The Ledger

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The Ledger

Posted by Meagan Mujushi

ASC 606 Project with HMH: Part 1 - Business Model Challenges

Part One: Assessing the business model challenges of ASC 606

At Aptitude RevStream's annual user conference - RevConnect 2017 - Aptitude RevStream customer Andy Nickerson, Finance Manager at Houghton Mifflin Harcourt (HMH), discussed his finance office and their adoption of automation.

Companies spend big dollars on their customer-facing operations: automating, simplifying and offering great UI/UX. But what about the backend? Many big companies are operating on old enterprise systems, managing data via Excel spreadsheets, and aren't keeping pace with new business needs. In the words of Gary Simon, CFO at FSN, "If your front end goes away and innovates at a rapid pace, and your backend office systems stay still, it's going to break apart."

How prepared is your finance office for today's business needs?

The first step in preparing for tomorrow is to understand today. HMH, a $1.4B public company, had transitioned to a SAAS business model and it was time for the back office to catch up. With the impact of ASC 606 appearing, HMH made the strategic decision to analyze their current financial systems and build an architecture ready for the changing future of accounting.

Understanding your business model

HMH sell online software, physical goods, and professional services through a number of different channels. They also operate in a high-volume reseller environment. Functioning in a decentralized business unit environment, contracts are multi-layered and frequently change as customers add, upgrade, and change products. Scoping the revenue stream was huge and complex for Nickerson and his team. Using manual spreadsheets in conjunction with their SAP ERP was difficult, not sustainable and not scalable. Just 12% of the revenue was in single element arrangements. The remaining 88% was "bundles and bundles, within bundles," according to Nickerson.

Business model key challenges:

Business component Revenue Recognition Challenge
Decentralized Business Units (BU) While great for business, the revenue management can be challenging. Data collation, separation, and reporting can be tough.
Independent governance Forming the revenue governance around these BUs was crucial as well as demanding. It required a genuine team investment.
Program centered data ASC 606 centers on contract data so input data would likely need reconfiguration to catch essential data points.
Product volume A high number of SKUs, material offerings, and bundles would need tracking and management.
High volumes of transactions 6 million transactions per quarter across 19,000 SKUs.

 

What does it take to get to compliance?

The biggest question for the finance office was ‘what will it take to get compliant'? ASC 606 changes the focus to contracts and performance obligations. For some companies, there is little effect on their revenue recognition. For others, particularly SAAS business models, the effort is significant. After engaging a consultant and getting a grasp on the project, HMH focused on their rev rec challenges and bottlenecks. Using the three P's of Project Management: people, product, and process, helped them to focus the investigation.

Who can help relieve challenges for people, product, and process?

People in the finance office were struggling with the increased workload from acquisitions already. Excel spreadsheets were becoming increasingly larger, longer, and harder to manage. Pulling lines from each contract and separating them into performance obligations is a labor-intensive job and any labor-intensive job, at an accountant’s pay rate, needed to be streamlined.

Reduction of future workload was something HMH hit on early, making the early decision to recast using a Modified Retrospective  approach to ASC 606. This, they assumed, would mean less work as they could run dual systems, one in 605 and one in 606, without having to restate. The impact of producing this new 606 Chart of Accounts needed to be considered in their processes moving forward.

Changing the way products are sold to bring the sales model more in line with revenue recognition is one solution HMH considered.  At Aptitude RevStream we have seen companies (VMware) successfully use ASC 606 as a catalyst for business model transformation. This is a huge, multi-year project and not for the faint of heart. Changing the way products are sold can greatly simplify rev rec but, that is a much larger and longer project than HMH was ready to take on. Revenue automation appeared to be the best way to manage the changes ASC 606 was bringing. No extra headcount would be needed as revenue expanded, processes could be simplified through automation, and complex sales contracts could be handled with automated debundling and POB triggers.


Aptitude Software offers two levels of revenue recognition solutions: Aptitude Revenue Recognition Engine - a powerful, high-volume revenue automation tool, and Aptitude RevStream - a robust, user-configured, cloud-based, revenue management solution.


With thanks to Andy Nickerson for his thoughtful insights, as seen at RevConnect 2017

For more customer stories, join us at Aptitude RevStream's Annual User Conference - RevConnect 2018, May 16-17 in San Francisco, California, U.S.A.

 

Further ASC 606 resources:

Start preparing for revenue automation - checklist, worksheet & timeline

 

Want to hear more from Aptitude Software? Follow our Twitter account for blog alerts.

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