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Can you handle the IPO tsunami?

Executives who take on an IPO ride a long and sometimes unpredictable wave from start to finish. There’s all the debate over whether going public is part of the company’s grand plan, when to make the move, how the business will be valued, and then—the part that most people overlook—the arduous journey after the Wall Street debut.

Is your company able to take on the ups and downs of going public and then actually being a public company?

A lot of senior leaders are asking that question—or should be—in our region. It’s an especially hot time for life sciences companies on the IPO track in the Bay Area. The industry is riding a “three-year wave of renewed Wall Street interest,” and a relatively high number intend to go public soon. Fast-track tech companies and the $1 billion “unicorns” topping the news are adding to the talk about an active market.

From the moment the company decides to forge ahead with going public through the year or two after the actual offering, there are lot of adjustments and transitions in store. What’s the difference between companies that achieve success and those that falter (from embarrassing restatements and miscommunications with investors)? It’s all in the preparation, it seems.

By getting some essentials done early on, companies can navigate the choppy waters that come with taking on such a huge transaction—and the onslaught of new work and expansive demands that come with it. In that multi-year period before and after going public, most companies face a whirlwind of change and a supercharged environment of employees learning new ropes, processes and systems, and everyone is having to dealing with a higher level of scrutiny. There’s a new mindset required and a whole slew of financial and legal requirements to handle.

Companies that are facing an IPO should be prepared to:

• Get their financial house in order if they haven’t already.

• Ready their financial accounting and reporting for maximum valuation and for a new class of investors.

• Review the finance team’s skills sets and consider what new skills should be brought in to the fold, and when. You need someone who has been there, done that.

• Accept that “being” a public company is different than going public, and that in some ways, the real work begins after the actual IPO.

An IPO is a pivotal moment in a company’s lifecycle, and it helps to be as prepared as possible. It can also be a bumpy ride unless you have a navigational guide.

Don’t miss our one-hour online webinar on August 6 to dig into this meaty topic. Senior Consultant Diana Gilbert, who leads the Technical Accounting Group at RoseRyan, will be joined by Matthew Rossiter, Partner at Fenwick & West LLP, and Susan Berland, Consultant, Finance & Strategy, as they lay out the course for IPO-bound companies in “Smooth Sailing for a Successful IPO” at 1 p.m. PST. To register for this webinar for companies contemplating or going public, visit our registration page: http://bitly.com/ipoaug6.

Want even more? Get RoseRyan’s series of reports for IPO-bound companies: IPO in Your Future?, Ensuring a Smooth Ride as a Newly Public Company, and The IPO Journey: 6 Potential Obstacles to Avoid for a Smooth Trip.

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How to earn a spot on the “Top Workplaces” list: 3 tips on employee engagement

Foosball tables in a company break room only go so far in fostering employee interaction and loyalty. If employees don’t feel a strong connection to their company, its future and their role in it, they’ll eventually step away from the foosball handles and polish up their résumés.

best_places_to_work_BANG_Portrait_2015_AWThis is a constant issue throughout Silicon Valley and San Francisco as well as our industry. In the midst of the talent war in the finance and accounting field, it is paramount to keep employees engaged and inspired. Well, we must be doing something right, as RoseRyan was just named to the prestigious Top 100 Workplaces list by the Bay Area News Group. Based on confidential employee surveys, the competition revealed that our team believes that RoseRyan has very strong organizational health and rate their jobs well. Overall, they gave the firm a big, fat thumbs-up.

Our team gave our organizational health very high marks, helping RoseRyan stand above the benchmark group in many respects. RoseRyan’s results were really high in the areas of overall strategy, ethics/values and confidence in leadership, and we achieved rave reviews in the areas of efficiency and execution.

What’s worked for us? Here are three hot tips we can humbly offer up:

Forge connections: Since our folks are predominantly out at client sites across the Bay Area and beyond, we double our efforts to keep people feeling connected with one another. Our setup has led to tight bonds among peers as well as between consultants and the client managers who oversee our engagements. Gurus who need some backup are able to quickly and easily reach out to the entire team, so the “collective intelligence” really comes to life. Teammates who know and trust each other can get things done so much more quickly than those who don’t.

And there are so many ways to stay connected. Technology helps break down the barriers of space and time, as text, chat, Skype, social, phone and email keep us connected. But those things have limitations. Real time spent face to face with people is always optimal. Lunches and happy hours with other employees, clients and partners are particularly fun for forging friendships and trading talk. These meetups are popular times to connect, sort through the business and swap great stories. Our volunteer activities with colleagues at food banks, childhood literacy agencies and backpack drives help support our community. The wine club, book club, fun runs and other activities are still more ways to give employees the chance to enjoy shared hobbies or a personal cause together.

Keep everyone informed: It’s important to actively manage the multiple streams of communication to keep the team up to date—such as email communiqués, videos, webinars, virtual fireside chats, all-hands meetings and social gatherings. Make it easy for folks to easily access all the material they need and know where to go for more. Every one of our managers enjoys chatting with employees live and over email for feedback, to gain input on strategy and to answer questions along the way—it is an open office world here, with genuine interest in hearing what’s on people’s minds.

RoseRyan employees feel well-informed about important decisions at the firm, according to the survey results, way more than their peers at other firms. Our employees believe that senior managers know what is really happening. The results were great to hear, because we work hard at developing a culture of open and honest communications.

Focus on execution: That sounds cliché, yet it remains so true. RoseRyan scored extremely high in overall execution, far outpacing firms we were benchmarked against. It’s a gratifying finding since that’s how we roll: we revel in jumping into fast-moving companies, picking the best practices that suit the situation, tailoring a few tools and melding it all together with our years of expertise from having worked with over 700 clients. By having swift and steady execution as a top priority and part of our DNA, we help clients move on to the next stage of the business lifecycle quickly and efficiently. Employees really relish the satisfaction of a job well done.

We’re thrilled to be named as a “Top Workplace” in the Bay Area. The recognition builds awareness, adds to our solid reputation and will naturally help our recruiting efforts this year. It’s a talent war out there, and the best candidates will gravitate to the firms that have leaders who lead, corporate cultures that inspire and truly live their values, and teams that work together like a well-oiled machine. That’s us.

For more information about the Top Workplaces in the Bay Area, see our press release. And to inquire about a career at RoseRyan, reach out to our talent manager, Michelle Hickam, at [email protected]. And just so you know, our workforce gets to work at some of the hottest Bay Area companies, so if you work with RoseRyan, you can still score the occasional foosball game.

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EY Entrepreneur of Year Award winners: Inspiring, innovating and paying it forward

There is an interesting dichotomy that has existed in Silicon Valley for decades. Entrepreneurs have to closely guard their IP, the tremendous asset on which their business is run, while at the same time they have a compelling need to evangelize their business and share their vision.

Throughout the Valley and Northern California, there is a concentrated effort to share in each other’s knowledge and wisdom, from mentors to colleagues and back around again. Pass on what we’ve learned so we can all improve and innovate, the thinking goes.

At the 29th annual EY Entrepreneur of the Year® 2015 Northern California Awards gala on June 11, paying it forward was a key theme. The 9 out of 25 finalists chosen as regional winners shared what they’ve learned, and the spectators (approximately 480 people, including a few of us from RoseRyan) were there at the Fairmont Hotel in San Francisco to soak it all in.

 

 

Stan and his wife, Marjo, and VP Maureen Ryan

Stan, his wife, Marjo, and VP Maureen Ryan

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Director Chris Vane and CEO Kathy Ryan

 

A good mix of industries, including five technology areas, were represented with the final nine award recipients, who will go on to compete at the national level. There was also an award for the best Young Entrepreneur (Doesha Monay Wright, from San Jose), as part of the program’s efforts to recognize and support the development of entrepreneurship with young people. Here were the winners for Northern California:

  • Cloud Services: Keith J. Krach, chairman and CEO, DocuSign
  • Emerging: Dheeraj Pandey, president and CEO, Nutanix
  • Health and Life Sciences: Jean-Jacques Bienaimé, chairman and CEO, BioMarin Pharmaceutical
  • Networking: Jayshree Ullal, president and CEO, and Andy Bechtolsheim, founder, chief development officer and chairman, Arista Networks
  • Retail and Consumer Products: John Foraker, CEO, Annie’s
  • Services: Kenneth Lin, CEO and founder, Credit Karma
  • Software: Marcus Ryu, chief executive, president and co-founder, Guidewire Software
  • Technology: Paul Nahi, president and CEO, Enphase Energy

In their acceptance speeches, these winners touched upon their goals for changing lives, building sustainable value and giving back to the community. Also, they commented on the art of building great teams, listening to the customer and keeping “innovation” as a core value. It’s a big part of the EY award as the judges—who always do an excellent job—give community involvement and company culture as much weight as financial performance.

Another theme was that entrepreneurs work so hard because they know that what they do makes a difference. This was a universal theme regardless of industry or focus. We’ve all seen it firsthand in the effects this small group has on this region. Consider how much the 25 finalists have achieved in total:

  • 13,290 jobs created
  • $3.8 billion in sales revenue
  • 4 unicorns (startups exceeding $1B in valuation)

Any of those areas could be the subject of a lengthy blog, but what interests me most were the discussion around knowledge sharing, one of the core values in the Valley and Northern California as a whole.

Keith Krach of DocuSign had some fascinating comments during his acceptance speech. Because of my longtime involvement with the EY program (15 years and counting!), I had the pleasure of interviewing Keith many years ago, when he was the CEO of Ariba and a EY finalist that year as well. Keith is a very dynamic individual who radiates a high level of enthusiasm and energy no matter whether he’s in a one-on-one meeting or presenting in front of a large audience. His energy is simply contagious.

He thanked many people, with a special emphasis on his wife, his long-term administrative assistant and the entire DocuSign team. And he gave a special thanks to Cisco CEO John Chambers, who acted as a mentor to Keith on a monthly basis for two years. The only thing that John asked from Keith was to do the same for someone else. Keith remarked that this “paying forward” philosophy is what makes Silicon Valley a unique and special place.

At the gala, where inspiration was boomeranging off the walls and lessons learned were shared freely, that theory certainly rang true.

Stan Fels is a director at RoseRyan, who joined the finance and accounting firm in 2006. In addition to helping the finance dream team keep their skills sharp and stay true to RoseRyan’s proven processes, he matches gurus to clients in the high tech and life sciences sectors. 

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Women at the top in accounting: RoseRyan ranks high on national equity leadership list

We’ve always thought that both men and women are fully capable of having positions of power and authority. Let the talent, skills and merit of any individual shine so they can rise to the top.

At this time in our firm’s history, we have three extremely talented executives at the helm here, all women: Kathy Ryan, founder and CEO, and vice presidents Pat Voll and Maureen Ryan. And it is being noticed.

Each year the Accounting & Financial Women’s Alliance (AFWA) and American Women’s Society of CPAs (AWSCPA) recognize firms with high proportions of women partners and principals in the accounting profession. Just 14 firms made their Accounting MOVE Project Equity Leadership list this year—that’s the number of participating firms that have at least 50 employees and a minimum of 32% female partners and principals. This year we rank at the top of the list, since our executive team is composed of all women at this time.

Maureen Ryan, Pat Voll and Kathy Ryan
What’s really nice about the MOVE Project, now in its sixth year, is the ongoing effort to encourage the advancement of women in the accounting profession. Unlike us, many accounting firms still have a small percentage of women in executive positions (just 19%, according to the MOVE Project, even though women represent 51% of public accounting firm employees). Too bad, as there is a lot of great talent out there that may get overlooked.

Like others in our industry and talent-strapped Silicon Valley, we are always competing for the very best employees we can get, regardless of gender, and trying to make sure the ones we have love our firm so much that they stick around. While they’re here, we give them the tools they need to expand their talents and advance their careers.

Ever since she started the firm in 1993, Kathy Ryan has set out to gather an incredibly capable and diverse team of talented finance aces to provide outstanding work every time. And thus the “dream team” was born—senior consultants, both men and women, who are steeped in both public accounting and corporate finance experience, who fit in easily with various settings, and who help clients at any stage of the game.

Whether it is to help companies interpret the latest accounting rules, whip their corporate governance into shape or to guide them through transitions and transactions, the best consultant for the role is based on experience and skills, not on gender. We love to supply our clients with the right talent at the right time.

What drives our diverse team? Passion and enthusiasm for the job, for sure. But there’s also a united set of values behind it all. Our four key values are to be trustworthy, to excel at everything, to be good advocates for our clients and employees, and to be a great member of the team. We think these are pretty good values to live by. By embracing these values honestly and deeply, we are carving the best path forward to help all our men and women advance and find their spot in the sun.

Read more about the MOVE project and the background of RoseRyan’s founding in our press release.

Does our firm sound like a good fit for you? We’re looking for a few good salaried consultants, who will get the independence of consulting combined with a trusty paycheck, benefits package and professional support. See our open positions here.

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Putting the E in “revenue”: A big challenge of the new rev rec standard

Accounting professionals who have been involved with revenue for many years can recite the four criteria for revenue recognition as quickly as they can their children’s names—it just becomes second nature. For people less familiar with the process, I have used a mnemonic—it’s like learning your ABC’s but without the AB—you can sort the criteria into Collection, Delivery, Evidence, and Fixed Price (C, D, E, F). Gimmicky, but it works.

Well, we’re all going to need new hints for taking on the new revenue recognition standard when it goes into effect. The adoption date may be a ways off with FASB’s recently announced one-year delay, but finance teams still need to get their heads around the changes. Implementation challenges are ahead, and contingent revenue related to bonuses and penalties will be particularly challenging for some organizations.

The new big “E”: Estimates
While many of the same concepts will still exist, the framework of the standard moves to a five-step process rather than relying on criteria. So while collectability, delivery, evidence of the arrangement, and even some aspects of fixed or determinable pricing still come into play, that last aspect is where I see the biggest challenges.

If I had to create a new term for what we currently view as the “fixed or determinable” part of rev rec, I would call it “fixed or estimable” for the new standard. It requires, in almost all circumstances, entities to estimate the amount of contract consideration that they believe they are entitled to (assuming that recording such revenue would not likely result in a significant reversal of revenue in the future). So, there will be more judgment involved and this will require a change in practice.

Much has been written about how the new standard will require organizations to not only make many more estimates but have systems to support those estimates, provide more disclosures in their filings, and have controls to ensure that the system that supports the estimates is controlled—this isn’t about someone just throwing a dart at a board! This is why now is the time—while we all have it—to take a close look at your systems and processes and decide whether they’ll need to be modified to make room for the flexibility that’s needed when you’re dealing with estimates.

You say tomatO, I say tomAto: A bonus and penalty can be the same thing!
How is this different than current practice? Consider this pretty straightforward example of how a contract with a bonus (or penalty) provision would be treated today versus the new standard. Keep in mind this deal (from an economic perspective) can be structured using either a bonus or a penalty.

Assume Customer A purchased a single hardware element that qualified for separate accounting (i.e., it is not a multi-element arrangement). The vendor structures the deal at a fixed price of $10K for Customer A with the understanding if the product meets certain performance parameters after 60 days (i.e., uptime), the vendor gets a bonus of $2K. Then consider a deal that same vendor makes for Customer B: It charges the organization $12K with the understanding it would have to give back $2K if those same parameters are not met.

Current U.S. GAAP treats both these contracts the same—it is a classic “substance over form” example and the reality is that both customers negotiated the same deal. But there’s that $2K unknown; since it does not meet the fixed or determinable criterion, the vendor cannot count the $2K contingent amount as revenue until that 60-day contingency passes (at which point both the vendor and the customer will know if the uptime spec was met). It’s the same scenario even if the vendor can show that 100% of the time it has achieved the specs it’s promising.

Now, fast-forward to the new standard—this contingent revenue will have to be estimated and recorded up-front. The result is binary—either the vendor records the $2K payment or not. This time, if the vendor has a strong history of meeting its performance specs, it would book the $2K. Or it could estimate a weighted-average probability amount if the amount it expects to receive falls within a range of possible outcomes. This would be more appropriate if the contract bonus depended on a percentage of spec achieved (i.e., a different example).

The bottom line
In almost all companies, a purchase order is a big factor for determining the ceiling for revenue recognition. Using our super-simple example above (if only all rev rec determinations were that easy!), the vendor may receive a PO of $10K from Customer A but $12K from Customer B. But let’s say Customer A ends up following up with a second PO for $2K when the performance bonus was earned—just as the vendor predicted. Under the new rule, the vendor would have already recorded $12K for that contract even though the PO said something else—this discrepancy could create challenges for many companies from a systems perspective.

Also important to understand is that the first step of the new standard—determining the contract—contains the old collectability criterion in it. Put another way, you can’t have a contract if you don’t have a contractual right to payment with a credit-worthy customer. In our example, the contract value is “potentially” $12K regardless of the amount and timing of POs received.

Ultimately, companies need to have a process in place and should look at how their ERP system may handle situations like this. Manual, off-line, Excel-based tracking may seem like a reasonable solution, but in my experience, it introduces too many risks for errors and inefficiencies.

In addition to the accounting considerations, the new standard could let sales organizations give customers more contracting options. Often, the finance or accounting organization has had to “hold back” certain deal structures to ensure revenue rules were met. Given the focus on the big “E”—estimates—in the new standard, many organizations will find that they can create contracts with more value for their customers and alter contractual language, win more business and, in turn, increase profits—although that is just my estimate!

Looking for more insight on the new revenue recognition standard? RoseRyan and FinancialForce.com teamed up for a new report that gives companies a starting point for planning for the changes, explaining who should be involved, what areas of the company should be impacted and how to move forward. Click here to download the report: Quick guide to revenue recognition.

John Cook is a member of the RoseRyan dream team. He is a CPA with over 25 years of experience working in finance and accounting organizations in Silicon Valley with a focus on operational finance and technical accounting.

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Hot deals, talent wars and ‘winning’ entrepreneurs: Just another day in Menlo Park

Optimism in the air—that was the first thing you would have noticed at an EY Entrepreneur of the Year® reception at the Rosewood Sand Hill last week.

As I walked through the hotel’s reception area, I couldn’t miss the well parked Lamborghinis highlighted by a metallic blue one that simply screamed “IPO success.” Just to the side of the reception area, the Rosewood bar was packed with wall-to-wall patrons relishing in the latest business deals.

The real show was going on in the Rosewood’s lower conference room, where a wonderful reception was held for the 24 finalists of the EY Entrepreneur of the Year Awards, who were honored for making the grade. Truthfully they were all winners at this event, which RoseRyan proudly sponsored again this year. However, the final 8 winners will not be announced until June 11 at the lavish event at The Fairmont in San Francisco. (Check out the 24 finalists for Northern California here: www.ey.com/us/eoy/norcal.)

Conversations in Menlo Park that night with the entrepreneurs and their teams ranged from valuations of funding rounds to the mentality of “take the money now” when it is available from growth-starved investors. These entrepreneurs’ most immediate worry? The talent war. They seem most concerned with the ability to hire top-notch employees with just a small pool of candidates in front of them.

Looking further out, they are optimistic about the future, but they also expressed a sense of trepidation of what is going to happen when interest rates rise and the cost of commercial and residential real estate continues to be expensive. There is a general feeling that the current influx of late-stage funding rounds may decline once any indication of a slowdown in the general economy occurs.

But any down talk was quashed by the overriding sense of optimism. It was wonderful to see a diverse group of companies among the finalists. Although cloud software and mobile technology seem to gather all of the headlines these days, these finalists represent a broad range of categories: finance, beverage, food, biotech, consumer brands, cleantech and healthcare. Of course, application developers, wireless and cloud companies are well represented too.

Overall, the EY finalists are a fine showing for Northern California as they demonstrate the versatility and entrepreneurial spirit that are alive and well here.

Chris Vane is a director at RoseRyan, where he leads the development of the finance and accounting firm’s cleantech and high tech practices. He can be reached at [email protected] or call him at 510.456.3056 x169.

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Thanks, San Francisco, for the 2015 “woman of influence” nod to our CEO

We were beyond thrilled when we found out RoseRyan CEO & CFO Kathy Ryan would be recognized as one of the most influential women in Bay Area business by the San Francisco Business Times.

Of course, we’re always excited to get recognition, and Kathy, who co-founded this firm over 20 years ago, certainly deserves acknowledgement. She’s not one to brag, so the rest of us will do it for her: she was a pioneer in creating a consulting firm from scratch when she and a former colleague saw a better way to deliver finance and accounting services to Bay Area companies, particularly in tech and life sciences. The nod from the San Francisco paper comes on the heels of another noteworthy accolade Kathy received over the past year; she was named to Accounting Today’s national listing of the sector’s top 10 leaders, known as the Managing Partner Elite, last fall.

What makes the most recent honor truly special is the fact we are continuing to expand in San Francisco and it’s getting noticed. In recent years, of course, the city has enjoyed meteoric growth in the high tech sector. It’s positively bubbling over with well-funded startups and a few happy unicorns. So it’s natural for us to be there, too, working hand in hand to augment their finance teams, fill a gap or resolve a complicated accounting dilemma.

It’s a great time to be part of the San Francisco scene. The city has changed dramatically from when RoseRyan first started out two decades ago. In 1990, tech jobs made up just 1 percent of the economy and all the action was down in the Valley. Now high tech accounts for 30 percent of job growth there since 2010, absolutely transforming the City by the Bay. The growth has been astonishing—just witness the gleaming new private buses that shuttle the many thousands of new tech workers from their San Francisco homes to their Silicon Valley jobs. New transportation systems have risen amidst the chaos, Uber is everywhere, and Chariot and Leap offer special shuttles.

There is a raging battle over commercial real estate in town. The prices for office space are up and inventory is down. Last year the overall vacancy rate dropped to 8.3%, the lowest rate since 2001, according to the San Francisco Center for Economic Development. The mid-market corridor has been anchored by Twitter and other innovative companies, and SoMa is smoking with hundreds of new businesses.

There’s excitement everywhere you turn: the streets are awash with Millennials carrying messenger bags, furiously typing into small devices. The hotels are popping full. Some days the Giants pitch exceptionally well. And the fog has been remarkably light this year.

What could be better than all of those things? Well, we’re still praying for rain.

Eve Murto heads up our marketing and leads the charge for getting the word out about the stellar work that the finance pros do at RoseRyan. Before joining the firm in 2011, Eve held leading marketing roles at various Silicon Valley software startups, after building up steam at Sun Microsystems and Apple.

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Why the consulting life is a lot like gardening

After 14 years of working in the corporate world, I recently decided to switch to the consulting life. I was looking for a change as I wanted more of a work/life balance.

What do I mean? In many corporate cultures, we are expected to work obscene hours that are unpredictable and tough to manage. The stress of round-the-clock work eventually caught up to me, and it got in the way of my personal life. I had little time to spend with my kids and my husband—and forget about getting any free time for me and my favorite hobbies.

At times, I thought, “There must be something better.” Then lo and behold, one day Michelle Hickam, RoseRyan’s talent manager, contacted me through LinkedIn (an important lesson for anyone: always keep your profile updated—you never know who will contact you tomorrow!), and we immediately jived. She shared with me some of the ins and outs of the consulting life.

It turns out consulting is a lot like one of my favorite pastimes, gardening. If you’ve ever contemplated making a switch from the corporate world to the consulting life, consider how your own career and professional development can grow in a whole new direction:

  1. Start off with an open space filled with soil. In other words, be open minded and ready to start over.
  1. Till the soil. Research potential clients and their needs (in RoseRyan’s case, the gurus here share in that work, unlike independent consulting firms where the task may fall on just one person).
  1. Plant the seeds. Let clients know you’re ready and able, and be prepared for what comes your way.
  1. Nurture seeds with water, fertilizer and sun. Consultants have a box of tools at their disposal to take on the variety of challenges and issues that rise when they’re working with clients. It’s rare that there’s just one problem and just one solution.
  1. Enjoy the rewarding blooms. When you’ve done your job right, a healthy relationship has blossomed, the result of successful business partnering and rewarding projects.

Like any beautiful garden, consulting offers a ton of variety. I get to work in different industries such as technology, biotechnology, medical devices, and pharmaceutical, and I gain so many new experiences at each client. There is never a dull moment!

I get a bird’s eye view and insight on various systems and processes while I’m at different client sites, but when you’re an employee at one company, you’re usually exposed to just one system, day in and day out.

Another reason I love consulting is that my skills are always expanding. At the same time, I have more chances to meet new people and expand my circle of business contacts.

I get to enjoy what I do and at the same time have room for my hobbies. So long to the relentless, unpredictable work schedule. Hello, great career with meaningful work and time left over for ME!

Khyati Patel has been a consultant with RoseRyan since April 2014. Previously she worked in hi-tech, retail and consumer goods industries for 14 years in roles related to accounting, internal audit/SOX, and financial planning and analysis. Some of her hobbies include gardening, painting, volunteering, yoga, and reading novels. She resides in the San Francisco Bay area with her husband and two sons. Check out the latest positions at RoseRyan here.

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A Silicon Valley viewpoint: How to ‘fail fast’ without failing miserably

I have always believed the following adage is true: “You don’t plan to fail, you fail to plan.” However, more recently in business, and especially fast-paced Silicon Valley, the mantra has been to “fail fast.”

Many Silicon Valley CEOs are on record saying they are trying to instill this concept into the DNA of their corporate culture. They want their employees to be able to develop products quickly to gain market share, like now, and profit in a high velocity and often fickle technology marketplace. It’s so critical from their perspective that they say they actually embrace failures as part of the process. (“You have to break some eggs to make an omelet” would be the appropriate folksy analogy for such a strategy.)

Much has been written in business and management journals about slight variations on this theme: Fail fast, fail often. Fail better. Fail smarter. Create room for the honorable failure. Iterate quickly and often. Whatever wording you decide on for your own organization, it should have these guiding principles:

Managing risk doesn’t mean risk avoidance: The sentiment here is pretty obvious, that risk taking is needed, especially in fast-paced technology businesses. Those who don’t innovate will definitely fall behind and might not survive in the long run.

However, I think all too often, in their need to be quick with solutions, employees may get the wrong impression. They may think the company doesn’t need a managed product lifecycle process, product development roadmap or even a reasoned method for providing limited resources to unlimited R&D demands. CEOs need to ensure that even with the “fail fast” mantra, people are still expected to give it their best shot the first time around.

This is not about just pushing stuff across the line and scrambling to fix it once it’s in the marketplace. You’d get stuck with a broken product, impaired customer loyalty, rotten PR, increasing warranty claims, and more.

Make sure that you walk the talk: In my experience working at both hardware, software and medical device companies in the Valley for over 25 years, I have seen my share of failed product strategies, product launches, marketing launches, and even accounting projects, ERP implementations and audits. However—and this may come as a shock to you—I have never been invited to a party to celebrate a failure. I have never listed a failure on my list of accomplishments at the end of the year during performance review time. And I have never seen anyone promoted immediately following a major (or even minor) failure.

The reality is that management has a tough challenge for ensuring that “fail fast” isn’t just a slogan that everyone pays lip service to while being secretly terrified of making a mistake. How mistakes are dealt with on an organizational and personal level will be critical for the “fail fast” mantra to become a natural part of the evolutionary cycle of any company.

Do the hard stuff first: I think this is the key message of “fail fast.” It’s all about having your eye on the right ball. All too often, human nature is inclined to do the easy (and cheap) stuff first to show some progress. But it might not be the most important stuff. In organizations, this manifests itself in glowing status reports that a project is on track and on budget when in truth the targeted release date is in serious doubt. It will look like a lot of the to-dos have been crossed off, but when you look closely only the easiest parts of the product development have been tackled.

Using an example, assume a product has two key projects that need to be completed for it to go to market. Project A is estimated to cost $1 million, and the engineering group figures it has a 90% chance of success. Project B costs $1.5 million and has a 50% probability of success.

Now let’s say the organization doesn’t have much of a product development strategy and immediately wants to focus on completing Project A, mostly to gain favor with management because of its lower cost and higher probability of success. This would be a mistake from both a cost and timeline perspective. Statistically speaking, the probability of success for the completed product before any work begins is really just 45%—the 90% multiplied by the 50% (which would be extremely high for most companies in Silicon Valley, but let’s just stick with this easy math). However, after completing Project A, the probability of success for the whole product increases only to 50% and the organization is still left having to spend $1.5 million to complete Project B.

Consider what happens if the organization took on Project B first. The results can follow only one of two paths. Either Project B is successful and therefore the probability of the entire product’s success skyrockets to 90%, or the company “fails fast” and avoids 100% of the cost of doing Project A. Doesn’t hurt as bad, does it?

Failing fast is still failing: Arguably, failing fast is only the third best choice in a four horse race. The only thing worse than failing fast—after succeeding fast or slow—is failing slowly and not vectoring quickly to take on the next attempt. Again, not to be overly simplistic, but the wording can matter here (I would recommend ultimately adopting some internal slogan that didn’t use “fail” as the first word—but I get the appeal of the slick alliteration of “fail fast” that’s easy to remember).

So what to do if the organization does making that losing lap? Make the most of it and move on. Try the next strategy. Some of the most successful companies had initial failures and got right up and tried again. It might not have been until their third or fifth product evolution that they hit it out of the ballpark. This work is all about absorbing key learnings and vectoring quickly to a new strategy that makes more sense.

Ensure that robust processes are in place for the organization and employees to review and understand what went wrong. Did the market shift? Economics? A major competitor threat emerge? Today’s business environment, especially here in Silicon Valley, is moving at warp speed. This is especially true of a large multinational organizations where visibility into all of its parts may not be that good. Internal communication forums like blogs and websites where employees can share lessons learned from product development and project management will help the organization move in a new direction—to succeed fast.

Not all risk is created equal: While the failing fast and vectoring quickly strategy is a natural part of the tech product development world, it is not a wise choice for the accounting and finance functions. It is important to take appropriate risks and move quickly but wisely. Taking too much risk in projects like a new ERP implementation to accommodate a newly issued revenue standard or other structural items probably isn’t the right approach. The cost of being wrong is too high. Compliance type functions like SOX, external reporting, tax, etc. demand extraordinary precision and careful processes. Fast growing companies upgrading systems should plan carefully and not shortchange the testing and deployment phases, or their project might crash and burn.

I believe inventor Charles Kettering was right when he said that “a problem well stated is a problem half solved.” Iterate fast and get that prototype out in the open for a test drive. If the reaction is horrible, live and learn. The final product will be better off based on those lessons learned.

John Cook is a member of the RoseRyan dream team. He is a CPA with over 25 years of experience working in finance and accounting organizations in Silicon Valley with a focus on operational finance and technical accounting.

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Coming up with a game plan for revenue recognition

Consider taking the new revenue recognition rules out for a spin. It could be a short test drive, with just a sample of current contracts sitting in the passenger seat so you can see how the changes feel and how drastic they may or may not be to your company.

The point is to explore the impact of the new rules and determine if any of your processes, systems and contracts need to be adjusted before the rules go into effect. It’s much easier to consider the changes now than when a deadline is staring you in the face. That was the overriding theme of a recent Proformative.com webinar called “Revenue Recognition in 2015: What Your Company Needs to Get Done” with speakers Steve Jackson, a senior consultant at RoseRyan, and Mike O’Brien, General Manager, Financial Management Applications, at FinancialForce.com, a cloud ERP provider on the Salesforce1 Platform.

Changing your view of revenue
It’s been nearly a year since standard-setters released the new rules last May. Since then, companies have, at the very least, digested the literature (if not, it’s time to get cracking!), but what they’ve done next varies. Some have pressed the Financial Accounting Standards Board to make tweaks and give companies more time to adopt the standard while others are moving full speed ahead and are exploring the impacts.

During the Proformative event, several hundred attendees were polled on their plans. Just 15% of the webinar attendees said they have a plan in place to deal with the new rules while 35% said they’re still mulling over the guidance and observing what other companies are doing. “For those of you who are early in the process or don’t know what to do yet, don’t fear, you are not alone,” O’Brien said. “I talk to a lot of customers every day, and some are further down the line, but in fact some companies haven’t fully embraced the standards from a systems perspective.”

As expected with a rule of this size and significance, FASB and the International Accounting Standards Board are hearing about implementation issues and considering whether to clarify anything (most recently, FASB agreed to propose an update that would make clearer how to account for licenses of intellectual property and identify performance obligations).

We’ll all have to stay tuned. Under the current timeline, public companies’ financial statements won’t reflect the changes until 2017 (beginning with reporting periods that start after December 15, 2016; private companies get an extra year). Finance and accounting teams need the time between now and then to get a grip on potential impacts, prepare their systems for the changes, and give investors a head’s up for any shift in financial results.

One way to truly understand the impact? “Go through the motions of closing a month as if the new rules were in effect now,” Jackson suggested. “It’s important that you try to understand the impact so you’ll know what you’re dealing with when building your full plan,” he said.

For those 2017 reports, public companies will be showing three years worth of comparative information, “so activity that is taking place now will be part of the financial presentation” in that first year, Jackson noted.

Where to begin
Jackson recommended viewing the adoption as you would a big tech system upgrade or an acquisition of another company. Like those big projects, you need to do your homework, put a team in place to tackle it and hatch a plan. For some companies, Jackson explained, the work may involve a just few people while others will need to supplement their skillsets with outside resources.

Ideally, the person spearheading the endeavor should have strong project management and communication skills. “As you implement the new standard, your revenue could be different in 2017,” Jackson said. “So as you forecast to shareholders and analysts what you believe revenue and earnings per share are going to be, that needs to be incorporated.”

To get to that point, companies should take these actions:

  • Come up with an overall plan and calendar. Treat it like a big project, which it is.
  • Formulate your team and make sure all other relevant departments are involved. Some companies may need to include sales, IT, human resources (if any compensation plans are tied to revenue), legal, tax, investor relations. Also consider getting other executives, the audit committee and external auditors up to speed with your plans and evaluations.
  • Manage your investor communications. Give outside observers a sense of the potential impact. So far, as required under the new rules, public companies are hinting at how the new standard will affect them. They have either said, in general terms, that it could have a significant impact on their financial statements or won’t have a material impact.
  • Check all your financial systems to see if they can accommodate the changes and what your vendors have planned. “You don’t want to switch on new software the first day of the reporting quarter,” O’Brien said. “If your vendor doesn’t plan to comply or make the application available to you, you need to know now.”

The overall message? It is best to plan ahead. Not every company will be deeply affected by the new changes, but every company should be considering the level of impact at this time.

Watch the replay “Revenue Recognition in 2015: What Your Company Needs to Get Done,” which took place on Proformative.com, a website for senior finance executives.

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