The word leakage can never leave us with a positive feeling. But when the leakage is that of revenue, it can be devastating, as it creates a huge hole in the enterprise’s pockets. In contracts management, revenue leakage is seen as lost opportunities. Revenue is lost when sales and billing are misinformed or misinterpreted. Apart from being a signed agreement between two parties, a contract also brings with it a lot of opportunities, which when tapped, can bring in more revenue than expected. Opportunities such as renewals, cross-sell, negotiations or billing timings are the time to revisit these contracts and improve their terms for long-term relationship with clients or suppliers, adding value to your businesses in terms of revenue and reputation.
However, when such opportunities are missed, it leads to revenue leakages. Though it is an unnoticed or unintended loss of revenue, statistics indicate that most companies end up losing anywhere between 1 and 5% of their earnings, before they can identify or realize the leakage.
A recent study by International Association for Contract and Commercial Management (IACCM) reveals that poor contract management can result in revenue losses up to 9.2 percent every year.
As someone new in procurement you may ask, how can a contract prevent or cause revenue leakage? Apart from the contract terms, which need to be followed to the tee to avoid revenue leakages, it is also the additional provisions within the contracts, which lead to creating value or leaking revenue for the enterprise. With hundreds and thousands of contracts being created and amended in an organization, it becomes nearly impossible to get into the details and manage the contracts impeccably resulting in value realization and avoiding losses. While, there may be various reasons of revenue leakage, the most common ones are errors in data entry, unpaid accounts, client management issues, incorrect reporting and discounting, which are rooted in lack of visibility, transparency, automation and accountability that have financial impact on the organization.
Recently, the city of New Orleans overpaid a whopping $4million, thanks to poor contract enforcement practices. In another case, revenue leakage was on a rise due to invoices being held up by customers or not being paid on time. According to a recent study conducted by Aberdeen Group, it was found that 13-21% of invoices arrive as incorrect or without complete information, which ends up being disputed and therefore unpaid. Such errors resulting in non-realization of invoices could affect both the top and bottom line.
The first and foremost step towards preventing revenue leakage is to be thorough with the terms and conditions of a contract and its details. It could be information about the products or services covered by the contract, the agreed upon rate at which the invoice has been raised, the incentives or discounts, reimbursements or expenses, renewing terms, protection of intellectual property, or even the confidentiality clauses. It is the very crucial to know every part of the contract to be able to prevent revenue leakage. This can be particularly difficult when contracts are created, stored and managed by human resources. Enterprises need automated monitoring and alert mechanisms that keep the sales and finance teams on top of operations.
Preventing revenue leakage requires proactively monitoring contracts, while creating, amending and implementing. Identifying, recouping and preventing revenue leaks is possible by scrutinizing contracts and critically analyzing processes. With technological innovations such as machine learning, natural language processing (NLP), and text analytics, artificial intelligence (AI) is gaining traction from across business functions and processes including contract analysis and management.
A cognitive contracts analysis platform enables automatic monitoring of contracts, flagging whenever required and alerting the system to intervene, thus helping prevent revenue leakages. It consolidates the contracting processes into one single system, eliminating the need for multiple chain of e-mails. This helps streamline the review process eliminates duplication and clearly steers the focus to constructive discussions and contract closures.
It can also automate classification of risks and thus assign them to the right stakeholders, enabling automation of workflows, better cross-functional coordination, contract standardization, higher visibility and better enforcement of terms ushering in the best contract management practices.
By automating review and monitoring, contract analysis ensures that operations and sales teams are freed to do core work, without ever missing an important deadline or contractual obligation.
XtractEdge Contract Analysis utilizes advanced Machine Learning (ML) techniques to automate contracts extraction, risk analysis and review of unstructured contracts. It acts as a single source of truth to answer any kind of contracts-related information. It leverages ML techniques such as vision-based, semantics-based, and language-sequence-based to transform the process of analyzing and reviewing contracts, providing an intuitive workbench with different personas to configure and train ML models.
Most enterprises become an easy prey to the opaque and inaccessible contracts. As per IACCM, the cost of a standard, low risk procurement contract from draft to signature has gone up by 38% in 6 years costing almost $6,900. This is where AI-powered contracts analysis can be of help. Not only does it provide visibility and accessibility to contracts, it also simplifies the entire process and reduces the dependency on legal process outsourcing thus cutting down the legal operational costs, while empowering the in-house procurement teams. A clear contract analysis platform can help identify the anomalies, call alerts to rectify the same and help fulfill the contractual obligations, thereby preventing revenue leakage at all costs.