Order-to-Cash Cycle for Revenue Recognition

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 thatvr_Recurring_Revenue_06_finance_less_satisfied_with_invoicing 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.

vr_Recurring_Revenue_07_dedicated_system_users_are_more_satisfiedHowever, 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

Genesys Advances Omnichannel Experience for Customer Engagement

I recently wrote about six technologies that can help companies deliver experiences that live up to their customers’ expectations: an integrated multichannel infrastructure, analytics, a VR2014_TechInnovation_AwardWinnersmart agent desktop, business applications such as workforce management and knowledge management, collaboration and mobile apps. They should be closely integrated to simplify system administration, to support processes that have been disconnected because they required multiple systems and to be easy to use. In my experience few vendors provide systems that meet all these goals so I was keen to learn about the latest version of the Genesys Customer Experience Platform which was the recipient of 2014 Ventana Research T Technology Innovation award for contact center in its works with IBM Watson Engagement Advisor.

The platform includes many systems, including SIP-based multichannel communications (contact center telephony, enterprise communications and WebRTC communications), routing, IVR, workforce optimization, omnichannel desktop, reporting and analytics, omnichannel management and proactive communications. Together these systems support familiar capabilities such as multimedia communications, workforce management, scripting and knowledge management, and some specific to the platform – personalization, orchestration, multimodality, omnichannel context, interaction and task distribution, dynamic self-service and life-cycle monitoring and analytics. Orchestration allows responses to be made in the context of the overall customer relationship, and omnichannel context supports similar capabilities so responses on one channel are in context with previous interactions on other channels. Multimodality supports customers in using more than one channel at the same time – for example, the company’s website while talking to a contact center agent. Interaction and task distribution works behind the scenes to ensure that each task is given to the resource most appropriate to handle it. In vr_NGCE_Research_01_impetus_for_improving_engagementdynamic self-service, responses can be varied depending on the customer and put into context using data entered and/or retrieved from supporting systems. Life-cycle monitoring and analytics captures interaction and transactional data to provide reports and analysis of customer journeys. The platform is available in three different packages (premier, business and enterprise), which target centers of different sizes, and is available on-premises or cloud-based.

As a package, these match most of the capabilities I outlined to support customer engagement in the digital era. Three in particular caught my attention: an omnichannel desktop and routing, personalized assisted and self-service interaction, and orchestration of omnichannel journeys. All of which support what our next generation customer engagement research found is the top priority for improving customer experience as found in almost three quarters (74%) of organizations.

vr_db_top_five_customer_service_challengesThe omnichannel desktop is an updated version of the Genesys interaction workspace. It has been enhanced to take into account the demand for agents or other employees serving customers to support multiple channels of interaction. Our benchmark research into the agent desktop shows the usefulness of such a desktop. Participants said that they struggle to provide superior customer service because communication channels are managed as silos (21%), activities are not coordinated across business units (17%) and the desktop is complex (13%); regarding the last, agents on average have to access seven separate systems to resolve an interaction; some have to use 20 or more. A “smart” desktop that masks this complexity can overcome these issues, but it has to support an array of capabilities. The Genesys omnichannel desktop supports an interaction preview that includes a view of the customer’s profile, interaction history and notes; co-browsing and multimodal push of Web pages to the customer; views of the customer’s browsing history; steps in the customer journey; access to multiple business apps, such as CRM, from a single desktop; and access to and integration with knowledge management to provide fuller responses to assisted service. While the current version makes it easier for anyone handling interactions to access the systems and information they need to resolve customer issues, I believe it could be further improved with a new task-oriented, point-and-click user interface that would match the expectations of digitally oriented users and help them complete specific tasks.

Personalized assisted and self-service interaction focus on multimodal operations and providing responses within the context of the overall customer relationship and prior channel usage. It combines understanding of historical interaction data and use of transaction and knowledge manage systems to personalize responses across all touch points. A key feature is multimodal callback; for example, when a customer tries to call the contact center and all agents are busy, he or she is given the option to set a time for the company to call back. It also includes what I call connected service; for example, when a customer using a mobile app and cannot complete a transaction, he or she can call the contact center and data already entered into the app is shared with the agent, who can pick up the transaction without asking the customer to re-enter data. It also can include the option to arrange a callback or schedule an appointment without speaking with an agent. Genesys says it is enhancing these capabilities to support what some vendors call virtual agents, which automate assisted service so that customers can complete more interactions without speaking with a person, for example by pushing surveys to customers after they complete an interaction. I believe such capabilities will appeal increasingly to digitally oriented customers.

Orchestrating of customer journeys is in my view the most exciting development in Genesys’ new release. I recently wrote about the importance of the customer experience in the digital economy and the difficulty of mapping customer journeys. The Genesys Customer Experience Platform includes capabilities that allow companies to design, orchestrate, monitor and tune journeys across channels and business units. It has the key capability to capture both interaction and transaction data, and I expect future releases to use this data to visualize journeys in more sophisticated ways that not only show the journey but the outcomes and the root causes of journeys and offer recommendations for improvement. From the customer’s perspective this should make it possible to  resolve issues with less effort.

Genesys is evolving quickly from its origin as a vendor of call-routing software. The overall Customer Experience Platform includes a combination of systems and capabilities that few other vendors provide. It is relatively new, so while every component might not be the best in its class, the fact they are integrated is key. Despite not having the best clarity in why Genesys is better, faster and smarter than alternative vendor approaches, I recommend that companies wanting to improve multichannel customer experiences and accelerate the transition to omnichannel interaction assess how Genesys can support those efforts.


Richard J. Snow

VP & Research Director