Ok, so “breeze” might be pushing it, but every high tech services firm knows that managing long-term contracts and accurate revenue recognition is anything but easy with even the best of software at your disposal. However, the right technology coupled with proven best practices and careful execution can minimize risk, improve the customer experience and substantially reduce revenue leakage.
What kind of advanced contract management are we talking about?
Whether focused on public or private sector, B2B or B2C, High Tech services firms revolve around software, hardware and services contracts that must be in place to generate and accurately recognize revenue. Even simple contracts require consistent tracking and the flexibility to adapt as relationships, requirements and timelines evolve. More often than not, hit tech firms are dealing with “multi-element arrangements” that incorporate both products and services in the same contract with different delivery obligations and rules for revenue recognition.
Technology Services: Professional services firms that provide infrastructure and security services or implement business software solutions like ERP (enterprise resource planning) or CRM (customer relationship) may spend months or even years on a single project. Services rendered as a part of the project will be billed as delivered and often according to pre-determined milestones and obligations.
Licensing, renewals and warranties: Effectively managing contract entitlements, usage, software licenses, warranty costs and renewals are essential to profitability. High Tech Services firms and software publishers who provide warranty, service or license solutions, must meet their customer obligations in order to ensure the continued revenue stream these services offer. As the market for subscription-based software (SaaS) continues to grow, most High Tech services firms find themselves struggling with cash flow fluctuations and an inability to quickly adapt contracts to changing customer requirements.
Can’t Microsoft Dynamics AX handle Advanced Contract Management?
Mostly, yes. Microsoft Dynamics AX is designed to handle thousands of business processes natively (without further customization), but it is also built on an extremely flexible architecture that allows 3rd party developers to create custom solutions that meet the unique needs of large, enterprise companies. In this case, it is the advanced contract management and revenue recognition needs of High Tech Services firms that require a custom solution.
SBS Group provides an advanced Contract Management tool set as part of AXIO for Professional Services, an enterprise suite that tailors Microsoft Dynamics AX to the needs of high tech and other professional services organizations. AXIO allows customers to streamline the creation and management of subscription-based and fixed-price engagement based contracts and to configure and manage contracts from discovery and negotiation through acceptance and delivery. Integrations with 3rd party quote management applications like BigMachines are available to simplify data sharing.
Below is a more comprehensive overview of the enhancements available only through SBS AXIO for Professional Services:
> Advanced Billing Management
Business are able to set up complex billing rules and allocations to manage split funding scenarios and configure various billing frequencies (monthly, quarterly, etc…) and billing cycles such as up-front or in-arrears
> Advanced Revenue Recognition Functionality
Subscription-based projects are becoming more prevalent every day in the High Tech Services sector so automated revenue recognition functionality on fixed price and subscription based project is extremely important, as the automatic reversal of accruals upon invoicing.
> Comprehensive Contract Renewals
Contracts can be renewed based on percentage, flat amount or even index-based contract amount increases and can be applied to different renewal types such as automatic, linear and non-linear based renewals. It will even generate renewals letters and distributions for customers automatically.
> Automated Contract Realignment
Complex projects often require adjustments to the contract during the tenure of the contract. We’ve made it easy to change both the contract amount as well as tenure, but most importantly the revenue recognition and billing cycles are automatically adjusted as well.
> Contract Re-parenting
This is a personal favorite of mine as it can save an enormous amount of time for customers and provides a level of flexibility you just don’t get in Dynamics AX out of the box. When companies are consolidated or divested, contracts can be moved (re-parented) easily and with history tracked for auditing purposes.
> Advanced Invoice Distribution
The advanced invoice distribution framework allows SBS customers to set up multiple contacts to receive invoice copies to be automatically distributed upon invoice generation. Again, a complete audit trail is created to create a clear chronology of invoice distribution history across all contracts.
Minimizing Revenue Leakage
What about new IFRS 15 standards and Dynamics AX?
Microsoft Dynamics AX is certainly capable of managing to the new standards but without AXIO, the process is much more cumbersome and more prone to user error in the High Tech services sector due to the inherent complexity of long-term project contracts as described earlier in this post.
Change in regulatory standards and compliance requirements are always a concern for hi-tech firms, especially those doing business with public sector entities (government contractors). However, regulatory compliance and Gaap can apply to anyone. If you’re not ready to support the expanded requirements from the new GAAP and IFRS standards, including ASC 606 and IFRS 15, you should be.
IFRS 15, effective for annual periods beginning on or after 1 January 2017, specifies the requirements an entity must apply to measure and recognize revenue and the related cash flows. The core principle of the standard is that an entity will recognize revenue at an amount that reflects the consideration to which the entity expects to be entitled in exchange for transferring promised goods or services to a customer.
The principles in IFRS 15 are applied using the following five steps:
- Identify the contract(s) with a customer
- Identify the performance obligations in the contract(s)
- Determine the transaction price
- Allocate the transaction price to the performance obligations
- Recognize revenue when (or as) the entity satisfies each performance obligation
Technology entities will need to exercise judgement when considering the terms of the contract(s) and all relevant facts and circumstances, including implied contract terms. An entity will also have to apply the requirements of IFRS 15 consistently to contracts with similar characteristics and in similar circumstances. On both an interim and annual basis, an entity will generally need to disclose more information than it does under current IFRS. Annual disclosures will include qualitative and quantitative information about the entity’s contracts with customers, significant judgements made (and changes in those judgements) and contract cost assets.
New Revenue Recognition Standard Effective Dates
IFRS 15 effective for annual periods beginning on or after 1 January 2017. Early adoption is permitted for IFRS preparers and first-time adopters of IFRS.
The effective date of the standard for public entities applying US GAAP is for fiscal years beginning after 15 December 2016, which is essentially the same as for IFRS preparers. However, US public entities will not be permitted to early adopt the standard.
Is advanced contract management only applicable to Hi-Tech Services Firms?
Not at all. Any company dealing with complex contracting or recurring revenue recognition needs a cost-effective way to lower risks in advanced contract management and ensure they’re maximizing revenue. AXIO for Professional Services was developed by SBS Group to help services companies operate more efficiently, but we’re finding that manufacturing, distribution and construction companies are just as excited when they see AXIO in action.
Check it out yourself by attending this educational Dynamics AX webcast on June 15th at 1 PM EDT. Register here!