10/25/2024 | Press release | Distributed by Public on 10/25/2024 08:57
Maintaining ASC 606 compliance is kind of like taking a cross-country road trip without a GPS. It's a long and arduous process, no matter where you're coming from. You also have to follow some incredibly complex directions if you don't want to get stranded by the side of the road (or fined by the SEC).
However, even though you're referencing the same map as everyone else, your speed, efficiency, and ease of travel will vary greatly, depending on which vehicle you've chosen.
ASC 606 changed the game when it comes to revenue reporting. Gone are the days when commission, bonuses, and incentive pay were accounted for as direct expenses. Now any costs incurred to obtain and fulfill contracts need to be amortized over the estimated customer lifetime. With all the complexities of ASC 606, your commission expensing process is more critical than ever.
But which process is best? That depends on multiple factors, like the size of your organization, its growth trajectory, and other specific business requirements. Let's take a look at the four most popular tools organizations use for commission expensing and the functional requirements you should look for when comparing your options.
The four types of commission expensing solutions:
Functional requirements for ASC 606 compliance:
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Let's start by looking at the four categories of commission expensing solutions that can be used to maintain ASC 606 compliance. Below, we explain what each type of solution does, how it does it, and what potential challenges you'll face if you rely on it for commission expensing.
DIY commission expensing means doing everything yourself, from patching together data inputs to manually checking for errors. This method typically relies heavily on Excel spreadsheets to keep track of everything.
Using Excel or another type of commission spreadsheet has a couple benefits. For starters, it's less expensive than many of the alternatives. It's also more familiar - you can jump right into your next ASC 606 report without having to stop and learn a new software. However, the DIY approach comes with some inherent challenges you'll contend with sooner or later, including:
There's no doubt Excel is a versatile tool. But it also hasn't changed much since it was first developed in the 1970s. It certainly wasn't built to handle the complexities of modern day commission expensing under ASC 606.
Even though Excel spreadsheets offer flexibility and can process unlimited formulas, you're cut off from more robust functionality designed to make your job easier - like being able to quickly tap historical data to determine amortization periods, or automatically apply specific expensing rules for every opportunity.
When you think about it, the DIY approach is sort of like lumbering along the Oregon Trail in an old-fashioned covered wagon. You have the bare minimum required to survive an ASC 606 audit, but you're also forced to rely on an archaic mode of transportation to reach compliance.
If a wheel went bust on the Oregon Trail, your journey would come to a screeching halt until you could repair it. It was easy for something to go wrong, and any mistake could be catastrophic.
Although fixing broken formulas or correcting mistakes in Excel might not be as physically demanding, it's still a manual process that eats up a lot of your time and has a wide margin for human error. This risk becomes even greater when you think about the vast number of controls you need to keep track of for revenue reporting. With the DIY approach, you can expect it to feel like you're scrambling to get as far as you can before something inevitably breaks, just like you would in a covered wagon.
Excel spreadsheets aren't just manual in nature. They're also not easily shareable and understandable for those who aren't working directly on it - which gives you limited ability to collaborate. This can lead to bottlenecks as your organization expands and you have increasingly complex commissions to expense.
White glove commission expensing operates on "bespoke" software that's been heavily customized for your organization. Vehicle-wise, it's sort of like being chaperoned across the country in a limousine.
From a distance, this upgrade seems like a no-brainer, especially compared to a covered wagon. However, there are some significant challenges with white glove commission expensing you should be aware of, so you can decide if it's worth the trade-off:
Normally, when we hear "bespoke" or "white glove", we think premium - like a suit or dress hand tailored to your exact measurements. Similarly, bespoke commission software is engineered to adapt its core functionality to your organization's specific needs. But what happens when those needs change?
As your organization rolls out more products or expands to new markets and territories, commission gets more complicated - and so does your expensing.
Now, a lot of software is "customizable", but it's important to understand what exactly a company means when they describe themselves as such. Are you able to make modifications and implement new business rules yourself? With a white glove approach, the answer is: probably not. Due to its complexity, even smaller changes typically require engineering proficiency and deep expertise with the legacy code that particular software was built on.
Bespoke software is technically customizable - for your vendor's engineers. But when you can't make any changes yourself, you're forced to rely on a third party to adapt your software to keep up with shifting requirements.
When you don't have the ability to modify how you use your commission expensing software, you're essentially surrendering the driver's seat. Sure, a white glove approach may be a more "premium" option than a creaky covered wagon. But you can't control the speed of the journey, or where and when to pull over. Everything ultimately depends on your vendor and their ability to keep pace with new business rules. Scalability is seriously limited.
Something else to consider is the speed at which regulation and compliance changes. With a white glove approach, by the time your latest batch of adjustments have been implemented, they may no longer be relevant.
Besides, if your vendor experiences employee turnover, you may be assigned a new CSM every couple of months. With each new CSM, you are forced to wait while they get acquainted with your business model. You're essentially putting commission expensing in someone else's hands - someone who doesn't have to suffer the consequences should you fail to comply with ASC 606 regulations.
When it comes to ASC 606 compliance, a white glove approach is by far the most expensive way to travel. "Bespoke" software that's been manually customized for your organization is a hefty investment right off the bat, but there are additional costs you'll need to consider as well.
Because white glove commission expensing relies on a third party for modifications, you'll need to budget for professional service fees down the road. Like hiring a limo driver, the longer you go, the more expensive it gets - especially because vendors are positioned to take advantage of the high barriers to exit and may hike their prices accordingly.
This will ultimately drive up your total cost, and should be factored into the equation from the start.
Enterprise Resource Planning (ERP) software pulls different processes together into one central system. If your organization is already managing its finances, operations/supply chain, reporting, and HR through ERP, why not use it for your commission expensing as well?
In a way, it makes sense. With everything in one place, you won't have to worry about wrangling disparate data sources. But, like every other vehicle that can get you to ASC 606 compliance, there are also some hurdles:
Using an ERP for commission expensing is kind of like taking a cross-country road trip in a tractor. It's technically a mode of transportation, and certainly comes in handy for certain tasks. But it also wasn't designed for long distance travel.
Similarly, ERPs weren't specifically built for commission expensing. They definitely offer some helpful features, like automated calculations, high-level data, and even revenue tracing. One thing ERPs can't do, however, is process the vast amounts of granular commission data you'll need for your ASC 606 audit.
If you're using an ERP for commission expensing, you're bound to run into some similar problems as you would with Excel. Both were built to accommodate a dizzying number of use cases, which often results in a bulky, complicated system you're forced to navigate.
Effectively managing an ERP usually involves a steep learning curve and extensive onboarding before you can get up and running. It also takes longer to run your commission expensing process than a simplified alternative focused on the functionality you actually need, without the additional bloat.
ERPs require a big investment - not just in the initial costs of implementing a massive, complex system, but also in the excessive hours required to make sense of it. This means that the barrier to exit is high. Similar to white glove commission expensing, vendors are incentivized to continually increase their prices.
Self-service commission expensing typically operates on a low-code/no-code system - that is, software specifically designed to allow customers to make their own modifications. However, there are a few things you'll need to consider when choosing this option:
Any Excel alternative means ditching familiarity and old habits. Self-service software is no exception, and requires onboarding. This may cause temporary delays before you can get up and running on your next ASC 606 report - although the amount of time will vary by vendor.
Although self-service software was built for quick and easy modifications, it's still not grab and go. In order for your commission expensing process to operate like a well-oiled machine, you'll typically need to configure your commissionable components or portfolios first.
This isn't necessarily a bad thing - front loading the bulk of your efforts instead of implementing them in smaller steps over an extended period of time means rarely having to stop or pull over once you've hit the road.
Self-service commission expensing software can come with a higher price tag - at least initially. However, it's a very different business model from similarly expensive white glove alternatives.
As we briefly touched on, bespoke vendors may initially offer complex, custom builds for less money, trusting that you'll eventually require their engineering support to make any changes. This secures steep professional service fees in the future to make up for initially competitive pricing. The right self-service solution won't require this kind of ongoing maintenance and its associated costs.
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Despite major differences between DIY, white glove, ERP, and self-serve commission expensing, the underlying functional requirements for ASC 606 audits remain the same.
How these functions are actually executed, however, depend on your vehicle. No matter which process you choose, it will need to include the following:
To comply with ASC 606, you'll need historical data for expensing commissions over time, instead of when incurred. This data also helps you understand how variable compensation is paid at your organization - so you can more effectively determine amortization periods.
Beyond the historical data, you'll need to track every commissionable component, determine which commissions are incremental costs (if any), and allocate costs to multiple performance obligations within every contract.
In short, you need data. A lot of data. But where does this data come from?
The answer to this question will likely change depending on which solution you choose to help manage your commission expensing process. Let's take a look at each:
Under ASC 606, intangible assets like commissions need to be reported as forecasted estimates. This can get tricky when you factor in customer churn, changing contracts, and employee turnover, all of which can significantly impact commission expensing.
The odds say you'll need to adjust your estimates at some point along the journey. But what does that process look like? Again, the answer to this question depends on which vehicle you've chosen to drive the commission expensing process. Let's explore the options:
ASC 606 requires granular details about every commissionable event. At most organizations, the data you need is probably dispersed across multiple sources, like your CRM, ERP, HCM or payroll and invoicing systems. Here's how each of your options handles this:
With an abundance of nuanced, minute details to keep track of, translating your datasets into a usable format is crucial to any ASC 606 process. Otherwise, you'll be left with a massive data dump that no one can make sense of.
Let's take a look at each of the options we presented today and see how they stack up:
There are more than one ways to comply with ASC 606 - but as you saw today, not all solutions are created equal. Every method comes with its costs and challenges, but in most cases, a self-service commission solution will give you the smoothest ride on the road to ASC compliance. As you consider your options, make sure you recognize all the unique complexities that make ASC compliance so difficult - and find a solution built to address every challenge along the way.
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Molly is an experienced marketer and content professional with more than 12 years of B2B SaaS experience covering topics related to revenue generation, sales operations, GTM strategy, organizational alignment, and more.
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