Subscriptions aren’t just for magazines anymore.
In fact, for many businesses—both new and old—subscription-based contracts have become the norm. If you need proof of that, look no further than the software industry. Software was once a physical product: if you wanted to purchase a copy of Microsoft Office, you would pay Microsoft, and Microsoft would deliver you a CD (or in the older days, floppy disks) with the application on it.
Nowadays, the transaction isn’t so cut and dried. With the latest iteration of Office, you don’t purchase a boxed product, but an annual or monthly subscription to Office 365 that allows you to download and use the various Office applications on your devices. When your subscription expires, you lose access to those applications until you pay again.
And this is just one example, as hundreds of companies are moving towards subscription-based services—and not just software companies, either. SaaS and financial services companies in particular are finding that the stability of annually recurring revenue is just too tempting to pass up.
New models, new challenges
An interesting side benefit of this phenomenon is the fact that many companies now offer their customers a high level of flexibility in their subscriptions and provide value pricing. Where customers once paid a flat price regardless of how much they actually used a product, it’s increasingly common to see products and services delivered in an a la carte or pay-as-you-go manner, with clients paying for what—or how much—they use.
However, the larger move to subscription services does have a downside. Flexibility in pricing and bundling offerings may be great for sales and the front office, but creates some incredible challenges for the back office. Both the order to cash and order to revenue processes have had to rapidly evolve to accommodate this new model and rate of change. The end result: existing automation in enterprise resource planning (ERP) and other financial systems is often left in the lurch. This means billing and revenue recognition—critical for reporting how well or how poorly a company is performing in terms of earnings—become much harder.
When a product changes ownership in exchange for money, the moment of revenue is easy to spot, allowing for easier renewal management. When a product or service is delivered over a period of time and payment has to be renewed every so often, revenue recognition is far less easy—especially when the payment amount is a function of a number of different variables. To make things even more difficult, subscription arrangements often have multiple elements to them, all of which differ in value and are delivered at different times.
ERP and subscription arrangement
Before the advent of the “subscription economy,” companies tended to rely on their ERP or other financial systems to handle their order to cash and order to revenue cycle processes. But most of these systems were designed in an era when manufacturing was the main mode of doing business, and can have trouble dealing with billing and revenue recognition where subscription and multiple element arrangements are involved. In short, they just aren’t made to deal with today’s dynamic, subscription-driven world.
That doesn’t mean it’s time for drastic measures. ERP systems provide a solid backbone and can still be quite useful for many companies. Too, the costs for replacing them can be huge in terms of time, money and risk. If you are a company that deals in subscription arrangements, the most efficient and cost-effective way to avoid compromising your revenue management capabilities is to keep your existing systems in place, but bolster them with plug-in modules built especially for recognizing revenue in the most complicated of circumstances.
Another option is to attempt to custom-code your own solution. However, this approach comes with its own set of headaches. First, it means your team assumes the responsibility for keeping up with any changes in regulation or business processes, opening you up to significant liabilities. Even a slight change to your business model—subscription-based or otherwise—could have a far-reaching impact on the complexity of the associated revenue recognition. With a homegrown solution, this leads to time-intensive upgrade projects and bumps up the complexity—and therefore maintenance costs—of your ERP customization.
What’s more, unless your team fully understands the requirements and implications of those changes, there’s no guarantee that your custom fix will actually be able to address them in the long term. This becomes especially crucial when significant changes are made to accounting regulations and principles—something companies faced with the introduction of Sarbanes-Oxley, and will face again once with the upcoming changes to the GAAP (generally accepted accounting principles) for revenue recognition, both in the US and abroad.
The value of plug-in solutions
Most vendors have been evolving their plug-in solution for many years and have a large number of clients who are actively using the product. As a result, they have encountered – and already dealt with – many of the complexities you will face as your business grows, and weathered changes in both business models and accounting principles and regulations. By comparison, a custom-coded module generally only sees use at one company: yours. It will not retain the benefit of rapid stabilization that a module in use at hundreds of companies will undergo. Worse, most of the knowledge regarding the customization will be in the minds of the team developing it, people that might not even reside within your corporate walls. This leaves you tremendous vulnerable to turnover, creating unnecessary risk.
A third option, of course, is to move these processes back to spreadsheets or other manual solutions, but this option is also fraught with risk. For further information on the problems associated with this option, take a look at our white paper “Improving Billing and Revenue Management: A Guide to Getting Off of Spreadsheets”.
A vendor-provided plug-in module for your existing system may well be the optimal solution for you, but there are some several factors you should bear in mind. In particular, you may encounter issues around integration, functionality, and stability – issues that are best surmounted by sticking to an experienced, knowledgeable vendor. Vendors with a track record of successful deployments will have already faced and dealt with the myriad data and integration issues to be considered. This means that their solutions will be much more adaptable to regulatory changes, and are tried and tested in terms of both functionality and their ability to integrate with major ERP and other financial systems.
For more details on building up your company’s ERP system to handle the revenue challenges of the subscription economy, download our recent white paper, “A Guide to ERP Augmentation for Improved Billing and Revenue Recognition.”