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Our benchmark research on next-generation business planning finds that a large majority of companies rely on spreadsheets to manage planning processes. For example, four out of five use them for supply chain planning, and about two-thirds for budgeting and sales forecasting. Spreadsheets are the default choice for modeling and planning because they are flexible. They adapt to the needs of different parts of any type of business. Unfortunately, they have inherent defects that make them problematic when used in collaborative, repetitive enterprise processes such as planning and budgeting. While it’s easy to create a model, it can quickly become a barrier to more integrated planning across the business units in an enterprise. As I’ve noted before, software vendors and IT departments have been trying – mainly in vain – to get users to switch from spreadsheets to a variety of dedicated applications. They’ve failed to make much of a dent because although these applications have substantial advantages over spreadsheets when used in repetitive, collaborative enterprise tasks, these advantages are mainly realized after the model, process or report is put to use in the “production” phase (to borrow an IT term).
Host Analytics Modeling Cloud is designed to address the needs of people who – often working alone – create representations of the business or portions of the business used in a collaborative planning process. These individuals often create analyses and reports that complement the planning process. To date most dedicated applications have been far more difficult than spreadsheets for the average business user to use in the design and test phases. To convince people to switch to its dedicated application, a vendor must offer an alternative that lets users model, create reports, collect data and create dedicated data stores as easily as they can do it in a desktop spreadsheet.
Modeling Cloud is designed to integrate individual businesses unit plans with a company’s financial planning, forecasting and budgeting. It attempts to address the spreadsheet problem by enabling individuals in business units to create and update plans and budgets and their underlying models in a way that is consistent with what they are used to doing, but also makes it easy to tie these together to achieve an integrated company-wide view. Compared to desktop spreadsheets, this approach better enables a company to analyze and refine plans and budgets. It also facilitates advanced modeling capabilities such as rolling quarters forecasting and contingency and what-if planning. Compared to desktop spreadsheets, with Modeling Cloud it’s much easier to consolidate the plans from multiple contributors and then drill back down into individual plans and their underlying assumptions. The software also has mobile features that enable individuals to review, contribute and approve plans and budgets on the go. Each of these capabilities increase the business value of the company’s planning and budgeting.
People and businesses plan in order to be successful. Companies do a lot of planning – some formal and some informal – about all aspects of the business including sales, production, headcount, distribution and the supply chain. Done properly, planning is the best way to get everyone organized in executing the plan. At that point they can take advantage of collaboration, which is essential to effective planning and budgeting. Our research finds that in the large majority (85%) of companies that collaborate well in their planning and budgeting processes participants regard it as well managed. Dedicated applications work better than desktop spreadsheets when it comes to bringing individual models, plans, budgets and forecasts into an integrated companywide view. In contrast it’s difficult and time-consuming to combine desktop spreadsheets into a consolidated view, and it’s even harder and more tedious to look back into the underlying data in seeking a better understanding of important differences between individual plans and models.
Modeling Cloud is designed to address an important need in corporate planning – closely tying all aspects of business planning to financial planning and budgeting and helping organizations collaborate across business silos. Our research shows that integrated planning works better, as I have written : Two-thirds of companies in which information in individual plans is directly linked have a planning process that works well or very well, compared to 40 percent in which the information must be copied and only 25 percent where there is little or no connection. As a rule, providing users with a familiar environment in which to create business models, create and compare different business scenarios, analyze actuals and create reports goes a long way toward mitigating the difficulty of having to learn to use a new tool that has been a barrier to the use of dedicated planning software across an enterprise and makes it easy to directly link plans. Business planning can be more effective if individuals have software that gives them a high degree of flexibility to create models and plans in a way that works comfortably for them yet also facilitates the integration of everyone’s plans into a consolidated view. Our research shows that dedicated planning applications can help users align their plans with strategy and the rest of the organization. For example, companies that use them said twice as often that they are able to estimate accurately one plan’s impact on others as those that use spreadsheets. In addition, two out of three that have dedicated applications said they are satisfied with their planning process and that their plans are accurate.
Information technology has the potential to make business planning more useful, as I have noted, enabling it to improve a company’s performance and increase its competitiveness. One of the necessary tools for more fully integrating business and financial planning is a software and data environment that enables business people to plan their part of the business in a way that is familiar, productive and useful to them in achieving their objectives. That environment also must enable them to communicate the financial consequences of their business plan to inform the financial forecasting, planning, budgeting and review processes. Host Analytics Modeling Cloud is designed to do that. It’s not a perfect substitute for spreadsheets, which still excel in their ability to help people quickly translate their thoughts into models and reports. But because Modeling Cloud eliminates most of the hassles and defects of spreadsheets (for example, the ability to quickly store, retrieve and consolidate data from a single authoritative source), it is ultimately a much more attractive alternative. I recommend that Host Analytics customers assess using Modeling Cloud in their organization and that buyers of dedicated planning applications include this type of capability in their evaluation of vendors’ offerings.
Robert Kugel – SVP Research
Revenue recognition standards for companies that use contracts are in the process of changing, as I covered in an earlier perspective. As part of managing their transition to these standards, CFOs and controllers should initiate a full-scale review of their order-to-cash cycle. This should include examination of their company’s sales contracts and their contracting process. They also should examine how well their contracting processes are integrated with invoicing and billing and any other elements of their order-to-cash cycle, especially as these relate to revenue recognition. They must recognize that how their company structures, writes and modifies these contracts and handles the full order-to-cash cycle will have a direct impact on workloads in the finance and accounting department as well as on external audit costs. Companies that will be affected by the new standards also should investigate whether they can benefit from using software to automate contract management or in some cases an application that supports their configure, price and quote (CPQ) function by facilitating standardization and automation of their contracting processes.
The soon-to-be-implemented revenue recognition standards (called ASC 606 or “Topic 606” in the U.S. and IFRS 15 in most other developed countries) will fundamentally change how companies that use contracts in business account for revenue from them. They will not affect those that rarely if ever use formal or implied contracts in the normal course of business. And almost all corporations that use standard contracts that cover a straightforward transaction (such as a one-time sale of some good or service) where the terms are satisfied within a relatively short period of time are likely to find little change to their accounting treatments and processes. However, corporations that don’t fall into these categories will benefit from a thorough re-examination of the structure and wording of their sales contracts and the processes they use for creating, negotiating and reviewing sales contracts.
To minimize the impact of the new revenue recognition standards on finance department workloads, companies ought to standardize sales contracts and automate as much of the order-to-cash cycle as possible. Although strictly speaking the new revenue recognition process requires companies to manage contracts one-by-one, companies can treat sets of similar contracts or similar performance obligations that are part of a contract in the same way if the overall impact on its financial statements will not be materially different from applying the same approach to the individual contracts or individual performance obligations. In other words, the specific wording of the sales contract is irrelevant if the substance of the contract or individual performance obligations that are part of that contract are substantially the same. Thus the objective of reviewing a company’s sales contracts is to find ways to achieve the highest possible degree of standardization (that is, making contracts, parts of contracts and performance obligations under those contracts identical) or commonality (achieving sufficient similarity to apply the identical accounting treatment). At the end of the review, controllers should be able to implement a process that can map all contract elements to a set of accounting treatments that are at least plausible under the new principles. (Compared to current U.S. accounting standards, the new approach to revenue recognition is more principles-based and far less prescriptive.) Such standardization is extremely helpful in a principles-based accounting approach because it will ensure consistency in how the company treats specific types of contracts and their specific elements. Doing so will facilitate internal reviews and external audits. It will also lay the groundwork for automating the classification of contracts and contract elements, which can reduce finance department workloads as well.
Up to now, a major concern in drafting sales contracts has been covering all the legal bases. Typically, how to organize a contract has been at best an afterthought. This will need to change. CFOs and controllers should insist that all of their sales contracts (or contract templates) be structured in a fashion to make it easy to account for them. By analogy, in the manufacturing world, engineers often constrain their designs to make a product easier or less expensive to produce (for instance, by using similar components across multiple products or relaxing tolerances) or cheaper to maintain (by making replaceable components easier to access). With the advent of the new revenue recognition standards, legal departments or outside counsel must now pay attention to the structure and wording of contracts to facilitate accounting and auditing processes. In negotiating the wording of a sales contract, company representatives must be trained to be sensitive to changes that can have a material impact on revenue recognition from the standard and also to understand when such changes will not make a difference. In the new revenue recognition regime, “sloppy drafting” now includes needless complexity or lack of standardization in a sales contract, not just ambiguities and omissions. Moreover, as much as possible, the wording of the contract should include language that clarifies the accounting treatment by the seller. For example, explicitly stating whether intellectual property that is part of a performance obligation is either symbolic or functional simplifies accounting and auditing by eliminating a potential ambiguity. Making the distinction explicit is useful because that characteristic determines whether revenue from that intellectual property must be recognized over the term of the contract (if it’s symbolic) or at a point in time (if it’s functional). It’s important for finance executives to work with their legal department or outside counsel to appreciate the importance of having sales contracts that minimize workloads for their department. Our benchmark research on recurring revenue suggests that it’s common for people working in one part of a business to be unaware of issues their colleagues in other parts face. For example, when it comes to invoicing the research finds a major disconnect between the finance department and the rest of the company. Nearly half (47%) of participants working outside of finance and accounting said they are satisfied with their company’s ability to produce invoices for their recurring charges, compared to only 29 percent of those in accounting roles. The gulf between the two reflects the reality that when parts of a business process are performed without regard to their impact on finance department operations, invoicing becomes a highly labor-intensive effort. Indeed, of those not satisfied with their invoicing, four out of five (79%) said it requires too much work, two-thirds (68%) said it involves too many resources, and more than half (54%) said it takes too long.
To be sure, standardization is either difficulipt or impractical for very large or complex transactions. And, in some cases, customers will insist (successfully) on writing the sales contract “on their paper.” (That is, the buyer’s side provides the contract that forms the basis of the negotiated result in order to better control the negotiating process and minimize the risk of the buyer being subjected to unfavorable terms and conditions.) However, unless these instances are common and unavoidable, they amount to exceptions that do not affect the need for consistency and commonality in a company’s sales contracts. Even in the case of exceptions, corporations should define and document a standardized framework and process for determining how to handle the accounting in the five-step revenue recognition framework laid out in the standards as easily and consistently as possible.
Invoicing and billing are a part of the order-to-cash process that benefits from automation. This process is relatively straightforward for companies that exclusively or mainly have contracts for stand-alone transactions where the performance obligations to the customer are met over a relatively short period of time (no more than a month or two). Generally, ERP or corporate financial management systems will be able to automate the process and related accounting.
However, companies that engage in subscription or recurring revenue relationships with customers, or those that have contracts covering longer-lived transactions (such as projects), will find it useful to have dedicated software to automate their invoicing and billing and serve as an authoritative source system that drives revenue recognition. Subscription and recurring revenue relationships often involve frequent changes to deliverables, which complicate invoicing and billing as well as the revenue recognition process under the new standards. In our research more than twice as many (86%) companies that use a third-party dedicated billing system said they are satisfied or somewhat satisfied with the software they use for invoicing as those that use spreadsheets (40%).
Finance executives in companies that will be subject to the new revenue recognition standards should not overlook the impact that the structure of their sales contracts and contracting process can have on their accounting department. I recommend that they scrutinize their contracts and contracting processes to determine how their design can be used to minimize finance department workloads under the new standards. They should examine how well their contracting processes are integrated with invoicing and billing and any other elements of their order-to-cash cycle, especially as these relate to revenue recognition.
Robert Kugel – SVP Research