Managing high-tech revenue streams. (Revenue Recognition).

Call it the "perfect storm," a wholesale accounting industry crisis or the biggest series of financial scandals in decades. However you choose to characterize it, the U.S. economy is at the kind of business reform crossroads that only emerge as the messy aftermath of enormously bad news.

Amid the ever-unfolding Enron Corp. situation, there is relentless and pervasive upheaval in the accounting profession and almost-daily commentary from accounting bodies, the Securities and Exchange Commission, the Congress and the White House. There's no question that the ripple effects of the last few months of intense corporate accounting scrutiny will be felt for years to come.

This is not the first time that poor judgment, opaque accounting methods and revenue management questions have surfaced -- it's merely the most impressive display of grandscale improprieties with billion-dollar price tags, and the most publicized. This is a time that strikes fear into the hearts of many public companies, when the outside world appears poised to pounce without mercy onto any financial wrongdoing, real or perceived. It's also a climate in which the line between honest mistake and intentional deceit has ceased to matter to most people.

This is troubling for all companies but most potentially frightening to high-tech businesses, whose rapidly evolving business models add operational complexity that grows exponentially. The result is uncharted territory: complex combinations of service, product, license and subscription contracts ("multi-element" contracts), and the very real requirement to manage revenue generated by multiple sources over differing contract component cycles.

In this "Enron Age," proper revenue recognition can mean the difference between viability one quarter and being out of business the next. Very few investors are willing to wait out the results of restated financials without bailing out on their investments. Even a few months ago, it was considered important to recognize multi-element contract revenue in an organized way to support ongoing fiscal health and establish the ability to produce accurate forecasts. Now, it's the cornerstone concern of the high-tech enterprise, and the rules and regulations can be as confusing and difficult to correctly apply as ever.

Most of these companies manage their multiple revenue streams with an uneasy mix of financial, accounting and contract management software systems. Because none of these contains the unique functionality that allows revenue management to be a key corporate activity, updated spreadsheets, paper files and custom-built point solutions are thrown into the mix as well. But in such a scenario, the core infrastructure of the business is self-limiting. When a company is unable to clearly delineate the revenue streams that sustain its business, it's usually losing revenue, increasing operating costs and limiting vital cash flow.

Increasingly more exacting guidance and regulations surrounding revenue recognition from the SEC, the Financial Accounting Standards Board (FASB) and American Institute of Certified Public Accountants (AICPA) demand a high level of attention. The AICPA's SOP (Statement of Position) 97-2 and SOP 98-9, and SEC SAB (Staff Accounting Bulletin) 101 are the key compliance regulations for software companies. If a company's current revenue management processes are openended, or the methodology is inconsistent, the risks for improperly allocated revenue and incorrect billing only complicate financial closing processes and increase inefficiency.

SOP 97-2 applied directly to the software business by focusing on what had become the industry norm: multi-element contracts. It was intended to ensure that revenue was booked not on orders, but on shipped, and fully received, contractual elements. Thus, license, maintenance, services and product revenues were individually accounted for with unique invoicing and revenue allocation schedules. Mandatory documentary evidence of a business arrangement, like a signed contract, would be used to support each contract and related schedules. In addition, charges associated with the contract needed to have fixed or determinable fees.

SOP 97-2 guidance also addressed revenue allocation using VSOE (vendor specific objective evidence) -- price books that delineate component pricing when sold separately, or prices set by management with "appropriate authority." If there is no existing VSOE for a contract, SOP 97-2 required that the entire contract be deferred, SOP 989 extended the main principles of 97-2. It added the "residual method" for situations when VSOE exists for undelivered contractual elements but does not exist for delivered elements, even if all other revenue recognition criteria have been met.

Then, the SEC issued SAB 101, which stated that as of the fourth fiscal quarter of (fiscal) years beginning after Dec. 15, 1999, all public companies in the U.S. should hold to SOP 97-2-like accounting standards. The chief motivation for SAB 101 was the SEC's concern about earnings management. During the past three years, in fact, more than 400 companies have restated earnings, a sharp increase accompanied by shocking market losses. From 1995 to 2000, the loss was $78.3 billion. In 2000, seven of the top 10 restatements were directly tied to revenue recognition issues.

High-profile examples included Cendant Corp., which restated $11.4 billion; Microstrategies Inc., $11.3 billion; and Lucent Technologies, $10.9 billion. Today, Microstrategies is still feeling the effects. During the company's fourth fiscal quarter of 2001, it recorded a charge of $11.6 million, all tied to litigation settlement costs stemming from restatements for the years 1997 through 1999.

Cendant's streak of bad fortune has continued. The real estate and travel company, which has a 19 percent ownership stake in Internet real estate portal Homestore.com, announced in February that it would take a hit of $285 million for an after-tax charge associated with Homestore.com. In January 2002, it confessed to overstating online ad revenue in the first three quarters of 2001 by between $54 and $95 million. Nasdaq had already suspended trading of Homestore.com shares in December after an internal accounting audit was announced.

Tarred by Same Brush

More recently, there has been constant public discussion of restated earnings reports, and the media has been eagerly delving into each instance. While many companies see their stock fall substantially, sometimes disastrously, on rumors of upcoming restatements, others suffer simply because they're in the same business, even though their books are clean. There seems to be a domino effect within the Nasdaq group these days, and if one company falls, others stumble with it.

The frustration for many organizations is that there's no time to head off the selling frenzy. Some businesses are guilty of misapplied accounting procedures and unintentional financial statement mistakes. Others appear to be perpetrators of planned deceit, recognizing revenue before its time, altering records and leaving things off the balance sheet.

The successful operation of a high-tech business, and the retention of satisfied investors, can be enormously facilitated, and safeguarded, by employing a sophisticated revenue management system that optimizes all revenue management activities. It starts with contract entry and establishing automated schedules for billing and revenue recognition. It progresses to consolidation activities that make it possible to create single customer bills, regardless of the number of transactions in various categories. Detailed reporting functions are streamlined. And everything is supported by the capability to apply consistent pricing methodologies from contract to contract.

For those high-tech entities operating within the parameters of 97-2, 98-9 and 101, the challenge is to comply while still meeting revenue expectations. There is enormous pressure to recognize as much revenue as possible, as early as possible. In this climate, hard numbers for revenue projections and forecasts become a company's lifeblood.

A specialized revenue management solution will enable compliance with SEC and FASB guidelines. By automating key processes, it will provide stable methods for recurring billing, deferred revenue scheduling, VSOE pricing and revenue allocation, and revenue recognition. Hundreds and sometimes thousands of multi-element contracts make up the core business of high-tech companies. Business models keep developing, causing contracts to be adjusted, pricing systems to evolve and transaction volume to increase. By centralizing data in a revenue management system, any type of contract activity can be managed from one place. Additionally, a centralized system provides an audit trail and improved visibility for the auditor.

Robert O'Connor is president and CEO of Softrax Corp. (www.softrax.com), a privately held enterprise software company in Canton, Mass., that provides revenue management solutions for technology companies.