High tech has transformed the way business gets done. Every industry, every process, every task is being reconsidered, disrupted, and rebuilt from the ground up due to the power and potential of digitization. In fact, high tech companies themselves aren’t immune to these changes. They’re experiencing the same disruption, and high-tech finance is a prime example. High tech CFOs are helping their organizations address some fundamental changes — even as the companies they serve are responsible for developing radical new approaches to longstanding business practices. Here’s a quick look at three areas where high tech CFOs are navigating new challenges.
New business models
As in many industries, high tech companies are making the transition from traditional modes to subscription-based business models. This shift from hardware producer to service provider represents a major change for CFOs and finance teams, starting with revenue recognition.
But this transition comes with challenges. The company still has to compensate its sales team up-front based on the full amount of the contract, even though the bulk of the revenue is deferred. Also, when the company reports its earnings, it doesn’t want investors to think that revenue has dropped due to the deferred amounts. And most high-tech businesses will continue to manage and maintain their traditional business model even as they transition to a subscription model. They’ll need to keep a foot in both worlds, which adds to the complexity the finance team faces. Finally, recognizing deferred revenue requires a different set of capabilities in both transactional and reporting systems. Systems configured for traditional hardware/product sales don’t adequately support these new subscription models.
Risk and regulation
There are obvious risks involved in trying to juggle these two business models. Any missteps in revenue recognition can affect a company’s standing with its investors and its credibility with current and potential customers. The same is true with any breaches in data security and privacy, which are inherent risks of doing business in a digital economy. In addition to any liability companies incur by the exposure of sensitive customer, partner, or employee information, they could also see significant damage to their brands and future revenue potential. Then there’s the risk that comes with regulatory non-compliance. For example, the EU’s can issue fines of tens of millions of euros for non-compliance with its General Data Protection Regulation. And finally, there’s the unpredictability that comes with possible trade wars and tariffs. How does a company manage tariff compliance in a volatile political climate? How should those tariffs affect pricing? Should a company rethink long-standing supply chain relationships to reduce the impact of tariffs? These are just a few of the potential pitfalls.
This new era also increases the urgency of operational visibility for the high-tech finance leader. The to-do list still includes assessing the strength of leads and opportunities from channels, maintaining the optimal product-mix for profitability targets, and determining the key customer and product segments that are driving profitability. But in this new competitive climate, that work has to be done in real time. A finance team has a significantly smaller window to create reports on key metrics such as plan-to-actual comparisons. The data it needs has to be reliable and up-to-the-minute, and the supporting processes have to be streamlined, automated, and integrated to deliver the insight decision makers need at the pace required.
Finance has always been a data driven function. The difference is that now the finance team needs to focus more on evolving conditions than backward-looking analysis. CFOs need to help the business identify and anticipate trends as they’re happening. They have to help make sense of the chaos to find the meaningful patterns that help the business be more competitive. The good news is that for innovative CFOs of high-tech enterprises, these challenges aren’t insurmountable. The convergence of several emerging technologies is helping them drive this transformation – from the ability to process huge amounts of data to the computing power needed to execute predictive algorithms on the fly. Results that finance organizations had to wait days for are available in real-time, and processes that required time-consuming manual intervention are becoming increasingly automated. As a result, CFOs in high tech are playing a bigger role in setting the strategic course for the business.