Forging the Link Between Sales and Revenue Recognition

- RevenueRecognition.com

RevRec.com:
How do you educate and motivate your salesforce when it comes to revenue recognition issues? With the post-Enron regulatory and business environment, it’s got to be even more essential for Moldflow’s salesforce to understand and comply.

Suzanne Rogers-MacCormack:
There are several different levels, and related methodologies, for communicating internally about revenue recognition rules. For one thing, it’s important that everyone in an organization have basic familiarity with what revenue recognition and compliance mean. But you’re right, for the salesforce, it’s a key aspect to their jobs. I view the salesforce as the front line in revenue management. That means that they’re in the trenches, with the customer, negotiating deals and bringing in business. We need to start at level zero with our staff education efforts, uncomplicating the complicated, and making the subject manageable. And that means being personally involved.

RevRec.com:
Most people aren’t accounting and finance experts unless they’re directly in those operational areas. Corporate governance and regulations are changing as we speak. Where do you begin?

Suzanne Rogers-MacCormack:
First of all, I divide the educational needs into different arenas. Every year we hold a sales kickoff meeting, with Sales Managers and Sales Reps, where our revenue recognition rules and related information are presented and discussed. I, or my staff, need to be in front of the sales management and salesforce several times a year to provide updates, to explain, emphasize, and clarify, and to engage in a dialogue about their needs and the company’s needs. They need to know how seriously I take it, if I expect them to take it seriously too. This is definitely an area where the tone has to be set from the top. I also need to know first-hand what challenges they’re encountering in the field, and work through solutions to real-world situations – practical solutions that can really be used by them. I always begin with the basics: what qualifies as a sale, in terms of revenue? And move on to de-mystifying specific guidance and recasting it in practical terms.

There is also regularly scheduled internal management training. Moldflow has a great program that creates a very positive forum for education. I leverage this by using the opportunity to train managers on the legal and accounting processes surrounding revenue recognition. Understanding that revenue recognition, order quality and the quality of business are important to their jobs, not just those of Finance, is the first step towards proper revenue recognition in the sales process. By getting time with employees that’s face-to-face, (or in some cases, via Webcast) in a structured setting, I can ensure that the topic gets addressed dynamically, and the communication isn’t just by memo or standard operating procedure.

At the next level in the organization, I pair the Controllers - who are regionally assigned – with the corresponding regional Sales Management. The Corporate Controller is the “preacher” in this setting, with a clear message about what constitutes “goodness in revenue”. Between him and the three regional Controllers, communication flows regularly because he issues various materials, as well as holding meetings throughout the year. For example, there’s an annual publication dealing with revenue recognition policies, periodic updates on issues of emerging importance, and policies and procedures that complement them. This information moves both sideways, and down the organizational chain, getting regional attention and input and not just being dictated by Corporate.

RevRec.com:
What would you recommend to another CFO if they were facing this for the first time? Or, have a new and urgent need to spearhead education in their organization?

Suzanne Rogers-MacCormack:
You know, I really strive to get everything down to the basics. I – and my Finance team – may need to be familiar with the details of hundreds of pages of documents about revenue recognition, but our larger organization needs to know just the salient facts. My advice is to always remain cognizant of the overarching goal of simplification. Try not to convolute the rules, which are so complex already. Excerpt key points of current regulation and frame them with a policy that truly makes sense to the people who have to implement it, and is ultimately appropriate to the company’s operations. Send regular email alerts, yourself, when significant changes occur. And make sure you use every option available to deliver regular, consistent, actionable information throughout the organization. That includes being smart about spreading the responsibility inside your own department, and utilizing the many talents your Controllers and Financial Managers have. You can’t afford to be a bottleneck, and the company needs more than one resource when questions or problems arise.

RevRec.com:
As sales negotiations and contracts become more restricted by revenue recognition policies that the salesforce has to abide by, how do you keep your message from demotivating the people you really need to feel motivated?

Suzanne Rogers-MacCormack:
You absolutely have to keep things summarized. If I issue a thick, hard-to-read manual full of policies and rules, it will end up on the “too hard to do” pile. In a context like that, Finance becomes the policeman. I don’t want that to be my, or my department’s role. We need to serve a value-added role, helping to create business and close business, not make it difficult and frustrating. This is about making the most of every sales opportunity and realizing every cent of revenue from a contract that’s properly done. To accomplish that, Finance leaders have to be partners in the sales process, not enforcers.

RevRec.com:
What do you do in your own department before your transfer information to Sales? How do you make sense of the mountains of information that have to be distilled down into guidelines that work?

Suzanne Rogers-MacCormack:
We break down the revenue recognition rules as they apply to our business, and evaluate them in that context. How will this apply to Moldflow? Where are the trouble spots? Do we fit this model, or do we have additional revenue recognition needs? How can our people work within these parameters without fear of error? And there has to be a critical evaluation of current business processes. Historically, where are the roadblocks to compliance encountered? And can we anticipate a future conflict somewhere?

For example, with SAB 101, there is a clear directive that F.O.B. terms are presumed material to the contract with a customer, and there is a risk-of-loss transfer to the customer. Previously, transfer of the title was not a clear element in revenue recognition. This is a key issue for us and significantly affects how we do business. We needed to revamp the process used for revenue recognition. We took some of the previous manual checking out of the cycle, and the individual time the Operations person assigned to each region had to spend reviewing contract terms and highlighting the important milestones that required revenue recognition. Along the way, we modified the sales order processing form to incorporate check-off sections that clearly identified relevant changes.

When you engage in this kind of exercise, mapping your business processes to the existing revenue recognition rules, you can identify the rule changes that would impact the timing or amount of revenue on a transaction. Is there a change in overall process required? Or a change in order handling? We took a look at our license agreements recently and asked ourselves, how do we typically sell our products? In what combinations? Can we establish VSOE? If not, how will we apply the residual method? The answer was to proactively perform additional pricing analyses, with a new template. Then, we brought in our auditors and asked them to review our work, and assess – were our discounts properly allocated? Let’s eradicate negative impact on the business from processes we can examine and change, proactively, to help us comply and still close business at the same time.

RevRec.com:
There’s been a fair amount of buzz recently about whether revenue recognition should be an element of any salesforce’s compensation plan. What do you think about that?

Suzanne Rogers-MacCormack:
We task our reps to go out and get orders for goods and services. That’s what business is about – our ultimate goal is to maximize our profitability over the long term through the sale of goods and services on commercially acceptable terms. But, we know that the revenue recognition rules are so complex, it can be very difficult at the outset for the rep to fully comprehend the revenue impact of the order. If the definition of an order, as captured in the sales plan, is consistent with revenue recognition rules, then I believe sales reps should not be solely accountable at the end of the day if the order is beyond the scope of the definition. Many times, the best outcome for the company is ‘to get the deal off the street now’ – to eliminate competitive threats and so on. But, in doing so, it may be that the sales terms conflict with the sales plan definition of an order, and, revenue may have to be deferred. In this case, it’s all about optimization. So, I think although the intention of adding revenue recognition clauses to a compensation plan might be well intended, it could very easily morph into a driver for uncertainty and the feeling that the sales process has become unmanageably complex, and ultimately, de-motivating.

RevRec.com:
Finally, with all of the intense aspects of your job, particularly in today’s market environment, you must need to pay attention to staying energized and committed to your role. How do you do that? Finish this sentence: “When I’m not busy being the V.P of Finance & Administration and CFO, I…”

Suzanne Rogers-MacCormack:
“… spend time with my family. At home, on vacations, at sporting events – my husband and my daughter are my world away from work, and that’s where I really enjoy being me in a very different role.”

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Moldflow Corporation (NASDAQ: MFLO), is the world leader in software solutions for optimizing the design and manufacture of plastic products, and is headquartered in Wayland, MA. Further information can be found at www.moldflow.com.