"Revenue leakage" is where you do work and then don't invoice it, or where you do invoice it, but then issue a credit note, so never collect the cash.
I was talking to a CEO recently where he shared with me that his business issue quite a large number of credit notes each month. This was a great frustration to him as he could see the cash slipping out of the business. I have been in a similar position before - if not with credit notes issued, at least with not invoicing clients for as much as should have been.
There is nothing more frustrating than having completed some work, to invoice it to the client, and then have the client come back with all kinds of reasons why they feel they have been overcharged. In many professional services businesses, this is seen as an occupational hazard, and in the interest of good faith and not wanting to bite the hand that feeds you, many companies wind up giving up on such claims, and just issue the credit.
Or, if the process is such that the PMs are supposed to agree the invoice prior to billing, and they can't agree that some of the work done should be billed, the PM might just write the cost off, and never even try to recover it from the client.
Such revenue leakage is the worst kind of revenue slippage - worse than not having the work to perform in the first place. You would have been better off not doing the work at all, than to have completed it, often burning the midnight oil to meet a deadline, and then not recover that effort at all.
At one business, review of project profitability data led me to search for drivers behind profitability dips in certain projects from time to time. Each project would run along business as usual, and then every so often there would be a month with very low profitability. Maybe even a loss.
Before my intervention, the prevailing explanation within the business was that issues within the timesheet process and customer billing rise and fall were unknown issues that nothing could be done about, and the CEO said that to judge how a project was going, you were better off looking at the overall long-term or project life-to-date results. This view was also used to judge how effective the project manager was on the matter of financial control.
Within a few months of my analysis of the issue, it became apparent that from time to time, work was being performed but not invoiced. The project managers were not confident that they could recover certain costs and invoice the client where delivery might have gone pear-shaped for some reason. So although the work had been performed, they just didn't invoice the client, and the drop in project profitability that month was just seen as an "one of those things"as the team wrote off the work.
The action I took was to put into place an approval matrix for write-offs. Every month, if substantial work was not going to be billed, or where a significant credit note was requested, I asked the project manager to explain to the Head of Service Delivery and myself, why they felt they couldn't charge the client.
I also held training courses for all the senior Service Delivery team members, to highlight to them our contractual rights in relation to recovery of work performed. Where additional work was required, for any reason, we were contractually entitled to bill and recover that work. Unless the project manager wanted to concede that it was their error, or inefficiency, then we could seek compensation from the client. Of course, they rarely admitted that.
Speak to the Client
Of course, the best approach to such a situation is to notify the client as soon as it becomes apparent that additional work is required. Before the additional work is actually performed. To explain why it is required, and wherever possible, to offer a means of reducing effort elsewhere to bring the project in on the original overall budget. There is nothing more annoying for the client than to be told after the event, that some feature is going to cost them an unanticipated additional amount, without giving them the option of retracting the work.
"If I had known it was gong to have cost that much, I wouldn't have asked for it".
Good. In that case we will scrap it. Better than pressing ahead with it, and then not getting paid for it at the end of the day. We can come back and provide the additional functionality at a later date, budget permitting.
Within 3 months of our change in process our monthly write-off of unbilled work had reduced by over $100k per month. And our key metric covering the service delivery team - Revenue per Head - continued tracking North.
And the Project Managers were more happy knowing that their teams' efforts were being consistently recovered, rather than wasted.
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