Robert Kugel's Analyst Perspectives

ERP systems have been a fixture of organizational process management and record keeping for so long (more than three decades) that it is likely that few who use the software are aware that ERP is an acronym for Enterprise Resources Planning. Its smooth and uninterrupted functioning is essential to an organization’s accounting and finance processes. In manufacturing and distribution, ERP manages inventory and logistics. Some organizations use it to handle human resources functions like tracking workers, payroll and related costs. Its initial introduction represented a major advance, but its subsequent evolution has been slow and mainly a series of incremental refinements.

Now, the technology underpinnings of ERP systems have begun to change fundamentally, which will significantly increase their business value. The ongoing shift from on-premises to cloud-based ERP will accelerate over the next five years as more configurable and customizable systems become available, designed for specific business verticals. The ongoing evolution of the underlying technology architecture in particular will support major changes in how finance and accounting departments work. Artificial intelligence using machine learning (AI/ML) will change the nature of staff work, reducing the amount of low-value chores, enabling departments to be more analytical and forward-looking and serve as a more consultative service to the rest of the organization. Technology will enable those executives who adopt a continuous accounting methodology (more on this below) to attract and retain the best talent by offering a more attractive working environment.

The shift to cloud-based ERP systems has been underway for years as this approach has provided accessibility advantages, superior security and disaster recovery, improved performance and total-cost-of-ownership advantages. However, many businesses have resisted replacing their on-premises systems because their existing on-premises software works well enough: Our Next-Generation ERP Research finds that 81% of organizations believe their system works well or very well. Moreover, the cost, complexity and perceived risk associated with change are also disincentives to switch. For that reason, organizations change over slowly: Our research indicates that the average age of an organization’s main ERP system is seven years, so they are in service for more than a decade. Some vendors provide hybrid environments, where part of the functionality of the system is on-premises but has been augmented or partially replaced by functionality that operates in the cloud. In any case, existing on-premises systems are aging, and cloud offerings have been undergoing ongoing improvements that have steadily increased their attractiveness. While it is still the case that organizations will replace their ERP systems only when necessary, it is also now likely that they will no longer have reasons to put off changing for as long as possible.

Customizations: One factor accelerating the shift to the cloud is the ongoing enhancement to the configurability of ERP systems, particularly to address the needs of specific industry verticals and sub-verticals. Ventana Research uses the term “configuration” to refer to a system’s native tools that are used to change its behavior or features without changing the underlying code. This enables subscription software and infrastructure providers to update the underlying code without affecting configurations made by customers. Vendors have also been expanding their configuration options to support specific industries, making them more fit for purpose and reducing cost and time to value. Moreover, there are an increasing number of vendors that offer customization options. Ventana Research uses the term “customization” to refer to a feature, extension or modification that requires custom coding and/or some form of special implementation. In the past, this was utilized by organizations to allow their on-premises software to perform in specific ways that matched their processes and other requirements. However, these customizations were an expense to implement and often made it difficult to upgrade as ERP vendors issued new releases. Cloud-based systems enable organizations to incorporate customizations using extensions that are independent of the core code and that are far less prone to breaking as the core system is upgraded. Some systems have low-code or no-code customization environments that enable subject matter experts in lines of business (rather than consultants or IT professionals) to create and maintain these additions.

Artificial Intelligence (AI): Ventana Research defines “AI” as the use of technology to process information in much the way humans do, including improving accuracy in recommendations, actions and conclusions as more data is received. I like the alternative term “augmented intelligence” because it emphasizes that these systems enhance, rather than replace, the capabilities of the humans employing them, especially in improving decision-making and eliminating the need for an individual to perform repetitive parts of a process. In fact, AI/ML features and capabilities are already at work in some vendors’ applications and new ones will be introduced at an accelerating pace. Ventana Research asserts that by 2025, all vendors of software aimed at the Office of Finance will differentiate their offerings by the capabilities and accuracy of their AI functionality. Some of the more common applications of AI to ERP systems include:

• Task supervision to constantly monitor inputs and results in order to spot potential anomalies, inconsistencies, outliers, errors and omissions in data entry to reduce accounting staff workloads devoted to finding and resolving errors.
• Recommendations to suggest a next best step or options for the next step, or a range of values to input that represent a best fit under the circumstances, which increases productivity, speeds task completion and reduces training required.
• Opportunities to accelerate production through automation as well as providing assistance to supplement users’ analytical skills.
• Reporting and dashboards functions including AI-generated, automated commentary to accompany charts and tables, with increasingly richer and more meaningful narratives.

Continuous Accounting: Recognizing that a long series of small breakthroughs in technology was about to upend the rules of how finance and accounting departments operate, in 2016 Ventana Research began to use the term “continuous accounting” to describe a new approach to managing the department, which rests on three pillars:

• Using software to manage data continuously in an end-to-end process, which ensures accuracy and reduces workloads caused by the need to check and reconcile figures in the absence of this level of control.
• Taking advantage of software capabilities to spread workloads continuously across an accounting period.
• Instilling a continuous improvement culture in the department to facilitate change, especially as it relates to technology in order to be a fast follower and use available technology to redesign department processes.

One of the more compelling reasons for adopting continuous accounting is to shorten the accounting close. We assert that by 2025, two-thirds of organizations will have applied continuous accounting principles to close their monthly books within one business week, up from one-half today.

The annual audit is a process that is ripe for technology-driven change since it consumes considerable staff time and resources and requires a considerable expenditure for services from an outside auditor, especially for companies that have to file their financials with the U.S. Securities and Exchange Commission. For several years, I have advocated for the adoption of a virtual audit, one where an organization provides the outside auditor with remote access to core financial systems to allow it to test them for fidelity, control and accuracy. This would replace the current approach where the auditor requests voluminous amounts of data that requires the organization to spend hours collecting and distributing this information. Remote audits became necessary during the pandemic when offices were locked down. A virtual audit builds on that experience. The virtual audit benefits all parties since it reduces the amount of staff time required and lessens the amount of time that the external auditor spends on site — cutting these direct costs — and it enables audit firms to spread the workloads more evenly over the year, a trend that is already in place.

The long-standing reasons for staying away from cloud-based ERP have largely disappeared. For most companies, advances in the functionality and configurability in all vendors’ offerings make them similar enough to existing on-premises software, and customization capabilities can plug most or all of the remaining holes. Moreover, the total cost of ownership may be lower, security in the cloud is superior to what all but the largest organizations can afford, and systems performance is better, since vendors are constantly upgrading equipment and usually offer elastic computing resources. I recommend that organizations that are contemplating changing their core ERP system should now consider a cloud-based system as their default option.

Regards,

Robert Kugel