New Accounting Rules Make Tech Services Appear Bigger - Reasons for Caution
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How revenues are recorded and financials are tracked will have no impact on
the business model of managed services or other technology service delivery
models. MSPs and HAAS providers still will be able to offer end users extended
contracts with periodic payment plans. Service providers will still have the
same cash flow issues, meaning that expenses will apply to incoming revenue and
not the upfront recorded amount.
Given the interest level in managed services and consolidation among
providers, the accounting rule changes could change the way managed services
and professional services organizations are appraised for potential buyers.
Currently, a services company is valued based, in part, on the recurrent
revenue and ongoing accounts. Upfront recognition of services contracts could
make a company look bigger in total revenue, but reduces the volume of
recurring revenue.
"It will change the service models, particularly in multiyear
relationships, and will require fresh analysis of the balance sheet during a
valuation process, essentially moving to cash accounting," says Tim Eades,
CEO of Everyone.net.
Upfront revenue recognition of services is a neat accounting trick for
making a service-provider business look bigger, but, again, Marks points out
that the same rule has a negative consequence when contracts are canceled or
curtailed.
"I believe this change for MSPs could possibly make a company look
larger immediately as the MSP is allowed to book the revenue up front, but I
would caution that cancelled contracts will go in the opposite direction and
force MSPs to deduct the remainder of the booked revenue," Marks says.
While the change may prove tempting to some MSPs and professional service
providers as a way to pump up the size of their businesses, some solution
providers say the change isn't worth the aggravation or risk exposure.
"I'll still do it on a monthly basis. It's safer and it reflects the
revenue stream. If I got a lump sum payment at the start I would book the
entire amount then," says Lawrence Rodis, president of the Strategic
Resource Consulting Group in Las Vegas.
Managed Services 
