Signs of Value Leakage Issues in Your Contract Life Cycle

There are many clear signs of value leakage that you may be impacting your contract value and impacting your profit maximization. Questions you may not want to hear since they are a sign that you have a value leak in your organization even before you bring out a proposal which may be impacting profit maximization, are the following.

Value Leakage Issues in the Pre-Proposal and RFP Phase

If you hear the following questions before you even started working on a proposal, it may already indicate that the expected revenue value is at risk:

• Can you tell me which business unit is responsible for responding to this RFP?
• We didn’t know this RFP was going to be sent to us?
• Where is the RFP for the proposal we’re working on?
• Why are we submitting an unsolicited proposal?
• Is this a new prospect or an existing customer?
• Where can I find data on the prospect?
• Do we know who our competitors are?
• Where are my existing contracts for this customer?
• What terms & conditions did we use for this customer?
• Have we made non-standard commitments in the past?
• Do we have enough resources to fulfill the terms of the agreement?

If you have to ask any of the above questions you most probably are wasting valuable time and money before you even have started creating the proposal!

Identifying that Profit is Not Being Maximized in the Proposal Phase

If you hear the following questions when you are working on a proposal you may start taking measure because value leakage is threatening your margin:

• Who in our organization can draft a winning proposal?
• Can we deliver this proposal to the customer within a week?
• Do we know all the customer requirements and what they really need and did we check that with them?
• Do we have a clear and strong value proposition?
• What is our pricing strategy, it is based on value and does it maximize profit the best we can?
• Do we have any idea what the competition is quoting?
• Which latest negotiated price catalog version is currently in effect at each customer?
• Have we identified any upselling or cross-selling opportunities which we can also offer?
• Which terms and conditions will be applicable?
• Which version of the proposal draft is the right one and where can I find it?
• What did we agree to before with this customer as for prices, discounts?
• Do we have preferred or most favorite customer clauses in existing contracts, and are we obligated under this proposal to also offer them?
• Is it crystal clear and unambiguous what we are exactly selling, and what not?
• Do we have all resources available and can we deliver on time?
• Were all stakeholders involved from the beginning and has as the proposal been reviewed and approved by management?

All the above can lead to inefficiencies, loss of potential revenue moments in the next phases, and missed sales opportunities.

Further Profit Erosion Occurring in the Contract Drafting and Negotiation Phase

The phase in which traditionally a lot of value erodes or is ‘given away’ is the contract drafting and negotiation phase, so you need to be alert when you hear the following questions:

• Who in our organization can draft and negotiate the contract?
• Can you explain to me what exactly is written in these contract clauses mean?
• Are we able to provide a draft to the customer this week?
• Do we have a standard contract template we can use for this contract?
• Are there non-standard clauses in this contract?
• Does the draft contract cover our future risks, but also opportunities, performance, and potential benefits?
• Are we actually describing the business relationship we want to have with our customers or only describing our own internal governance and compliance processes and focusing too much on risks and blame/fault?
• Are our negotiations effective and efficient and not leading to unnecessary delays which may lead to competitors coming in and sidetracking us?

Poor drafting and negotiation skills leading to unnecessary price discounts and risk exposure and essential clauses related to profit maximization or preventing value leakage (like liability cap) from being weakened.

Loss of Margin Occurring in the Contract Manage Phase

The phase in which value leakage continues is the contract manage phase. Bring in the value rescue team when you hear the following questions:

• Will there be a handover from the deal team to make sure everybody understands the contract?
• Were the contracts routed to the implementation team?
• Are post-award processes and governance in place to prevent repetitive issues and errors causing value loss?
• Are all subcontracts in place and have subcontractors started work?
• Why are the acceptance protocols so lengthy?
• Are we over-servicing?
• What does this clause exactly say and why is the contract so difficult to understand?
• Why can’t I find the warranty clause in the contract?
• How can I find a way between all the different or non-standard terms & conditions in this and other contracts without losing the overview of the obligations?
• Why are we receiving claims for penalties, liquidated damages?
• Did we pass-through all costs and risks to the subcontractors?
• Why can’t we get invoicing right?
• Are our customers meeting their payment obligations?
• Did we apply price escalation at the end of the year?
• What up-sell/cross-sell opportunities have you identified?

Contract Value Leakage in the Contract Change & Renewal Phase

The margins can also be hit in contract change and renewal phases. When your contract needs to be adjusted, updated, options for extension of the duration are exercised or changes are needed due to whatever reasons, like new regulations, customers demanding it, be careful when you hear (or don’t hear) the following questions:

• What are the product/service renewal dates?
• Did we already foresee these changes in regulation?
• Have we amended the contract for this change?
• Did we think of the impact of the proposed change on other contracts?
• Shouldn’t we make use of this opportunity to change or renew this contract to improve our terms and conditions?
• Did we do an analysis of whether we again have the resources to continue delivering after the renewal date?
• What up-sell/cross-sell opportunities have we identified that can be included in the change or renewal of the contracts ?

Contract Underperformance Becomes Apparent at Close-out or Exit

At close-out, cancellation, or termination of an agreement, you can calculate how much value you lost during the whole lifetime of the contract. I say ‘can’ because I have never seen a company who actually followed this.

In mega-projects involving expenditure over 500 million euros, it is even worse. Studies (2013) of the European Commission show that 65% fail or severely underperform, with an average cost overrun of 80%.

Much of this failure could be avoided through better commercial and contract practices, processes, and tools. On both sides of the equation: buy-side and sell-side.

One thing is for sure: continuing to invest in traditional business systems and processes will not help you eliminate value leakage. Limited or no use of contract technology results in poor contract visibility, inefficiencies, and loss of quality in performance and analysis and complete, timely, accurate information not getting to the people who need it.

I can help you with auditing your commercial and contract management processes to maximize your profits by reducing contract value leakage during the lifetime of your contracts.