NetSuite and RevRec – where differentiation in ERP is red hot

SUMMARY:

RevRec is a hot topic, NetSuite is bringing new capabilities that map to the changing regulatory landscape. Brian Sommer digs deeper and provides his assessment.

rev recNetSuite, a fast growing cloud ERP vendor, has built a product line that serves a variety of industries. They’ve got products for professional services firms, manufacturers, e-commerce merchants and more. Each vertical has its own billing and accounting challenges and NetSuite seems committed to solving them all.

How revenue for each kind of transaction is booked often differs by industry, by type of deliverable and other factors. The accounting of the revenue is rarely as simple as a credit to revenue and a debit to cash.

Accounting standards bodies have poured a lot of thought (and guidance) into how revenue should be booked today. Far from the days of the matching principle, accountants must parse complex subscription/digital economy deals to identify how much revenue can be booked each accounting period for services, products and other categories. It’s not easy or for the faint of heart.

Note: I undertook an analysis of recent Revenue Recognition requirements in this Diginomica story

There was quite a bit of discussion re: new revenue recognition (RevRec) rules at NetSuite’s recent user conference. NetSuite President/COO Jim McGeever showed the connection between NetSuite’s industry solutions, the different types of billing capabilities each vertical requires, and, how revenue recognition needs impact them.

rev rec, suiteworld
Exec Q&A at SuiteWorld 2016

After McGeever’s brief discussion on the subject, we heard more in the executive Q&A/press conference right after the keynotes.  I asked the first question to Jim and NetSuite CEO, Zach Nelson. I mentioned that a Wall Street analyst had recently opined that new RevRec rules will cause so much work for accountants that some firms will defer the purchase and implementation of new financial application software. The Wall Street analyst mentioned Workday by name.  I wanted to know if they shared this assessment and would this cause a drop off of sales for NetSuite?

Nelson responded that the new RevRec rules would actually be “an accelerant” of new software deals. I tend to agree with that assessment. McGeever added that:

No one will buy new financial software without a revenue recognition solution in place.

I’d agree with that, too. Nelson added some additional commentary regarding the overall completeness of their RevRec solution over those of competitors.

After the press conference, I attended a specialized billing breakout session with four other analysts. While the breakout was titled “Billing”, we turned it into a deep-dive discussion re: RevRec.

We learned that:

  • The new Advanced Revenue Management module supports RevRec requirements that will be mandatory (for public companies) in 2018.
  • Functionality to support emerging standards for RevRec implications for leases is still being designed.
  • Subscribers of NetSuite’s current Revenue Management module will get access to the new Advanced Revenue Management module when they elect to do so. There is no additional charge for this to existing customers of the Revenue Management module.
  • The Advanced Revenue Management module does have an expanded set of data requirements and functionality. As a result, the implementation of this module will require some effort if users are converting from the older solution. This isn’t unexpected given the enormity of the regulatory change. Both old and new contracts will need re-examining as part of the implementation.

The implementation of new RevRec rules may tax the accounting knowledge of systems integrators, implementers, NetSuite channel partners and possibly NetSuite’s captive service group. Unlike a technology-driven project, these initiatives will require subject matter experts (SME’s) with deep accounting expertise. Many implementers may possess a number of technology SME’s but lack enough accounting SME’s to meet short-term demand.

There will be other challenges, too. In some firms, there needs to be a well-reasoned dialogue between Accounting and Sales. This discussion could surface ways to unbundle the kinds of contracts that have services, products, rebates, discounts and/or subscriptions all bundled into one deal. While bundled deals might be great for a sales person, the accounting workload they will create could be unacceptable.  Another reason for new discussions will involve whether the firm will permit existing contracts to be modified (e.g., to add an additional service mid-term) or will the accounting be easier if a net-new contract is written (with the new service included).  Who will be the neutral party to broker such discussions and policy changes within a firm? Don’t be surprised if these accounting changes also prompt adjustments in how sales commissions are calculated and paid out.

Who will NetSuite target initially for the new Advanced Revenue Management solution? According to presenters we heard from, NetSuite will focus initially on the SRP (services resource planning) user community. These are often professional services automation users – some of which came from the QuickArrow and OpenAir acquisitions several years ago.

Other verticals, like fast growing cloud software firms and other subscription economy firms will doubtlessly be solid marketing opportunities, too. And, like Nelson said, other net-new customers will come into NetSuite’s sales pipeline if their existing ERP or financials software cannot deliver a viable RevRec solution in time for the prospect to do a quality implementation of new RevRec rules.

Several NetSuite executives confirmed the Advanced Revenue Management solution is generally available now. The product has been out in a ‘soft’ release with existing Revenue Management module users.

It should be noted that NetSuite was comparatively early into providing robust RevRec capability. My colleague Den Howlett first talked about this in 2012, providing a detailed take on what NetSuite offered at the time. It is clear the product has undergone significant improvement and that, subject to service expertise on the ground, should make NetSuite a front runner in any selection where RevRec is a high value issue.

Image credit - via the author

Disclosure - NetSuite covered most of the authors travel and expense costs for attending SuiteWorld.

    Comments are closed.

    1. I can confirm that the Advanced Revenue Recognition functionality is already live in a number of NetSuite customers – when I worked there up until March, one of my customers was an early adopter. This is a real differentiator for NetSuite, especially when you combine it with the fact that NetSuite also has robust CRM, sales, project management, contract management, billing and accounting capabilities – because it means that you can track the customer journey from lead > opportunity > project > invoice > rev rec > cash > reporting, all in one system of record.

    2. greg says:

      yes, revrec is now add-on in sap ecc as well for both GAAP and IFRS (which are supposed to be ‘the same’ anyway). in many implementations it needs to integrate with some kind of percentage of completion logic and tie it billing to offer the full ‘passing of control’ functionality.

      my understanding is that the next standard up for implementation is leases, so as soon as Norwalk agreement settles on that we should have new compliance work for our good old capital vs operating leases or what to put on balance sheet vs what is still possible to be kept off of it.