Leakage refers to the difference between a contract’s expected value and what is achieved by its implementation. This is often called revenue leakage for sell-side contracts. The goal of the relationship, which is to make money through the provision of goods and services, is to prevent this from happening. (Procurement and buy-side contracts suffer leakage in terms of value or savings. These are the main goals of contracts negotiated with suppliers.
The concept of revenue leakage might surprise someone new to contract management. The contract should clearly state the services or goods to be delivered and the cost. Contracts often contain additional provisions in a dispute to protect both sides and ensure that revenue and value are as predictable as possible.
The path to contract fulfilment can be difficult. The terms of contracts can change over time; they are subject to negotiation changes and may be amended throughout their lifetime. This requires cooperation from all employees. It cannot be easy to manage hundreds or thousands of agreements. Money is lost due to billing errors, missed opportunities, and fulfilment issues.
What Are the Causes There for Contract Leakage?
Leakage can occur before and after the contract is signed (signing substandard agreements) or during execution (poor understanding and inability to comply with the conditions). Technicalities often cause contract leakage. Besides, contract management database breach can cause contract leakage. These clauses govern how a product or service should be produced and were never approved by the relevant internal department, supplier, or contractor.
Sometimes, technicalities can be so severe that it causes the entire project to stop and threaten the contract and the business relationship.
These are just a few examples of contracts leaked.
Invoicing Mistakes
Invoices may not include the correct pricing or contract terms. This can lead to a discrepancy between the billing price and the expected value of the company’s invoices. This is often the case when finance staff encounters unexpected terms or complex contracts they aren’t sure how to bill for.
Failing to Involve Stakeholders
Stakeholders are individuals, groups, or organizations directly affected by a contract’s outcome. How well these contractual relationships are managed could have a significant impact on the fulfilment of the contract. Poor contract management can lead to disastrous consequences for a project.
Pricing Adjustments That Are Not Realized
This is the difference between the current price and the previous price.
It generally affects companies that purchase components or products to improve or upsell them. Knowing the true value of your inventory will allow you to know how much a contract is worth at any given time.
Non-compliant Work
Suppose work was performed in part or entirely outside the scope of the contract. An example is a construction contract specifying that redevelopment must be carried out in accordance with various building codes. The non-compliant redevelopment would be treated as if it was done another way. Your business must inform the teams performing the redevelopment of your contracts about the requirements to ensure compliance.
Delivery Failures
Contracts are also a way to specify when and how a product or service will be delivered. Failure to meet expectations can lead to a loss of business relationships. These contract leakage types could lead to lost renewal opportunities, poor customer experiences, and loss of business.
How to Prevent Contract Leakage?
Implementing a contract management platform is the solution for the above-mentioned contract leakages. It streamlines the company’s contracting processes and allows for dynamic team communication. This enables the company to increase its profitability while reducing its overall contract management spending.
Contract management software supports all aspects of the process, from request to execution, storage, renewal, and disposal, through review, redlining, and approval. Here are some ways it can help you:
Clause libraries enable staff to create contracts from clauses approved and signed by relevant teams. This means potential problems with fulfilment or compliance can be flagged before signing the contract.
Managed workflows ensure that all teams work from one source of truth. This helps to reduce invoicing errors.
Compliance is automatically taken care of by automatic reporting. By connecting the contract terms to individual fulfilment or compliance parameters, integrations with other tools can help reduce the risk of delivery failures or unrealized price adjustments.
Contract Leakage: Contract Management Is the Solution
Standardizing contracting can solve leakage. It is recommended using high-quality, customized agreement templates and tools to negotiate, including click, accepts, playbooks, clear service level agreements (SLAs), and remedies.
Top companies also claimed that a CLM reduced contract value leakage by 35% compared to industry competitors. What impact does contract leakage have on your bottom line? There are huge profits and new regulations to consider when it is a good time to invest in contract management.
ContractSafe is the best-in-class CLM platform developed by contract managers. The extensive features of ContractSafe can be used across all industries and include contract templates to help you understand the CLM process.