The three primary forces affecting software companies today are the demand for growth, evolving business models and regulatory changes, NetSuite SVP of Sales Marc Huffman said onstage at the software industry keynote at last week’s SuiteWorld 2017 conference.
Judging from the rest of the keynote, it might be that last item that’s most pressing. While investors continue to demand fast growth from the software companies they’ve backed and the evolution of business models from product-based to services-based to subscriptions to every combination thereof, regulatory compliance, specifically around ASC 606 took center stage.
Perhaps in no place was that made more clear than in comments from Scott Davidson, CFO of Hortonworks, a NetSuite customer, and Prasadh Cadambi, a partner at KPMG and a member of the Financial Audits and Standards Boards when the ASC 606 rules were written.
“You need to jump into ASC 606 ASAP. You’re not going to get another deferral,” Cadambi said, noting that previous decisions to delay the implementation to 2018 for public companies and 2019 for private companies are unlikely to happen again.
“When you say get started ASAP, I would say that might even be too late,” said Davidson. Hortonworks began preparing for ASC 606 in the third quarter of last year.
Yet, many businesses may in fact be too late. An informal poll of NetSuite customers found that 60 percent have not begun to prepare for ASC 606 according to Huffman.
But, there’s good news. NetSuite has built out capabilities to account for the accounting changes in ASC 606. Notably, NetSuite has built revenue recognition and billing system software together in the same engine, according to William Schonbrun, director of product marketing.
“Some things are inherently meant to stay together -- billing and rev rec should not be separated,” he said. “I’ve heard some of the smartest people in software saying keeping these apart and having a lost in translation moment in rev rec is reckless. And I agree. You have an unfair advantage with NetSuite. Take it.”
Yet, adapting to ASC 606 is going to take more than software.
“People call it an accounting impact,” KPMG’s Cadambi said. “Think of this more as a business model change and what you need to do.”
ASC 606 will have an impact on areas outside of accounting, notably investor relations and sales compensation. Many large software companies are already preparing, Cadambi said, including Microsoft.
“Some very large companies and very nervous,” he said. “I am in charge of 65 companies in my office and we are really behind.”
Davidson and Hortonworks is taking a detailed, methodical approach to preparing for ASC 606 in three phases. The first phase was a gap analysis determining where 605 and 606 differed for them and documenting those processes. Phase two focused on existing systems and processes like sales ops, sales compensation, and planning and forecasting. Phase three will be the deployment, which Davidson expects to happen before Dec. 15.
It has not been without its challenges. Like many software businesses, Hortonworks has some intricacies specific to its business. Working with the open source software Hadoop, for analyzing Big Data, engineering gets involved as well.
“Our engineering team deals with customers,” Davidson said. “We co-develop some technology with our customers. It feels like a support arrangement but there’s deliverables with work and materials. The pricing can look a lot different from traditional SaaS.”
Davidson also urged software companies to work with auditors.
“It’s going to have a big impact on forecasting, how you deal with investors and the board,” he said. “A high level of communication for change management is critical. Start last year.”
For more on ASC 606, download a demo on preparing for the new rev rec with NetSuite.