March 27, 2025
2 mins read
In part one of this article, we examined the causes of value leakage, reflecting on the importance of keeping that analysis as simple as possible.
In the second instalment, we are going to apply that simple approach to the causes of value leakage and then examine how to look at the opportunities and risks that arise from those causes.
As I mentioned in Part One, my point of view is developed through 30 years of working in most of the functions that work on contracts, with the exception of the legal department.
Four Lenses of Contract Value Leakage
I look at the opportunities and risks presented by value leakage through four lenses - financial, operational, risk/compliance and strategic.
The financial lens is where everyone starts and where some people also stop! This is part of the longstanding challenge of defining value in procurement and supply chain - which can end up as a discussion about price.
Some good examples here are missed opportunities to claim early payment discounts, rebates or credits and overpayments, which could include duplicate invoices, payments beyond agreed rates, or unverified charges.
Operations and Performance
The operational lens involves holding suppliers accountable for what has been agreed in the contract. Non-performance includes failure to meet SLAs, KPIs, and deliverables.
Scope Creep and Uncontrolled Changes can also result in the same failures. Both non-performance and scope creep can have their operational roots in manual workflows where disconnects occur. This lack of automation in the contract processes can cause delays, all kinds of misalignment, and errors.
Risk or Compliance
The risk or compliance lens appears in a few areas that are typically tied to regulatory non-compliance (where contracts aren't aligned with evolving regulations, which can lead to fines).
Data security and privacy failures that could increase risk in cybersecurity or data protection clauses. IP and confidentiality breaches are typically results of undefined or unclear ownership of intellectual property or violations of confidentiality clauses. Third-party risk is often overlooked by smaller companies that may not have clear definitions of obligations or liability clauses.
Nurturing Strategic Value
The final lens is focused on strategic value. If third-party relationships stay transactional in nature, companies will fail to leverage the broader opportunity, which is in innovation, collaboration, and a closer partnership.
A common problem here is that contracts are too rigid and don't adapt to business needs or lack a way to get amended as needed. Another example is missing out on ESG & sustainability targets if this is a priority for the business.
Wrap-Up – Asking the Right Questions
In part one of this article, we discussed the three main causes of value leakage: the problem is built into the contract (or the process), contract drift has changed the intent, or the contract is subject to non-performance.
In terms of how we look at the value leakage that arises from those causes, I divide them into opportunities and risks, which we examine through the four lenses discussed above.
I use those lenses to define the questions that will determine what we need to know to identify those opportunities and what a quality answer would look like.
Figuring out the right questions and thinking about how to assess a quality answer can lead to all kinds of complexity, but I’ve found having a simple way to think about value leakage in terms of both cause and effect helps keep that complexity in check.
