Selling Finance

How sales teams are learning the finer points of revenue recognition.
P.B. GrayMay 8, 2006

Geac Computer Corp.’s annual sales meeting is always a fun event, full of braggadocio and bonhomie, as salespeople gather each spring at a sunny resort. Last year, in addition to the usual pep rally, something new was on the agenda in Orlando: a class in finance. Specifically, it was a two-hour primer on revenue recognition — and attendance for the sales force was mandatory.

“Selling is an art,” says Donna de Winter, CFO of the $444 million (in revenue) software concern headquartered in Waltham, Massachusetts. “I don’t want to suggest I know anything about selling,” adds de Winter, who helped create the course, “but I do know how to structure a deal.”

Educating salespeople on acceptable structures is fast becoming a necessity as regulators crack down on questionable sales practices and irregularities in booking revenue. CA, for example, has been embroiled in an accounting scandal that involved improper booking of $2.2 billion in revenue. Six executives, including the former head of worldwide sales and the CFO, have been indicted. And in 2004, Qwest Communications International Inc. paid the SEC $250 million to settle charges that it fraudulently booked $3.8 billion in revenue between 1999 and 2002 — a probe in which two former Qwest sales executives were censured.

It doesn’t help, of course, that there are almost 200 different approaches to revenue recognition in accounting literature. It is hoped that a review project at the Financial Accounting Standards Board will establish a definitive standard. But in the meantime, it’s little wonder that revenue recognition was named one of the top three ongoing control risks in a survey of 400 finance executives by Softrax Corp.

To rein in that risk, many CFOs are formalizing finance education in sales. The trend is most apparent at software concerns — where bundled products and services wreak havoc with revenue recognition — but it is moving across many industries. And while the techniques vary, the goal is similar. “Salespeople don’t have to be experts, but it would be nice if they had some appreciation for the fine points of finance,” says Daniel Noll, director of accounting standards for the American Institute of Certified Public Accountants.

Selling to Sales

Instilling that appreciation is not easy. “Salespeople care very little” about the often-complex accounting rules that govern transactions, says Wendy F. DiCicco, CFO of Exton, Pennsylvania-based Kensey Nash Corp. Many view their jobs strictly in terms of sales and customer satisfaction, she explains, and consider financial aptitude “not their responsibility. Of course, their job is sales and customer satisfaction,” she adds, “but even so, that job has to be performed within the rules and regulations of the finance world.”

To be effective, say finance executives, education for sales must be repetitive and direct. For example, Mark White, CFO of SAP America, a unit of German software giant SAP, takes the issue into the field several times a year. Every quarter, he says, SAP hosts a conference call for 75 top finance executives to discuss new developments in revenue recognition. Then finance folks are dispatched into every U.S. field office to update the firm’s 1,000 salespeople. “This allows information to cascade through the finance department into the field,” White explains. In addition, the firm offers seminars on revenue recognition and maintains a Website on the topic.

By making sure lines of communication between sales and finance are open, White hopes the sales force will see his department as enabling well-structured deals rather than blocking them. “We want our salespeople to feel comfortable calling in the revenue recognition specialists as soon as a deal starts shaping up in other-than-standard terms,” he adds.

That philosophy is echoed at Inc., a fast-growing software company in San Francisco. There, large sales contracts are continually reviewed by a dedicated team of two to four finance executives. Complex transactions command the attention of CFO Steve Cakebread. New hires go through an orientation process in which revenue recognition issues are layered in to a larger discussion about business ethics, says Cakebread, adding that he wants salespeople to understand that the finance department will work to get deals done.

What makes an initiative particularly effective, says SAP’s White, is its ties to compensation. The firm regularly reviews its compensation for salespeople to make sure it provides ample rewards without promoting deals that straddle or cross a regulatory line. If SAP seeks to sell to a new division of an established customer, for example, it provides salespeople with incentives aligned with revenue recognition rules.

No Freebies

What the initiatives guard against, says Geac’s de Winter, are red flags that could cause accounting hassles. Take performance guarantees. In the software industry, customers sometimes demand guarantees that a new product will integrate well with other software on their systems. Or they may insist the software be customized. Such promises create headaches for finance because, under GAAP, recognition of the revenue would have to be deferred until the software works as promised — which could take months and involve additional consulting.

Promises of future upgrades or other deal sweeteners are also troublesome. For example, says de Winter, “a salesperson may tip the customer that a new version is due in six months, then [offer] a free upgrade if the sale closes now.” Auditors usually take the position that the customer isn’t buying the current functionality but rather functionality that isn’t on the market yet. So, depending on circumstances, only a portion of the revenue may be recognized at the time of the sale of the first version.

Extended-payment terms cause problems, too. Sometimes, to meet goals, a salesperson will urge a customer to buy now and pay later. Even long-cherished freebies such as support or no-cost training for staff using the software may be, under certain circumstances, taboo. “Freebies create a multi-element deal, and from a finance point of view, that’s a challenge for revenue recognition,” says de Winter. “Deals that have multiple elements, meaning software, services, support, and training, need to have a fair-market value assigned to each component.” Revenue from each may have to be spread out over months or even years.

Understandably, there is tension between sales and finance over what can be promised and what can be recognized. And that tension is often directed at the CFO who delivers the news that certain sales techniques are now banned. At Geac, de Winter and her team, at least early on, heard muttering about “stupid regulations.”

Overcoming that hostility takes time, but it can be done. As proof, de Winter says she now hears salespeople knowledgeably describing deals with revenue recognition in mind. What’s happened, she says, is that salespeople have simply had to “accept that there’s a new world order — and that we are not alone in imposing [these] stricter rules.”

P.B. Gray is a freelance writer based in Wellesley, Massachusetts.

Early Education

Finance executives who have developed revenue recognition programs for sales have some tips for those just beginning the process:

Navigate political waters carefully. Build support at the top of the organization first before trying to enlist sales executives, who may prickle at the intrusion.

Make educational programs simple, and even entertaining. One CFO dissects a “bad deal,” picking through a sales contract line by line during a presentation, then reconstructs the contract as a “good deal.”

Plan a minimum of three or four presentations to salespeople each year. Turnover can be high in sales. New hires may be unfamiliar with the rules of the game. Also, as regulators continue the crackdown, ever-stricter rules are likely.

Make sure that compensation programs for salespeople are well structured and don’t provide inducements — even subtle ones — to flout accounting rules.