Recognizing the Value of Revenue

It is an oddity of ‘revenue’ assurance that so many practitioners have little or no knowledge of what the word ‘revenue’ means. Paradoxically, if they are working for a CFO, they will be working for someone with a very thorough understanding of the word. Revenue is not just a simple function of sell more, get more revenue, company makes more profit, gets more cash, and everybody is happier. In fact, I have often seen RA people embarrass themselves by their ignorance in front of CFO’s, sometimes without realizing that they made fools of themselves. Ironically, these same people often talk about the need for support and sponsorship from the top, and will even give sermons about the importance of their job. Well here is a newsflash for those people: if you want the CFO to understand your job, it is a good idea that you first show some understanding of the CFO’s job.

Imagine the following scenario: the CFO is reviewing, yet again, the results for the year so far. He looks at the actuals, and the forecasts, and tries to know the reason for every variance. It looks like results are on target. Then the Head of RA strolls in to his office for a meeting to explain what benefit his team has added over the year. There was no target for this Head of RA, but the Head of RA goes on to explain how his team added a few hundred million of revenue to the company. Would it be surprising if the CFO was sceptical? Everything he was measuring was on target. He is looking closely at the results on a regular basis. Everybody’s numbers come back to him. They all add up and he has explanations for everything. Yet, as if by magic, a team in his own directorate pops up and claims to be adding huge benefits that were not even part of his forecasts. Then imagine the scenario continues as follows: the CFO is impressed and is glad to see this level of return from his RA team. So he wants to ensure RA is managed like everything else – by forecasting the returns from RA that will be enjoyed in the next financial period. All of sudden, the Head of RA wishes they could leave the room. He is confronted by one of two choices:

  • RA focuses on work that is predictable and easy to forecast. Work becomes dull ‘handle-turning’, dealing repetitively with the same symptoms of the same known problems, but never fixing the root causes.
  • RA has to make wild guesses on the value it will add, without knowing what the leakages are, and without knowing if it will be able to push the necessary fixes through. In addition, this work must be done in a way that can be shown to be genuine when properly scrutinized by the CFO.

Either way, from now on the CFO expects to see the numbers, will expect that they are incremental to all the work performed elsewhere, and he will be disappointed if the numbers come short. Self-indulgent ‘measures’ of RA’s success created by the RA team but not reviewed by anyone else may be usual in immature telcos, but the telco’s RA maturity cannot increase without proper measures. Remember, spending a lot on software may give people jobs, but it will not help the business if nobody can measure if value is being added. Like any team, RA’s reports of its performance needs to be properly and impartially reviewed to prevent the RA team giving a biased view of its own success. Which brings us back where we begun – with not understanding the word ‘revenue’ and hence being prepared for that scrutiny.

I question whether any revenue assurance department deserves that name unless they employ at least one person with a good technical understanding of the principles of revenue recognition and a detailed knowledge of the policy adopted by in their company. Otherwise, their job is not about ‘revenue’ but about ‘data’. If they do not understand revenue, these teams should be called data integrity teams, because they may understand the data but not what it is ultimately used for. You can check data without understanding its purpose. The shortcoming is that if you only partly understand the purpose of data, the checks may not be optimized for the needs and risks faced by the business. To claim to assure revenues, you have to know what they are, and all the factors that will influence the revenue numbers as scrutinized by the CFO and reported to shareholders. Yet lots of RA teams contain not a single person with more than a cursory understanding of the complexities of revenue recognition. Take a look here for a very well-written article on how revenue recognition policies do matter.

Assuring revenues means understanding revenues, and revenue recognition is a complicated discipline in its own right. RA people would do well to remember that. If your RA team is not going to assure revenues, then best not make claims that the CFO will see through. Instead, RA should be honest, and explain the limits of what is done. When it comes to putting a value to the benefits added, RA departments takes a chance when calculating their own numbers if they do not also understand revenue recognition. Some get lucky, others do not. To avoid the danger of having those numbers ripped apart at a senior level, RA should work with somebody in the business who really understands revenue recognition. Then, when the numbers are presented to the execs, they will be more robust. They may also be smaller, but if you want executive support, it is better to have a smaller and reliable number than a big number that the CFO does not trust.

Eric Priezkalns
Eric Priezkalns
Eric is the Editor of Commsrisk. Look here for more about the history of Commsrisk and the role played by Eric.

Eric is also the Chief Executive of the Risk & Assurance Group (RAG), a global association of professionals working in risk management and business assurance for communications providers.

Previously Eric was Director of Risk Management for Qatar Telecom and he has worked with Cable & Wireless, T‑Mobile, Sky, Worldcom and other telcos. He was lead author of Revenue Assurance: Expert Opinions for Communications Providers, published by CRC Press. He is a qualified chartered accountant, with degrees in information systems, and in mathematics and philosophy.