By making sure lines of communication between sales and finance are open, White hopes the sales force will see his department as enabling well-structured deals rather than blocking them. “We want our salespeople to feel comfortable calling in the revenue recognition specialists as soon as a deal starts shaping up in other-than-standard terms,” he adds.
That philosophy is echoed at Salesforce.com Inc., a fast-growing software company in San Francisco. There, large sales contracts are continually reviewed by a dedicated team of two to four finance executives. Complex transactions command the attention of CFO Steve Cakebread. New hires go through an orientation process in which revenue recognition issues are layered in to a larger discussion about business ethics, says Cakebread, adding that he wants salespeople to understand that the finance department will work to get deals done.
What makes an initiative particularly effective, says SAP’s White, is its ties to compensation. The firm regularly reviews its compensation for salespeople to make sure it provides ample rewards without promoting deals that straddle or cross a regulatory line. If SAP seeks to sell to a new division of an established customer, for example, it provides salespeople with incentives aligned with revenue recognition rules.
What the initiatives guard against, says Geac’s de Winter, are red flags that could cause accounting hassles. Take performance guarantees. In the software industry, customers sometimes demand guarantees that a new product will integrate well with other software on their systems. Or they may insist the software be customized. Such promises create headaches for finance because, under GAAP, recognition of the revenue would have to be deferred until the software works as promised — which could take months and involve additional consulting.
Promises of future upgrades or other deal sweeteners are also troublesome. For example, says de Winter, “a salesperson may tip the customer that a new version is due in six months, then [offer] a free upgrade if the sale closes now.” Auditors usually take the position that the customer isn’t buying the current functionality but rather functionality that isn’t on the market yet. So, depending on circumstances, only a portion of the revenue may be recognized at the time of the sale of the first version.
Extended-payment terms cause problems, too. Sometimes, to meet goals, a salesperson will urge a customer to buy now and pay later. Even long-cherished freebies such as support or no-cost training for staff using the software may be, under certain circumstances, taboo. “Freebies create a multi-element deal, and from a finance point of view, that’s a challenge for revenue recognition,” says de Winter. “Deals that have multiple elements, meaning software, services, support, and training, need to have a fair-market value assigned to each component.” Revenue from each may have to be spread out over months or even years.
Understandably, there is tension between sales and finance over what can be promised and what can be recognized. And that tension is often directed at the CFO who delivers the news that certain sales techniques are now banned. At Geac, de Winter and her team, at least early on, heard muttering about “stupid regulations.”
Overcoming that hostility takes time, but it can be done. As proof, de Winter says she now hears salespeople knowledgeably describing deals with revenue recognition in mind. What’s happened, she says, is that salespeople have simply had to “accept that there’s a new world order — and that we are not alone in imposing [these] stricter rules.”
P.B. Gray is a freelance writer based in Wellesley, Massachusetts.
Finance executives who have developed revenue recognition programs for sales have some tips for those just beginning the process:
Navigate political waters carefully. Build support at the top of the organization first before trying to enlist sales executives, who may prickle at the intrusion.
Make educational programs simple, and even entertaining. One CFO dissects a “bad deal,” picking through a sales contract line by line during a presentation, then reconstructs the contract as a “good deal.”
Plan a minimum of three or four presentations to salespeople each year. Turnover can be high in sales. New hires may be unfamiliar with the rules of the game. Also, as regulators continue the crackdown, ever-stricter rules are likely.
Make sure that compensation programs for salespeople are well structured and don’t provide inducements — even subtle ones — to flout accounting rules.