There’s a growing realization that the multitenant approach to the cloud isn’t the only option that companies should weigh in deciding between deploying software on-premises and in the cloud. That some people describe the multitenancy approach as “the real cloud” reflects the contentious nature of some technical debates, especially those that occur early in the evolution of a new technology. Multitenancy does have advantages that confer cost savings, and these have been important in the first stages of cloud adoption. However, we predict that single-tenant structures will rapidly gain in importance as corporations mature in their use of cloud computing, especially with respect to how they manage their ERP vr_BTI_BR_widespread_use_of_cloud_computingsystems, as I have written. Corporations are increasingly adopting Web-based applications and moving their computing environments to a hybrid model that combines a combination of on-premises and cloud deployment options (private, community and public; single- and multitenant; or managed cloud). The right choice depends on the needs of the company and the ability of vendors to provide services that match their requirements.

At this point the focus on multitenant clouds is partly an artifact of history. Beginning in the late 1990s, the rapid adoption of the Internet and the dot-com mania that went with it led to the creation of numerous new Web-based business models, many of which turned out to be duds. Among these were application-hosting companies that in essence were selling single tenancy in the cloud structures. Unfortunately, these startups were more a case of technology in search of a problem than a service driven by market demand. Often these hosted services offered the worst of both worlds: the lack of customization that comes with multitenancy without the economic savings that multitenancy can provide. Partly because of this failure and the overwhelming success that multitenant services such as salesforce.com enjoyed, technology analysts and venture capitalists seem to have concluded that the single-tenant concept was inherently flawed rather than an idea whose time had not yet come.

Multitenancy was the most attractive approach in the early stages of cloud adoption because it provided sufficient economic incentive to overcome misgivings about the safety and security of the cloud and the durability of cloud vendors. The earliest successes were mostly in software categories that lent themselves to cloud deployment because they could be readily configured to the needs of an individual company even if the software and data structures were standardized. They were business-useful but not business-critical. Examples include sales force automation, travel and entertainment expense management and human capital management. A system outage would be inconvenient but would not cause a company to grind to a halt the way it would with, say, ERP, supply chain or shop floor management systems going down. The multitenant software services approach also has been successful in some mission-critical categories where affordability has been the overwhelming requirement. An example is ERP systems for midsize companies that have grown too large and complex for entry-level accounting systems but do not wish to make the substantial investment in an on-premises system. And low-cost multitenant structures have expanded the market for software that was previously unaffordable for smaller companies. This includes contact centers for small and midsize business.

Multitenant cloud offerings will continue to grow and thrive. However, the emerging opportunity is in offering software users other deployment options. One example is outsourcing the operation of perpetually licensed software to a public cloud vendor that assumes responsibility for its operation and maintenance. This could apply to migrating existing instances from on-premises to the cloud as well as new installations. This may sound like the old (and failed) hosting idea from the late 1990s, but virtualization and open source software have substantially reduced the cost of providing this type of service. Moreover, while a single tenant offering may be more expensive to provide than a multitenant, the total cost of ownership (TCO) may be lower for companies than on-premises if their internal, on-premises costs are much higher than the vendor’s. Or the TCO may even be higher but can be justified if the company believes it will get better results. For example, a company the specializes in managing applications operations is likely to be more adept at applying patches, bug fixes or new releases than a company’s internal IT staff, especially if the staff is small. To draw an analogy, most people would prefer to have open-heart surgery at a clinic that has specialists who do dozens of them each week rather than leaving it to a well-meaning specialist who might have done a dozen during his or her career among other operations. Having a specialist take care of this aspect of managing an application ensures that updates are performed properly on a timely basis and on a schedule that suits the company, not the service provider. In addition, even if it is more expensive the user of such a hosting service may place a high value on being able to have complete control over the application without having to manage its day-to-day operations. I recently spoke with a global company that has deployed its consolidation software in a single-tenant cloud for both of these reasons.

The largest potential white space in the single tenant market is ERP. To be sure, the multitenant cloud ERP market will continue to thrive because an increasing number of companies will find this to be the most attractive and cost-effective approach. On-premises ERP also will remain a viable model, especially for larger companies that have the resources to support and maintain their applications or that find on-premises is the best technical approach for their requirements. However, there are many midsize and smaller enterprise businesses that will not find multitenant ERP an optimal or even workable choice for their business requirements. They would benefit from having their perpetually licensed (or leased-to-own) ERP system operated by a service provider. Such a vendor might offer integration of the ERP system with a selection of multitenant analytical applications such as financial performance management suites (including planning and budgeting, dashboards and scorecards, and statutory consolidation and reporting) provided on a software-as-a-service basis. A big potential market for these sorts of ERP services is in migrating existing companies from on-premises to the cloud.

We see business computing moving to a hybrid of on-premises and various flavors of cloud offerings. An increasing number of vendors offer single-tenant or managed cloud options. The biggest challenge for service providers is likely to be figuring out how to define and price their packages. Some might be deluxe but pricey and so have a small addressable market, while others may be inexpensive but ultimately are unattractive to the market because they fail to deliver sufficient value. Some vendors’ applications are better suited to a managed single-tenant cloud deployment than others. That is, some software applications are easier and less expensive to operate than others, which is likely to make those a more attractive offering for a company that is attempting to build a business around operating and maintaining business software. In any case multitenant software as a service is not the only game in town. We are entering period of greater choice for companies and therefore increased confusion. Corporations will have to figure out what works for them, but they will be better off for having more options.

Regards,

Robert Kugel – SVP Research

Reconciling accounts at the end of a period is one of those mundane finance department tasks that are ripe for automation. Reconciliation is the process of comparing account data (at the balance or item level) that exists either in two accounting systems or in an accounting system and somewhere else (such as in a spreadsheet or on paper). The purpose of the reconciling process is to identify things that don’t match (as they must in double-entry bookkeeping systems) and then assess the nature and causes of the variances. This is followed by making adjustments or corrections to ensure that the information in a company’s books is accurate. Most of the time, reconciliation is a matter of good housekeeping. The process identifies errors and omissions in the accounting process, including invalid journal postings and duplicate accounting entries, so they can be corrected. Reconciliation also is an important line of defense against fraud, since inconsistencies may be a sign of such activity.

But let’s be frank: The reconciliation process is tedious. As for all tedious processes in modern corporations, it makes sense to let machines do this work. Reconciliation is a part of the accounting close process, and one of the main benefits of automation here is that it can accelerate the process. This is important because our benchmark research on closing finds that it’s actually taking longer for companies to close their books than it used to. The research also shows a correlation between the degree of automation in the close process and the time it takes to complete it.

vr_fcc_financial_close_and_automation_updatedBack in the days of quill pens and blotters it might have been manageable to meticulously comb through accounting entries. Today, however, volumes of data are too great to make this realistically feasible, and technology provides accountants with faster and more effective means of spotting patterns and familiarizing them with the peculiarities of the company’s books. For CFOs and controllers who are trying to determine how to begin the process of transforming their department to make it a more strategic player in their company, here is a way to free finance staff to do more productive tasks.

There are three important virtues associated with automating reconciliation. The first is consistency: Business rules, policies and procedures are applied consistently in ways that are in line with accounting policies that external and internal auditors accept. Machines are more reliably consistent than humans in such tasks. The second virtue is elegance: Automated systems simplify the process while making it faster and more accurate. They enable auditors to focus their time and attention on the most important issues that arise from the process. The ability of automated systems to highlight exceptions eliminates the need for random sampling, which both consumes time and poses the risk that something important will go unnoticed. The third virtue is efficiency: Automated systems enable a company to substantially reduce the amount of time needed to complete the reconciliation of accounts because the system performs the purely mechanical tasks and skips the accounts in which there has been no activity or in which the amounts to be reconciled are too small to be material. These systems also reduce the time internal and external auditors need to check reconciliations because all of the work is centralized in a single system and because the system and its configuration functions as a higher level of control in the reconciliation process that’s easy to test and monitor.

Despite these obvious virtues, most companies don’t use such capable automation. The majority manage reconciliations in spreadsheets shared through email. Electronic spreadsheets were a major advance decades ago. Today, however, they are not the best choice because the information they contain is fragmented, difficult to consolidate, hard to share and prone to error. Running this process with spreadsheets and email is more difficult and time-consuming to manage and control than using a dedicated reconciliation application. A well-designed dedicated application assigns ownership of every task to individuals and provides real-time visibility into which parts are on schedule, which are behind and which may be in danger of falling behind schedule. These systems employ templates that are centrally controlled to ensure consistency and quality. The templates can be updated as needed. A spreadsheet may start as a template, but it’s difficult to control them, even with protections built in.

Documentation is another weak spot in spreadsheets shared through email. Although there are objective aspects to the reconciliation process, those performing it ultimately must use their judgment. These judgments must be supported by narratives and calculations that clearly and completely explain the decisions each person made and by citing supporting documents wherever necessary. A related aspect is approvals, since good governance and control of accounting systems requires that someone inspect and approve the work of others when their actions (or lack of action) can have a material impact on the quality and accuracy of financial statements. So another important element that a dedicated reconciliation system can provide are approval workflows to ensure that the work has been completed before the books can be closed.

Automating reconciliation can be a first step in creating a virtuous cycle. Many executives in finance organizations would like to improve the performance of their department but face the challenge of finding the time to devote to such efforts. The staff time that can be saved through automation can be reinvested in finding the root causes of other issues that bog down the department and fixing them. Automating reconciliation can accelerate the financial close, improve productivity, reduce errors and the related possibility (albeit limited) of financial misstatements, enhance control and diminish the risk of financial fraud. These are reasons enough why all midsize and larger corporations should investigate the benefits of dedicated reconciliation software.

Regards,

Robert Kugel – SVP Research

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