Robert Kugel's Analyst Perspectives

The subscription and recurring revenue business models became a significant part of the economy this century with the advent of streaming services for entertainment and software as a service. They have grown in popularity because they enhance customer lifetime value by evolving what had previously been a one-time-sale relationship into a delivery of ongoing services, which can create a more loyal customer relationship as well as provide a regular, more predictable revenue stream. While once used almost exclusively in service industries, these business models have become a feature in many product-focused businesses. I recommend that enterprises that have adopted or are planning to adopt these business models take a continuous accounting approach to managing recordkeeping. ISG Software Research asserts that by 2027, one-third of subscription organizations will use continuous accounting to remove constraints limiting sales and marketing flexibility, streamline back-office processes, shorten the accounting close and improve customer satisfaction. Subscriptions are a well-established business model, but what has historically been a relatively simple accounting process for newspapers, magazines and other periodicals (straight-line amortization of the up-front cash payment over the subscription term) now presents enterprises with challenges because these business arrangements can be more complex. For example, the scope can change frequently as the number of users of the service increases or decreases, or charges can vary seasonally, or there may be some consumption element that varies from period to period. Today’s revenue recognition standards have also made the accounting process more complicated because each of the components of a given contract may require different accounting treatments. The challenge can be even greater for companies that have adopted a hybrid approach—combining a one-time product sale with an ongoing set of services or consumables—because the existing financial management system may not easily accommodate this type of business model or may require extensive modifications to support subscriptions. Continuous accounting enables enterprises to achieve four main objectives that improve performance in handling subscription or recurring revenue arrangements. First, managing the flow of business and financial data in a straight-through, end-to-end process ensures data integrity, which, by guaranteeing accuracy, cuts accounting workloads by eliminating the need for checks and reconciliations. Data accuracy issues, often overlooked at a systemic level, cause unnecessary workloads for accountants. A lack of assured integrity forces all billing information to be checked because not reconciling data almost guarantees there will be errors that either annoy customers because they are overcharged or create revenue leakage when they are underbilled. Moreover, as data moves from the front office to the back office, systems must maintain a consistent record of the nature of each revenue element to ensure accurate revenue recognition treatment that minimizes workloads, guarantees compliance and reduces potential audit issues. Second, straight-through processing eliminates period-end bottlenecks because data doesn’t need to be reconciled all at once since transactions can be reviewed whenever necessary. What has been regarded as a given set of monthly, quarterly and annual routines is not set in stone but is rooted in centuries-old limitations imposed by paper-based systems and manual calculations. Today’s business applications can continuously process data end to end so work schedules can be restructured to distribute workloads better, eliminate the period-end “crunch” time and increase operational efficiency. This enables enterprises to close the books sooner, which promotes agility in operations. Our Office of Finance Benchmark Research finds that 62% of companies that close within six business days have timely information, compared to 39% that take longer. Third, reporting and responsiveness can be improved because technology enables executives and managers to continuously track performance and progress toward objectives using dashboards tailored to their specific needs and designed to accelerate decision-making. Moreover, working from a single authoritative source of data eliminates the need for financial and business analysts to spend time on data preparation and reconciliation, enabling them to shorten cycles and broaden the scope of their analyses. Our Analytics and Data Benchmark Research finds that analysts typically spend the biggest share of their time (69%) simply preparing data for analysis rather than doing what they are trained to do: analyze. And fourth, a lack of data integrity and the resulting need for checks and reconciliations before invoicing and billing often has the underestimated impact of limiting the flexibility of sales and marketing to create and, crucially, change offers and terms. To make accounting workloads manageable, enterprises have tried to limit the complexity and variability of the offers or put up with some degree of inaccuracy in billing. However, both the front office and back office get what is needed when the organization deploys a billing system that delivers data integrity using straight-through transaction processing. Rather than always being behind the curve, sales and marketing can respond to better—or worse-than-expected results—even during the middle of a month by modifying an offer or increasing some incentive without impacting back-office workloads. Enterprises with a subscription or recurring revenue business model should adopt a continuous accounting approach to manage these transactions. Technology has made it possible to not only remove operational constraints that once limited sales and marketing flexibility but also streamline back-office processes, shorten the accounting close and improve customer satisfaction. Organizations established around subscriptions or a recurring revenue arrangement with customers likely have a financial management system designed to support this model. However, product companies that adopted a hybrid approach or are now considering it must assess whether the existing system can easily support subscriptions and a continuous accounting approach. I recommend that these enterprises consider using dedicated subscription management software that also automates revenue recognition processes. This system operates parallel to the main financial management application, creating a sub-ledger that easily meshes with existing accounting methods. It’s likely that this approach is faster, easier and has a lower total cost of ownership than modifying an existing software. Regards, Robert Kugel

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