Introduction
Revenue leakage in projects is like a disease that eats away your revenue gradually without anyone realizing it. It is like a water tap kept slightly open that does not make much noise, but over a period, you get an empty tank and start wondering what happened! Revenues are hard-earned money, and there should not be any reason to lose it. But it is also a fact that there are leakages in most projects that can erode your profits if not detected in time. Some statistics show that revenue leakage amounts to around 1 to 5% every year for an IT Organization due to multiple reasons. Meaning for a 1 MUSD revenue, 50 K is lost annually. In these challenging times, there cannot be a reason why any amount should be blown away without giving a try to prevent it. Let us discuss various possibilities of revenue leakage (RL) and how we can avoid it happening.
Below are eight revenue leakages that can be seen in projects very often:
Incomplete estimation – When you are working on the estimates to submit a proposal to a customer, do you consider all the efforts needed to develop a product? Or are you happy with a ‘guestimate’ based on your experience? In doing that, we miss out on some of the key activities involved in the work. We must understand that all projects are different. So, estimation must be done precisely to the requirements. Yes, it is a good idea to take some references from previous projects, but time needs to be spent on the current one to come out with an accurate figure.
What can we do about it – One of the best ways is to go for a template-based estimation depending on the type of projects you estimate. That way, the chances of missing essential components will not be there. This can be an estimating tool or even an excel spreadsheet with required estimation components. Every time use the same template and enhance it as you go along.
Not Mapping the right person for the right role – This happens while allocating the team to an IT project. When you have submitted a proposal with a defined margin, you might have considered talents having lesser experience for the job. But when you actually allocate the resource to projects, we assign a person with higher expertise and a higher rate. Reasons can be the availability of the workforce then, or the Project Manager was not aware of what was proposed earlier. But this allocation mismatch happens a lot in projects. The consequence of such a mismatch is revenue loss. Just a USD 5 rate difference for a three-month engagement amounts to around 16-17% loss.
What can we do about it – This is a practical challenge, and we may not be able to eliminate it entirely. But what is important here is to have a system in place where there is the visibility of this mismatch and Project Managers are aware of the same. In status reports or resource allocation reports, this should get highlighted to all relevant stakeholders. That way, the issue can be tracked, and the proper allocations to be done as soon as possible to minimize RL.
Rework – For multiple reasons, there is rework in a project. This can be due to incomplete requirement gathering or defects, or changes that came in between. But the root cause of rework needs to be determined and rectified. Rework is one of the single most reason for revenue loss, and this happens in every project across the industry.
What can we do about it – There are multiple reasons for rework to occur, so avoiding it ultimately is a challenge. However, a well-integrated system may at least give an idea of exactly how much rework has happened and if that can be avoided in the future. Many a time, rework happens because changes are entertained between a running project. These changes might be logged as change requests, but if a proper impact analysis is not done before estimating, some of the completed work might have to be reworked. Hence, there is revenue loss and time overruns.
Gold Plating – Gold plating is another common reason for revenue loss. Here the project team happens to add functionalities or services which were not in scope. Typically, the intention is to make the customer happy, but the effort behind it is unaccounted for. These are something that can be avoided.
Scope Creep – Here, the customer gradually increases the scope of work without factoring in the impact on the timeline and cost of the project. If the deadline is not missed, this issue will remain hidden. But in any case, an additional and unaccounted effort is consumed, hence revenue loss.
What can we do about it – The project’s scope needs to be prepared and documented. Have the backlog items in place. Please discuss with your customer and get a sign-off and make it the baseline. Internal stakeholders should also be made aware of the scope. The project team – PM, QA, and Developer need to ensure that they are working as per the given scope, nothing less or nothing more. Any changes from baseline should be tracked with a change request process with impact analysis and estimates. Once the customer approves the same, consider it in the running project else consider it for future releases.
Delay in receiving revenue – Invoices once sent to the customer need to be followed up so that it is received within defined payment terms. Delay in receiving revenue can be very much detrimental as this impacts cash flow and thus hinders business growth. It also impacts payables and can also call for penalties as agreed with your supplier payments. So, it is very important that a proper system is established for the receivables and Days Sales Outstanding (DSO) to be kept at a minimum. Else paying penalties will again add to the revenue leakage of the company.
What can we do about it – Delayed payments are widespread. So, identify the root causes. High DSO is one of the indicators that there is some failure in the collection process and needs some attention. Establish a set of standard operating procedures (SOPs) for your sales team, automatic alerts, or follow-ups to the concerned person so that the collection happens on time.
A few very common reasons are
- Timesheet not approved by the customer on time
- Delay in raising the invoice for an Approved timesheet
- Delay in customer’s payments system
- The cash-flow issue at the customer’s end
- Incorrect invoices sent to the customer and got rejected
Improper Process Implementations – In most organizations, there is a system for invoicing and collecting payments. There are also systems for tracking project-related tasks and monitoring them. However, if these are not integrated with the Project Financial Systems then chances are that manual interventions will be required before an invoice is raised. If the volume of invoices raised per month is a smaller amount, then manual billing works well. But as the business grows it is essential that proper processes and tools are deployed in time so that the probability of process failure reduces. Also, these processes and tools are to be monitored regularly and adequate changes implemented. With changing businesses scenarios across the world, it is imperative that our processes are tuned in for a leakage-free experience.
What can we do about it – Establish a system in place that takes care of all the stages of a project starting from initiation, planning, execution, and finally to financials and billing. Get a tool that integrates all of them. Avoid using siloed systems because it does not give the real on-ground picture. Define the metrics that need to be measured so that the project is on track – on target and within budget. Monitor these parameters and make course corrections if you see that the parameters are not within defined limits. This way over a short period of time your project management system will mature, and the project will give a more predictable outcome.
The cost involved in ad hoc activities – Many a time existing or new customer requests proof of concepts and solutions for their new initiatives. These are opportunities that can bloom into projects down the line and hence need to be considered from a long-term perspective. However, you need to put a fixed cap on this as resources are limited. If these were not planned, then over a period the effort invested may not yield any revenue. Sometimes, apart from utilizing your own resources, we might need to involve specialized consultants for such work and hence incur additional costs. So, if there is no funding coming up then we will have to consider it as leakage.
What can we do about it – Plan for a fixed capacity per month for such activities and discuss with your customers that any additional manpower that you have invested will be chargeable. This needs to be part of your ‘in scope’ activities in your Statement of Works (SOWs). This brings in transparency and customer will be happy to make those payments. Any additional effort spent needs to be part of your change management process and estimated accordingly.
Conclusion
The points that we mentioned here are at a very high level and probably just the tip of the iceberg. But we can help improve our project margins by avoiding revenue leakage by following the below steps:
- Identify the revenue leakage components in your project
- Work out the percentage loss from each of them
- Focus on the high-value leakages
- Take corrective actions like:
- Establish a system to monitor the identified leakage areas
- Make sure that areas, where process improvement is required, are implemented at the earliest
- Discuss with your customer on the billing issues if required
- Have an integrated Project Management system so that you track-measure-monitor-take corrective action to reduce or eliminate revenue leakage
- Make revenue leakage a part of your status report discussion with senior management or board members. Focussed attention on this loss will help improve the revenue and hence worth trying.
Revenue leakage is there in all projects and hence knowledge and identification of them is an absolute necessity. Since it eats away your margin silently makes it a vulnerable area to focus on. Thus, identify the leakage areas, get the necessary process or tools to plug them off, and monitor and track them to avoid recurrence. You will see improvement in project margins!
