Automated Price Adjustments with CLM Can Eliminate Revenue Leakage from Your Contracts

In today’s volatile economic landscape, many companies embed clauses in their contracts that allow for price adjustments based on fluctuations in input costs—such as inflation or commodity prices. This is crucial for protecting margins, especially in industries where raw material costs can spike unpredictably.

For instance, consider a manufacturing supplier who provides steel parts to another company. To safeguard their profitability, the supplier might negotiate a clause that triggers a price adjustment if steel prices rise above a certain threshold. Buyers often accept these terms as they recognize the need to keep suppliers viable in the face of rising costs.

Similarly, service providers frequently incorporate inflation adjustments into their contracts. For example, they may stipulate that every six months, prices can be adjusted according to a neutral, third-party index like the Consumer Price Index (CPI). This mechanism ensures that sudden inflation, such as what we've seen in recent years, doesn't erode profits.

The Challenge: Contract Leakage

The problem arises when organizations have thousands, or even hundreds of thousands, of active contracts across their business. Managing and enforcing these price adjustment provisions becomes a monumental task. Inconsistent handling across accounts often leads to companies missing out on their contractual entitlements.

“This phenomenon is known as "contract leakage"—the difference between what a company should earn or pay based on the contract terms and what actually happens in practice.”

Contract leakage is a significant drain on a business's bottom line. Studies by McKinsey and World Commerce & Contracting estimate that companies lose between 8.2% and 9% of a contract's value due to leakage.

The Impact of Missed Price Adjustments

 Inflationary pressures have highlighted how many businesses lack the necessary contract controls to ensure they are updating their prices to reflect rising input costs. For example, a 2022 report by Boston Consulting Group (BCG) revealed a case where one Icertis customer discovered 3.5% of potential revenue was missed due to unexecuted inflation adjustments—equating to hundreds of millions of dollars in lost income.

The Solution: AI and Automated Contract Management

In the age of AI and automation, such losses are entirely avoidable. BCG succinctly puts it: "Contract management solutions have the potential to prevent significant margin reduction. They also help improve visibility by providing a centralized digital repository of contracts for the C-suite and enable them to track their outstanding contractual obligations and manage commitments. AI-enabled solutions backed by cloud storage functionalities, hold the key to the future of arresting margin erosion and providing an efficient and transparent contract management solution."

With AI and automation, organizations can ensure that inflation and other price adjustment clauses are systematically included in every contract. If customers push back, the system can provide alternative clauses and negotiation playbooks, streamlining the entire process. Once terms are agreed upon, automated alerts and ERP system integrations can monitor compliance, ensuring that these critical provisions are enforced.

Conclusion

As businesses navigate a world of rising costs and economic uncertainty, the ability to automatically track and enforce contractual commitments is not just a luxury—it's a necessity. By leveraging AI-driven contract management solutions, companies can effectively eliminate contract leakage, secure their margins, and reclaim revenue that would otherwise be lost.