Anomalies reveal themselves
Concretely, EY recalculates all prices based on the contracts, compares them with the prices in the client’s price system and finally with the amounts that the client actually paid over the past years (on invoices).
“This exposes anomalies. For example, it may say in black and white that pricing is based on the prices applicable at the time of the purchase order, but due to complicated calculations with indexations, the client actually turns out to be paying invoices based on the time of shipping. Although we often hear people say ‘that's normal in the sector,’ it is not what the original contract says and something like this is rarely to the client's benefit.
“Discounts are another example: they may be agreed upon for all transactions in Belgium and the Netherlands, but in practice they are only calculated for Belgian transactions. Often, such incorrect calculations go unnoticed.”
“Another example is that prices are invoiced that have since been adjusted (for example, in e-mails between the purchasing department and the supplier), but the financial departments of both companies know nothing about this and so have continued to use the old prices. Or sometimes, they just use incorrect prices.”
Third-party reviews for the total picture
A client has no view of certain pricing factors. Suppliers sometimes apply price indexes related to the efficiency of their production process, for example. EY may perform a third-party audit to gain better insight into this internal information of the supplier. That happens on the basis of audit clauses in the contracts, but equally often simply on the basis of the goodwill of the supplier who wants to keep its relationship with important clients transparent.
For the revenue leakage services, EY calls in a team of people who know their way around data, can untangle contracts and can critically analyze processes. “In the case of big retailers, we focus on the many relatively small transactions with very diverse suppliers typical for this sector. With big production companies, we take a close look at the larger transactions through intensive data analysis.”
A possible follow-up process for companies is to take a hands-on approach to their contract management. “It is about keeping and managing contracts, as well as how they are drafted. Often, this can be dealt with much more intelligently in commercial terms. Take the example I just mentioned: pricing based on purchase date versus shipping date. As a business, you have to think strategically because it can make a big difference.
“As part of a follow-up process, EY can draft contract templates or set up internal audit measures. It is also possible to better align the client’s pricing system with the company’s actual requirements. It makes no sense for a product to be packaged in three different ways without the possibility to include the prices for the different packaging in the pricing system, for example.
“Revenue leakage reviews and the follow-up processes are a matter of a real partnership with clients,” Vanderlinden says. “We support the finance team and make sure that companies can work with each other properly.”