Not long ago, when shareholder value seemed to be exploding in every sector, companies were too busy counting revenue to focus on leaks in the stream. But, as we have all learned too well, success can breed complacency — and bad habits. Many companies, flush with boom times, took their eye off the ball. They stopped focusing on operational diligence, and on collecting (and preserving) all the revenues they were owed.

Today, of course, there are far fewer opportunities to hide such sins. The economic waters are choppy — and many companies are discovering their vessels are not leak-proof.

But there is a silver lining — in adversity lie opportunities to correct these leakages and bring each company into ship-shape.

What's Behind Revenue Leakage?

Companies often suspect that mysterious little gremlins are the culprits. But the fact is, beneath every revenue leak lie three layers of causality — temporal, cultural and proximate.

Think of catching a cold. The temporal causes are whatever reason this virus has appeared on the scene. The cultural causes are why an individual happens to be vulnerable to it — say, he never takes vitamin C. The proximate cause behind his catching this cold is simple: someone sneezed on him.

With this image in mind, let us now consider how a company catches its own kind of cold — or suffers from leaky revenue.

Temporal Causes: Rapid Change

Over the past six years, virtually every industry has experienced rapid, dramatic change — accompanied by serious, repeated revenue leakage. Let's examine the factors.

Frequent Mergers & Acquisitions

Mergers may well produce synergies in the long term, but in the short term they are more likely to produce migraines. For instance, reconciling a billing and a provisioning system is a difficult exercise in itself, but in this age of frequent mergers, that thankless task is often multiplied several times over.

Also, for some companies with decentralised assets — utilities, cable or wireless companies — frequent acquisitions have led to new regulatory schemes, new cultures and different revenue assurance approaches. And post-merger organisational culture clashes often mean a weakening of corporate resolve to attack the problem of leakage — precisely when it's most needed.

Rapid Adoption Of New Technologies

Rare is the company nowadays that has the luxury of writing brand-new technologies onto a blank slate of processes and systems. More often, companies have to bolt new technologies onto existing systems, requiring manual intervention — and manual error.

And, as everyone knows, most systems don't work "seamlessly" together. What's more, many new services created by new technologies also cause leaks. Consider cable companies, whose ability to offer new services such as high-speed data and Internet telephony often far outpaces their ability to attend to — let alone, bill — the resulting surge in demand.

Accelerated Product Development And Marketing

Companies must also bring new services to market faster. Accelerating competitive pressures (and determination to keep share prices up) often force them to skip revenue-maximisation steps. In telecoms, for example, practically every company rushing DSL services to market faced huge, expensive problems in billing and provisioning.

This trend holds true as well for the bewildering array of new marketing and pricing plans sweeping through entire industries (like airlines and wireless telephony).

Changing Competitive Landscapes

In many industries, the rapid shifts in the competitive landscape mean that new competitors are appearing every day, putting tremendous pressure on margins, and forcing companies to cut expenses — including revenue maximisation programs. At the same time, the new landscape — new suppliers, customer channels, regulatory schemes, competitors — is triggering enormous changes and, in their wake, revenue leaks.

Cultural Causes: Susceptibilities

While nearly every company faces the same temporal causes of leakage, not every one leaks the same amount. Let's examine the most common susceptibilities.

The Silo Mentality

This mentality is characterised by individuals and departments locked in their own perspectives. It is endemic to large organizations. And it may be the number-one cause of revenue leakage. Poor cross-functional cooperation — not to say rivalry — creates the gaps into which uncountable revenue drains. It is an unfortunate fact — in business as in life — that individuals tend to blame others for their problems, and to show little interest in (what they consider to be) the problems of others. Who suffers? The company, of course.

Cutting Muscle

Revenue maximization requires a commitment of resources, time and, most of all, leadership. Unfortunately, especially in lean times, such commitments are often lacking and, despite ample evidence of its cost-efficiency, this muscle is being cut in almost every industry.

Competing Priorities

Obviously companies have many other priorities — with more sizzle and potential profit — than revenue maximization. And managers can only concentrate on so many tasks at a time. But companies must understand that credibility-damaging revenue inaccuracies will occur unless profitability and integrity are given precedence over sometimes more glamorous (and less substantial) initiatives.

Defensiveness

Sadly, executives often react to revenue-maximisation initiatives defensively — even when no one is being blamed for the leakages. Alternately, especially within technical sectors, one sometimes encounters excessive self-assurance — and the belief that outside advisors can't possibly add value. ("Our billion-dollar, state-of-the-art system can't possibly leak....") Yet even new billion-dollar systems, especially in interaction with others, frequently do leak revenue, in ways that agenda-less outsiders can often detect more readily than insiders.

The "Exceptions" Complex

Even in an age of frequent downsising, almost every medium-to-large company has hundreds of people dedicated to handling "exceptions" — records needing manual attention after being rejected from systems. Too often the heads of such departments, having a vested interest in keeping their staffs large, will resist streamlining improvements.

The Control Mindset

Sometimes you can't see the leakage for the trees. When a company measures success only by how many bills it audits or its regulatory compliance, it will rarely put forth a major revenue assurance effort.

A Culture Of Extremes

Two extremes of corporate culture increase the susceptibility of revenue leakage: a too-aggressive one and a too-cautious one. The ready-fire-aim approach, while praiseworthy on many levels (too much planning and analysis can be paralyzing), often means revenue maximisation gets short shrift. Too-cautious companies, on the other hand, tend to see this technique as too new, too unproven, and shy away from it.

Proximate Causes

Just as you can't catch a cold just from not using vitamin C, you can't leak revenue just from being susceptible to it. You need someone to sneeze on you (or your company). The proximate causes of leaks are flaws, misalignments, mistakes, omissions, lapses related to technology, people, and processes — all of which undermine the integrity of data.

Technology

Systems tend to leak at the joints.

Mainframes are not well connected to Web systems, data warehouses are not integrated into mainframe applications, financial systems are not fully linked to service-delivery systems and new technologies are not seamlessly incorporated into legacy systems. Many hospitals, for example, have ten or more systems bolted onto the mainframe backbone — with predictable results.

The fact is, most organisations do not have the daily controls and procedures necessary to stop revenue leaks where they occur. And that is doubly true in technology-intensive sectors, where faulty connections between systems can wreak havoc with revenue streams.

Finally, although it would seem to be stating the obvious, a lack of adequate technology can also lead to revenue leaks.

People: We're Only Human

Human error. Dreaded words that spell revenue leakage. Let us count the ways:

The Classics. People make mistakes. Worse, mistakes, the result of human intervention, often beget more mistakes, in the form of — you guessed it — human intervention.

Replicating Errors. Simple data-entry errors can spawn major revenue inaccuracies, damaging profitability and even integrity.

Interpretation Errors. Even when data is entered properly, it can still fall prey to errors further upstream.

Plugging Square Pegs Into Round Holes. Sometimes contracts for large customers are so complicated that in day-to-day execution they are subject, for expediency, to "creative" solutions — to the detriment of the company.

Rushed Provisioning. When a company rushes to fulfill an order (say, installing telephone service in an entire building in 48 hours), mistakes are often made and revenue is lost.

Qualitative Assessments And Fraud. Even defensible decisions — if made in isolation and uncoordinated with the rest of the company — can cause serious revenue problems. And fraud, both internal and external, is always a major source of leakage.

Processes

In many of the above cases, the propensity for error is not a function of the individual, but of process. Sometimes companies don't have procedures or rules in place where they are needed. Or, their processes are too complicated or cumbersome to be effective (the "code-crazy" healthcare industry comes to mind). Or, worryingly, employees do not know about — or simply are not following — key processes.

The Big Picture

Behind every penny of revenue leakage lie concentric circles of causality. For example, the lost revenue from a poorly executed process (proximate cause) may be caused by a too-aggressive corporate mentality which undervalues such control-oriented processes (cultural cause) — which, at bottom, may be due to the need to rush a product to market in the wake of deregulation (temporal cause).

Stopping the leaks — in other words, improving your company's profitability, integrity and growth — requires adopting compensatory, layered strategies of revenue maximisation. The rewards of doing so will far outweigh the difficulty of the task.

This column solely reflects the views of its authors, and should not be regarded as legal advice. It is for general information and discussion only, and is not a full analysis of the matters presented.

© 2003 PricewaterhouseCoopers. PricewaterhouseCoopers refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity. All rights reserved. This article originally appeared on the PricewaterhouseCoopers' Global Web Site at http://www.pwcglobal.com.

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