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        Robert Kugel's Analyst Perspectives

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        Recurring Revenue Challenges Finance Departments

        As I noted in a recent analyst perspective note the recurring revenue business model is gaining increasing use worldwide. Our recently completed recurring revenue benchmark research shows that companies are using this business approach because they find that it can convey a strategic advantage in creating additional sales opportunities, making future revenues more predictable, enhancing their customers’ experience  and increasing customer loyalty. However, recurring revenue businesses have unique challenges, especially in finance VentanaResearch_RR_BenchmarkResearchand accounting departments because most ERP systems (the ones that handle the accounting function) are not designed to manage the specific requirements of a recurring revenue businesses.

        One of the root causes of the problems finance and accounting departments encounter with managing the invoicing and billing of recurring revenue is that the order-to-cash process often is fragmented, with each part of the business doing its own thing and managing its activities. Our research on information optimization confirms that this is a common issue. A choppy process leads to fragmentation of data as it is entered multiple times in multiple systems. And because of such multiple entries, inconsistencies and errors are almost inevitable. For example, last-minute changes in a contract or a purchase order may not be entered everywhere or at the same time. After a couple of months customers may add or subtract services, and these changes may not be reflected accurately in every system at the same time. Creating new services or products thus can generate complexities that take time to implement. All these complexities and changes can create billing errors.

        Finance departments wind up bearing the brunt of data fragmentation, a fact that is rarely appreciated by the rest of the company. Since they can’t take for granted that the billing data is utterly reliable, they construct monster spreadsheets to vr_Recurring_Revenue_06_finance_less_satisfied_with_invoicingreconcile the information about the customers’ services, pricing, the contract terms, usage and other factors that are stored in each of the systems. It takes time to work through the reconciliation spreadsheets, and this job requires experience. The more variations in the services and products offered, the more complicated and time-consuming the reconciliation process becomes. Therefore, it shouldn’t be a surprise that our research reveals that those working in finance and accounting organizations are far less happy with their company’s invoicing process than everyone else: only 29 percent of them are satisfied with invoicing, compared to nearly half (47%) of people vr_Recurring_Revenue_07_dedicated_system_users_are_more_satisfiedworking in other parts of a company. One way of dealing with such complexities is to put tight controls on what sales people can offer and what product managers can introduce. But this isn’t a good solution. It might save time spent by the accounting department but can make the company less competitive. Moreover, it’s unnecessary.

        Dedicated billing systems that are designed for companies that offer recurring or subscription services enable finance and accounting departments to get what they need to perform their jobs well without diminishing the company’s ability to introduce new products or features quickly, and without severely limiting sales teams’ flexibility in negotiating pricing, terms and conditions. These dedicated billing systems provide finance and accounting groups with controlled, accurate and up-to-date billing information so that invoicing becomes easier and more reliable. They can substantially reduce or even eliminate errors (which can speed up collections), and they enable companies to handle customer billing inquiries quickly. Automating the process means reducing the need for administrative or operational overhead, thereby cutting costs. This probably accounts for the finding from our recurring revenue research that almost all (86%) users of dedicated billing systems are satisfied or somewhat satisfied, far more so than those that use spreadsheets to support their process and those that rely on their ERP system.

        A well-designed recurring revenue billing system usually will automate the revenue recognition process to make it completely reliable and easier to audit. Companies that try to manage revenue recognition in desktop spreadsheets almost certainly will find that keeping track of even slightly complex services is difficult and time-consuming. It’s all the more difficult because in many recurring revenue businesses, customers frequently modify or change their contracted services or products. Using spreadsheets to track what revenue can be recognized and when is even more difficult when customers decide to add or drop features, bring on new users or respond to a new marketing offer.

        The business case for investing in a dedicated billing system often can be made simply on the time (measured in full-time equivalent employees) saved in bringing on new customers, modifying their contracted services and preparing and checking invoices. It’s also important to be able to quickly add or modify a company’s offerings and to give sales people the ability to adjust the terms and conditions of contracts (within reason, of course) as needed to close a sale. I recommend that CFOs, controllers and heads of accounting in a business with a subscription or any other type of recurring revenue business model that are not using a dedicated billing system investigate this software; they should admit that most ERP systems are not designed to handle the specific requirements of these types of business. These dedicated systems usually are available as a cloud-based service, so they are relatively easy to deploy, and most vendors have experience integrating their offerings with ERP systems.

        Regards,

        Robert Kugel – SVP Research

        Authors:

        Robert Kugel
        Executive Director, Business Research

        Robert Kugel leads business software research for Ventana Research, now part of ISG. His team covers technology and applications spanning front- and back-office enterprise functions, and he personally runs the Office of Finance area of expertise. Rob is a CFA charter holder and a published author and thought leader on integrated business planning (IBP).

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