Robert Kugel's Analyst Perspectives

Midsize businesses “pay” for their use of entry-level accounting systems by not having the essential information they need readily available and by using up valuable time that could be better spent generating business, finding issues or responding to opportunities sooner or simply enhancing the efficiency of the organization. Nevertheless, the transition from an entry-level accounting package such as QuickBooks to an on-premises system can be daunting for companies whose entry-level software no longer addresses their needs. Usually, the shortcomings start off as minor annoyances for companies that have between 100 and 500 employees and grow over time, and usually the pain grows with the number of employees and the volume and complexity of the underlying business. As business volumes expand and complexity grows, entry-level accounting systems are increasingly less able to support the underlying business. Yet finance executives usually don’t want to migrate to a new system until their old software threatens the orderly management of the business or becomes an overwhelming burden on finance operations. I know this firsthand, since not all that long ago I worked at a company where the CFO thought his biggest IT challenge was finding spare parts for the ancient Burroughs mainframe on which our financial system ran.

Whether they choose cloud-based or on-premises software, almost all companies can implement a new ERP system in less than three months. However, moving to cloud-based ERP (or simply accounting) software addresses two key barriers to making the transition away from an entry-level system. First, the up-front investment in taking the cloud approach is considerably smaller than with on-premises software, though there is almost always an up-front outlay for consulting and initial provisioning costs even if cloud-based services don’t require purchasing a software license or new hardware. Second, midsize companies with employee counts at the lower end of the range may not have an IT department per se. (Even those at the higher end usually have limited capabilities provided by IT generalists.) A third-party value-added reseller or consultant may handle the initial implementation of an on-premises system, but not having (and not being able to afford) the in-house expertise to maintain such software can keep a company from purchasing one.

By eliminating these barriers, cloud-based systems make the value of migrating from entry-level systems all the more compelling, especially when you consider that these offerings have a much richer and deeper set of capabilities to manage core business processes and collect data than entry-level software. They can, for example, handle multiple currencies, manage the order-to-cash cycle (as well as other end-to-end processes) and manage purchasing more effectively. Some web-based systems aimed at midsize companies offer professional services organizations (such as consulting, engineering and architecture) the ability to manage project schedules, attach costs to projects and schedule employee time to these projects.

Cloud-based systems also offer more robust business intelligence capabilities, such as individualized dashboards that promote more management by exception. All of them can be quickly configured to produce industry-specific reports, and all come with some built-in templates configurable to varying degrees by end users. All make it possible to spot future cash flow issues by automating the netting of cash inflows from receivables and cash requirements for payables, debt repayment, recurring expenses (such as lease, rent and salaries) and other predictable costs.

Finance executives in midsize companies have been wary of cloud-based systems because of potential security and reliability problems. These are legitimate concerns, of course, but they ought to be considered in context. Senior executives should understand that their on-premises systems have vulnerabilities too and are not inherently safer. At a time when a 64GB thumb drive costs about $35, a company’s on-premises financial and customer data can be taken out the door and put into an outsider’s hands without detection in a matter of minutes. Also, on-premises systems are vulnerable to fire, flood and other catastrophes. If the backup tapes are sitting in the same room as the server, there is no plan B for disaster recovery available. Cloud providers often have multiple locations and can save clients the cost of having their own remote disaster recovery site. To be sure, cloud providers have vulnerabilities too, so it’s important to assess how effectively each vendor addresses them.

One area where an on-premises, perpetual license can be more attractive than a software-as-a-service cloud option is total lifetime cost of ownership. This is similar to other lease-versus-own business decisions. If a company were to keep a perpetually licensed ERP system for more than X years, it would be less expensive than buying it as a service. The value of X depends on several factors, such as the cost of the license, implementation, hardware and IT personnel, among other factors. Typically, the breakeven point will be between four and six years.

Increasingly, midsize companies are figuring out the value of cloud-based services. This market has been growing at a good pace. Netsuite, a vendor that offers accounting as well as a broad and integrated set of business management software, recently reported that deferred revenue (an indicator of future revenue potential) had increased 38 percent in the most recent fiscal quarter ending June 30, and that revenues grew by 29 percent to $75 million.

Companies have a large and growing list of options to choose from if they are interested in moving their accounting systems to the cloud, including Acumatica, Aplicor, Expandable, FinancialForce, Intacct, Intuit, Microsoft Dynamics (available through a reseller network), NetSuite, Noguska, Plex and SAP ByDesign. I believe every company that is using entry-level accounting software and beginning to run up against its limitations should look into a cloud-based alternative, especially if buying, deploying and maintaining an on-premises system is a daunting prospect.

Regards,

Robert Kugel – SVP Research