Unraveling the Software Billing Knot

Growing complexity is heightening the need for a unified approach

By Jim McGeever, COO, NetSuite

Acme Software burst onto the market with an innovative product that generated huge buzz and saw rapid uptake. With capable executive leadership and ample funding, Acme was considered one of the hottest software companies in its niche.

Then the company hit bumps in the road. Customer dissatisfaction and churn spiked because of misbilling issues, while Acme leaked revenue because of similar problems with underbilling and failure to engage with customers up for subscription renewal. Finance staff struggled with an unruly snarl of spreadsheets that made revenue recognition a nightmare and compliance virtually impossible.

Finally, Acme was forced to spend hundreds of thousands of dollars on a third-party auditor to sort out the mess, while putting its IPO plans on the back burner. The root cause: A disjointed billing system of spreadsheets and point solutions ill-suited for the complexity of software industry billing and revenue recognition. These billings silos deprived the company of the control and visibility it badly needed.

Billing: Complexity in the Middle
Acme may be a fictional company, but its problems are very real for both fast-growing and established software vendors. Billing sits in the middle of a number of complex processes—order management, revenue recognition, collections, taxation, renewals, sales commissions, and forecasting. In addition, you need to make an accurate, timely billing record available to customers over the web. And billing itself is growing increasingly complex.

Software vendors are moving en masse toward subscription billing, with many offering customers both subscription plans and traditional perpetual licensing. Usage-based billing layers on further complexity with per-use fees tied to a running variable such as data accessed, minutes used, storage size, or consumption (think utilities). Billing spans a range of channels —licensing, professional services, and support.

Add in one-time charges for training, events, or time and materials and you’ve got a knot that defies what your customers and auditors want—a simple, accurate, and timely representation of billing. It’s a recipe for problems that can undermine operational performance. It’s the reason why software companies are looking for a unified billing solution purpose-built to handle even the most complex use cases.

The Perils of Point Solutions
With the rise of subscription billing, several vendors are trumpeting point solutions aimed at recurring business. Zuora, for instance, offers an application that handles discrete subscription billing reasonably well. What Zuora doesn’t handle well are multiple revenue streams and complexity. We’ve heard from numerous Zuora customers about integration and interoperability issues to get the system to work with other billing processes and in the overall lead-to-order-to-cash and revenue recognition landscape.

In the software industry, as well as telecommunications, media and publishing, healthcare, professional services, technology, and other verticals, spreadsheets and point solutions will inevitably frustrate efforts to strengthen revenue recognition, enable agility and growth, and better serve customers.

Strong revenue recognition. Revenue recognition is complex enough in traditional business models, and more so when subscription and usage billing is added to the mix. Many finance teams use spreadsheets and manual processes to deal with this complexity, and some forgo trying to get revenue right on each order, instead running a massive Excel exercise at period-end to reconcile revenue in the aggregate.

Such brute-force techniques should be a real concern to any CFO from an accuracy, consistency, auditability, and scalability point of view. For public companies, the risks of errant revenue recognition are well known and exacerbated by ever-changing regulations. Meanwhile, private firms may be in for a rude awakening in preparing for an IPO or in acquisition talks. Unified billing processes linked intimately with revenue recognition relieves these pressures and saves countless hours.

Billing and pricing flexibility and scalability. Growth depends on agility and innovation in meeting customer demands and reacting to competitive threats. You may need to adjust pricing on the fly and propagate it accurately across multiple points, from order management to proration of existing contracts to customer self-service over the web. Rolling out a new billing option needs flawless execution across your back-office and customer-facing systems and personnel.

Spreadsheets that are workable enough with 50 customers will become a liability when you reach 1,000. If you’re doing business in global markets or plan to, are you set up to effectively handle multiple currencies? It’s important to ensure that your billing environment has the flexibility to scale and accommodate new types of billing, pricing, markets, and customers as you grow.

Effective customer retention, renewals, and upsells. Misbilling is a surefire way to steam a customer and even trigger unflattering social media reviews, especially when they need to spend hours figuring out what you should have billed them. On the other hand, a sound billing system helps minimize churn and can be a competitive advantage that improves customer satisfaction and retention with hassle-free processes and self-service controls.

Your systems need to provide visibility into renewals, and should automatically trigger workflows across both your customers and account management teams as a fixed-term contract nears expiration. That same visibility should give your sales team insight into cross-sell and upsell opportunities with the ability to seamlessly onboard product or service additions and bill accordingly.

Toward a Unified Billing Model
More than a decade ago, NetSuite, one of the pioneers in enterprise subscription licensing, managed billing and revenue recognition by rolling up our sleeves. We wrestled with a revenue recognition spreadsheet containing 600,000 fields in an extremely labor-intensive process. Back then we were doing only monthly revenue recognition. The challenge would have been magnified exponentially for daily revenue recognition, which we do today as a GAAP-compliant public company.

Of course, we knew we weren’t alone in our pain. Other software companies struggled with the same problems. In a unique position with both firsthand experience and a vision for the solution, NetSuite has built out industry-leading capabilities for unified billing and revenue recognition. “Unified” is the key—recurring and one-time charges, usage-based, time and materials, and other billings across licensing, services, and support are handled in a single solution.

Spreadsheets and point solutions might provide some tactical expediency for a startup, but they are no way to run a growing business. By automating billing and revenue recognition processes on a system designed to scale, you’re well positioned to grow the business and satisfy customers without a billing millstone tied to your neck.