We've been seeing strong signs of optimism about the economy in our customer base and in the prospective customers as well, so I was interested to see the results of PwC's survey of 60 multinational U.S. industrial manufacturing companies.  While this is a somewhat different segment of manufacturing than most of our customers, I think there's definitely enough overlap to be relevant to high tech. 

Based on the survey summary released today, these companies expect global economic growth this year and are planning accordingly.  Here's a quick overview of some of the findings: 

·         Most survey respondents plan to increase hiring in 2012.

·         The majority of those surveyed plan to increase investment spending this year. 

·         Companies report improved profitability in recent quarters.

·         There's less worry today about growth barriers than in the recent past.

One section of the survey that may be of particular interest to readers here is how the overwhelming majority of these companies have used technology to help achieve their strategic objectives to date.  In fact, a full 98% of these companies credit technology for improving operating performance in areas such as business intelligence and reporting and manufacturing and supply chain/distribution processes.   Most also cite increased business agility as a benefit of technology investments.

Going forward, 71% of these companies will be looking to digital change and transformation as a key enabler for their business growth over the next 1-2 years.  Why?   The two most common reasons are customer demands, especially for product information access, and supplier demands, especially for order management capabilities. 

Finally, 57% stated that their immediate plans for technology investment include cloud computing.

It's worth reading the entire summary, if you have a chance.

 I had the opportunity to weigh in on another great question on Proformative this week, this one from a finance executive who's interviewing with a SaaS company and wanted a quick update.  His question was: "With all of the pronouncements coming out on software recognition, has there been any substantial changes to the basics, i.e. we would have a monthly subscription fee revenue (take full revenue in month they were charged and used the product) and any support and maintenance would be amortized over the contract period?"

Here's the brief answer that I provided there:

"Yes - most definitely.

EITF 08-1 impacts SaaS companies because it changes the prior guidance of EITF 00-21 from the Residual Method to the Relative Selling Price Method. The criteria for separating contracts into separate elements is also different under 08-1.

SaaS companies may find there are more elements to account for in transactions and they are required to have values for all elements, not just the undelivered elements. Because 08-1 is a recent accounting change, best practices are still evolving.

Companies may find that their current accounting system may not adequately address issues under the new guidance and may need to consider manual workarounds or changes to their accounting system and polices.

Good luck with your interview!"

 Seeing Dynamics GP 2013 for the cloud was definitely one of the highlights of this year’s Convergence for me.   It was great to see all of the focus on enabling Microsoft Dynamics for the cloud and all of the resources around that.  The one they’re doing this is by enabling screens using Silverlight technology to take existing dictionaries and configuration files from Dynamics GP, and presenting them as Silverlight windows.  So, for add-on modules that use a dictionary, then it should be enabled in the Dynamics GP 2013 web client.  Also, Microsoft has put a lot of thought into how to support multi-tenant deployments,   which promises to provide some cost savings, which we can then pass on to our customers.

For my perspective as a CTO, the session that I was most excited about was on high availability for SQL Server 2012, the new “AlwaysOn” version.  High availability is a key benefit for SQL 2012, allowing you to have multiple instances which will automatically fail-over, one instance to another.  For Cloud customers who want to have an on-premise instance of the Dynamics databases for archive purpose, internal reporting writing, or testing, this will allow us to do asynchronous synchronization to a customer site.   So, with SQL 2012, we can take the live production server and synchronize it to their server as part of that job process.   

Another benefit of SQL Server 2012 is that if you have two servers linked through AlwaysOn technology, you can actually have your transactional SQL Server database instance running and then have synchronous link to a secondary hot site, and have all your back-ups coming off of the secondary site.  Then you’re not impacting performance on the production server with overhead for backups or reporting, etc.   Now you can have a second SQL instance to use for anything that might impact performance. 

 Increasingly complex regulatory requirements, along with the often challenging business models in the technology industry, may make it difficult to analyze your company's revenue recognition needs.  Because of this, it can be extremely helpful to use a framework to analyze your company revenue processes.  Categorizing and organizing the company’s business needs can help you build the processes and systems required for accurate revenue recognition.

One such framework organizes the requirements into three distinct categories.  These categories are based on an overall revenue process model consisting of: a) determining the revenue model; b) applying the revenue model to sales that occur; and, c) recognizing revenue based on the revenue recognition concepts.  These three categories are described in more detail here:

1)     Determination.  Effective revenue processes begin with identifying the appropriate compliance regulations and the revenue rules for the products sold based on these concepts. For many technology companies, an independent analysis and valuation of the items sold in multi-element models is also required.  Determination is generally completed on an annual basis and may also be monitored during the year.

2)  Application. While the determination occurs in a static environment, it is useful only if the determined revenue rules and values are applied to real company transactions as they occur.   Application considers your sales model (how sales occur), as well as the transactions that are created for which the determined revenue rules are applied, and then automates the consistent processing of the revenue.

3) Recognition. If you apply revenue rules and policy to the appropriate sales transactions as they occur, revenue recognition is much more streamlined.  However, it is still a good idea to review the sub-ledger validation, special case or exception rules needed, as well as the general processes around revenue recognition.

Arequest to understand the fair value of a single element within a multi-element sale thus becomes a Determination need.  Likewise, a need to ensure a consistent approach to revenue recognition based upon company policy and compliance requirements is an Application need.  Once the proposed framework is applied, addressing the requirements becomes significantly more manageable.

A solid, documented understanding of your company’s go-to-market model(s) is a good starting point.  "Go-to-market" means the combination of channels, sales efforts, and customer actions that result in sales.  This type of process and analysis is critical when thinking about how to best manage and implement the required revenue recognition processes and systems.

For more information about this topic, you may be interested in Tensoft's white paper, "Revenue Regulatory Compliance Considerations in Business Software Implementation," co-authored by Bob Scarborough and Jeffrey Werner.

 Exposed, then re-exposed - when will it end...?!  The joint revenue recognition project for FASB and the IASB will be hitting a significant milestone on 3/13/12 - the deadline for comments.  Coincidentally, Tensoft will be hosting a webcast on this topic that day, early enough for you to still get in your comments on the draft! 

Silicon Valley revenue recognition expert Jeffrey Werner will break down this topic, presenting practical, actionable information for attendees.  You may think that you'll have plenty of time to make the appropriate changes - or you may still think that these changes don't apply to your company.  Just in case, you may want to sit in on this timely and important webcast. 

Here's a quick preview of the agenda:

• Overview
• Scope, Timing and Status
• Five New Principles of Revenue Recognition
• Differences from Current US GAAP
• Implementation Guidance
• Effects of the Changes on Technology Companies 

For more information, and to register, just go to http://bit.ly/yBATpi, or contact me directly to register you.

And, if you're wondering how Tensoft's solution for complex revenue, billing and contract management can help you company make the required changes, please contact me, or Michael Chadwick. 

   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.

 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.

 Thanks to everyone who attended "EITF 08-1 and the Relative Selling Price Method for Multiple Element Arrangements," another very informative webcast presentation by Silicon Valley revenue recognition expert, Jeffrey Werner.  Tensoft was pleased to host this event, and is looking forward to Jeffrey's upcoming revenue recognition online classes that we'll hosting in November - check Tensoft's website next week for more information about that. 

Meanwhile, here are the answers to attendees' questions from last week's webcast:

Q: How does this apply to Web Based Application Services, if at all?

JW: If the web-based application service includes multiple elements, we would use ESP to allocate revenue to each stand alone element and then generally recognize revenue when that element is delivered. There may be other considerations such as the requirement to recognize set up fees over the longer of the contract period and the expected customer relationship period.

Q: If a company sells software using an on premise subscription model and SAAS-on demand, how can you justify using different revenue recognition models for which is essentially the same business model. The primary difference is on is a time based license that is on premise at the customer's location and the other is time based whereby the customer's software is located at a data center? This is more a request, but it would be helpful to see similar examples where the multiple elements include services, on demand services that include support. Is there anywhere I can obtain this info

JW: If the on-premise subscription model meets the requirements for software revenue (customer has the right and ability to take possession without significant cost) it would be recognized under software revenue recognition (residual method using VSOE).

The SaaS on demand sales would be allocated and recognized under EITF 08-1.

If a transaction had both on premise subscription and SaaS, the allocation would be done using EITF 08-1 and then on premise recognized using residual method and VSOE and the SaaS recognized as a service under 08-1.

Q: is EITF 03-5 no longer relevant?

JW: EITF 03-5 is superseded by EITFs 08-1 and 09-3.

Q: is ASU 2009-14 only used for tangible items w/ software?  What is used to determine how to account for a hosting engagement where software is sold? 

JW: If the hosting engagement meets the requirements for software revenue recognition because the customer has the right and ability to take possession and self-host without significant cost, then software revenue recognition would continue to be applied. If not, the multiple elements in the arrangement would be allocated revenue according to EITF 08-1.

Q: Would you use residual method for delivered software other than ESP?

JW: The residual method would only be used for the initial revenue allocation for software sales without other non-software elements. Software would use ESP and the relative selling price method for the allocation if the multiple element arrangement included non-software element.

Q: While I understand that contract terms and conditions affect the decision, I am wondering about his opinion on a particular transaction set.  If a company responds to an RFP which requires HW, SW & ongoing services (PCS & BPO, for example).

JW: This would appear to be a transaction that requires allocation of revenue to the separate elements using the relative selling price method. If some of the elements are determined to be software elements under the guidance of EITF 09-3, then the residual method would be applied to the allocated amount and VSOE would be required for any undelivered elements.

Q: Assume vendor responds to RFP requiring HW, SW and ongoing services (PCS & Business Process Outsourcing) and also assume that the vendor usually uses contract accounting & guidance of 97-2, an old fashion "Build & Run" scenario.  What's your opinion about using ASU 2009-14 to take the transaction outside of 97-2 guidance?

JW: If the hardware and software meet the requirements of EITF 09-3 to determine that the hardware and software work together to provide the functionality of the combined hardware and software product, then the transaction would be accounted for under EITF 08-1 for both the allocation and revenue recognition. If it is determined that there are both software and non-software elements, then revenue would be allocated using ESP and the relative selling price method and the software recognized under software revenue recognition and the non-software elements recognized under EITF 08-1.

Q: Does this mean that the software & PCS are taken outside of 97-2 with the hardware?

JW: It depends on whether the hardware and software meet the requirements of EITF 09-3 for treatment as non-software. If the hardware and software are always sold together and work together to provide the functionality, then the entire transaction would appear to be outside of software accounting. See Case A.

If the hardware is not always sold with the software, the determination might be that the hardware is a non-software element and the software is a software element. See Case B.

It would depend on the facts and circumstances.

Q: If your company has VSOE established for your product, can you choose to use BESP instead to avoid having to keep VSOE data and analysis?

JW: If a product currently has VSOE, the expectation is that the company would continue to use VSOE. The company would continue to use VSOE unless the situation changed and the company was no longer able to establish VSOE because the pattern of stand-alone sales no longer met the requirements of VSOE.

Q: If we have 2 different ways to sell our product - premise (where the customer buys a perpetual license and has it on site) and SaaS, the premise deals would be under SOP 97-2 and the SaaS deals would be under EITF 08-1, correct?

JW: For software only sales, the company would continue to use SOP 97-2 for allocation and revenue recognition.

For SaaS arrangements, the company would use ETIF 08-1 for allocation and revenue recognition.

If a transaction has both software and SaaS included in one sale, the revenue would be allocated to the separate elements using the relative selling price method of EITF 08-1 and ESP.

Then the software would be recognized using the residual method and VSOE and the SaaS would be recognized using EITF 08-1.

Q: In example 1, how is the ratable revenue split up between hardware, software, and support?

JW: Allocation of the ratable revenue should be on a reasonable and consistent manner to the different classes in the statement of operations/income statement. Pro rata allocation to each element based on contractual amount might be one method. The total revenue would be equal to the total ratable revenue for that period. Consideration would be given to each element. For example, the amount of revenue for support would probably be limited to 1/12^th for each month in the recognition period.

 Gartner analyst Jim Sheperd recently published a commentary called "Multienterprise Commerce May Be What Comes After ERP," which discusses the need for a replacement for ERP.  Here's a partial explanation of why he's suggesting this:

"Many companies in the retail, distribution and manufacturing industries are struggling to manage complex and dynamic global supply chains with ERP systems that were intended to support the internal operations of a vertically integrated enterprise. The 'enterprise' in ERP was definitely singular!  The problems that I dealt with as a material planner in the 1970s, or that I designed ERP and supply chain applications for in the 1980s and 1990s, are largely irrelevant today. I needed systems that could help me plan materials with six- to nine-month vendor lead times, where everyone's warehouses and distribution channels were stuffed with inventory....  The real business problem that today's manufacturers and distributors are struggling to manage takes place between companies, not within them. Planning, sourcing, production, costing, tracking and fulfillment must take place in an environment that can be accessed and updated by all the players in the value chain. "

Tensoft's customers operate in exactly this environment, which has informed our product design from inception.  Cloud delivery has been a more recent development, but I couldn't agree more that it is the right way to go to meet today's collaboration challenges.  

What do you think?