In 1965, Intel co-founder Gordon Moore came up with a new "law." This law was not passed in a state legislature and signed by a governor, but was instead pieced together informally from Moore's observations about semiconductors while he worked at the world's most famous chipmaker:
- He noticed that the number of transistors per square inch on one of these integrated circuits had been roughly doubling each year since their introduction in the 1950s.
- Eventually, this trend reverted to a doubling every two years, and Moore's Law (which predicted exponential increases in CPU performance accompanied by decreases in relative production costs) was born.
Moore's Law, while not a law per se, has been one of the most accurate predictions about computer technology. Even outside the semiconductor space, Moore's Law explains a lot about why small businesses and large enterprises both struggle to keep pace with shifts in their respective industries.
The old joke about someone coming home with a new desktop or phone, only to see an ad about an even newer model that already makes it obsolete, hits uncomfortably close to home for many organizations, which remain saddled with legacy enterprise resource planning solutions at a time of rapid technological and regulatory change affecting areas such as revenue recognition.
ERP and the changing face of revenue recognition
In May 2014, the Financial Accounting Standards Board in tandem with the International Accounting Standards Board agreed upon a fresh set of converged standards for revenue recognition. Their new guidance was designed to replace many of the existing rules specified in the U.S. Generally Accepted Accounting Procedures as well as International Financial Reporting Standards. The change instantly made many on-prem ERP solutions and spreadsheet-based processes as outdated as a CPU on the wrong end of the Moore's Law trajectory.
However, modern cloud-based ERP is not the norm everywhere yet, despite its clear advantages over legacy solutions in terms of scalability and flexibility for handling tasks like revenue recognition in particular. Old-fashioned ERP still has a foothold at many SMBs and enterprises; these organizations that have sunk a lot of money into buying, implementing and maintaining such old-fashioned systems. The status quo here creates problems in automating and streamlining core financial processes, not to mention in keeping up with ongoing industry-wide changes.
Why traditional ERP and Excel are no longer enough for revenue recognition
Older ERP systems were not really designed to take on the complex revenue accounting that is now essential to new regulatory compliance. Their main functions were instead for generating invoices and fulfilling orders as part of order-to-cash. They are now like years-old computers trying to run a recently released high-end video game – a lot of modifications are required for them to even give the impression of success.
Revenue recognition is now subject to new guidelines.
As a result, finance teams end up using a mix of homegrown software and spreadsheets to paper over the shortcomings of their ERP platforms. The accompanying workflows are much more error-prone and time-consuming than what would be possible through true cloud-enabled automation. Data gets moved between the ERP solution and external non-ERP applications, raising the risk of data staleness and costly input errors. Accountants get burned out trying to meet the new revenue recognition with an altogether insufficient set of tools.
"[C]ompanies are realizing the challenge will not be solved by a couple of their bright accounting staff working a few long nights and weekends to devise a new spreadsheet," explained John McGraw and Jeff Johnson of Ernst & Young in a February 2016 article for CFO.com. This problem is far more complex and affects downstream systems used for management reporting, financial planning and, potentially, other functions dependent upon revenue data."
One of the obvious differences between the CPUs of Moore's Law and accounting systems is that the latter is not replaced or updated all that frequently. It usually takes a big change – like the FASB/IASB revenue recognition revisions – for businesses to tap into the growing power of cloud financial solutions and leave behind the spreadsheets that McGraw and Johnson kept returning to in their piece.
Cloud budgeting and forecasting software: The right upgrade for revenue recognition
One of the biggest long-term beneficiaries of Moore's Law has indeed been cloud service providers. The flow of increasingly fast yet economical semiconductors has enabled them to support affordable and convenient software-as-a-service applications at great scale, taking a huge IT infrastructure burden off of their customers. Cloud ERP is a great example of the high-level benefits:
- End users can access data anytime and anywhere, as long as they have a standard Web browser.
- This financial information is available, up-to-date and capable of being included in various report types, all without the assistance of IT.
- Application improvements are automatic and seamless; the normal ordeal of the hardware/software upgrade cycle can be done away with.
"Cloud ERP has clear advantages in scalability and flexibility."
Development and adoption of cloud ERP has been swift. Total revenue from SaaS ERP systems surpassed new license fees for on-prem ERP at some point in 2013, according to Gartner and Securities and Exchange Commission numbers compiled by Forbes contributor Louis Columbus. Net new licenses for traditional ERP platforms have been declining ever since.
At a more fine-grained level, a cloud-based solution, such as Intacct, can keep pace with the accelerating rate of change in both financial regulations and technologies. It can do so because it has:
- Real-time reporting for FASB, IASB, GAAP, IFRS, Sarbanes-Oxley and other standards, including many pre-integrated templates for drilling down to the transactional level.
- Automatic software updates each quarter; these improvements ensure that the ERP system is aligned with the latest accounting standards.
- Multi-entity support, so that teams can create multiple ownership structures and also install separate charts of accounts and list definitions for each one.
- Custom dashboards and self-service reporting, which between them can replace ad hoc reporting and provide superior insight into numbers.
- Numerous point-and-click integrations that expand the solution's scope while not requiring the technical assistance of IT.
Adjusting to the new normal for revenue recognition will require a transitional phase and some adept planning. Cloud ERP is a big asset here because it is so extensible with its updates, integrations and on-demand power. Switching from legacy ERP to cloud ERP is sort of like getting a much faster Moore's Law-enabled CPU after waiting years to upgrade. The boost will be immediately apparent, but it will also last much longer and ensure the sustainability of your revenue recognition operations.
