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JDA Software is an established vendor of (among other categories) accounting software for the retail sector. So it is a bit ironic that the company is in the process of restating its earnings for 2008 through 2010 because of revenue recognition practices that led it to book some revenue sooner than it should have. The issue centers on certain transactions the company linked to service agreements and license revenue. As well, in 2009 and 2010 some of its license contracts included a clause protecting customers if certain products were discontinued, which can be construed as promising a future deliverable that would have required a delay in recognizing some or all revenue from those license contracts. Also, JDA is re-evaluating vendor-specific objective evidence (VSOE) for its Cloud Services in 2008 through 2010 to determine whether it met the appropriate requirements to recognize revenue at the start of those contracts; otherwise revenue would have to be prorated over the life of the contract. For a public company, any accounting restatement is serious, and JDA’s stock price has declined since the start of the year, but this seems to be due more to a fourth-quarter 2011 revenue shortfall relative to expectations and a downward revision in earnings expectations than to the restatement. The changes it is likely to make are more optics than substance, which accounts for the muted response from the market.

While it remains to be seen how JDA will fare in the restatement, I think its predicament has applicability for many companies and their finance departments, in the technology industry and elsewhere.

Accounting for the sale of intellectual property can be a slippery thing. Many software companies’ revenue recognition policies were extremely aggressive until 1991 when the first standards were put in place. Those first iterations proved too feeble, and further revisions attempted to prevent abuse, but in the process the rules have become highly detailed, and it’s easy to make mistakes trying to abide by accounting regulations that have more than 100 requirements governing recognition of revenues and gains. Partly to remedy this complexity, the U.S. Financial Accounting Standards Board (FASB) is looking to simplify these rules and move to more of a principles-based approach as it harmonizes U.S. accounting standards with the broadly adopted International Financial Reporting Standards (IFRS). (I covered this topic earlier this year). But for the time being, rules are rules. Especially because accounting for revenue in software is so tricky, companies must make extra effort in implementing and maintaining processes. Documentation must be thoroughly reviewed and vetted by auditors (and based on experience, I’m afraid even that isn’t an ironclad guarantee of compliance).

The shift to more of a principles-based approach in U.S. accounting standards is necessary. In the case of revenue recognition, the current rules can obscure economic reality rather than reflect it, giving professional investors an edge over others because they have the ability to see through the reported numbers (this is the exact opposite result of FASB’s stated intentions). Worse, in this case it can distort (and to my knowledge has distorted) the behavior of software companies, keeping them from making decisions that would benefit shareholders because of the negative impact those choices would have on reported revenues and earnings.

Another important point may be found in JDA’s efforts to address accounting process issues in a more comprehensive fashion. According to its CFO, JDA is implementing an end-to-end “opportunity-to-cash” process, which connects each step of a business process as it crosses departments and cuts across multiple IT systems. By smoothing handoffs between participants and linking necessary data from one step to the next, automating the progression from identifying a potential customer to closing a deal and collecting the cash can be performed faster, more efficiently, with fewer errors and with greater customer satisfaction than an approach that is not integrated. However, our research finds that too few companies have deployed such automated processes. Although implementing end-to-end processes (other examples include “requisition-to-pay” for purchasing and “hire-to-retire” in HR) is not simple, I believe inertia is the main reason why many corporations have not embraced this approach.

It shouldn’t take a crisis to drive change, especially when timely change can avert crises. I urge finance departments to re-examine how they do things on a regular basis. In my judgment, the reflexive “we’ve always done it this way” mentality is the most common barrier that prevents Finance from operating more efficiently and effectively. I believe every CFO should review major processes at least once a year to assess opportunities for improvement. Identifying ways to use existing information technology must be part of this effort, since only a minority of departments fully utilize these resources. Unfortunately, human nature being what it is, it often takes a crisis to force finance departments to act. In the 10 years that Ventana Research has been doing benchmark research, I’ve seen little evidence of substantive improvements in major processes; as just one example, the financial close now takes longer than it did five years ago. There’s a lot of lip service paid to change but as usual, when all is said and done, more is said than done.

Regards,

Robert Kugel – SVP Research

Companies (especially in high technology) that sell through an indirect channel face a difficult challenge because global sales channels are complex, fragmented and changeable, with different business practices and customs than direct channels. Keeping track of which products have sold in and sold through which partners can be a difficult task. Unless a company is working with only a handful of channel partners, just collecting the data is time-consuming. Not only is the data complex, much of it is taken from disparate IT systems of individual channel partners. They report their data at different times and in different ways using a mishmash of data structures, aggregations and nomenclature, so companies have to go through a data-cleansing step to acquire a consistent data set with which to work. Yet having accurate, detailed and timely data is important to both the day-to-day and strategic management of a corporation. Without that, it’s hard to manage customer and partner relationships effectively and have a timely, accurate view of aggregate indirect channel sales and inventory positions.

Not having reliable, complete or timely sales information from indirect channel partners can delay revenue recognition, lead to inaccurate reserves for returns or cause material errors in inventory valuations. It can impair a company’s ability to do sales planning, market analysis and channel partner effectiveness assessments and is part of an overall sales performance management program which my colleague recently articulated. And the lack of visibility makes it difficult to understand which incentive programs are working and which are not. Thus companies may be missing opportunities to give their best partners better treatment or to attract new ones. Compensation and incentives also are much harder to manage accurately because of missing information and long time lags between when events occur and when reliable data is available. Both sales people and channel partners are unhappy if they think they have not been properly credited or if waiting for information extends delays in payments. Moreover, there’s an asymmetry when it comes to compensation: Sales people and channel partners never complain when they are overpaid, which inflates costs, requires time and effort to correct and can produce hard feelings.

I think there’s a broader issue at play here, too. The lack of timely, reliable channel data makes it harder for company executives to design and execute channel-based strategies and to manage the day-to-day business. It may not be possible to ensure that the right resources are applied to the right channel partners. Measuring results in an accurate and timely fashion may be infeasible to support the kind of agility required to compete effectively in dynamic markets. Moreover, it’s difficult to manage any organization well when information is not immediately at hand. In other words, channel data visibility is important for the CEO, COO, CFO and the finance department, as well as the sales and channel management organization.

It’s not that companies haven’t been trying hard to get the channel data they need. Until recently, however, they have had to make do with improvised and imperfect solutions. Now, however, Zyme Solutions offers an array of products that help companies manage their channel visibility more cost-effectively. Its TrueData enables companies to capture validated worldwide channel data from hundreds partners and end customers. Its TrueID enables them to identify their channel partners and end customers and match them to point-of-sale transactions. TruePay automates the validation of an organization’s channel incentive programs, allowing for faster and more accurate compensation. Zyme dashboards – and the Zyme Analysis Portal – enable companies to present data in the most effective fashion, along with the Tech Channel Index that companies can use to benchmark their performance. ChannelView brings channel visibility into a company’s CRM system (Zyme has prebuilt integration with salesforce.com) that was brought to market in 2010. Zyme also offers professional services support with its data steward services.

By specializing in providing channel visibility and focusing on the technology sector, Zyme Solutions is able to achieve economies of scale that it can pass on to its customers. Few companies on their own have a scale of operations that can support or justify the investment required to ensure channel data integrity. Consequently, they wind up making do with what they have, which often fails to provide sufficient visibility. In this context, it’s not surprising that within the high-technology vertical market, Zyme’s most common competitor is the desktop spreadsheet and other home-grown solutions.

I recommend that companies with dynamic product lines that use worldwide indirect channels – especially those that are in the technology sector and/or use salesforce.com to manage their indirect channel partnerships – compare the cost and quality of Zyme Solutions’ channel visibility offerings with the quality and timeliness, as well as the direct and hidden costs, of the data they currently have to work with.

Regards,

Robert Kugel – SVP Research

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