This post will the first in a multi-part series exploring the design and definition of a line item as it relates to CPQ and other related systems. In this post, we will be following a transaction through the Quote-to-Cash lifecycle and exploring what are some of the different and possibly competing forces and requirements that define the answer to the question:
What constitutes a line item?
The first force we will explore is the Quote requirements. The Quote is comprised of header information, such as the customer it is associated with, as well as any totals or other summary information. The bulk of the Quote, however, is in its detail or line items, which represent the detail of the products and services being quoted. Line items of course have list and net pricing, as well as some sort of identifier such as a part number or SKU. They may also have a variety of other attributes, such as a description, indicator of the charge type (one time, recurring), product family, or other classifications.
The way that the Quote represents its line items should be geared towards clarity, ease of understanding, and ultimately, it should be uniquely targeted for the specific customer being quoted. In short, the Quote should be crafted in such a way as to maximize the chances of closing the deal, and the representations of its line items should be aligned with this goal. After all, the Quote means very little if it isn’t, in the end, converted to an Order.
The Order, like the Quote that spawned it, is also comprised of header and detail data. However, whereas for the driving force behind the Quote is to maximize the probability of a sale, the driving force behind the Order is to ensure the correct fulfillment of its products and services.
In manufacturing, this typically means that the Order must have the necessary level of detail so that a downstream system (or even the CPQ system itself) can generate a Bill of Material and Routing to direct the downstream manufacturing processes. In Telecommunications, to give another example, this means that there must be enough detail for the downstream provisioning systems to be able to decompose the order into the individual discrete automated provisioning tasks.
Due to the difference in the driving force behind the Order as compared to the Quote, chances are that the required level of detail, especially in what exactly constitutes a line item, may be different between the two.
Financials and Invoice
Moving further downstream, our Quote has been converted to an Order, and it has now reached our backoffice financial and invoicing system. Much like there might be a difference between the Quote and Order lines, how these lines are booked against the accounts in your company’s general ledger is yet another competing force that works to define what constitutes a line item.
In the simple case, the revenue represented by a line item is booked on a single account in a direct 1:1 relationship. In more advanced cases, there might be complexity around how revenue is split for bundled goods or services, or how it is deferred. In fact, the upcoming FASB ASC 606 accounting standards update, due to take effect for most non-public entities in 2018, changes the way that performance obligations are identified and defined, how the transaction price is determined the (especially for variably priced products and services, such as with volume or usage based pricing), and how and when revenue may be recognized, all of which affects how line items should be defined in order to make these accounting changes possible.
Similarly, invoicing and invoice presentation requirements apply yet another selective pressure on how we define our line items in CPQ. The lines that you want to show on your invoice may be different than the lines that you need for ordering, which may be different than the lines that you show on the Quote.
Along the Quote-to-Cash process there may be various different reporting opportunities and related requirements. During Quoting, you may be doing Sales Forecasting in your SFA or CRM system that relies on CPQ data and detail. While fulfilling the Order, there may be reporting requirements around individual line-level order statuses, as well as the status of the order as a whole. Of course, there are aggregate and detailed financial reports, as well as sales history reports, all of which ultimately rely on CPQ data, since it is the system of entry into the whole Quote-to-Cash process.
The Bottom Line
When implementing CPQ, one of the most fundamental design decisions that need to be made is the definition of a line item. Sometimes, this is an easy question to answer. Other times, due to the different potentially competing forces of Quote, Order, Financials, Invoice, and Reporting requirements, this is quite a complex question, and the correct answer may be obscured by the different voices representing the different departments and teams that represent and own these requirements.
There is no one right answer to this question, as each organization is going to have a different blend of forces that are acting on the design of the line item. The right answer for a given organization is the one that finds the unique compromise between the different forces.
Sometimes, though, there is no need for compromise. An advanced use of CPQ allows for everyone to get what they want. We’ll cover an example of such an advanced use in a future post, so stay tuned!