As medtech customers continue to evolve, manufacturer’s revenue management process limitations are exposed. Customers bring ever-increasing demands to contract negotiations, and manufacturers have improved their ability to precisely monitor these requests. The total number of internal and external stakeholders involved in the order-to-cash process also has increased, leading to more diverse and complex process requirements, including better collaboration methods. To meet these increasingly complex needs, revenue management capabilities also must change.
Before we dive into exactly how to advance them, let’s define good revenue management.
Revenue management comprises five key capabilities:
- Price management and governance
- Configure, price and quote (CPQ)
- Contract lifecycle management (CLM)
- Payment management
- A foundational pricing and contracting data hub
The maturity of a revenue management capability can be measured by analyzing the strategy and vision, people, operational model, data management and tools used across each module. Any of these modules, if under-developed, can lead to revenue leakage, customer dissatisfaction and significant team efficiency losses.
Revenue management process failures happen for a variety of reasons and have significant top-line revenue impact. Causes range from small issues that go unnoticed—such as rebate miscalculations—to large, catastrophic issues that cause massive headaches—such as a price reference audit. Based on our experience, these issues can result in annual revenue losses of more than 1%.
These failures are almost always linked to the lack of process clarity and standard capabilities supporting each process module. Let’s look at how to avoid these common pitfalls for each of the key revenue management capabilities.
Price management and governance helps to set and enforce pricing guardrails. To maximize contract value, organizations should have a clear strategy and consistently execute pricing guidelines. Each product group should have a defined market strategy and desired outcome reflected in the pricing guidance. A robust contract creation and contract management solution can automatically enforce pricing compliance and manage the pricing exception and approval process.
Revenue management capabilities also can facilitate the capture of key contracting data, which can be used in pricing analysis. This is a key step in the process because analysis from past deals must be used to inform better contracting decisions in the future. A streamlined revenue management solution can enable automated price guideline communication, adherence, exception monitoring and post-deal price actualization insights.
While some of these points may seem aspirational, revenue can suffer when price governance processes aren’t closely followed. Some organizations can experience price reference pressures when a strategic customer discovers another customer’s lower price point and demands discounts. This can have major impacts to revenue and create ripple effects, further exacerbating this issue. Customers also can become confused and dissatisfied if they are interacting with multiple people from the same company with inconsistent value propositions, portfolio strategies or, in the worst case, price quotes.
The CPQ module includes all activities to set up a deal, including scenario modeling, competitive analysis and collation of the final price quote offering. The CPQ process usually gets the most attention when organizations begin to focus on revenue management because it’s the process most directly linked to revenue generation. While this focus is warranted, organizations usually consider a subset of the CPQ process related to price setting.
A more holistic approach to improving the CPQ module is key to maximize value across all aspects, not just in determining and winning a price point. Start by setting a clear strategy and vision for the CPQ process and identifying the most important aspects. Ask yourself: “What do I want my contracting team to do well 100% of the time?” Answers vary from wanting to be excellent in turn-around time and customer service to communicating the deal strategy across teams and avoiding rebate offers on contracts whenever possible. Having achievable, defendable goals for this process before diving into a capability overhaul is important.
Once priorities are identified, enhancements to the contract decision support capabilities can be made. These include automated deal analytics such as scenario modeling price impact analysis and competitive wargaming. The most mature organizations will have a deal desk capability that can suggest contract dates, clauses, rebates and price points to achieve specific goals entered by the contracting team. A deal desk capability streamlines the deal creation process while also making it more objective and defendable. The best capabilities will have a standard deal score metric that provides an objective summary of deal health.
Organizations that fail to invest in the CPQ process risk inaccurate price quotations, missed deadlines for contract submittal, customer dissatisfaction and overworked, inefficient contracting teams. A common example observed is a surprise request-for-proposals deadline for a significant surfacing with only a few days’ notice. During the scramble to put together a quote for this opportunity, some price exceptions are not thoroughly reviewed. Once they surface, the deal either goes to the customer without proper sign-off or doesn’t go to the customer because of process delays. Either outcome causes decreased potential revenue, price reference risks and potential customer grievance.
Creating a winning contract is meaningless if you can’t enforce the terms and conditions. Some are easier to enforce than others, but all are important. We continue to see teams use contract terms they can’t track or measure—which introduces risk of noncompliance being rewarded with rebates, reduced prices or increased service levels. Creating good contracts also is much less important if making small changes takes as much effort as creating them from scratch. Adding customers, products and terms to a contract should be simple yet regulated to avoid inefficient contract operations and mistakes while amending contracts.
A best-in-class revenue management solution measures all metrics necessary for monitoring contract compliance. In addition, it should make amending the contract easy, with easy-to-configure clause libraries and analog contracts. Investing in a legacy-to-digital conversion methodology also can save time and scrape valuable data from years of contracts. While not all of these are key aspects to add at the same time, they all bring significant value to the organization through increased efficiency.
The last module also the most common cause of direct revenue leakage. As contracting terms have evolved, there’s a greater emphasis on delayed payments back to customers. These can come in the form of rebates, admin fees and risk-sharing refunds. Each of these payment types must be calculated precisely, using a set of standard business rules. However, customers and sales organizations often want to push the envelope on creative and mutually beneficial payment structures during deal creation. This creativity can lead to great contract outcomes but also can cause significant increases in payment calculation complexity and chance for error.
Organizations need to set an objective for their payment structures offered on a contract. Rebate payment structures can be used to defend market share, drive growth or incentivize purchasing the full portfolio of products from a manufacturer. It’s wise to have a small number of payment structures identified as “in play” for your contracting team so the approach and calculation is clear to everyone within the organization.
Once the objectives and payment structure options are clear, calculation of the payments should be standard, transparent and proactive. Best-in-class organizations will have tools that alert stakeholders to a payment being due and guide them through the calculation in an automated fashion—and provide customers with proof of the calculation’s accuracy . Each stakeholder should have clarity on how calculations are done and be able to communicate the process to customers.
A foundational aspect of any revenue management capability is the contracting data hub. Having this data foundation in place is necessary to tracking key performance indicators, performing deal analytics, monitoring contract compliance and calculating accurate customer payments. Ideally, the data hub should close the loop from pre-deal quote decisions through contract outcomes so that each phase in the contract lifecycle can be measured, learned from and used to create better deals.
At a minimum, this hub should contain sales data, pricing data, customer data and product data, but it can be enriched with many other data sources such as customer relationship management data, historical rebate data and affiliation data, etc. Having a clear vision of what you want your revenue management system to accomplish will involve what data elements are necessary to include and which are nice to have.
COVID-19 rapidly advanced the drive toward digital transaction systems in the medtech industry. As more business is conducted digitally, investing in tools and processes to orchestrate and validate these systems is key. The trend toward customer consolidation and complexity will continue and so will the need to carefully monitor compliance. The goal for any medtech organization should be to construct win-win arrangements with customers that can drive strategic outcomes for both parties. Often these arrangements require multi-tiered incentive structures that usually include more than just two entities and must be supported by robust revenue management processes and tools. Failure to do so can cause significant revenue leakage and customer dissatisfaction, both of which can cause major harm to an organization’s top and bottom lines. Investments in revenue management are important for organizations at all levels of maturity and should be considered a must for 2022 and beyond.