Incidental losses are, by nature, unexpected. You don’t know beforehand that a customer or vendor will breach a contract. You could be entirely unprepared to deal with the subsequent fallout. This uncertainty leaves you in a difficult position, unless you take steps to prevent these incidental losses.

At Canidium, our expert software implementation teams work with advanced partner systems like SAP SuccessFactors Incentive Management (SFIM); this solution features innovative new ways to deal with previously unmanageable problems such as incidental losses. We design, configure, implement, and offer ongoing managed services for SFIM, giving us an in-depth understanding of how our clients can use it to resolve thorny issues like incidental losses.

This article explains incidental losses and one unique approach to resolving them.

What Are Incidental Losses?

Incidental losses are costs or lost revenue resulting from a breached contract. They are relatively immediate and directly result from a contract breach.

Incidental losses include costs such as finding replacement goods or services after a customer or vendor breaches a contract. Suppose a supplier fails to deliver goods, for instance. In that case, incidental costs include sourcing these goods from another supplier at a potentially higher price.

You can experience incidental losses from vendors, customers, or any individual with whom you have a business contract. In a sales-based organizational structure, incidental damages due to customers failing to make timely payments, not accepting the goods or services as agreed upon, or canceling an order without proper notice are all too common. 

The result of a high rate of incidental losses is a direct cut into your bottom line. You can expect to incur replacement costs associated with reselling the product at a discounted rate, the administrative overhead required to find a new buyer, potential legal fees stemming from attempts to enforce the contract, additional shipping and inventory costs, and any resulting consequential expenses that stem from the initial direct breach. 

The Cyclical Approach: Eliminating Incidental Losses

Businesses often employ risk management strategies, including thorough contract drafting with clear penalties for breaches, maintaining robust customer relations practices to manage and negotiate conflicts, and possibly securing insurance that covers contract breaches to mitigate these incidental losses. However, these measures are only partially successful on their own. Approximately 63% of executives feel that their organization's risk management processes offer either "no" or "minimal" competitive advantage, meaning current strategies of managing incidental losses simply keep organizations afloat, failing to go far enough to improve sales figures. 

Until recently, there has not been a solid method organizations can use to improve their approach to incidental loss management. The problem's unpredictability was unsolvable, and to a certain extent, there will always be a degree of uncertainty in sales. However, improved ways of collecting and analyzing information allow enterprise and mid-sized organizations to pick out hidden trends and insights to capitalize on. 

In addition to offering a variety of other beneficial features and uses, such as helping improve retention metrics, SFIM software is making it possible to address incidental losses at scale. 

You cannot control customer behavior. To better manage incidental losses, you must focus on how your sales team’s strategies, approaches, and motivations can alter the customer experience and subsequent actions. The cyclical approach to incidental losses uses data analysis and incentives to continuously identify and improve internal trends that lead to incidental losses. 

This approach leverages the power of continuous improvement to help your workforce overcome incidental losses.

This incidental loss prevention cycle should be repeated annually or quarterly. By integrating this continuous approach in your business processes, your team will have enough time to thoroughly test current compensation and incentive structures. 

Here is a breakdown of the four pillars of the incidental loss management cycle to complete the picture of each phase.

Design

Based on data regarding trends, actions, or behaviors resulting in spikes in incidental losses, you can use SFIM to create and implement a new comp plan design or implement targeted incentives to resolve the issue. 

A SPIF (sales performance incentive fund) is a short-term incentive that temporarily boosts sales performance. With SFIM software, setting up a new SPIF to run alongside existing compensation plans can be done in just a few minutes. The software's interface allows managers to define the SPIF's terms, such as the target sales metrics, eligible products, and the duration of the incentive, and then deploy it almost instantly.

You can use your quality assurance (QA) environment to experiment with and model changes to your systems before applying them in the production environment. This process, known as modeling, allows you to adjust variables, run compensation calculations, and analyze potential outcomes without affecting real-world operations. By doing this in a sandbox or QA setting, you can safely see the effects of modifications on your systems without the risk of inadvertently altering what you pay out to employees. This practice is crucial for ensuring that any changes are beneficial and do not disrupt your existing system. You can copy your current production settings into a QA environment to conduct this modeling work, ensuring accuracy and safety in testing.

Implement

Once you have established a plan design, the next step is to implement your changes in the production environment. You can generate your incentive plan from templates that categorize your workforce into groups based on job titles, even considering region or country. This method ensures that changes to the compensation plan—aimed at driving sales or responding to market shifts—can be implemented swiftly and uniformly, simultaneously affecting a large sales staff. In the event of incidental losses, the company can quickly pivot, using software to adjust incentives and potentially recoup losses or redirect efforts efficiently.

At this point, you will let your new comp plan structure run its course for a year or a quarter, allowing SFIM to collect data for the next step in the cycle. 

Evaluate

SFIM software lets you leverage data to better navigate market trends and internal optimization.

SFIM does not offer pre-built reports out of the box. However, your software implementation (SI) partner will configure custom reports tailored to your needs before the solution goes live. 

One of the most popular reporting formats is stack ranking capabilities, which allow management to quickly identify top and bottom performers on various time scales, such as daily or monthly. This feature helps visualize trends over time, provided all necessary data is captured and recorded.

The potential applications of AI-based embedded analytics reports are also vast, ranging from understanding compensation expenditures to more nuanced analyses like performance by product, service, job title, tenure, age bracket, or region. This breadth of reporting capabilities allows sales leadership to gain deep insights into various metrics, depending on the data available. 

When the implementation phase ends, you will delve into the relevant reports to identify potential weaknesses leading to incidental losses. This evaluation allows you to strategize what potential short-term incentives or long-term restructuring initiatives could mitigate these trends moving forward. 

Repeat

One cycle has the potential to reduce incidental losses while simultaneously increasing your capacity to bounce back from significant losses by leveraging incentives. However, the key to engendering lasting and profoundly impactful changes to your incidental loss rates is iterating on this cycle multiple times. 

Each time you complete this cycle, you can improve on the successes from the last go around, resulting in continuous adaptation, learning, and optimization that mitigates your unexpected losses.

By never stopping the incidental loss management cycle, you can constantly identify and resolve internal factors, behaviors, or actions that may be unwittingly causing contract breaches. So, once you have finished evaluating your reports, restart the cycle by initiating the design phase again. 

Mitigating Incidental Losses With Incentive Management

Incidental losses will always be a challenge. However, your organization can reduce loss rates by initiating and consistently implementing the incidental loss management cycle: Design, Implement, Evaluate, and Repeat. 

SFIM software is foundational to this cycle. You need the tools to capture data, create reports, design changes, and rapidly implement targeted initiatives. Your SI partner can integrate and configure all these features to your specifications. However, SFIM software also includes a variety of other beneficial uses you can leverage to improve your sales KPIs. 

Read on if you are interested in learning more about building internal buy-in for your implementation project.