While there’s been plenty of hype regarding the benefits of Cloud Computing and SaaS, a commentary by Proformative’s John Kogan in Forbes – “Defining IT Differently” – provides a very reasonable argument.   Kogan argues that moving to the Cloud and/or SaaS solutions reduces the number of IT staff needed at companies who do this, but that those who are left are more strategic.

I agree that this shift changes the composition of your IT team.  How it changes the composition depends on where you are in your company history.  Smaller companies who move to the Cloud will no longer need as many system administration staffers, such as desktop support and support for your engineering team.  Subsequently, the shift to the Cloud allows smaller companies to bring in a business analyst(s) at a much earlier point than they normally could afford to – definitely a strategic IT position for most companies.  While it still desirable to have someone on staff who understands what your Cloud provider is doing, and there may be some tasks you need/want to do on your own, the move generally means a reduction to system administrators and hardware specialists.

Kogan touches on another point that I see as one of the most significant benefits of the Cloud - the ability for companies to have access to far more – and better – hardware, technology and support in the Cloud than they could economically source for themselves.  This democratization allows smaller companies a more level playing field, and it also makes the Cloud a comparative money saver if you consider all of the costs that go into it (labor, hardware, replacements, training, etc).  This comparative cost savings is a point that is often over-sold and misunderstood – it’s a powerful benefit, but “the Cloud is cheaper” is not an accurate picture.

 Multi-element arrangements are created when multiple inter-dependent items are sold to customers.  For SaaS companies, some examples of this include: setup fees, subscriptions, training, and professional services.  When multi-element arrangements occur, they’re subject to EITF 08-01.

Consumer businesses may try to eliminate the multi-element arrangements requirements of EITF 08-01 by offering only subscription licensing.   However, companies who are in the business-to-business space often don’t have that option.  Your market will dictate what mix of products and services that you need to offer your customers, not the hope to streamline the revenue recognition process.

A special scenario occurs when you offer product modifications – where there is a required delivery component tied to the subscription sale.  This scenario can require the use of SOP 81-1, along with EITF 08-01.  SOP 81-1 requires recognition of software revenue based on the delivery of the required modifications, often by percent complete methodology.

Often these product modification scenarios are something that happens early in a company’s history, when your product is still maturing.  If this is the case, the need to offer product modifications should disappear as your product matures and your installed base and reputation grow.  However, if offering product modifications is part of your long-term go-to-market strategy, then you may want to look at options such as isolating the customization layer in your product so that it becomes an implementation challenge rather than a product extension requirement.

Whenever possible, it’s reasonable and smart to try to simplify revenue recognition requirements.  A revenue recognition expert can help with planning for this, as well as providing tactical assistance with agreement negotiations, to make sure the agreement optimizes your revenue opportunities. 

 Effective January 1, 2012, the California Transparency in Supply Chains Act requires many companies doing business in California to provide information regarding their activities to ensure their supply chain is free from slavery and human trafficking.  This law affects all companies that do business in California and whose worldwide gross receipts exceed $100 million.  That includes a lot of semiconductor and high tech companies in our area, so I was curious to see how companies are complying.

I tried a quick search on "CA Transparency in Supply Chains Act semiconductor" and found the following on the first page, in order of appearance: Vishay, ON Semiconductor, Texas Instruments, Applied Materials, Cypress Semiconductor, Micron and Global Foundries.  I'd expected to find Apple there.  After all, Gartner just announced in a January 24 press release that Apple was the top semiconductor customer of 2011, moving up from third place in 2010.  And, they've certainly been in the news lately for the human rights issues that their supply chain audit uncovered.  

Checking back on the requirements of the law, I found that no specific language is required to be compliant, but it does require that the disclosure appear on the company's home page, and that it is conspicuous and easily understood.   Looking through the homepages of both the top 10 semiconductor customers of 2011 that Gartner identified and the hits on my initial search, Apple stands out as one of the best examples of compliance, while others don't appear to be in compliance at all.  Interesting.

 Tensoft customer Amalfi Semiconductor pioneered high-performance radio frequency (RF) semiconductors for the cellular handset market based on standard, low-cost complementary metal-oxide semiconductor (CMOS) technology. Experiencing rapid growth from its success, the company needed more financial and manufacturing management capabilities than Intuit QuickBooks and a "point-in-time" WIP tracking solution could provide. Working with Tensoft, the company implemented Tensoft Fabless Semiconductor Management (FSM) and Microsoft Dynamics. The company has already saved US $75,000 in duplicate vendor invoicing and realized significant efficiencies. With the business management software in place, Amalfi has a solution that takes advantage of purchasing controls to support regulatory compliance. In addition, executives, operations employees, and finance managers now have the insight and control they need to help the company reach its growth goals.

For the complete case study, go to http://bit.ly/yiWV3g.

 At times the question arises of how to best manage inventory cost.  In manufacturing operations, the role of finance is usually a partnership with operations related to inventory – cost reduction and management, inventory valuation, and appropriate inventory levels to maintain.  The partnership works best where each team’s feedback matches responsibility in the partnership.

At Tensoft, we are strong believers in the benefits of standard costing (compared to actual costing).  Standard cost is commonly associated with a swift inventory value that streamlines transaction processing and at times is viewed as ignoring the reality of inventory value as it changes.  However, we believe this is the result of a lower level of engagement that is required in any organization actively trying to manage inventory value.

When manufacturing and finance partner over inventory costing (and cost reduction) using a standard cost model, you can think of standard cost as a plan.  You are setting goals for what inventory cost should be based on the inputs and manufacturing requirements.  Variances identify reasons for moving away from the plan – such as yield hits, productivity (units absorbed for throughput), PPV variances, rework variances, and so on.  Correctly identifying and categorizing the variances allows manufacturing operations and finance to review why the goals were not met, and what the specific variances tell you about not meeting the goals.  Approached in this way, standard costing plus variance analysis actually requires the most active engagement in cost modeling and results management – setting a plan and measuring performance against the plan. 

Years ago I met with the VP of Operations of a high volume electronics component company who told me their inventory cost reduction committee met weekly – a finance and operations partnership.  Their stated goal was to reduce the cost of inventory value by $.01 each week, which achieved a $0.52 cost per unit reduction annually.  For them this amounted to millions of dollars in additional margin each year.  Results like that aren't possible unless you have an active engagement through standards (plan) and measurement (partnership review).

QUESTION: I am looking for a software service that allows me to track customer and product profitability.  I work for a SaaS company and we are trying to track engineering and marketing time along with any direct expenses attributed to a particular customer or product.  Since labor is the biggest cost, we are looking to track employee time at a very detailed layer.

What I am looking for is a system that does the tracking and then feeds into the overall system, so I can measure profitability against a specific customer or product.  Ideally, I just want the "one-press-of-the-button" concept.  I know there is stuff for manufacturing, but see no solution that handles more SaaS service-oriented (non-consulting) companies.  Any advice?

ANSWER: In my experience, some challenges require business trade-offs, especially given the reality of available solutions.  While anything is possible, the benefit you receive from tracking this information needs to be business-reasonable to collect, and it also needs to fit with your company’s culture and realities.

Take product cost for example.  The challenges of tracking engineering time to a specific end-customer and product line is monumental -- unless your company does only very large sales to a very few customers.  Obstacles include: accurate time-capture for employees’ timing differences (the time lag between events and labor cost and the revenue to be recognized) and matching challenges.  Some of the expenses will be cost-of-goods-sold (COGS), which is matched by definition to revenue.  Some of them will not be tracked as COGS – and would be challenging to track as COGS (both from a GAAP and a management perspective).

A solution that provides value while considering some of these challenges is a product line P&L.  Revenue, COGS, engineering time and marketing time are all tracked to a P&L by way of an account code or other financial designation.  The period of time considered is usually 3-5 years for analysis – allowing for R&D or other engineering and marketing costs to be captured along with the overall revenue and margin created.

- Bob Scarborough, President and CEO, Tensoft

 A: There are a few ways to interpret this question. I will interpret it as follows: “How do you explain the lower training costs associated with running SaaS compared to conventional on-premise models?”

There is a general expectation -- especially for companies that have under $50M in revenue -- that implementation of SaaS software is lower in cost than traditional models.  We sometimes find that this expectation extends to training, and it may be assumed that training cost is not required.  However, most experienced folks expect there to be support and training for any type of system transition.

In general, this expectation is backed up by what the market offers.  There are definitely some tasks that are no longer required in a SaaS world, starting with system administration training and support.  However, there are a number of factors to consider related to this lower cost. I’ll attempt to address these below.  After that, I’ll add a few cautionary notes for executives who are looking to manage training and implementation.

Drivers for lower training and implementation costs:

1)    The general trend in ERP over the last ten years has been to move toward a best-practices implementation model.  At its most basic, this model states that there are a number of configuration options to which most companies default, based upon market and product experience – and these assumptions are built into the implementation rather than covered uniquely each time.  At its best, this model should be adapted to your specific industry (vertical) so that the best-practices are based upon comparable organizations.

2)    There is an increased “do-it-yourself” expectation that goes with SaaS modules.  This expectation is supported by online training sessions (recorded or otherwise), short remote training sessions instead of day-long commitments, and the general expectation that the customer team will roll up their sleeves and contribute heavily to the conversion effort.

3)    There is also a general expectation that software is getting easier to use – or that web-based software should be easy to use.  This is an area where I suggest extreme caution, since complex business processes or configurable options definitely require background training.  On the whole, systems have become better-understood with some convergence of transaction metaphors.

A couple of cautionary points to consider:

1)    There still are custom implementations in the world: where the project is unique to your company; where everything is configured uniquely to you; or where the software is adapted to your exact specifications.  Most people do this sort of implementation only when the uniqueness adds to your competitive advantage in the market rather than as standard practice.

2)    SaaS does tend to commoditize some types of functionality.  It is best to think about this related to training as well. Look at the areas that add the most value to your company and the areas where you expect to be business-standard.  Expand or contract the levels of training and support where you receive the most benefit.

3)    Be careful in your transition from the sales process to the implementation process.  If you need to document the expectations discussed in training for internal review within your company, do so.  Purchasing a best-practice-based system, streamlining it for do-it-yourself implementation and then managing it like a unique customized training implementation generally leads to poor results.

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 Re-posted from ERP Software Blog:

I recently answered a question about the “disadvantages” of the cloud on an accounting and finance forum.  As a cloud solution provider, I’m actually very enthusiastic about cloud services – I see the benefits to our customers and the potential for even more benefits in the future.  However, I’m also in a good position to play Devil’s advocate on this topic, having heard some of what can go wrong in the cloud, and having learned a great deal from my company’s experience in this area.   Still, the benefits of the cloud delivery are strong enough that I think “trade-offs” more accurately describes what I’ve seen than “disadvantages.”    

 As there are with most things in life, there are certainly trade-offs to consider related to operating in the cloud.  If you’re interested in achieving the great benefits of the cloud, you should be fully aware of the trade-offs involved, so that you can establish an agreement that optimizes these trade-offs as best fits your company.   For example, let’s take a look at three of the major benefits of running in the cloud – simplification, availability, and ease of upgrades – and what the trade-offs may be for those benefits.

One of the primary drivers for cloud business applications is simplification.  Most system users have, at some point in their career, been told by their IT department that some seemingly simple thing can’t be done due to technology, resource availability, scheduling, or some other factor.   In these situations, who hasn’t thought, there must be an easier way to get things done?   The decision to move to the cloud may be seen as a way to focus on your company’s core competencies and to outsource non-strategic functions, or as a way to free up your internal IT staff for more high value-add tasks, or simply an acknowledgement that a good cloud provider generally has more expertise and infrastructure to leverage.  Whatever the driver is, I couldn’t agree more that the idea of turning on applications as a service and letting the cloud provider take care of the behind-the-scenes IT functions is very compelling.

The trade-off here is some loss of the control that you naturally have when everything is managed and run in-house.  For example, you may have less control related to direct data access, or the ability to extend applications through integration and optional extended analytics or reporting capabilities.  Most cloud providers simplify systems to make the solutions easier to use and support.  If you’re in a situation where strategic benefit can be gained through extending or modifying the application, you may find that – while most cloud providers do have optional services to support additional functionality – they often come at an unexpected and outrageous cost.  The solution?:  Make sure that:  1) the cloud solution that you choose is a very good fit for your industry; 2) negotiate for flexibility if needed; and, potentially, 3) budget for a private/public hybrid environment.

The second great benefit of the cloud is availability – the cloud makes remote access available and highly efficient for a cost that most internal IT organizations simply cannot beat.  If you open a remote office, your IT staff is now supporting multiple locations.  If you open an overseas office, your IT staff is now supporting multiple time zones.  If you have a single office that’s full of road warriors or remote access users, you are now supporting an extended enterprise.  The cloud is designed to be accessed from wherever you are, on multiple devices.

The trade-off is that your system performance will be more dependent on your network performance.  If you have survived on small network pipes to date, and your engineering team decides to download large design files every morning, then system performance will decrease.  If it isn’t already a priority, it soon will become a priority to actively manage networks and connectivity to the outside world.  The solution?:  If you’re moving from in-house applications to cloud-based applications, it’s important to consider the quality and quantity of your network pipes, and make the appropriate changes to update/upgrade.

Finally, the cloud offers the promise of easier upgrades.  The concept of easier, no-hassle upgrades appeals to almost everyone.  The trade-off here is the short shrift often given to user acceptance testing (UAT) – a process that is both required for Sarbanes-Oxley compliance, and a best-practice when your organization reaches a level where mission-critical systems should be reviewed as part of good change management.  Without a UAT option :  1) changes to functionality can occur before your team is trained; 2) errors could be found after you’re already live; 3) your provider may give you a UAT option that fits their schedule rather than your team’s availability; or 4) your provider may avoid significant feature enhancements in order to simplify their own upgrade cycles.  The solution?  If your cloud solution provider does not provide or offer a UAT process, negotiate one before you buy. 

If you carefully weigh the pluses and minuses of in-house applications versus cloud applications, you’ll be better equipped to avoid the possible pitfalls.  Not only will your decision to “cloud or not cloud” be easier, but it will be much more obvious which cloud providers can best support your needs.

 Re-posted from ERP SoftwareBlog:

Think for a minute about how ubiquitous software has become.  How many everyday consumer products, such as mobile devices, have embedded software today?  How would businesses function without software?  How many online services depend on software to take care of their customers?  Every day new smart products or helpful services are created – software is pervasive.

When software (or software based) products are sold the sale is often a combination of related items.  One example of this is the sale of software plus maintenance.   These are normally sold as two separate line items but are inextricably related to each other; so they constitute a multi-element sale.   Another example is an online subscription that includes setup as well as ongoing service.  A multi-element sale is, simply, the sale of multiple related items to a customer.

Okay, so lots of companies are affected – what’s the big deal?  The issue is that the EITF and the FASB have recently issued guidance that many companies have not yet adopted, and their auditors are starting to call that to their attention.   We’re seeing – and hearing about – significant amounts of pain at companies who have not yet analyzed their various sales arrangements and taken steps to ensure correct revenue recognition for such multiple-deliverable arrangements. 

Tensoft can help.   In addition to Tensoft Revenue Cycle Management (RCM), a suite of products that brings together the specific revenue recognition, recurring billing, and contract management functionality that today’s technology companies need, we offer an optional Compliance Module.  Integrated with Microsoft Dynamics, the determined rules are applied based on sales transactions, the appropriate method, and the independent revenue valuation for each item.   With fully auditable processes and reports,   Tensoft RCM is the only solution of its kind that has passed the rigorous Certified for Microsoft Dynamics (CfMD) testing process. 

For additional information about this topic, you may want to review the recorded webcasts in Tensoft’s Resource Center (www.tensoft.com/resources), including “EITF 08-1 and the Relative Selling Price Method for Multiple Element Arrangements.”  This webcast was presented live on 9/20/11.  Tensoft regularly hosts webcasts that are eligible for CPE credit, and is an accredited member of the National Registry of CPE Sponsors.