Can't meet your rev rec needs with an ERP?
Modern accounting leaders are always looking for new ways to strategically advise their business on scalability and growth. Historically, leaders would prioritize cost cutting measures and expense management. But as businesses adopt increasingly complex pricing models—incorporating a mix of subscriptions, one-time, and consumption-based offers—accounting leaders must shift their advisory focus to revenue recognition.
As this shift continues, leaders are also becoming increasingly aware that their daily revenue recognition processes and financial close are becoming more time-critical, resource-intensive, growing in complexity, and prone to compliance risks.
In fact, 76% of accounting leaders experience increasing pressure from the business to support new, more complex go-to-market models, products, and pricing, which may include consumption-based pricing and bundles. But at the same time, nearly 70% report that they do not have the right technology to address these growing demands from the business.
The obvious solution is to increase revenue automation, but what is the best approach? Many CAOs, controllers, and revenue accounting leaders may believe that their revenue process is already completely automated, but upon further investigation, they discover a web of spreadsheets combined with a customized revenue module within their enterprise resource planning (ERP) system.
This error-prone, costly, time-consuming revenue process is anything but full automation. And simply put, if you have to wait until the books are closed to know what the monthly revenue is, then you aren’t automated.
True end-to-end revenue automation must include:
- 90-98% of revenue recognition is automated in the system
- Minimal manual interventions to process transactions
- Real-time access to data and reporting
- Out-of-the-box support for new products and pricing models
According to a recent MGI analysis of the industry, most companies who adopt an end-to-end revenue automation solution can see a positive return on investment (ROI) in just two quarters (6 months). But what does an end-to-end revenue module entail?
While utilization of an ERP and spreadsheets does remove some level of manual effort, leaders may be surprised to discover that 60% of revenue accounting team members report that their current ERP revenue modules do not fully support business requirements, even with customization.
In addition, 65% say ERP revenue modules were more expensive than anticipated, when factoring in customizations and ongoing maintenance leading to higher total cost of ownership (TCO) than planned.
Clearly, an ERP revenue module on its own is not sufficient to support most businesses as they scale. However, a complete rip and replace of your current ERP system may not be the right option for your business either, so what is the alternative?
More and more companies have shifted away from managing revenue recognition within their ERP and additional spreadsheets. Instead, they look for specialized tools, such as an enterprise-level revenue subledger—a purpose-built solution where data can be managed and accounted for in a controlled but flexible environment. Data can then be fed directly to the ERP general ledger for financial statement capture.
In this article, we draw upon customer, partner, and analyst research, along with published vendor capabilities, to explore the pros and cons of popular ERP revenue modules. In addition, we propose options for using a revenue subledger in conjunction with your ERP to increase automation.
When should you consider an ERP revenue module?
While most ERP revenue modules from vendors like NetSuite, SAP, Microsoft Dynamics, or Workday are able to offer some revenue recognition automation, they are usually just one small piece in an ERP’s broad array of solutions. This means that developing and updating the revenue module to keep up with the ever-changing requirements of revenue recognition and—accounting teams at large—may not be a major area of focus or investment for the vendor.
According to MGI research, a small-business or mid-market level ERP revenue module can be a good fit for businesses with less complex revenue recognition policies, use cases, and lower transaction volumes. These solutions commonly offer many of the controls required for revenue accounting and allow for various revenue management scenarios.
However, as businesses grow and their rev rec process becomes more complex, using an ERP revenue module in isolation can limit scalability and increase the need for manual workarounds. Additionally, since ERPs can be quite structured and controlled, implementing changes that allow your business to scale or work around outlier use cases can become time consuming and expensive.
Businesses often find that they have to further customize the system and incur the never-ending management costs to update and maintain the customizations, or hire additional headcount to handle the required manual efforts.
Automated revenue management solution comparison
Many ERP vendors entice users to use their revenue module by providing low introductory licensing fees or a free trial, but you may be considering it and wondering about the pros and cons of these solutions. What are the indicators that a revenue module is a good fit for your company and how do you know when it’s time to look for a different solution?
As you evaluate your current rev rec processes, you should consider three key areas that can greatly impact your business, now and into the future:
- Complexity and variability: How complex are the transactions and workflows? How much variability of pricing, bundles, etc. is present?
- Volume and future growth: How many transactions are handled per month? How has the complexity of those transactions grown and how will they evolve moving forward?
- Agility and automation: Is your current solution capable of incorporating new business and pricing models without requiring IT resources? How does the solution handle ongoing changes and modifications to customer contracts? How quickly can you get offers to market? Are manual interventions required?
| Small business to mid-market ERP revenue module* | Enterprise-level revenue subledger solution* |
|---|---|
|
Simple B2B business models |
Complex B2B or B2Any business models |
|
Low transaction volumes |
High-volume B2C or B2Any offerings |
|
Startups, small businesses, mid-market |
Mid-market to enterprise |
|
Minimal rev rec complexity |
Increasing rev rec complexity including bundling |
|
Minimal rev rec use case volume |
Increasing number of rev rec use cases |
When should you consider an enterprise-level revenue subledger?
We’ve covered the high-level indicators that your businesses might be outgrowing your ERP’s revenue module, but what are some more specific trends that may suggest you need a revenue subledger? Some or all of the following may indicate that it’s time to consider a new solution:
- Large number of manual workarounds
- Customizations and hidden costs abound
- SSP analysis breakdown
- Manual reporting and delayed close
- Rising audit costs
- Overworked and stressed employees
Large number of manual workarounds
While ERP revenue modules are commonly advertised as full revenue automation solutions, in reality, 79% of revenue accounting team members report that they rely on multiple spreadsheets in addition to their ERP as part of their rev rec process.
As discussed above, ERP revenue modules aren’t usually designed to scale for increased rev rec complexity and use case volume. As businesses outgrow the solution, this can lead to more and more manual workarounds, less automation of tasks, and more time reconciling—with the potential consequences of manual errors leading to misstatements, delays, or worse.
Unable to perform tasks within their revenue module, teams often resort to manual workarounds for tasks such as grouping contracts, bundling, standalone selling price (SSP) analysis and allocations, contract modifications, and reporting. More manual processes can lead to an increased chance of errors, greater risk, higher costs, a delayed close process, and overworked employees.
On the other hand, businesses that add a revenue subledger can substantially increase their revenue automation, potentially reaching the ideal 90 to 98% level. As shown below, adding an enterprise-level revenue subledger built to work alongside your ERP (instead of using an revenue module as an add-on) can significantly increase rev rec capabilities and automation.
Customizations and hidden costs abound
You may assume that your ERP’s revenue module will be cheaper and more effective than an enterprise-level revenue subledger, but traditional ERP revenue modules often require hefty, costly, and time-consuming customizations just to handle use cases properly.
For instance, when introducing new products, pricing, or packaging, the ERP must be configured to accommodate these changes for billing and revenue operations to be successful. If a revenue accounting team wants to understand how revenue will be recognized for new offerings, they must spend time configuring and testing customizations. These custom configurations must then be deployed and continuously maintained.
It’s also possible that the revenue accounting team may not be able to carry out these customizations on their own, meaning they will require the help of IT or an outside consultant who can configure, test, and maintain the tool. And even with all these customizations, 6 out of 10 revenue accounting team members still report that their ERP revenue modules do not fully support their business requirements.
All of this extra work and maintenance can incur additional costs as your go-to-market (GTM) approach evolves and your customizations multiply. In fact, 65% of revenue accounting team members say customizations and ongoing maintenance led to a higher than anticipated TCO for their ERP revenue modules.
Without the necessary support, technical expertise, or customizations, most revenue accounting teams will again return to doing manual work in spreadsheets, which can lead to increased audit risks.
Adding a revenue subledger that can automatically integrate with your existing ERP can significantly reduce the need for customization and manual tasks, thereby also potentially reducing costs.
SSP analysis breakdown
How is your revenue accounting team handling SSP analysis today—is it a manually driven process? One out of five revenue accounting team members say that their inability to do automated, real-time SSP analysis is one of their biggest data challenges.
As your business continues to launch more complex offerings, SSP analysis time will keep increasing and becoming more error-prone. Chances are you’re doing this work in Microsoft Excel, and if you’re an enterprise with a bunch of complex deals, that means you’re committing to deliver a variety of goods and/or services in each and every contract, such as hardware, software, training, or services. Each item requires a defined SSP, which means that if your team is doing the work manually, they are probably spending way too much time and potentially introducing errors in the process. In addition, you’ll need to consider who is managing the formulas to support this process and who will be responsible for managing and updating them on an ongoing basis. In addition, all of this knowledge about manual SSP work will need to be documented in the event that the responsible party leaves the company.
Some revenue subledgers include an SSP analyzer, which automatically reviews by line item or SKU and analyzes historical data to fully determine SSP values. The analyzer allows accountants to slice and dice the data to determine their accounting conclusions, but in a controlled environment that reduces the risk of human error.
Additionally, accountants can apply rules to allocate these SSP values across all the performance obligations (POBs) in a revenue contract in an automated fashion, in accordance with their revenue policy, and all while maintaining compliance with ASC 606 and IFRS 15.
Manual reporting and delayed close
Over half of today’s revenue accounting team member’s time is spent doing manual repetitive tasks. Most ERP revenue modules were built to capture final revenue numbers, not to be a database for revenue management or a repository for all contracts with customer-related data, which may or may not impact revenue recognition.
Like spreadsheets, ERP revenue modules have limits—and cost implications—for the amount of data processed or held within the system and the manner in which the data can be modified. This is where accountants often employ a manual process with a spreadsheet to account for or report on scenarios that are unable to be processed in the ERP revenue module.
Alternatively, to avoid these limitations, many accounting teams are faced with creating custom reports, queries, or code to gather all required data. The creation of these reports may require a third party or IT engagement to pull the data from multiple sources.
The accounting team then has to consolidate, manage, and analyze this data to successfully generate and deliver to other stakeholders or auditors in a timely manner. In addition to slowing down the pace of work, this cumbersome process may also hinder the type and number of reports your team is able to produce.
And even if the technical data consolidation was successful, this type of process can substantially delay the close process and may slow down your ability to forecast and make decisions based on your most current revenue standings.
A delayed close means there’s less time for a CFO and the rest of the C-suite and Board of Directors to finalize all the financial summaries, forecasts, and overall story for earnings calls and speaking with investors.
Adding a solution with real time analytics and a close process dashboard can allow you to achieve a high-level understanding of financial data for the current open period, identify data problems, mitigate revenue errors, or make adjustments throughout the month that allow for real-time, continuous GAAP revenue reporting.
Market-leading revenue subledgers provide revenue reports out-of-the-box, including revenue and deferred revenue waterfalls, disclosure reports, and audit trails.
Rising audit costs
Instead of automated systems, revenue accountants using ERP revenue modules are often stuck with headaches like manual processes and data that must be exported into spreadsheets in order to gain the appropriate insights.
Not only does this waste valuable time for the accounting team, as they have to handle more manual tasks associated with a company’s revenue recognition, but there is also more effort required by an auditor to validate the accuracy and completeness of that process. This is especially concerning, considering that companies are already facing increased scrutiny from auditors and rising audit costs.
These increased costs associated with the audit tend to be directly related to multiple manual processes, with a high risk of human error. This can increase a company’s overall risk profile, an auditor’s workload, and time spent by internal employees supporting the audit. A whopping 65% of revenue accounting team members report concerns about the risk of misstatement because of existing manual processes and control risks.
As a business grows, revenue process complexity tends to grow as well. Nearly half (47%) of revenue team members are frequently asked to support growing complexity and manual interventions to process transactions and compile reporting without additional headcount. This lack of support results in late nights and overworked employees, introducing more opportunities for human error especially in manual processes.
To help mitigate risk and reduce overall company costs as the business grows, it’s imperative to include automation within revenue accounting processes. Without added headcount or automation, your team’s job satisfaction and mental health may suffer.
Overworked and stressed employees
It is clear that the lack of automation in the revenue process is causing employees to be overwhelmed and stressed at work. A staggering 63% of revenue accounting team members report poor revenue processes affect their mental health. And 65% report working past midnight at least once in the last year.
In addition to the stress, manual processes, repetitive work, and lengthy close processes all reduce revenue teams’ abilities to focus on strategy, analytics, and business partnering, often resulting in frustration, exhaustion, and a lack of purpose.
If you are using an ERP revenue module and your revenue accounting team is facing any of these pain points, it may be time to consider solutions that deliver additional automation capabilities.
Selecting the right enterprise-level revenue subledger
Once you’re ready to start looking into revenue subledgers, what are the next steps? Access the complete roadmap for researching, testing, and selecting the right revenue automation software for your company.
Understand the needs of your team
By speaking with revenue accounting team members first, you can understand the obstacles they’re currently facing. List out the risks and costs associated with the current process. Use team member feedback and outside expertise if needed to compile a list of preliminary solutions and recommendations. Prioritize these needs; it is rare that one solution will solve every one of your team’s concerns, so it is imperative to sift out the best solution for the business.
Understand the needs of the business
Speak with other stakeholders within the business, such as product development, sales, or the deal desk, to understand both current and future use cases and the needs of other teams. Leverage their knowledge of processes and how sales data is captured to feed into revenue recognition processes. You will need their assistance to implement and enforce new processes.
It’s also imperative to loop IT into the conversation early on to get their input and buy-in. They can help evaluate vendors and solutions to make sure they align with needs, security, policies, processes, etc. Orders and billing teams will be impacted by any new revenue recognition process so include them as well. Understand how their current systems and processes will work with a new rev rec solution.
Define your technical requirements
Compile a list of must-have revenue automation capabilities that your team will require from a new point solution. These may include automated features like POB grouping, SSP allocations, contract modifications, disclosure reports, and internal controls.
Work with IT to understand whether the solution will work with your existing tech stack and corporate requirements. Again, prioritization is key here, as even the most efficient revenue teams still have revenue processes that include about 2 to 10% of work with at least one manual touchpoint.
Secure executive buy-in
While 79% of revenue accounting team members agree that they need higher levels of automation, 67% say they struggle to get buy-in from leadership in order to implement these new solutions. Bringing leadership up to speed on the current process, risks, and the implications for supporting a new go-to-market model can help make the business case for automation.
Furthermore, educating finance executives on the benefits of end-to-end revenue automation—such as improved efficiency, compliance, accuracy, forecasting, employee mental health, reduced attrition, and more—can also help revenue leaders bolster their case. Remind your executives of what this type of automation can do to improve their daily lives, reduce business risk, and drive growth.
Help the C-suite and other leaders understand the specific benefits that a revenue subledger could provide for them:
- Director of Revenue Accounting – Deliver the number faster and reduce attrition
- Controller – Close the books faster
- CAO – Increased financial reporting accuracy and reduced compliance risk
- CFO – Improved forecast accuracy
Test and evaluate vendor offerings
Ask vendors how many of their customers achieve full automation and ask for customer references, particularly businesses with similar requirements. For best results, use the same demo script for every vendor, this way, you can test and evaluate each solution against the same list of capabilities and use cases.
Review industry analyst reports
Use objective evaluations and ratings of the top automated revenue modules from analysts, such as MGI or IDC, to help you make an informed decision.
Taking the next step
Traditional ERP revenue modules may be a good fit for smaller businesses with less complex revenue recognition policies, use cases, and lower transaction volumes. But as your business grows and scales with changing customer needs, shifting industry trends, and compliance requirements, your rev rec processes will inevitably become more complex and the need for more automation of tasks will increase.
If you’re ready to consider the benefits of a revenue subledger, this revenue automation software buyer’s guide gives you a complete framework for the process.
Comparative claims based on customer, partner, and analyst research and published vendor capabilities as of November 2023. Capabilities and functionality subject to change.