholders access to the contract deliverables: these are three easy applications of a contract management system that will reduce the revenue lost in fulfilling a contract.
For organizations that are willing to plan ahead and address revenue leakage systematically, here are some additional approaches.
- Use Experience to Improve Contract Templates. “Lessons learned” are contained in the data collected by a contract management system. Which contracts realized revenue as expected and which fell short? Which terms (standard or non-standard) proved problematic in practice? Which pricing terms actually resulted in increased purchasing? Reporting in an electronic system can help to improve contract terms and conditions, making your templates more fit for purpose.
- Get Scope and Requirements Right Going Forward. Contract managers and delivery teams who work to meet contractually agreed terms know their practical shortcomings and can provide useful feedback directly into a contract management system. Revenue is lost when deliverables are inadequately defined and when the process of creating change orders is not clear. Both areas can be improved before the next contracts are created, negotiated and signed, increasing the profitability of contracts next time.
There are dozens of ways that contracts can bring in less money than anticipated. A contract management system gives contract managers the tools they need to reduce revenue leakage while improving the profitability of the company’s contracts over time.