Legal teams are often encouraged to audit their contract repositories to identify any overlooked legal liabilities, but do you know how to audit your customer contracts to identify the revenue you're at risk of losing?
In this eBook, we'll lay out the four simple steps you can take to quantify the customers and revenue at risk in the near future -- and explain how you can get ahead of these issues before they become a problem.
Step 1: Rank Every Customer Contract by Expected Revenue
Who are your most valuable customers? It's almost impossible to run a successful sales organization and not already be aware of this answer, but it's the starting point for any revenue audit. Customer relationship management (CRM) and accounting software should be able to tell you which clients and which accounts bring in the most money and drive the biggest profits.
Where the legal team comes in here is tying revenue to more than customers, but also to contracts.
For example, you may have a service contract that represents the primary revenue from a major client, and an ancillary contract that simply covers their tech support and customer service costs. Terminating the primary service agreement has a very different revenue impact than terminating the support contract. Knowing which specific agreements represent what revenue is the first and most important step in identifying revenues that are contractually at risk.
At the end of Step 1, you should have a master list of all your contracts with their associated monthly recurring revenue.
Step 2: Identify All Customer Contracts That Are Up for Renewal
If you have an ongoing service agreement with a customer, the first question you need to answer is: will that agreement automatically renew, or do I need to win the customer again? Customers that must choose to stay require more sales and support attention than those that must choose to leave.
For all those customers that don't auto-renew, you must also identify the date that those contracts will come to term. Those that end sooner are higher priority than those that terminate later. And when two contracts will terminate on the same date, the contract that represents more revenue is where your sales attention should go.
At the end of Step 2, each contract should be flagged as does or does not auto-renew, and should have a specific renewal date.
Step 3: Identify All Renewing Customers That Have Contractual Opt-Outs
Just because a contract automatically renews doesn't mean you can't lose it. Every contract has a termination clause, and, in most cases, requires that the terminating party give minimum notice. If a customer has to give you 30 days notice of contract termination, you effectively have 30 days to convince the customer to stay.
Some contracts have termination options beyond mere notice. For example, if you fail to meet a service level agreement (SLA) or if the customer falls below some level of usage of your services, customers can invoke a termination without penalty. You should know what these key metrics are and monitor them, so you can identify contracts that are "eligible" for penalty-free cancellation by the customer.
Above all, given that COVID-19 has had a perilous impact on many if not most businesses in the world, you need to identify every customer contract with a Force Majeure cause that could be invoked due to recent events.
At the end of Step 3, each contract should be flagged as having or lacking a current customer option to terminate. Each contract should also have a soonest date of termination, which is the date the contract would end if the customer gave notice to terminate today.
Step 4: Calculate Your Contractual Revenue at Risk
Below is a sample list of three contracts that all have the data that we suggest you track.
| Contract ID | Revenue per Month | Auto-Renews | Renewal Date | Can Opt Out | Soonest Termination Date |
|---|---|---|---|---|---|
| ABC-123 | $20,000 | Y | 4/1/2021 | Y | 1/31/2021 |
| QRS-456 | $12,000 | N | 1/1/2022 | Y | 3/30/2021 |
| XYZ-789 | $7,000 | N | 7/1/2021 | N | 7/1/2021 |
You now have enough information to build a list of contract revenue most at risk.
If you know how much each contract generates in an average month, and you know how many months are left before the soonest termination date, you know the minimum value of the contract. If the customer does not invoke their soonest termination date, but instead continues until their renewal date, you know the maximum value of the contract.
The difference between those two values is how much the contract is at risk if it doesn't continue until its "natural" renewal date.
Assuming you compiled this table on Jan. 1, 2021, it would look something like the data below.
| Contract ID | Revenue per Month | Min. Months | Min. Value | Max. Months | Max. Value | Revenue Risk |
|---|---|---|---|---|---|---|
| ABC-123 | $20,000 | 1 | $20,000 | 4 | $80,000 | $60,000 |
| QRS-456 | $12,000 | 3 | $36,000 | 12 | $144,000 | $108,000 |
| XYZ-789 | $7,000 | 6 | $42,000 | 6 | $42,000 | $0 |
From this example, you can see that the largest contract by monthly revenue is not the largest revenue risk. It also shows that, between these three contracts, $168,000 of revenue is "at risk' because the clients could opt out.
With this information, your legal team can help arm sales and customer service representatives to keep critical clients happy and critical agreements intact.
Conclusion: Audits Can Quantify Your Contract Risk
By doing some simple contract auditing, you can calculate the minimum and maximum value of client agreements and know exactly how much of your potential revenue is at risk due to early client opt-outs. Once you know what revenue is at stake, you can put resources in place to protect it.
LinkSquares Can Help
Extracting these key "smart values" from your contracts is exactly what LinkSquares is designed to do. Using cutting-edge artificial intelligence, LinkSquares can identify which of your contracts auto-renew, when those renewals occur, and the minimum termination notice period for any agreement -- and it can send all that data to your CRM or accounting software to help you calculate your contract revenue at risk. And you can do all of it at the speed and scale of software.
If you want to get up-to-the minute assessments of your contract revenue risk, and automate the most arduous parts of your contract analysis, contact LinkSquares today.