How should service credits revenue be allocated & recognized when delivery is across departments?
We have 2 general types of credits. One is used for training. Those are typically created over a certain time period and amortized monthly over that period whether or not the customer uses it. We are trying to create another one for services such as Consulting. However, we face a couple challenges:
1- We need to implement revenue recognition on delivery which we currently have not automated. We have a PSA running on SFDC. However, our Finance team is still looking for options in terms of tools. If any of you have implemented with success, could you share the too chain you use?
2- Typically, our services can be delivered by various departments internally. However, we are not sure how to implement that internal revenue allocation. Any best practices here?
Answers
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Regarding 2: I think this topic is getting more and more important for all of us. We had traditionally two different solutions that finance decided can be used: 1) revenue flows to the department that is selling the credit. 2) revenue is split with a fixed split based on the split of the yearly review of the departments. You can easily automate this.
In this setup 1) works well dependent on the sales compensation plans, and 2) works well in pretty static environments, which means departments are not changing in size
We realized during the last two to three years that in in increasing cross-department selling the following: 1) is difficult to use sometimes, and 2) is not easy once there are fast-growing departments based on new products.
So, we started to discuss distribution per usage, which we realized is very difficult in cross-country setups. So, the conclusion on our side was a modification of 2): instead of having a static key, you could adjust the key once per quarter based on usage. This means once a quarter you could use pure usage tracking to calculate the usage during the quarter, and next quarter you use these new usage numbers for revenue distribution
This is not perfect, and the ideal would be revenue distribution fully per usage, but it seems to be a good solution while not having perfect automation for everything.
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Thank you @Alexander Ziegler . It's an interesting concept to determine a percentage distribution and stick to it. For larger department where the variations in revenue do not impact them much, it's understandable. For smaller departments (in revenue), we have seen instances where they refuse or are reluctant to use the credits because they will not get full revenue and it impacts their margins.
I have heard that PSAs are often able to automate the revenue recognition piece. However, I have not heard about how they can do that by integrating credits. Thoughts?
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PSAs are not really the best solution for this. I would reach out to the vendors of the more sophisticated subscription management systems as these are increasingly supporting hybrid revenue models, including those based on usage, and at least some of them have worked harder art revenue recognition than most software vendors. I don't think it appropriate to name names in this forum but a Google search on 'subscription management' 'usage based pricing' and 'revenue recognition software' should set you in the right direction.
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