Why technology financial reporting needs to evolve

I started my career at PwC as an accountant. I kept renewing my CPA certificate for a decade after I had moved to the technology consulting practice. These days, I listen to (some) quarterly earnings calls of vendors I analyze. But since I mostly work with buyers of technology, I find quarterly and annual reports only matter so much. Vendor architecture, functionality, TCO are far more important.

Off late, I have noticed how technology financial reporting has become even less relevant to buyers ( as compared to investors). For example, analysts get excited to read about ACS 605 on Revenue Recognition. Most buyers I know cringe about RevRec as they see it as just another crinkle vendors rely on during negotiations.

Here are a few areas where most buyers would welcome more transparency

Capital investments

The promise of cloud computing was to turn technology capex into opex. The unwritten premise behind that was the onus of capex would move to the vendor world, not magically disappear. It is striking how obtuse vendors can be about capex. Example, in a data center deal we asked Verizon for capex details. It would only share a number in aggregate. Thanks but investments in FiOS underground cabling and mobile towers across the country were not so relevant for this decision. Same with Amazon – be nice to see what is going into AWS data centers and network as separate from what goes into their distribution centers and eCommerce infrastructure.

R&D

This is something which has been obtuse for a while but has gotten worse as we the tech sector has globalized and moved to the cloud. Most software vendors will say they spend 10-15% of revenues on R&D. But how much goes into maintenance of older releases versus new products?  How much is staff related and where are they located? In a cloud setting, how much of R&D is the amortization of capex? Outsourcers like to brag about solution centers as their R&D spend. Without details on the spend, more than likely it is a marketing expense. Buyers would like to make a much more educated guess on the vibrancy and relevance of the R&D spend. Today they have to guess, read detailed product road maps, rely on user groups to see where the R&D money is going.

New Product revenues

Every vendor wants you to believe their products are flying off the shelf like iPhones. They will share volume data – number of customers, objects developed using their tools etc. But almost none will share data about revenue from new products. Try finding out how much Watson has generated for IBM in the last 5 years, or S/4HANA for SAP or Fusion for Oracle.   Worse, there is an unverified meme which has taken over that technology is evolving exponentially. We are supposed to all be excited about that and welcome anything new and shiny. Reality is form/function may be evolving, customer adoption is as slow as ever. In Silicon Collar I had many examples of technology introduced decades ago which consumers still ignore.

I would love to see technology vendors follow the lead of 3M. One of the most innovative companies in the world with over 55,000 products, 3M keeps a close eye on new product introductions. It coined the term New Product Vitality Index (NPVI) to measure the percentage of 3M sales coming from products launched in the previous five years. In 2015, it reported its NPVI as 33.3%.Bear in mind, this is one heck of an innovative company and even a product launched five years ago is considered "new." For the average company, customer adoption of its new products is considerably slower. I would love to see tech vendors share details not just pretend how well their new products are doing.

There are many other areas where financial reporting should evolve to make it more interesting to technology buyers. Not sure many would still call into quarterly earnings calls, but there would be lot more information for them to make smarter technology decisions. That in the end is healthy for our sector.