University of Chicago
IACCM research has shown that good Contract Development and Management could save a massive 9% on average of a company's annual revenue. Why is it that years later, the value leakage continues?
The purposes of a contract are largely to secure economic value and to operate as an instrument of business management and control. Research data shows that in many cases, the contracts we produce and the way they are managed are not 'fit for purpose'. The result is substantial value erosion representing an average of 9% of annual revenue value leakage.
This leakage value was derived from IACCM research representing over 12,000 organizations, and originally reported in 2012. The 9% is an average number, that crosses industry, company, and contract size. Companies that are highly transactional with tight margins who measure results continuously will have a lower number than those who run large longer term mutli-level projects and contracts, where the leakage is higher. CPG could fall in the former category, Oil & Gas/Utilities could fall into the later.
Since the updated report came out in 2015, many of the larger consulting companies have done independent research with their clients, and have corroborated the fact that there is a large portion of revenue being missed. In 2020, we plan to conduct further benchmarking studies that will look to see if value leakage has changed in any material way. So the 9% should be looked at as a guidepost, and the actual number for a particular company investigated. Whether the leakage is 6% or 20%, there is room for improvement. The value is there, how can you make sure you keep it?
Value can be lost after the deal is signed, but it is also important to remember value can be lost before the deal is signed. It is important to note this is just value erosion - not value missed (e.g. failure to improve or innovate) that number is not easily quantifiable. If you are not aware of the potential that was missed, you can't track it. Are you one of the companies that just doesn't react to an opportunity, rather aims to respond to it taking into account many different alternatives and options with a strategic playbook? Exploring options not only your side but what the other side may offer as well?