The top ten customers totalling some 40% of the revenue did not have a contract, neither any basic terms and conditions and the prices in the system were input based on what the SVP sales said….troubled waters, fisherman’s gain. That was the SVP Sales benefitting from what was really going on in the sales area with the top ten customers. Were the shareholders able to get some gains as well?
I do not mean that contracts should be in place for legal reasons or just to avoid an auditor’s finding. Contracts should be in place for all parties to have full clarity on what has been agreed so the customers can be provided/served as per the agreement. Further, contracts should be made available to the main internal stakeholders so all departments serving the customers know what the agreement is. In my example, there was no evidence of senior management approving high discounts. If this was what had been agreed with the customer, and it had been appropriately approved, how do we ensure the invoices include the high discount? Further, how do we know that Finance knows about these discounts so they can be included in the budget and forecasts? There are sales targets and profits targets as well. These latter will be significantly impacted by high discounts.
In my example, only the SVP Sales knew about the service level agreements agreed with the customer. The customers were requesting different services and products to Operations team, who was unaware of what the agreements with the customers were. The SVP Sales was agreeing to all the customers were requesting. How could Operations team prepare to serve the customers? How could Finance budget and forecast all the purchases required to serve the customers?
Some people believe that shareholders do not care what happens internally in the company provided they get benefits. Volkswagen shareholders are not thinking the same. The share price fell 46% at the onset of the scandal and nearly a year later has only recovered a 20%, as it is still trading 26% below the price prior to the scandal. I think that in troubled waters, the shareholders are the ones who lose most.
In my example, when I highlighted all the troubles stemming eventually from the lack of contracts with customers, it was easy and straightforward to establish a plan to address the root cause. Once the contracts were in place and full clarity of what had been agreed with the customers was available to the different departments involved in serving the customers, everything started to flow smoothly.
Further, having full visibility of the sales and discounts per top customer helped building a more accurate budget and forecast, so senior management could take better decisions on the direction of the company. This ultimately benefited shareholders.
There are still some people that believe there is nothing wrong with not having any contracts in place. Maybe because they are the only fishermen?