Rethink Revenue Management: 3 Ways to Avoid Common Pitfalls

Spend Matters welcomes a guest post from Michael Kerman, the Director of Industry Development at Revitas.

The financial and legal perils of using outdated, manual, and silo-based revenue management practices can be so severe that your company could be losing millions – or billions – of dollars each year. While this should be a wake-up call for finance, sales, and supply chain executives, many still rely on antiquated systems and struggle with how to drive greater revenue, streamline operations and optimize spending. So I ask, “what would you do to reduce revenue leakage in your organization?”

The complex, tiered incentives and promotions that many manufacturers set up for their partners can drain 1-2% of gross revenue when managed improperly, according to the Gartner report, “Emerging Technology Analysis: Economy Fueling Wholesale Distributors' Interest in Chargeback Management.” At that rate, major smartphone manufacturers, for example, could be leaking billions of dollars in revenue a year (see an infographic here).

An automated system can track and execute incentives and promotions, plus store all data in a single repository. But before manufacturing companies move to implement this kind of solution, they must change their own mindsets about revenue management and those of everyone around them. Here are three simple recommendations for changing the way your company approaches incentives and revenue management:

1. Avoid linear thinking.

Many executives see contracts, agreements, or promotions as having a beginning, middle, and end. They’re created, revised, designed, approved, and executed.

In my own experience, efficiency (and relationship with my CFO) improved when I saw every agreement as a cycle. Creation, review, and approval is just the start. Those agreements are then used as the baseline for measuring the contract or promotion’s performance. Analytics are applied to assess their effectiveness and determine how to craft more effective promotions or deals in the future. Incentives drive behavior, which generates revenue, which in turn is measured against the original agreement. Recognizing this cycle allows for an integrated, closed-loop process that is measureable, easily audited, and leads to continuous improvement.

2. Restrain your inner spreadsheet junkie

I’ve built complex spreadsheet models that began as intuitive and easy to use, and end up downright scary. I’ve witnessed the dramatic impact of a few cut-and-paste errors on determining the proper rebate tier or applicable discount. For example, a 30% credit almost paid out on more than $500,000 in sales transactions when the proper amount discount should have been around 7.5 percent. Mea culpa. Fortunately, I’ve always had someone in finance double-check my calculations.

But some organizations are not as lucky. Earlier this year, an internal report was released detailing the issues that led to JPMorgan’s $6.2 billion in trading losses in 2012. One of the causes was traced back to error-prone spreadsheets on which JPMorgan managed its finance functions. Data was uploaded manually, without sufficient quality control. On top of this, the spreadsheet-based calculations were made with frequent formula and code changes.

Spreadsheets can be useful, but I strongly recommend process and system improvements for more control and greater accuracy. For example, separate the modeler from the users, ensure you have a clear and documented process for all requests, and identify the different systems, applications, and results impacted by the spreadsheet’s output.

3. Build in metrics from day one

I once reviewed a channel partner contract with the intent of quickly signing it and getting it executed. The contract had numerous appendices documenting all types of discounts, accelerators, and so on that seemed to cover every possible scenario. However, despite all the figures, clauses, and appendices, it really wasn’t clear what two or three key objectives and metrics would make this contract a success. Was it revenue? Profitability? Market share? Share of wallet? Share taken from a competitor? I went back to the contract request form and modified it to include several additional fields (all mandatory, naturally):

  • What is our purpose in implementing this contract?
  • What result do we expect from this contract?
  • How will we measure this contract’s success?

As you can imagine, this led to a number of challenging discussions and meetings. However, we ultimately shifted our focus from “just get the contract done” to “how will this contract support our strategic initiatives and how can we measure its impact?”

Agreements, incentives, analytics, and compliance are all part of the same core revenue management cycle, but they’re often managed by different functions, tools, and processes. This leads to an inconsistent, error-prone system that fails to provide insight into what’s working and what isn’t. And as you can see from the Revitas infographic, this can result in revenue leakage throughout the manufacturing and distribution processes.

By focusing on an integrated approach to contracts, revenue and compliance, you can drive greater revenue, streamline operations, and optimize spending across all of your trading partners.

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