Hi Michael,
For the sake of the thread, I thought I'd give a real-world example of how service revenue often gets credited too early.
Some years ago, I did the annual budget for a German software company. In addition to selling software products, the company developed custom software on a fixed-price basis. Most custom software contracts lasted between 3 - 4 years and managers were paid a sizeable annual bonus if they kept their contracts on schedule.
Strangely enough, all the current managers were always right on schedule! But I did notice that managers usually quit their jobs to work at another company about 3 - 6 months before a contract was due. It was usually then, that a new manager would discover that there was in fact another 1 -2 years of work to be done to finish the project.
The total system, however, operated like a Ponzi scheme. Since they always managed to bring in more new contracts than there were late old projects to be finished, revenue kept growing and there was enough cash-flow to pay the bills. It's just that if business ever slowed, there would have been one heck of a liability finishing off all those late fixed-price contracts with no cash-flow to pay the bills.
I brought this to the attention of the CEO/owner, explaining how rewarding managers for remaining on schedule tended to bias their opinion of the progress that had been made to date. I emphasized the fact that most projects were probably not as complete as had been reported and that the company was facing a growing disaster. To my surprise, the owner said that he liked the system as it was and didn't want to change anything!
Oh, by the way, shortly thereafter the owner sold his company to BMW for a very high price . . .
Best regards, John. |
