Few industries have as many interconnected relationships or “moving parts” in the value chain as manufacturing. Unfortunately, each of these complex parts can, if ignored, become a crack through which the organization can leak revenue.
Revenue leakage occurs when contract terms are not followed
How much revenue? World Commerce & Contracting has estimated that an average of 9.2% of a contract’s value is lost due to contracts not being followed after they are signed.
Unintended, unnoticed, and preventable, revenue leakage can exist throughout your end-to-end revenue generation process, but comes down to a simple fact: organizations often set terms in their contracts that are invisible to the rest of the enterprise. This leads to missed entitlements and obligations, be they volume discounts, payment terms, or delivery requirements.
Gartner found 74 percent of CFOs suggested lower profitability as the biggest risk organizations face from input price inflation. Digital investment is being seen as the key to mitigating inflationary pressures by increasing productivity and taking advantage of data.
The result is less cash in the business’s account — cash that could otherwise be spun into new investments, materials, or plant equipment. In the best of times, contract leakage is a liability and competitive disadvantage; in the worst of times, it is an invisible bleed that can devastate businesses.
For many manufacturers, it is not the best of times. Once anticipated to be a short-term anomaly, current inflation promises to erode margins as costs of materials, parts, and labor climb as manufacturers try to hold the bottom line. A survey by Gartner found 74 percent of CFOs see lower profitability as the biggest risk organizations face from input price inflation. Digital investment is being seen as the key to mitigating inflationary pressures by increasing productivity and taking advantage of data.
The need for unified systems in contracting
A major cause for revenue leakage for manufacturers stems from their lack of a unified system that manages the thousands (or millions) of contracts that exist across the enterprise. When the sales team uses one contract system to make deals, and the finance uses another to track payments, and procurement a third to source goods needed to fulfill the sales orders … discrepancies happen.
For example, a customer requirement may be put into a sales contract. This is an obligation that needs to be flowed down to procurement or production. Disjointed systems give plenty of opportunity for the obligation to get lost, putting delivery—and therefore payment—at risk. Or, if finance fails to enforce payment terms on the sales contracts, money stays out of the business longer than necessary.
5 strategies to stop the leak
A holistic contract lifecycle management (CLM) solution addresses revenue leakage by putting sales, purchasing, and production contracts in one place. This speeds up time to revenue, reduces human error, and prevents payment delays. With a sophisticated CLM system, revenue leakage is no longer an invisible drain on value. Tracking and quantifying contract performance and intent is easier with relevant data all stored in a single, centralized place.
Here are five best practice strategies to reduce revenue leakage.
1. Integrate your contract and enterprise software
Unifying contracting software with enterprise systems like your CRM and ERP helps reduce leakage by eliminating the process gaps as a deal goes from sales to contract to delivery and, finally, payment. It’s important to make sure your CLM solution takes advantage of the latest in AI to integrate contract data across the lifecycle of a deal. Enterprise integrations mean nothing goes into the contract that wasn’t negotiated during the sales cycle, and nothing happens in operations that wasn't agreed to in the contracts.
2. Review pricing regularly
Reduce leakage by regularly reviewing pricing strategies to make sure prices are appropriate and avoid potential loss from undercharging. Investigate modern contract management tools that incorporate pricing collaboration services to streamline pricing updates with suppliers and partners to stay on top of them.
3. Track and monitor obligations
Track your key commitments and obligations with customers and suppliers, including KPIs related to revenue recovery, customer retention, and average order value. This way you can identify trends and potential issues, analyze data to determine where leakage occurs, and take steps to address it. It’s estimated that between 5 and 40 percent of a deal’s value is lost because business functions don’t efficiently track contracts!
4. Take advantage of AI
By automating tasks in sales and contracting, you can reduce errors and improve efficiency, resulting in reduced revenue leakage. AI can automate the identification of pricing errors and payment obligations, bringing anomalies around receivables to light and ensuring they are processed accurately and quickly. AI can also accelerate business: According to Aberdeen, customers that use advanced CLM tools can save an average of 16 days of cycle time to create, negotiate, and approve contracts—meaning deals close faster and start bringing dollars into the business.
5. Don’t forget the human element
Train employees on the latest trends and best practices related to sales and contracting. Include education on the latest contract management AI such as generative AI and the rapid advancements taking place that can improve their work lives and help the business be more profitable.
By implementing these strategies, companies can take steps toward reducing revenue leakage and improving their overall financial performance. On top of that, by implementing certain tasks and providing a clear visual representation of the contract lifecycle, manufacturers can identify and repair bottlenecks and inefficiencies.
With the volume and complexity of contracts manufacturers must handle in today’s environment, it takes the assistance of AI and deep integrations to centralize and unify their management. CLM that leverages sophisticated AI has become a must-have investment for manufacturers, bringing sales and contracting together into one system, reducing revenue leakage, streamlining processes, and creating a faster road to revenue.
To see how an AI-powered CLM technology can help you reach your revenue goals, schedule a free consultation with an Icertis platform specialist today.
