Viewpoint: Improving revenue management
By John Van Decker
MOST Global 2000 organisations have not appropriately matched revenue management solutions to their financial requirements. Older releases of enterprise resource planning (ERP) solutions often lack tools to measure and manage revenue performance. Firms should evaluate emerging applications and upgrades to ERP, as well as develop custom solutions where appropriate.
META Trend
Core ERP financials will be further commoditised, with differentiators in global capability and the financial value chain (FVC).ERP vendors will acquire and develop FVC extensions (for example, credit, collections), as user adoption of FVC rises to 25 per cent. , the ERP financial value chain will become more complete and integrated with CRM and supply chain management processes and data models as financial and operational application distinctions are blurred.
Revenue restatements, one of the leading causes of accounting restate- ments, can be a disaster for an enterprise. In this post-Enron age, proper revenue compliance can mean the difference between viability one quarter and being defunct the next.
Inefficient and ineffective revenue accounting processes can lead to costly restatements, often destroying equity. This is usually a symptom of poor/broken revenue recognition and management processes that:
- reduce both company valuations and company image (generated from negative press and SEC inquiries); increase shareholder lawsuits;
- lower profits and reduce cash flow due to lower sales and inflated expenses (based on erroneous revenue forecasts); increase customer attrition; and
- reduce employee morale. Some accounting issues of the past year were due to aggressive accounting not considered "wrong" two to three years ago, because much was open to interpretation.
Ensuring consistent revenue
Enterprises must have the capability to ensure accurate and consistent revenue accounting due to increased scrutiny by the SEC and other regulatory agencies. In Europe, Basel II regulation sets forth specific rules on when revenue can be recognised, requiring financial institutions to ensure that it can actually be collected before being booked in accounting systems.
An emerging solution space focused on these issues is referred to as "revenue management". This can be enabled through best-of-breed products (for example, Softrax, Emagia, I-many) and upgrades to ERP solutions (for example, Oracle 11i, PeopleSoft 8.4), both of which can replace disparate spreadsheet and legacy processes to track and manage revenue recognition functions.
In the absence of automation, manual processes are usually required because existing enterprise solutions do not address this functionality, seriously limiting visibility and accountability. Current financial solutions, including ERP (for example, Lawson), typically fail at enabling the requisite visibility and accountability into global customer contracts, customer-facing financial processes, and revenue assurance processes.
ERP billing and accounts receivable solutions are the worst offenders, typically paying only lip service to revenue and receivables management requirements. This can have profound implications in many industry verticals, especially technology companies.
Global 2000 organisations will choose (in order) point solutions (for example, working capital analytics, contract management), upgrades to ERP solutions, and custom development to fill out components of a revenue management platform, to ensure compliance with regulations and improve working capital.
By 2005, ERP solutions will improve revenue management capabilities in accounts receivable and billing solutions to support a closed-loop life-cycle approach, including metrics, contracts, reporting, and planning.Organisations that have implemented these solutions will have enabled improved decentralised management approaches, and thus more effectively improving speed of reaction to economic and competitive pressures.
Revenue Management
Revenue management is part of the FVC. From a business application perspective, the FVC includes ERP applications and extensions (for example, contract management, working capital analytics) that enable improvements in business performance measurements, effective decision support, and efficient transaction processing.
Revenue management is focused on improving revenue processes within the enterprise through best-in-class solutions (for example, Softrax, Emagia) as well as extending core ERP financial solutions. It encompasses the entire revenue cycle, including revenue recognition, recurring revenue, revenue reporting/allocation/analysis, and billing with the goal of improving the enterprise cash position.
Many professional services automation (PSA) solutions (for example, Changepoint, Novient) have improved revenue management by more closely correlating revenue recognition to billing. Too often, generic ERP solutions do not meet the full revenue management requirements of an organisation. Although commodi- tised ERP best practices may meet the needs of an organisation's expense-related processes, the "special differentiation" of a firm is typically inherent in revenue and customer-related processes. This differentiation can vary significantly by industry vertical. ERP solutions sometimes lag in providing capability for proper revenue treatment, despite customers' strong requirements.
Effective revenue management relies on close connectivity/interopera-bility with billing, contract management, and customer relationship management processes, and should include the following critical capabilities. (See Figure 1 for additional requirements)
Contract Management:
To manage the terms of the contract throughout the contract life cycle, including terms for billing and revenue recognition. It must support sales and renewal orders with multiple pricing based on volume or service level.
Billing: To handle the various business models and customer billing requirements, including automatic pricing based on product/service-level contractual terms.
Revenue Allocation: To ensure that revenues are booked accurately and consistently within the enterprise for internal management and external financial reporting. Contracts that have multiple elements and numerous revenue streams require tight attention to detail to ensure that all revenues are captured appropriately and allocated in a timely fashion.
Revenue Recognition: To ensure the revenue is booked and recognised in the appropriate fiscal accounting periods according to accounting practice and regulation (for example, project-based organisations, where partial recognition on per cent complete is critical).
The solution should ensure visibility into this process. Regulations from the SEC and FASB will continue to appear, governing the recognition of revenues to ensure that investors have a better understanding of how revenue is accounted for.
Revenue Reporting: To ensure that reporting is accurate. Organisations should have access to detailed reports, audit trails, and visibility into revenue schedules to take a proactive approach to managing their revenue streams.
Revenue forecasting/planning: To provide revenue-forecasting capability and enable a firm to adjust business plans to reflect changing business scenarios. It must enable analysis of changes in future maintenance revenues and deferred revenues by product, forecasting product and services revenue by customer and/or engagement, and measuring profit and loss impact by service engagement.
The capacity for ensuring the revenue stream, optimisation, forecasting, reporting, and compliance is paramount. Current G2000 revenue and receivables processes are frequently customised and require extensive IT maintenance/management due to shortfalls in many packaged enterprise applications.
Although ERP and PSA solutions are improving the management of revenue, firms should evaluate ERP upgrades (where revenue management improvements have been made) and emerging solutions to fill the gap with custom development to ensure appropriate functionality.
Best-in-class solutions are targeted to specific verticals, and firms must ensure applicability to their business model as well as understand existing support for ERP integration (see Figure 2 for tools to assist in selecting revenue management business applications).
Business Impact: Without effective revenue management business applications, a company is destined to miss opportunities for revenue and profit, and leaves itself vulnerable with regard to increasing revenue regulation compliance.
Bottom Line: New solutions in the revenue management market are emerging that enable firms to better manage and influence revenue streams.
Firms should consider these solutions in addition to custom development where appropriate, to ensure continuous accuracy, compliance, and visibility into all revenue streams.
The writer is Meta's senior program director, Application Delivery Strategies. www.metagroup.com.
