Stopping revenue leakage

By Justin Schweisberger

Canada’s ongoing transition to a new payments infrastructure that provides full remittance data for electronic transactions will be a huge boon for businesses, accelerating the migration from cheques, reducing manual reconciliation and streamlining the supply chain and collections.

All of which is great news for CFOs and payment executives at B2B companies, because it means they can turn their attention to another area where new efficiencies are ripe for the picking: revenue leakage.

Revenue leakage is money that’s lost when businesses fail to capitalize on the full value of their current, contracted commercial relationships. Every quarter, B2B companies lose up to five per cent of their revenue due to errors and process gaps that prevent account managers from accessing important information like renewal events, potential price increases and customer contract obligations¹. In large organizations, the losses can easily run into the tens of millions of dollars every year.

Nearly all B2B companies experience some amount of revenue leakage. The chief cause of the income drain is an inability to see and act on the right information at the right time.

B2B relationships are often highly negotiated, with numerous customer-specific requirements encased in the dense legalese of contracts, where they are hard to extract or automate. Customer data is scattered across a jumble of systems including contract repositories, customer relationship management (CRM) platforms and quote-to-cash tools. As a result, it’s difficult to get unified pictures of the relationships. At many businesses, a history of multiple acquisitions and ever-expanding product lines add to the complexity, thereby increasing the chance of revenue gaps and the size of the potential loss.

The good news: a well-targeted revenue project can deliver results quickly. And because this is money that’s already in the system or on your radar it has little associated cost of goods and services: and can deliver a disproportionate impact to the bottom line.

Where to find revenue leaks

At my company, Pramata, we’ve identified seven areas where revenue leaks are most likely to occur, based on more than a decade of helping companies maximize the value of their customer relationships.

1. Renewal management. Contract renewals are the perfect moment to expand the relationships and renegotiate unfavourable terms. But understanding the attributes of customers that are most likely to renew and those at risk often means sorting through years of historical documentation. Even simple but crucial data points, such as contract renewal dates, can be difficult to determine without a hunt through multiple systems and documents. Result: excess churn.
2. Contracted pricing variables. Contracts often include provisions that allow the vendor to raise prices, for example based on increases in the Consumer Price Index over multi-year agreements. But tracking and managing these mechanisms consistently is a challenge. Sales teams may not even know they exist. Discounts can be problematic too; companies may miss their expiration dates and fail to deactivate them on time. Result: missed revenue growth.
3. Sales process productivity. The information that sales teams need to hone their pitches is located in multiple places and not readily accessible. It’s often out-of-date, inaccurate or incomplete. Sales reps spend too long pulling the intelligence together and, in the meantime, find themselves outflanked by competitors. Result: fewer deals processed.
4. Entitlement and billing reconciliation. Companies aren’t always sure which products customers have purchased or what permissions and authorizations they’re entitled to. For subscriptions or services, they strain to compare actual usage to contract. Result: overcharged or undercharged customers.
5. Service obligations. Negotiated service inclusions and exclusions vary so widely that it’s hard to know what should or shouldn’t be billed. Warranties, specific maintenance commitments for products you’re sunsetting, even special invoicing obligations…it’s a long list, and most B2Bs struggle to manage it. Result: unnecessary service penalties.
6. Expansion opportunities. It’s hard to identify white-space opportunities when you’re not sure what customers already own. Upsell and cross-sell opportunities evaporate when companies lack insight into customers’ previous buying patterns. Result: suboptimal expansion offers.
7. Deferred revenue. Right-of-return agreements complicate revenue recognition. Payment terms are too variable and often too long. Result: delayed revenue.

Fixing revenue holes in three steps

Every business is different but knowing where revenue leaks are most likely to happen gives you a head start on freeing up trapped customer value. I recommend these tried-and-true steps for your revenue recovery initiative:

Step 1. Find the gaps. Identify the revenue leakage zones that most likely apply to your business. If you’re a pharmaceuticals distributor, for example, you may have complex rebate structures and minimum purchase commitments that affect billing, so take a close look at contracted pricing variables. Mature high-tech firms often confront challenges around entitlements, for example in monitoring user licenses and software licenses.

If no one particular area stands out consider renewal management for contracts coming up in, say, the next quarter. This leakage zone offers the opportunity for a holistic review of the customer relationships; it’s often one of the quickest routes to revenue recovery.

Step 2. Choose your customer focus. Not all customer relationships are created equal and some will provide more fertile ground for revenue initiatives than others. Look for those relationships that can produce the most rapid revenue gains. Perhaps your top 20 most heavily negotiated contracts provide plenty of examples of the leakage zones you identified in Step 1. Or perhaps a broader band of mid-level accounts are constricted by product or pricing structures that are hard to manage. You’re looking for a quick win that shows the tangible financial value from eliminating a source of revenue leakage.

Step 3. Repeat and sustain. With a quick win under your belt, it’s time to look around for other leaks to fix. You’ll want to create a long-term strategy to ensure that preventing and eliminating revenue leakage becomes embedded in your organization’s DNA.

With a carefully targeted, repeatable revenue recovery programme, finance leaders can ensure that revenue delivery becomes every bit as efficient as the payments pipeline. And that can only improve B2B organizations’ customer relationships as well as their financial performance.

Justin Schweisberger is the chief product officer at Pramata (www.pramata.com), which helps B2B enterprises digitize their commercial relationships to eliminate revenue leakage. Prior to joining, he managed merger and acquisition (M&A) activities for the Husch Blackwell law firm.

1 Steve Van der Steen and Ludwig Bollaerts, “A powerful and effective answer to revenue leakage?”, EY, 2017.