Addressing The Growing Challenge Of Forecasting, Protecting And Optimizing Revenues And Margins In A Modern Commercial Model
Several forces have changed the formula for generating, protecting, and optimizing revenues in the past decade. Customer expectations have shifted as buyers have become more digital, better informed, channel-agnostic, and impatient. Traditional selling processes have become a data-driven and digitally enabled team sport where sales, customer success, product, and finance teams must work together to deliver against customers’ demands.
Perhaps the biggest change to the commercial model has been business model transformation to a more predictable and recurring revenue. This replaces episodic sales transactions with increasingly sophisticated and complex recurring, usage-based, and “as a service” pricing structures. This adds more deferred revenue to the revenue stream to maximize customer lifetime value and predictable revenues.
Most B2B organizations are moving down this path. Fifty three percent of boards are pushing their CEOs to repackage their products and services as subscription or usage-based pricing models, according to a report by CFO Magazine.And almost every business that sells technology, equipment, or software is moving to an as-a-service model according to Gartner.
A byproduct of all this change is it has rendered the traditional financial control systems used by finance teams inadequate to manage the speed, changes, complexity and collaboration associated with recurring revenue streams. As a result, finance leaders – and the operations teams that support them – now face a range of challenges as they try to forecast, recognize, realize, and optimize revenues and margins in a modern commercial model.
It’s not that subscription revenues are inherently unstable. The issue is incorporating recurring revenue streams into the traditional revenue mix introduces significant risk and uncertainty into the control systems and revenue forecasting processes CFOs have established over the last several decades. Most established businesses –like Honeywell, automotive firms like Audi, hardware firms like Avaya, and infrastructure like Flexential – are in the process of moving some or most of their revenues to recurring revenue models. This means the control systems based on spreadsheet analysis, transaction-based billing, and accounting systems that worked in transactional businesses, are no longer adequate to manage the uncertainty and variability of modern recurring revenue streams. This is because most traditional control systems in transactional businesses were based on a “one-time charge” assumption. In other words, revenue is recognized upon delivery of the goods and/or services. With recurring revenue streams, revenue is recognized incrementally as the service has been provided and ongoing commitments are fulfilled. Cash may be collected in advance (e.g. annually), but revenue is recognized in arrears (e.g. monthly) or even more frequently. When you add on top of that amendments and renewals – along with their related proration calculations – the whole model falls apart.
FIVE CHALLENGES FINANCE LEADS FACE FORECASTING, RECOGNIZING AND REALIZING REVENUES AND MARGINS IN A MODERN COMMERCIAL MODEL
In response, financial leaders are being asked to lead the digital transformation of the entire revenue cycle – from the initial customer engagement to the receipt of cash – to maximize revenues, margins, and the lifetime value of the customer. Progressive finance teams are taking five steps to align the organizations’ processes and data across the front and back office to make forecasting more agile, transparent, and precise over time.
1. Take ownership of the entire revenue cycle from customer engagement to revenue realization: The introduction of complex time-based, consumption, and milestone-based revenue streams has blurred the lines between traditional back office and front office in revenue reporting and expansion. It has also elevated the importance of customer engagement data in day-to-day financial workstreams. This forced CFOs to take on a bigger role in growing customer revenues, margins, and lifetime value and rethink their relationship with the front office to better manage, forecast, and protect revenues.
This is because adapting the commercial model to support more predictable and recurring revenue streams requires back-office finance teams to take greater ownership of the key points in the revenue cycle that impact when revenues are proposed (in CPQ systems), promised (in Contracts), booked (Order management), billed (in billing systems), forecasted (based on rules dictating revenue recognition), and realized (when cash is collected when the commitment is fulfilled). Along the way there are more errors and disputes, and revenues are prone to expand and contract more than in a purely transactional model. All of this means the CFO, controller, and financial planning functions need to work more closely with their counterparts in sales, account management, product, and services to transform their approach to managing and forecasting revenues.
As a direct result, most (60%) Financial Planning and Analysis (FP&A) organizations are driving global process ownership of end-to-end processes for booking, reporting, and forecasting revenues. Their goal is to reduce process fragmentation across silos and standardize and harmonize the way information moves across the process. More than eight in ten (81%) financial professionals believe sales and finance would benefit from improved collaboration and better communication about customers and contracts according to a survey of financial professionals by CFO Research. Thirty-one percent of CFOs are making it a high priority to integrate their finance processes from the back office to the front offices across organizational hierarchies according to a survey of 300 CFOs by the Everest Group. The best organizations are managing eleven points of failure and control by connecting the dots across the teams systems, and processes involved in converting opportunities to cash into a closed-loop – data-driven system.
THE KEY POINTS OF FAILURE IN THE REVENUE CYCLE THAT LEAD TO REVENUE AND MARGIN LEAKAGE, SLIPPAGE AND SHRINKAGE
2. Leveraging front office customer engagement data in financial forecasts, billing, and reporting: 63% of CFOs by making it a priority to leverage analytics and improve data management to improve visibility and drive insights according to a survey of 300 CFOs. A big reason the finance function is becoming more data -driven is that modern revenue streams are more and more impacted by information and events that occur after the revenue is booked. There are dozens of post booking variables in a recurring revenue model that can confound revenue forecasting and lead to significant changes to revenues and margins as customers and markets change. And this information about how the promises and agreements made to the client at booking change over time. And how well the business is delivering those promises to the client – in terms of service delivery or consumption, contract amendments, extensions, or delays to onboarding, training, and other milestones – now have a big impact on revenues. This customer engagement and account-level information is essential to informing and updating revenue forecasts, resolving billing disputes, applying revenue recognition rules, and collecting cash on time. Unfortunately, many CFOS lack visibility into this key information because they are generated from a mix of customer-facing systems, channels, and touchpoints in the front office. And most of this information is invisible to traditional ERP and Accounting control systems. So, while finance may ultimately get the data about amendments, onboarding delays, pricing or contract errors, and Service Level Agreement breaches, and changing timetables – it’s often late, piecemeal, or “stale.” Transactionally, this makes it hard for finance teams to calculate correct customer invoices due to proration calculations performed upstream. Strategically it makes it difficult to see the big picture about the size, health, timing, and potential of the revenues associated with a particular customer account.
In response, progressive CFOs are extending their control systems into the front office by taking greater control over the upstream inputs by taking control over the core approval, contracting, pricing, order entry, and invoicing processes and getting greater visibility into two dozen post-booking variables that lead to errors and revenue gaps. The best organizations are “connecting the dots” across the front office systems, data sets and processes involved in engaging customers and converting opportunities into proposals, orders, and invoices to provide better customer engagement data to finance. The smartest way to do this is to capture and unify pre-booking quotes, pricing, contract and transaction, and post-booking billing and amendment data from customer-facing systems and teams into the financial reporting, revenue recognition and control processes. This makes sure that every member of the sales and finance team has access to complete, verifiable, accurate, and up-to-the-minute data from engagement to quote to order to invoice – including all of the customer product purchases, contract changes, and service issues that impact customer value, revenue leakage and the customer experience.
“The challenge of generating more precise revenue forecasts is not a data problem,” says Haley Katsman, VP of Revenue at Highspot, who manages sales, success and enablement operations. “The data needed to create fact-based and reliable forecasts and accurate revenue recognition exists. The problem is the inability of organizations to share data between the front and back offices. The real sin here is every organization knows what is happening with their clients. Sales know things are slipping. Service and success teams know when there is going to be attrition. Account managers know that there are delays. Unfortunately, most finance organizations rely only upon opportunity data or a single stream of signals from the field when measuring, managing, and forecasting revenue performance.
3. Automating revenue management and forecasting processes to improve agility and precision: Traditional control systems based on spreadsheet analysis cannot keep up with the velocity and volume of data required to apply revenue recognition rules, update forecasts, and verify revenue commitments in a modern commercial model. Nor can the manual processes used to gather the data to populate those spreadsheets keep up with the rising volume, frequency of changes, and growing number of relevant data points that need to be assembled to support a traditional control system. “The notion of financial revenue forecasting and future revenue recognition is a hot issue for everyone right now given the uncertainty in the macro environment, particularly in industries like manufacturing and professional services where managing capacity, inventory and fulfillment assets are so critical,” according to Tim Brackney, the President and Chief Operating Officer at RGP (Nasdaq: RGP), a publicly traded professional services firm. To keep up with this pace of change and information flow, Financial Planning and Analysis (FP&A) teams are automating transactional pricing, quotation, booking and billing processes to get better control over these revenue drivers and automating the collection of the customer data that drives revenue recognition, avoids billing disputes and adds precision to forecasts. For example, more than two-thirds of insurance, life sciences, and manufacturing organizations are actively investing in transforming their FP&A operations and refocusing their time on judgment-intensive processes by moving their analysts off spreadsheets and onto data platforms according to a survey of 300 CFOs by the Everest Group.
4. Investing in solutions that extend financial control into the front office customer engagement workflows. Nearly two-thirds (68%) of finance leaders are actively exploring new processes or systems to support recurring revenue products or services. Almost half (49%) of CFOs are actively transforming their order to cash processes, according to a Grant Thornton CFO Survey. To achieve this, the most progressive organizations are automating and streamlining the upstream customer engagement, quote, and order entry to invoicing processes to ensure they capture consistent customer order and billing information across every channel touch point. Controlling front office problems early in the revenue cycle such as rogue discounting, poor account approvals, bad product fit, and wrong priorities can accelerate revenues and improve the return on selling investments. For example, 71% of senior financial executives think a more efficient pricing and approval process would substantially improve their organization’s profitability according to the CFO Research study. In addition, eliminating downstream billing disputes and late collections can stem revenue leakage, shrinkage, and slippage between booked and realized revenues – which can exceed 5% of total revenues. For example, according to client research by Salesforce, automating the subscription billing process can help your organization reduce invoice disputes and the days it takes to collect cash by over 10%. Automating the quote-to-cash cycle can increase new business and renewal conversions by double digits.
5. Embrace Revenue Operations To Foster Greater Front And Back Office Collaboration: Sixty-seven percent of finance executives believe the finance function should be better aligned with sales leadership to improve forecasting and maximize revenue growth according to a survey of senior finance executives by CFO Research. Two-thirds believe that better alignment between finance and sales leadership will lead to improved revenue forecasting and a 5% increase in revenue growth while simultaneously lowering both finance and sales costs by 5% and giving them greater control and compliance. “It takes collaboration between finance, operations and sales to generate predictable and scalable revenues,” says Tim Brackney, President, and Chief Operating Officer of RGP. “Doing this right is a team sport. So, I work very closely with my account management teams and CFO to bridge the gap in information and ensure we have the information we need post booking to allocate resources, monitor rollout logistics and project timelines so we can recognize, adjust resource sand revenues to reflect the reality in the moment.”
Progressive finance teams are embracing the Revenue Operations strategy as a better way to align the organizations’ processes and data across the core business groups to make forecasting more agile, transparent and precise over time – from the initial customer engagement to the receipt of cash – to maximize revenues, margins, and the lifetime value of the customer. To accomplish higher levels of front and back office collaboration, B2B organizations are evolving the traditional sales operations role into an expanded Revenue Operations function with a broader financial and data management remit. Over eighty percent of organizations are deploying Revenue Operations strategies by taking steps to align the teams, systems, data, and processes along the revenue cycle to get better control over revenue and margin leakage and increase customer lifetime value, according to research in the book Revenue Operations.
You can learn more about ways your organization can better align the front and back office to maximize revenue and margin growth by reading the Its Time for Finance to Take Control of the Revenue Cycle Report being conducted by the academics and practitioners at the Revenue Enablement Institute.