Business Case for Legal Investing in Technology: From Cost Center to Revenue Enabler
Contracts are an organization’s number one economic asset, yet they are often some of the most neglected assets within the organization. According to the Aberdeen Group[179] and the IACCM,[180] most organizations suffer significantly from revenue leakage and incorrect/improper invoicing, which, depending on the size of the organization results in millions of Euros/USD/GBPs of lost revenue opportunities.
To combat this loss, organizations must have access, visibility and a disciplined approach to contract management and oversight.Legal has the opportunity to become heroes if they are able to help (re)gain even 1 % of this leakage from their sales contracts.
When we break sales contracts down into their very basics, they dictate every facet of the business relationship with a customer:
1. Define the products and services sold or licensed
2. Specify a period of time
3. Sets the price and the payment terms
4. Describes the service and support levels to be provided
5. Outlines discounts
6. Contains an inventory of legal terms and conditions
But among these types of agreements there are many missed revenue opportunities. This is according to the Aberdeen Group, which conducted a study of 250 organizations and discovered that 3 % of invoices are entered incorrectly: with inaccurate prices, incorrect quantities or missing products.
Another 4-9 % of revenue is lost due to other types of revenue leakage due to poor contracting according to Aberdeen and the IACCM. Aberdeen defines revenue leakage as “revenue lost from regulatory penalties, missed deadlines, collection failures, maverick pricing, lost sales and transaction errors.”
The challenge with maintaining oversight to contracts does not come in when all contacts are the exact same documents with the exact same commitments. The challenge occurs when contracts are negotiated creating non-standard clauses.
Common non-standard clauses include:• Custom pricing;
• unique payment terms; and
• one-off performance obligations.
To overcome this challenge, organizations must be able to capture and report on the sales contracts across the enterprise. These issues get trickier when organizations analyze who within their organization negotiates these agreements—is it the legal department or the line of business? When is the legal department engaged (if ever) in these seemingly straightforward and standard agreements?
Another challenge is tracking discounting. According to Aberdeen, when discounts are offered to customers who meet certain volume commitments, payment timeframes or other milestones create a huge opportunity for revenue leakage.
• Discounts may be offered if customers can meet certain volume commitments, payment timeframes or other guidelines; and
• often times discounts are provided/granted even though customers do not hit targeted milestones and this lack of visibility can result in significant revenue reduction (up to 10 % per deal according to Aberdeen).
Three other terms cause opportunity for lengthening or recreating sales cycles and revenue leakage.
• Renewal: If there is not a clear understanding of term or termination, a “sure thing” renewal can disappear;
• Most Favored Nations: “I promise that you will always have the best pricing we offer.” Nearly impossible for most organizations to manage; and
• Payment: These provisions and revenue recognition can go hand in hand.
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