In software development, “retrospective” has a specialized meaning – it’s a post-implementation review, or “post-mortem.”  Over the years, this practice has helped Tensoft continue to improve both our products and implementation services.  In celebration of the ten year anniversary of Tensoft Fabless Semiconductor Management (FSM), a thoughtful retrospective of Tensoft’s work with semiconductor companies seems in order. 

When Tensoft first developed FSM, we became involved with the Global Semiconductor Association (GSA), which was then called the Fabless Semiconductor Association (FSA).  At that time, the GSA sponsored quarterly forums, and Tensoft presented at every Supply Chain and ERP Forum until they were discontinued, and exhibited annually at the association’s tradeshows.  This led to introductions to many of Tensoft’s early customers, and broadened our understanding of the semiconductor industry. 

During what many consider the harshest downturn in the history of the technology industry, Tensoft launched FSM 2.0.  The upside for us was that even $500M fabless semiconductor companies were conserving cash, so FSM’s low total cost of ownership was very attractive.   By 2006, there were enough Tensoft customers to start a quarterly user group, as well as an annual user conference.  These events boosted the collaboration between Tensoft developers and customers to a new level, and solidified the industry best practices that are now built into every Tensoft FSM release and enhancement. 

A true retrospective must take a hard look at “lessons learned,” as well as “hurdles overcome.”   Working with semiconductor companies for a decade taught us that understanding the needs of their operations, customer service, planning, finance and other departments wasn’t enough  - we had to be able to handle and support  the types of organizational change that our semiconductor customers grapple with.   We’ve seen companies go through three CFOs in two years, growth by a factor of ten in a six month period, or drastic reversals of fortune – or business models – as well.  We learned to adapt our support model and sometimes even step in and offer help before the customer was even aware of the need for it.  I think it’s one of our proudest accomplishments that we’ve been able to support customers going through some extraordinary stress during periods of really chaotic change. 

I think that going through this crucible together has formed some remarkable long-term relationships.  The community aspect of this relationship has changed the dynamics of our R&D and market approach, so that taking care of existing customers is the first priority, and bringing in new customers is actually the result of taking care of that first priority.   The level of involvement with some of our customers and their involvement with being part of our product development and with the rest of the user community is the really fun and fulfilling part of Tensoft’s business – we’re a living, breathing part of this dynamic organism, which is people using our software to achieve their business objectives. 

I recently ran across  a Microsoft press release  that summarized the results of its global SMB IT and Hosted IT Index, a research study that investigates how small and midsize businesses are faring during the recession and how they use technology. The research was extensive, interviewing 3,000+ small and mid-sized companies in 15 countries.

The key conclusions are well summarized in the first paragraph of the press release:  “businesses that value IT as an enabler for better business productivity and effectiveness and those that use hosted services performed better fiscally than those that do not.”   

Interestingly, more than 40% of the respondents were using hosted or cloud technology, and these companies reported revenue rises of 30% or more, despite the global recession.  On the other hand, 90% of the respondents who did not use hosted or cloud technology saw revenue decreases.  That’s a pretty strong endorsement for allocating IT budget in the direction of cloud technology!

Here at Tensoft, we’ve definitely noticed a trend towards the adoption of cloud or hosted ERP among our customers (see 10/1/09 press release).  While we could name quite a few examples of well-run companies from our customer list who choose to host their ERP systems on-premise, most of these are utilizing some form of hosted or cloud technology. 

This all makes good sense.   Most of our customers are multinational operations by the time they have 50 employees.   Building an internal IT infrastructure that can support a global operation 24/7 is a costly undertaking.  And, for many companies today, it’s a distraction from their core competencies. 

Of course, there are exceptions.   But the results of this study suggest that companies that haven’t yet tried some form of cloud technology may be making a mistake.  

It's been almost a month since Momentum 2010, the 5th Annual User Conference for Tensoft Fabless Semiconductor Management (FSM) customers.  Internally, we've had time now to process and begin work on all the great enhancement suggestions and feedback that came out of this year's fabless ERP brainstorming, and we've also had time to go through the conference surveys. 

The consensus seems to be that this was the best conference ever, despite the fact that we deliberately took a very low-key approach to keep the conference affordable.  Who knew?  Well, one conclusion that you could draw from this is that our very wise and grounded customers tend to choose substance over flash - a smart choice and one that we support!

For a little something different this year, I wandered around during the breaks and solicited feedback on the conference from customers, as a supplement to the usual feedback surveys.  I used a Flip HD camcorder, one of the mini videorecorders that are only about the size of a cell phone.  The result was a little "Blair Witch Project" as far as video quality goes, but our customers were good sports, so I was able to record some great feedback.  This was fun and helpful for our team internally, so I asked some  of the conference attendees if they'd be willing to let me share a few clips here.   A couple of them graciously agreed. 

The first clips are of Ted Tresch, a seasoned semiconductor ERP and supply chain planning software user, who became a Tensoft FSM expert at Open-Silicon.  Here, he's commenting on Tensoft's new product introductions.  Ted was also a strong proponent for this year's more casual conference venue, as you can see in this clip.  Thanks Ted!

Deshen Yu, VP of Information Technology at Amlogic, was attending the conference for the second year in a row.  Deshen has many years of experience managing ERP solutions from a variety of ERP vendors, so his positive feedback was especially appreciated. This is a clip of Deshen commenting on his experience at Momentum 2010.

I hope these clips give you a feel for what the Tensoft FSM User Conference is all about, and hope you can join us next year.

On May 25^th, Tensoft hosted a webcast^* with Silicon Valley software revenue recognition expert Jeffrey Werner entitled: Revenue Recognition Accounting for Software as a Service (SaaS). This is the fifth of five blog entries detailing Werner’s responses to audience questions posed after the live webcast.

Question - Stand-Alone Value - Delivered and Undelivered Items (Part 2)

To elaborate on whether we have stand-alone value on the undelivered element, we generally sell our hosted services on a stand-alone basis. There is no requirement for the customer to purchase professional services. However, we do have one service offering in which consulting is always sold along with the hosted services as a bundled package. Each element (hosted and consulting) is itemized and assigned a value in the contract. Similar to example 4 in the webcast, my conclusion would be that we do not have stand-alone value for these specific service contracts and therefore must account for the entire arrangement as a single unit of accounting and recognize the revenue ratably over the hosted service term.

Where the guidance gets a little fuzzy for me is with respect to the revenue allocation when there is no stand-alone value for any of the elements in an arrangement. For these scenarios, is it still appropriate to allocate revenue between hosted revenue and consulting revenue on the basis of their relative selling price versus prices stated in the contract? Revenue recognition in total is the same but the classification would be different.

Response

1) If the consulting services are sold separately on a standard hourly or daily basis, then you may be able to establish stand-alone value. If you have adopted EITF 08-1, you would estimate the selling price, assuming that the consulting had a separate value to the customer, independent of the hosted services.

2) If there is separate value to the customer independent of the other elements, the accounting depends on your method. 

If you are under the current accounting of EITF 00-21, without VSOE you would take all the revenue ratably.

If you have adopted EITF 08-1, you would estimate the value of each separate element and use the relative selling price method.

^* Click here to view this on-demand webcast in its entirety.

On May 25^th, Tensoft hosted a webcast^* with Silicon Valley software revenue recognition expert Jeffrey Werner entitled: Revenue Recognition Accounting for Software as a Service (SaaS). This is the fourth of five blog entries detailing Werner’s responses to audience questions posed after the live webcast.

Question - Stand-Alone Value - Delivered and Undelivered Items

I attended the webcast yesterday on revenue recognition for SaaS. The presentation helped my understanding of the new guidelines for multiple-element arrangements. I do have a question I’m hoping you can clarify for me regarding the stand-alone value criteria. Only the “delivered item” needs to have stand-alone value; the “undelivered item” does not need to have stand-alone value. Is this correct? So as illustrated in example 3, training courses and consulting packages sold with a hosted services contract are still considered to be the delivered items even if they are not actually delivered up-front but rather at some point later in the hosted services term.

A simplified common multiple-element arrangement at my company is: 12 months of hosted services, training course, non-implementation hourly consulting.

Since we frequently sell both training and consulting services separately, we have met the stand-alone value criteria. We also do not have a general right of return. Therefore, in the above scenario, once we have allocated based on their relative selling price, we can appropriately recognize the hosted services ratably over 12 months and recognize the training when complete (i.e., month 2) and recognize the consulting as performed (i.e., 50% delivered in month 3, 25% in month 4 and 25% in month 6). Am I interpreting and applying the guidance correctly?

Response

There are two issues with "stand alone value" – determining whether elements can be separated and determining the value of each separate element.

First Separation - in order to separate elements of an arrangement, each element must have stand-alone value. That means each element must provide value that is independent of the other elements. An example of an element that does not have stand-alone value is set up fees. The customer only receives value from them in conjunction with the monthly use of the service. If the elements of an arrangement have stand-alone value, then we can proceed to the next step and allocate value to each element.

Second Allocation - we can allocate the value to each element in several ways. 

For software companies and companies that have not adopted EITF 08-1, the value is determined by allocating the VSOE (Vendor-Specific Objective Evidence) to the undelivered elements and allocating the residual value to the delivered elements. 

If a company has adopted EITF 08-1 or for all calendar year-end companies after January 1, 2011, we allocate using either VSOE, TPE (Third Party Evidence) or BESP (Best Estimated Selling Price).

Regarding your specific question, it is hard for me to understand how a multiple element arrangement would have a delivered item with stand-alone value and an undelivered element without stand-alone value. If that were the case, it would seem we would only have one element to account for: the bundle.

In a transaction with monthly hosted services, training and non-implementation consulting, it would seem that there are three elements with stand-alone value. Each element would need to be allocated a portion of the total fee which may or may not be the invoice amount depending on the facts and the revenue recognition method (Residual or Relative Selling Price). If the training and consulting are frequently sold separately, those separate sales could be used to establish their value. Since the monthly services are undelivered, under the residual method we would need VSOE for these. This could be established with a renewal rate. Under the Relative Selling Price method, we would need to estimate the value of the monthly services and then allocate the total fee to each element using the relative percentage of the total fee.

^* Click here to view this on-demand webcast in its entirety.

On May 25^th, Tensoft hosted a webcast^* with Silicon Valley software revenue recognition expert Jeffrey Werner entitled: Revenue Recognition Accounting for Software as a Service (SaaS). This is the third of five blog entries detailing Werner’s responses to audience questions posed after the live webcast.

Question - Monthly User Fees

Have you come across monthly service fees based on a per-user/per-month price, but with a minimum monthly commitment which the customer has to pay?  I was wondering when the actual monthly usage is less than the minimum monthly amount and whether the difference should be deferred and recognized once the minimum is being reported, because the earnings process is only complete up to actual usage.  In a simple example – price per user per month: $1.00 and minimum monthly commitment: $10,000, which the customer must pay.  If in month 1 the customer only reports $7,500 (7,500 users) should we recognize the $10,000 or only $7,500?  In this example, the minimum monthly commitment is non-cancellable and non-refundable.

Response

The answer to your situation could depend on the contract language. 

If the contract specifies that if the minimum is not reached there is no recovery in future periods of the difference, then it would probably be appropriate to recognize the minimum each month. There would be no carry over or credit in following months when the minimum was exceeded.

If the contract allows credits or carryovers to future or prior periods for less than minimum usage, then the lower amount based on actual usage should be recognized.

^* Click here to view this on-demand webcast in its entirety.

Question - Best Estimated Selling Price

How are you seeing the “Best Estimate Selling  Price” (BESP) working in practice, especially where there’s no pricing history and management doesn’t establish firm pricing methodologies? Should we just bundle everything together (set-up, monthly service, etc.) and recognize over the longer of contract or expected customer life?

Response

BESP is required. If there are multiple elements that are separable, then the company must come up with estimated selling prices using the best available information and analysis. 

The elements have to meet the separation criteria in order to have BESP applied. SaaS arrangements often do not have separable elements because the elements do not have stand-alone value. An example is setup fees.

There seem to be a few approaches that are being used consistently for elements that can be separated. 

In companies with significant hardware costs and low volume, high-dollar products are often approaching BESP using a gross margin approach. This approach takes the cost of each element of a transaction and adds the expected or average gross margin to arrive at the estimated selling price. The gross margin is often at a division or product family level. Some companies with fewer product offerings might use a company-wide gross margin.

Other companies are using a discount from list price approach. This works when the company has a consistent pricing approach and a discount range by product or product family that has some consistency. Companies look at the average discount and then apply that to list price for each product to arrive at the BESP.

Some companies are using what I call a "VSOE Light." PwC calls this the “broken” or “failed” VSOE approach. These companies apply the same analysis as a VSOE study but allow greater variances in the covered population and the plus or minus percentage. For example, if the pricing of a product is consistent for say 60% of the population with a 20% plus or minus variance, that might be a good indicator of a Best Estimated Selling Price. This would compare to the normal VSOE analysis of 80-85% of the population covered with a 10-15% variance.

Obviously, there are complexities to these approaches and often there are “devils in the details.” Companies should work with consultants and their auditors to develop a reasonable approach.

^* Click here to view this on-demand webcast in its entirety.

On May 25^th, Tensoft hosted a webcast^* with Silicon Valley software revenue recognition expert Jeffrey Werner entitled: Revenue Recognition Accounting for Software as a Service (SaaS). This is the first of five blog entries detailing Werner’s responses to audience questions posed after the live webcast.

Question - Upfront Fees

What is your definition of an upfront fee? If a customer requires additional professional services to customize the SaaS but could actually use the SaaS based on the standard setup, is that defined as “setup fees” or “professional services?” The revenue treatment would be different if VSOE exists on the SaaS. If the services were deemed to be professional services, the revenue could be recognized as delivered. If they were deemed to be setup fees, revenue would be recognized ratably.

Response

Additional professional services that were not required to use the service but instead to enhance it for a specific customer could be considered an independent element.

The facts of the situation would determine this. For example, if the professional services were contracted for separately – several months after the service started and the initial contract was signed – then they would probably be accounted for as a separate element and recognized as provided.

If the professional services were an element of the original agreement, you would need to consider whether they were truly optional. If they are considered optional, you would move to separation and allocation to determine whether they have independent value and thus could be recognized separately. If not, they would be ratable with SaaS revenue.

The thing to remember is whether they are truly separate elements or just a way of pricing. In a true upfront fee, there is no option, and the cost is truly part of the cost-of-use. 

You might want to discuss this with your auditors to understand where they draw the line on being independent or having a relationship to the expected customer relationship period.

^* Click here to view this on-demand webcast in its entirety.

With Tensoft’s FSM User Conference approaching and Microsoft’s User Conference just past, I’ve had user conferences on my mind lately.  These events are rarely money-makers for the vendors and are often inconvenient for the customers, so it’s easy to wonder if all the trouble is worthwhile for anyone.  My experience on both sides has been that it is, but not for the reasons that you might think. 

You might think, for example, that all of the amassed conference content would provide the key benefit to attendees.  However, over the years that Tensoft has been hosting an annual User Conference, we’ve learned that our customers may benefit from the in-depth discussions and presentations that we’ve put together for them, but they’re really more interested in learning how other customers are managing their businesses.  As a result, we’ve shifted to our agenda to accommodate this. 

You might also think that these conferences primarily benefit vendors by giving them a forum to promote additional products.  On the contrary, Tensoft quickly discovered that the group discussions with customers provided a product roadmap for the next year, allowing us to add enhancements that our customers not only wanted, but had discussed with each other and reached some consensus about exactly what would be most useful to the majority of end users, based on industry best practices. 

This process of discovery through discussion with - and among – our customers has proven to be a powerful tool for improving our products and increasing customer satisfaction.  But it should not be confused with giving each customer what they ask for individually.  Early in Tensoft FSM’s development, one of our advisors cautioned us to avoid being overly influenced by any one customer’s needs and wants, which can sometimes simply be a reflection of the way that one company does business, not an  industry best practice.   Good advice, which our User Conference has helped us follow. 

So, why wouldn’t every software company take the time and effort to hold an annual User Conference?  There’s the time and expense involved, of course, but I suspect that most could find some way to overcome that.   The bigger issue to overcome is the one faced by companies who didn’t follow the advice that we were given, or who provide highly customized solutions to their customers – there’s less common ground for discussion among end users, and little hope of delivering enhancements that will benefit the majority.  And, to me, that means the loss of the special alchemy that’s created through discussion, listening and taking action. 

I'm here in Atlanta, GA for Microsoft Convergence, the 14th annual user conference for Microsoft Dynamics business applications, along with over 8,000 attendees.

Yesterday, Microsoft announced the general availability of the Dynamics GP 2010 (version 11.0) ERP software solution.  The opening keynote address was delivered by Stephen Elop, President of the Microsoft Business Division. The spotlight was the agile interconnectivity of Microsoft Dynamics GP 2010 simultaneously working with both on-premise and on-demand systems including Customer Relationship Management SaaS software, instant messaging, video conferencing, word processing, spreadsheet and email programs. Some of this was pretty interesting, so you may want to take a look at this live demo: http://www.microsoft.com/presspass/presskits/dynamics/videogallery.aspx. 

Dynamics GP 2010 enhancements include:

• Tighter integration with other Microsoft business solutions and cloud computing technologies
• 100+ new dashboard indicators / KPI's
• 400 Excel and SQL Reporting Services (SRS) web based reports
• Simplified and enhanced workflow automation
• Web based ERP enhancements

Interesting Microsoft facts shared during the keynote on their cloud strategy including the Windows Azure platform:

• 20 million customers now using Microsoft cloud computing applications
• 70% of programmers focused on developing applications for the cloud
• Spending $9.5 billion on R&D in 2010

Simply put, it appears that Microsoft is "all in" as it relates to cloud and software-as-a-service technology.

- Mike Chadwick, Director of Sales, Tensoft