Constraints-Revenue New Offers

FASB recently issued EITF Issue Number 08-1

This issue will change the way companies report revenue;

when they offer multiple deliverable types

  • Product
  • Software
  • Services

GAAP – Forces companies to use a single revenue method on all with the most evident being product which has immediate recognition of revenue upon delivery or evidence of shipment.

In the current process all product, software and service must be excluded from revenue until all system components and services have reached the qualifying milestone for recognition.

In the mid to late 90’s; I worked closely with KPMG auditors to develop a 30/30/30/10 revenue recognition model that was perfectly aligned to our Just in Time solution and system delivery model.

My boss at the time actually came up with the concept.

My role was purely influencing the auditors, ensuring a process to prevent audit findings through effective execution of the process model.

When we acquired our competitors we transitioned each of them to the same model.

My revenue manager was off the hook as we had some projects extending beyond 60 days for up to a year in some cases.

I was authorized to acquire a clerical resource who’s only responsibility was creating the project binder which copied 3 sets of each equipment specification all drawings before the 2nd billing period.

I sequenced the resource delivery based on the ability to recognize the revenue immediately after 2nd billing the lower cost delivery work would begin and 2nd engineer billing would complete.

Leaving any tuning and turn up by our installers who spent 1 day onsite with our lead technical resource to enable our last 30% billing.

We would have 10% left to bill in order to close with an expectation that the 1 day with both lead installer   and service tech turning up the system.  No effort was intended to remain outside my own billable time to get the customer to close.

First 30% – Includes the design service which was an accountable role for the design and equipment list.

Design engineers worked with Sales to define the equipment with an accountable role in delivery or our Design resources.

Sales had the quote and margin with close responsibilities closing this deal with end of month booking based on the name of their customers buyer and contact agreement within the predefined timeline supplied by the delivery resource manager.

Order Management framed the statement of work based on the Design equipment list using a general rule of 30% above the equipment cost.

Order management worked with the customers buyer from the point of sales presenting and their point of contact accepting the solution.

The customer would be instructed to have their buyer contact information supplied to sales at this agreement.

If not, the schedule and equipment may delay the project with a nice subject to the receipt of a signed statement of work and valid purchase agreement.

By default the service and software deferral of revenue has been a defect in the way companies report revenue on their financial statements.

This will focus on the way many companies must currently use a Vendor Fair Value model – to determine price for the fact that no market price has been determined by external analyst.

Example; Video conference technology offers – despite the length of time on the market; a competitive selling price across the market has not been established.

Some companies have been forced by their internal delivery methods into a Non-GAAP accounting report on financial statements.

Every organization or agency strives to attain a competitive advantage in one way or another.  The research and market trials can take several years.  Imagine if your company was forced to touch every transaction at the worst possible time.

When the order needs to book.

Your no touch models really have no way to be excluded unless you design the delivery model to contain these high touch offers in their own lane in a highway or using a line in the sand.  Not a constraint rather a guide.

You can be very effective managing your innovation and higher cost resources in this model.

If these types of offers get delivered in the same manner as other mature (Core/Foundation) offers. It is unlikely that the aggregation will occur.

You may not be convinced; harder to influence I suspect.   Let’s understand the gain in my prescription; move the barriers out of the fast lane.  Your low dollar and high volume transactions to revenue have a clear and no touch path.

If touched a few times for example as your slow lane models mature the touches become less moving to the middle lane; then as determined by industry analyst who prompt the middle lane as the second category reported on financial statements.  Many companies simply use footnotes after my analysis and synthesis of the “as is” which includes the two external audit reports and process to measurement systems.

Risk management portfolio results from reports supplied by your auditors and the quantified potential events have been significantly understated by default as certain technical forums have been promoting the standards in silos.  When you return the system to a whole before synthesis you will have a very different scenario.

Quantifiable measures force significantly higher defects

System approaches limits the risk to a single event rather than each function having defects for what seems like a unique failure in one function.

Conclusion the complexity factors and lack of policy skill and the poor management practices or lack of acknowledgement around the authority and boundaries of the authority.

Without these lanes; the situation result will be and has proven to be the highest contributing factor to both external audit report findings.

Every transaction event will be in-accurate and incomplete.

Your customers in the early phases are generally the ones with the most sustainable revenue in service.

Usually global accounts in most technology markets; the two organizations golf or can destroy your organization and your professional reputation.



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