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Where do revenue leaks originate?

Flowtap Insight

Revenue leaks or seepage losses, these terms imply something bad. A leak of any kind is never a good thing. If the leak is related to a company's revenues, they need to be identified and addressed. Let's look at the details. What is Revenue Leakage, why does it happen more often than we think, how does it affect businesses, and how can you prevent Revenue Leakage?

What are Revenue Leaks?

Errors in the billing logic that add up

In simple terms, revenue leaks occur when delivered or performed revenues are not correctly accounted for. Revenue leaks occur because business rules and market realities are not mapped without loss in software systems. Unfortunately, as the complexity of software, sales, products and customer needs increases, so does the likelihood that revenue leakage will become a problem for your business.

Although leakage can occur on both the revenue and expense side, revenue usually takes priority because it is closely linked to the customer relationship and customer lifetime value. They are the result of a Non-billing or Sub-billing for services rendered or products delivered to your customers. Simply put, they leave money on the table.

How big is the problem? Big enough, because Companies can lose between 2 and 5% of their revenue due to revenue leaks. This type of accidental loss can significantly impact the Bottom Line.

What causes revenue leaks?


Revenue leaks arise from the sum of small software or configuration errors. They usually creep in over time and, in combination, cause your business models to not be "executed" correctly by your IT systems. Humans cannot fully detect and catch these leaks today because there are simply too many transactions and data involved.

Here are some examples of causes of revenue leaks:

  • individualized or renegotiated contract terms
  • Services not booked / billed but rendered
  • Services not recorded at all
  • Services not covered by contract but provided
  • outdated or incorrect price lists
  • Incorrectly charged prices
  • Sales changes / overruled prices manually (without checks)
  • Interface errors and media breaks
  • Services are incorrectly assigned during transfer between systems (media discontinuity)
  • unrecognized and not / incorrectly billed penalties
  • Discounts erroneously given, although not justified
  • Discounts not "withdrawn again" e.g. after promotions
  • unbilled services
  • Outdated / incorrect customer data
  • Duplicates in customer data but also conditions etc.
  • Incorrectly applied products
  • Software, process and design errors to the rollout of the software, if software testing is carried out to a lesser extent
  • Incorrect or missing configuration

These examples are by no means cases of fraud. They are mostly changes made to the best of our knowledge and under time pressure - in order to win customers, to remain competitive, to "keep the day-to-day business running".


Complexity means change

For organizations today, change is the only valid constant. Customers purchase new licenses, request a service or product, upgrade to a higher service level, or pause service for a period of time.

If you don't capture, track, and accurately account for these changes during the lifecycle of your customers, you risk revenue leakage in a number of ways. The increasing prevalence of these types of business models means more breeding ground for revenue leakage.

Your ability to adapt and account for every change will ensure that your revenue flows into your bottom line and doesn't drain away before it can be accounted for.


Human error and pricing

Especially if your organization relies on manual process steps to track your revenue, you may be missing out on revenue without realizing it. Data entry errors can result in significant leakage due to an extra zero, misplaced decimal point, careless cut and paste, or a hidden row of data. 

Because manual processes are error-prone, inefficient and pose a particularly big problem. This is because immediate pricing errors can also occur as a result of manual adjustments, when customer contract prices are not enforced or when inappropriate or unearned discounts are applied during billing. Here, it would be critical for the IT system to map these business rules without loss and ensure error-free billing.


Inaccurate, unclear, or outdated customer and policy information

If customer data is not up to date or is consolidated from different systems, sales may not have sufficient information about how much they are turning over with a particular customer. This is equally important for all organizations, regardless of whether products or services are sold. 

In some companies, sales is very dynamic and salespeople need to have information readily available. If the information is not available on demand, sales may undercharge or may not realize that a particular service is actually an extra that should be charged.

Revenue Assurance prevents Revenue Leakage

systematically stop safety losses

Revenue assurance is the systematic application of processes and tools to prevent revenue leakage. It solves the problem of unrealized revenue from products sold or services provided. Revenue Assurance programs can be implemented and scaled up quickly and typically generate financial returns within the first two to six months.

A mature revenue assurance function, supported by automated processes, appropriately trained internal staff and analytics tools, can continuously identify and stop revenue leakage, maximizing realized revenue for organizations. In an international survey of more than 2,000 executives by the Boston Consulting Group, 45% indicated that revenue leakage is a systemic problem facing their organizations. Practice - as described above - shows why.

Some companies are at particularly high risk of revenue leakage due to the nature of their business. Experience shows that potential revenue losses tend to be greatest for:

  • Companies that have a longer-lasting contractual relationship between a buyer and a seller (as opposed to those that use a "cash and carry" model with immediate payment).
  • Companies that have many manual processes, especially to create or check invoices.
  • Companies that have a high proportion of sales from services.
  • Companies that allow for discretionary condition setting in customer-facing roles such as sales or account management.
  • Companies whose invoiced prices and quantities depend on the categorization of the type of product or service offered; This is often the case in companies that have to invoice for services that are not contractually agreed or included in the scope of services.

Revenue leakage occurs because business rules and market realities are not reflected in systems without loss. A well-organized revenue assurance starts with the identification of areas where revenue leakage can occur and their classification according to economic value.

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