Enterprise Systems and Revenue Recognition: The Missing Link FINANCIAL EXECUTIVE BENCHMARKING SURVEY. Enterprise Systems Edition

Transcription

1 - Entepise Systems and Revenue Recognition: The Missing Link FINANCIAL EXECUTIVE BENCHMARKING SURVEY Entepise Systems Edition

2 TABLE OF CONTENTS EXECUTIVE SUMMARY Executive Summay... 2 The Impact of Revenue Recognition on Financial Results... 3 Revenue Recognition Policies... 4 Enfocing Revenue Recognition Policies... 4 Entepise Systems and Revenue Recognition: The Missing Link... 5 Peceptions vs. Reality... 5 The Functionality Gap... 6 Revenue Accounting Speadsheets: The Compliance Killes... 7 What Do You Need to Spend Moe Time On?... 8 What Do You Need to Spend Less Time On?... 8 Intenal Contols and Compliance... 9 Impoving Revenue Recognition Pocesses Impoving Othe Finance Pocesses: Undeway This Yea Fomal Plans and Assessments in Place Impact of Technology Impoving the Financial Close Pocess Anothe Snapshot of Sabanes-Oxley 404 Pocess Efficiency.. 14 Summay Demogaphics About RevenueRecognition.com About IDC RevenueRecognition.com in association with Intenational Data Copoation (IDC) ecently suveyed 685 business leades about the need fo impovements in thei finance pocesses, with a focus on evenue ecognition and elated epoting pocesses. The suvey was conducted in May 2006 by and all esponses wee on an anonymous basis. Moe than 75% of espondents ae CFOs, Contolles, senio finance executives, intenal auditos, o compliance leades. 120 esponses wee fom companies with evenues of $1 billion o moe. Refeences to the data and naative in this epot should be souced: and IDC, Key Findings: The top 3 concens fo finance teams ae the financial closing and epoting pocess, the use of speadsheets, and evenue ecognition. 92% of public companies ely on manual pocesses to pefom key evenue ecognition and epoting functionality (nealy the same pecentage is tue fo pivate companies). t t 68% of all companies stated thei Financials/ERP systems DO NOT automate all thei evenue ecognition and epoting activities. 84% of companies that initially stated Financials/ERP systems DO automate evenue accounting ae actually using speadsheets fo these activities. Companies want to spend less time on data aggegation, manipulation, and validation and moe time on business pefomance analysis. The finance pocesses that ae most difficult to establish intenal contols fo ae contact management and evenue ecognition. Financial Executive Benchmaking Panel Entepise Systems Edition 2 and IDC, 2006

3 THE IMPACT OF REVENUE RECOGNITION ON FINANCE RESULTS Thee ae seveal ways that evenue ecognition can impact the validity of financial esults, putting companies at isk fo estatements o being cited fo compliance contol weaknesses, including: A lack of evenue ecognition polices A lack of policy enfocement Manually-intensive evenue ecognition pactices that ae pone to eo and inconsistency Manual effots that educe time available fo analysis and identification of citical issues Compliance initiatives have highlighted contol gaps within the oganization, and evenue accounting is a key aea that can benefit not only fom documentation and testing, but automation acoss the pocess. The esults of this suvey highlight the weaknesses that companies see within evenue ecognition pocesses, identify the oppotunities they see fo impovement, and also eveal othe finance pocesses ipe fo impovement. Financial Executive Benchmaking Panel Entepise Systems Edition 3 and IDC, 2006

4 REVENUE RECOGNITION POLICIES ENFORCING REVENUE RECOGNITION POLICIES Regadless of a company s size, owneship stuctue, o what systems it has in place, having a witten evenue policy is fundamental to accuate evenue epoting. The evenue policy should goven how contacts ae witten, how odes ae booked, define the evenue accounting wokflow, as well as how jounal enties ae made as evenue is managed though the finance depatment. Oveall, appoximately 60% of pivate companies and 85% of public companies have a witten evenue policy. As Figue 1 shows, the numbe climbs to 90% fo public companies with moe than $1 billion in evenue. How companies enfoce evenue policies acoss thei entepises is of vital concen. The integity of financial infomation is best maintained when it is systematically contolled fom the moment an ode is enteed all the way though to the epoting pocess. Many companies depend on entepise Financials/ERP systems to manage thei financial pocesses. Howeve, only 32% initially evealed that thei Financials/ERP systems automate all thei evenue ecognition accounting and epoting equiements, highlighting a significant weakness that can epesent a contol isk that impacts financial esults. In fact, the numbe was even lowe (28%) fo the lagest public companies (moe than $200M in evenue). Figue 1 Companies that have a witten evenue ecognition policy. (By size and owneship, n=685) Moe than $1B $200M to $1B $20M to $200M Unde $20M Yes 32% Figues 2a and 2b Does you cuent financial IT infastuctue (Financials/ERP system) automate all of you evenue ecognition accounting and epoting needs? All (n=685) No 68% Yes 28% Public, >$201M (n=170) No 72% 0% 20% 40% 60% 80% 100% Pivate Public Financial Executive Benchmaking Panel Entepise Systems Edition 4 and IDC, 2006

5 ENTERPRISE SYSTEMS AND REVENUE RECOGNITION: THE MISSING LINK ENTERPRISE SYSTEMS AND REVENUE RECOGNITION: PERCEPTIONS VS. REALITY In fact, thee is a missing link : peception of the use of entepise systems fo evenue ecognition is ovestated. In Figue 3, 92% of companies said they ae using speadsheets fo one o moe of the following key evenue ecognition and epoting tasks: Applying evenue allocation ules Redistibuting evenue (e.g. based on SOP 97-2, EITF 00-21) Ceating evenue ecognition schedules fo futue peiods Reviewing sales odes to identify defeed items Pefoming evenue contibution analysis Repoting on futue evenue steams Ceating accounting enties Figue 3 Speadsheet use fo key evenue ecognition and epoting tasks? (n=685) Why ae 92% of all companies using speadsheets when only 68% initially stated that thei financial/erp systems don t do the job? It seems thee is a disconnect between the peceived capabilities of Financial/ERP systems and eality when it comes to evenue ecognition and epoting tasks. When looking at the subset of companies that had indicated thei Financials/ERP systems do automate all thei evenue ecognition and epoting needs, 84% ae also actually using speadsheets fo these activities, as shown in Figue 4. Clealy oganizations have an oppotunity to automate and impove the evenue ecognition and epoting pocess. Figue 4 Speadsheet use by companies stating Financials/ERP systems automate ALL thei evenue ecognition and epoting needs. (n=217) Public Use speadsheets fo evenue tasks = 92% Pivate Use speadsheets fo evenue tasks = 91% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 84% use speadsheets 92% THE BOTTOM LINE Of public companies use speadsheets fo citical evenue ecognition and epoting activities. Use speadseets fo one o moe of the evenue tasks above Do not use speadsheets fo any of the evenue tasks above Financial Executive Benchmaking Panel Entepise Systems Edition 5 and IDC, 2006

6 THE FUNCTIONALITY GAP The question emains then, which activities ae falling though the cacks in the entepise financial infastuctue? We asked espondents to identify what tasks they ae pefoming with speadsheets in ode to assess whee the poblems lie. The esults, depicted in Figue 5, show heavy eliance on speadsheets fo all the key evenue elated pocesses listed. Ceating accounting enties was numbe one, but thee is not much diffeence between the top 5 tasks fo which companies ae using speadsheets. Despite the fact that lage, moe complex oganizations have significant IT investments, public companies with moe than $200 million in evenue ae substantially moe eliant than the oveall sample (61% vs. 52%) on speadsheets fo basic accounting enties. Figue 5 Speadsheet based evenue ecognition and epoting tasks. (Multiple esponses accepted, n=685, 170) All Companies Public with evenue moe than $200M Ceating accounting enties Ceating evenue ecognition schedules fo futue peiods Applying evenue allocation ules Repoting on futue evenue steams Pefoming evenue contibution analysis Redistibuting evenue, e.g. based on SOP 97-2, EITF Reviewing sales odes to identify defeed items 0% 10% 20% 30% 40% 50% 60% Financial Executive Benchmaking Panel Entepise Systems Edition 6 and IDC, 2006

7 REVENUE ACCOUNTING SPREADSHEETS: THE COMPLIANCE KILLERS These esults should be alaming fo copoate finance depatments, executives and investos alike. The isks intoduced by speadsheets have been well documented in numeous studies, including a pevious RevenueRecognition.com suvey. 95% of espondents to ou July 2004 suvey indicated that speadsheets ae on the wong side of key compliance issues. As Figue 6 shows, nealy two-thids said that the most significant isk of using speadsheets is that they ae pone to eos. The complicated mechanics of evenue accounting make the use of speadsheets in this pocess especially toublesome. IDC eseach confims that auditos find speadsheet eos difficult to detect because they lack audit tails and intenal contols, and the use of speadsheets fo key pocesses such as evenue accounting tasks is a concen. Pone to eos Lack audit tail Lack intenal contols Added time to the epoting and analysis pocess Inefficient Reduced visibility/tanspaency No isks Othe Figue 6 In you opinion, what ae the majo isks associated with using speadsheets? Multiple esponses accepted (July 2004, n=118) 5% 4% 30% 42% 51% 56% 58% 63% It is appaent that speadsheets ae filling a seious functionality gap, but they violate basic compliance pinciples. Financial Executive Benchmaking Panel Entepise Systems Edition 7 and IDC, 2006

8 WHAT DO YOU NEED TO SPEND LESS TIME ON? WHAT DO YOU NEED TO SPEND MORE TIME ON? Manual, speadsheet-based pocesses ae poductivity time dains. They involve data aggegation, manipulation and validation, which consideably educe the time available fo high-value tasks such as analysis. As Figue 7 shows, moe than half (56%) of all espondents want to educe the time and effot spent on these activities, followed by a eduction in time spent geneating custom epots, at a distant 21%. The esults ae even moe ponounced in companies with moe than $1 billion in evenue whee data aggegation was ated numbe one by 59% of espondents. When asked what activities equie moe time and attention, espondents wee equally decisive business pefomance analysis fa outanked all othe activities, as illustated in Figue 8. Foecasting futue business pefomance followed with 24%. Figue 7 What do you need you evenue management team to spend LESS time on? (n=685) 10% 3% Figue 8 What do you need you evenue management team to spend MORE time on? (n=685) 3% 2% 3% 6% 10% 56% Poductivity vs. Pefomance Companies want to spend less time on manual data activities and moe time analyzing pefomance. 12% 50% 21% 24% Data aggegation, manipulation, and validation (56%) Geneating custom epots (21%) Audit activity (10%) Compliance initiatives (10%) Othe (3%) Business pefomance analysis (50%) Foecasting futue pefomance (24%) Business planning (12%) Compliance initiatives (6%) Data aggegation, manipulation, and validation (3%) Audit activity (2%) Othe (3%) Financial Executive Benchmaking Panel Entepise Systems Edition 8 and IDC, 2006

9 INTERNAL CONTROLS AND COMPLIANCE With egad to evenue ecognition, the peviously epoted suvey esults do not highlight compliance diectly as an issue ecognizing that impovement is needed in the business pocess itself, which, when managed optimally, meets compliance goals. Howeve, as Figue 9 shows, two key intenal contols challenges still exist in this aea: Figue 9 In you opinion, fo which aea is it most difficult to establish intenal contols? ($20M+, n=492) Contact Administation and Management Revenue Recognition Accounting Contact management is a citical pe-pocess fo evenue ecognition and both ae complicated. Contact tems such as picing, discounts, delivey schedules, pefomance incentives, etc. ae needed to set up evenue ecognition schedules and amounts. One of the key challenges in establishing intenal contols fo these pocesses is coodinating the handoff of infomation acoss the sales cycle, ode enty pocess, and ecoding of financial tansactions. Even basic infomation such as the definition of a custome may vay between systems. Othe key challenges ae the inheent complexity of the evenue accounting pocess itself and pevasive use of speadsheets to manage it. To be effective, the intenal contols must be applied as infomation is tansfomed acoss the pocess, esulting in consistent definitions fo infomation. Contact Management, 34% Revenue Recognition Accounting, 32% All othes, 34% Puchasing and payables 8% Billing and accounts eceivable 8% Ode pocessing 5% Inventoy 4% Teasuy 2% Fixed assets 2% Geneal ledge 2% Payoll and equity 1% Othe 3% Financial Executive Benchmaking Panel Entepise Systems Edition 9 and IDC, 2006

10 IMPROVING THE REVENUE RECOGNITION PROCESS When asked to identify the single most impotant change they would make to impove thei evenue accounting pocesses, esponses wee spead acoss a numbe of key issues, as illustated in Figue 10. The top thee impovement aeas all petain to data integity and validity. Enhancing the evenue functionality in financial systems was numbe one, with 22% of the vote. Establishing a clean souce of evenue data (19%) and implementing business intelligence (BI) tools to analyze evenue (18%) wee a close second and thid. Fo companies with moe than $1 billion in evenues, establishing a clean souce of evenue data was numbe one (26%), followed by BI tools (19%) and enhancing evenue functionality in financial systems (16%). Collectively, these issues point to a need fo automating the evenue ecognition pocesses. Revenue ecognition pocesses ae dependent upon infomation fom multiple souces and typically cannot be executed in existing entepise systems. said Kathleen Wilhide, Diecto of Compliance and Business Pefomance Management (BPM) Reseach at IDC. What is equied is automation acoss this function which will yield a host of benefits, including: moe accuate esults, bette intenal contols, less eliance on uncontolled speadsheets, and feeing up time fo pefomance analysis. Figue 10 If you could impove you evenue ecognition pocess, what would be the most impotant change you would make? (n=685, 116) All Companies $1 Billion o moe Enhance evenue ecognition functionality in financial systems Establish single souce of clean evenue data Implement business intelligence solution fo analyzing evenue Integate sales, contact, sevice and suppot activities Impove intenal contols fo evenue Eliminate speadsheets Standadize consolidation and epoting pocedues Othe 0% 5% 10% 15% 20% 25% 30% Financial Executive Benchmaking Panel Entepise Systems Edition 10 and IDC, 2006

11 IMPROVING OTHER FINANCE PROCESSES IMPROVEMENTS UNDERWAY THIS YEAR Revenue ecognition is one of seveal financial epoting pocesses needing impovement, as uncoveed by ou suvey. The closing pocess is being addessed by moe than half of all espondents this yea. Use of speadsheets and the evenue ecognition pocess ae being tageted by moe than one-thid of espondents. As shown in Figue 11, lage, public companies ae actively addessing these issues acoss the boad 62% ae addessing the close pocess, while moe than 40% ae making impovements in each of the following aeas: use of speadsheets (49%), financial statement pepaation (44%), and evenue ecognition pocess (42%). Figue 11 Financial pocesses tageted fo impovement this yea. (n=685, 170) Financial closing pocess Use of speadsheets Revenue ecognition pocess Expense management Financial statement pepaation Sepaation of duties End use pocesses Sepaation of duties IT pocesses Tax pocesses All Public $200M+ Inventoy valuation 0% 10% 20% 30% 40% 50% 60% Financial Executive Benchmaking Panel Entepise Systems Edition 11 and IDC, 2006

12 IMPROVING OTHER FINANCE PROCESSES IMPROVEMENTS PLANNED FOR THE FUTURE Looking to the futue, Figue 12 shows that fomal plans o assessments ae being initiated in six key aeas: Revenue Recognition Use of speadsheets Tax pocess Sepaation of duties fo end use pocesses Expense management Sepaation of duties fo IT pocesses Figue 12 Financial pocesses whee plans fo futue impovement have been made o assessments ae being conducted. (n=685, 170) Revenue ecognition pocess Use of speadsheets Tax pocesses All Public $200M+ Sepaation of duties End use pocesses Expense management Sepaation of duties IT pocesses Financial closing pocess Financial statement pepaation Inventoy valuation 0% 5% 10% 15% 20% 25% 30% 35% 40% Financial Executive Benchmaking Panel Entepise Systems Edition 12 and IDC, 2006

13 THE IMPACT OF TECHNOLOGY IMPROVING THE FINANCIAL CLOSE PROCESS Companies ae expanding thei undestanding of technology to suppot pocess automation. As shown in Figue 13, the top aeas whee espondents believe technology can be most beneficial ae the financial close pocess and the evenue ecognition pocess, followed by a numbe of othe pocesses that companies peceive to be less of an issue. When asked moe specifically how the financial close pocess could be impoved, wokflow o document management to impove visibility and shoten the close pocess anked fist at 41%. Automating evenue ecognition and BI tools ound out the top thee choices with no othes eceiving moe than 10%. Figue 13 Whee do you believe softwae solutions would povide the geatest impovement? (n=685) Financial closing pocess Revenue ecognition pocess Expense management Financial statement pepaation Inventoy valuation Tax pocesses Sepaation of duties - end use Sepaation of duties - IT pocesses Consolidation o BI epoting tools Figue 14 Please identify whee the financial close pocess could be most impoved. (n=685) Wokflow o document mgmt Revenue ecognition ERP standadization Tax accounting Inventoy valuation Othe 0% 10% 20% 30% 40% Othe 0% 10% 20% 30% 40% Revenue ecognition is the top aea tageted fo futue impovements, (pevious page). This may be because it is an aea that can be effectively impacted by technology, and impovements flow though to the financial close pocess. Financial Executive Benchmaking Panel Entepise Systems Edition 13 and IDC, 2006

14 ANOTHER SNAPSHOT OF SARBANES-OXLEY 404 PROCESS EFFICIENCY We fist asked about the efficiency of Sabox 404 compliance pocesses in August of The esults fo public companies ae consistent between then and now, as the compaison in Figue 15 shows. Companies continue to question the value of excessive contol activities, and ae tying to detemine the impact of ecent guidance fom the PCAOB on "top down, isk based" appoaches. Figue 15 Public Companies Only How would you ate the efficiency of you key compliance pocesses fo Sabanes-Oxley 404? August, 2005, n=162 May, 2006, n=277 4% 14% 5% 12% SUMMARY This suvey highlighted thee key themes: 1) Key contol weaknesses in the evenue ecognition pocess; 2) The pevasive use of speadsheets in finance, and 3) Inceasing attention on the elements of the financial close pocess. Revenue ecognition and elated epoting pocesses ae not well-suppoted by Financial/ERP systems. Companies ae filling the gaps with speadsheets despite the fact that they violate key compliance pinciples. Clealy, new capabilities ae needed. Many of the isks, poductivity sinkholes, and infastuctue challenges discussed in this epot ae inteelated. Companies should look at key aeas of isk, such as evenue ecognition, and exploe solutions that automate these pocesses acoss entepise systems. Accoding to IDC s Wilhide, The concept of intelligent pocess automation that enhances but does not necessaily eplace entepise systems, as an emeging standad that can close the missing link in opeational efficiency. 24% 25% 58% 58% Highly efficient no futhe investment equied Modeately efficient may equie incemental impovement Modeately inefficient will equie incemental impovement Highly inefficient lagely tempoay fixes that ae being o will be eplaced Financial Executive Benchmaking Panel Entepise Systems Edition 14 and IDC, 2006

15 DEMOGRAPHICS Figue 17 What is you company s main industy? (n=685) EVP, SVP, VP, Diecto of Finance Business/Financial analyst Revenue Manage Intenal Audito Figue 16 What is you title? (n=685) CFO Contolle 1% 13% 20% Compute HW/SW 2% 5% Sevices Manufactuing Financial sevices 5% Tade 14% Healthcae 7% Non-Pofit Communications 7% 13% Tanspotation 12% Utilities CEO, Pesident IT - CIO, Diecto, Manage, othe Compliance Office/Manage Teasuy Office Othe Figue 18 What was you company s appoximate evenue in 2005? (n=685) 16% 27% Figue 19 What is the owneship stuctue of you company? (n=685) 40% 0% 5% 10% 15% 20% 25% 30% 17% ` 60% 36% Public Pivate Less than $20M $21M to $200M $201M to $1B Moe than $1B Financial Executive Benchmaking Panel Entepise Systems Edition 15 and IDC, 2006

16 ABOUT REVENUERECOGNITION.COM ABOUT INTERNATIONAL DATA CORPORATION RevenueRecognition.com is dedicated to educating finance pofessionals on evenue management and elated issues. The site focuses on evenue ecognition, Sabanes-Oxley compliance, intenal contols, copoate govenance/ethics, SEC and FASB guideline compliance, M&A issues, contact management, evenue accounting, evenue epoting and foecasting, and industy specific evenue challenges. Contact us at: RevenueRecognition.com is hosted in patneship with CFO.com and Softax Copoation, a leading povide of evenue management softwae solutions. To lean moe about Softax solutions, customes and patnes, please visit Softax Copoation. All ights eseved. IDC is the pemie global maket intelligence and advisoy fim in the infomation technology and telecommunications industies. We analyze and pedict technology tends so that ou clients can make stategic, fact-based decisions on IT puchases and business stategy. Ove 700 IDC analysts in 50 counties povide local expetise and insights on technology makets. Business executives and IT manages have elied fo 40 yeas on ou advice to make decisions that contibute to the success of thei oganizations. IDC is a subsidiay of IDG, the wold s leading technology media, eseach, and events company. Additional infomation can be found at Financial Executive Benchmaking Panel Entepise Systems Edition 16 and IDC, 2006