Why You Need to Rethink Your Contract and Revenue Management
To see why technology companies need to keep an eye on contract and revenue management, look no further than your smartphone. Think about where it came from. You likely bought it from a retailer, which received it from a distributor, which relayed it from the manufacturer, which sourced the dozens of components from equally as many suppliers.
The journey each smartphone makes from raw components to a finished product encapsulates the many opportunities for error in a company’s revenue management. The smartphone’s journey from the manufacturing floor to the store shelf is governed by complex incentives and promotions that are likely similar to your own company’s partner incentives, as you can see in this infographic.
In both cases, the agreements’ tiers and milestones are easy to mismanage, sometimes at the cost of millions or billions of dollars each year. Here’s a look at what’s at stake and how companies can think more strategically about their channel partnerships.
The cost of mismanaging contracts and revenue
Channel partner performance is often driven by rebates, chargebacks, and brand promotions, which, when improperly managed, result in either underpayments, which will upset your partners, or overpayments and duplicate payments, which chisel away at your bottom line. In fact, Gartner estimates that inefficient revenue processes can cost companies 1 to 2 percent of gross revenue.
Let’s put that in perspective, looking at the two leaders in smartphones: Apple and Samsung. For its fiscal first quarter of 2013, Apple reported revenues of $54.5 billion, while Samsung’s reached $52 billion in the fourth quarter of 2012. If either one was improperly managing its revenue, the cost to the bottom line – based on the Gartner estimate of 2 percent – would be $1 billion per quarter.
It’s time to rethink revenue
Clearly the stakes are high, but what can companies do to avoid such a fate or course correct if they suspect their channel incentives might be fueling mispayments? Here are three ways to dig up the root causes of mismanaged revenue and change the way your company approaches contracts and incentives.
- Step away from the spreadsheets A surprising 64 percent of businesses still rely on spreadsheets or other manual solutions to manage their finance functions, despite the many inherent risks in doing so. Just one typo can invalidate the entire spreadsheet, and more than 90 percent of corporate spreadsheets contain material errors. So if you’re still using spreadsheets to manage revenue, look instead for an automated solution that takes the risk of human error out of rebate and chargeback calculations.
- Know what success looks like. Contracts should fulfill a particular business goal. If you don’t fully understand the purpose of an agreement with a partner, don’t have an end goal in mind, and have no way to measure success, then it’s time to rethink that contract. Define the purpose, end goal, and key metrics that spell success so you can better distinguish the agreements that are working for you from those working against you.
- View contracts as part of a larger business ecosystem. Any agreement with a channel partner isn’t a one-off deal. Each contract is part of a feedback cycle, which, if closely monitored, can show your company which incentives work and which don’t. This allows you to continuously refine your agreements over time, leading to more favorable contracts that better align incentives and promotions with overall business goals.
So follow and learn from the smartphone money trail and take some time to evaluate your current contract and revenue management strategies. By replacing manual spreadsheet systems and focusing on strategic, measurable results, your organization can better protect its revenue and make a big difference on your company’s bottom line.
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