Robert Kugel's Analyst Perspectives

This year’s Dreamforce is likely include a focus on the value of moving a company’s accounting systems and related record management processes (for instance, invoicing and ordering) to the cloud. Salesforce.com’s annual conference is never short on hyperbole and promotion of everything cloud, which can be off-putting to staid finance department types (like me). And while some departments (notably Sales) have been quick to seize on the advantages of using the cloud, others (notably Finance) have not.

The difference in cloud adoption between these departments should not be surprising. Sales people are inherently mobile and operate “beyond the firewall.” Using a cloud-based architecture that is better suited to how these users function is, I believe, one reason why Salesforce is on track to generate over $2 billion in revenues this fiscal year (ending January 2012). On the other hand, accounting (and related record-keeping) is a back-office function usually performed on-premises. For many corporations, there is no IT architecture advantage to operating in the cloud. Even from a cost perspective, accounting systems are long-lived and a “sunk cost,” so the incremental expense of continuing to use an on-premises accounting system will almost always be less than for some other systems until a company needs to replace the software.

That noted, there are several areas where I would argue accounting in the cloud is a more sensible approach. In some cases, these are becoming more important because of the ongoing evolution of organizational structures to take advantage of new technology. 

One of the most important is when a company grows past 100 or so employees and finds that its desktop accounting software is being severely strained by the volume and complexity of the transactions it now must manage. To move from one of these low-end systems to an on-premises midsize accounting package from (for example) Epicor, Exact, Microsoft Dynamics or Sage is rather pricey and may require more commitment of IT staff than the company is comfortable with. For a long time, these sorts of companies found themselves using underpowered software that was not appropriate for their size because they viewed the cost and business risk associated with upgrading to a more complex application as too high.

A second, small but growing niche for which finance in the cloud is reasonable is corporations that have a part-time CFO. These organizations need an executive in charge (not just a head of accounting) but are not big enough to afford such talent and experience full-time. An increasing number of CFOs (willingly or unwillingly) have become free agents who service multiple companies. Having the financial systems in the cloud makes it far more practical to have a remotely located CFO. Similarly, CPAs used to have to make “house calls,” showing up on site to go over the books. If their clients use a cloud-based system, though, they can look at the books any time without having to be on site, improving the efficiency of their client service and perhaps reducing travel costs. 

A third area where cloud-based financial software is a better option is a company that has distributed operations and a decentralized accounting function. Since, like sales people, these operations are taking place outside the firewall, it can make sense to put them in the cloud so that these locations won’t have to have their own hardware and support. 

I am not suggesting that financial systems in the cloud are for everyone. Larger companies with 1,000 or more full-time employees are unlikely to get a lot of benefit from this kind of deployment for their main system because they are large enough to have an internal IT department that can support on-premises ERP. (By the way, smaller companies can have a more sophisticated ERP system in the cloud even if they don’t have the internal IT resources to support it.) Moreover, large companies may find it more efficient to have the system located in an office to facilitate the movement of data between the ERP application and other systems or data stores. Even here, however, there is one exception: If the company has a stand-alone operation in a remote location, it may make sense to use the cloud, especially if it’s not feasible to enforce separation of duties  in managing on-premises IT systems. And one final negative factor, as events over the past year have shown, is that Internet connectivity cannot guaranteed since governments can shut down access in cities or whole countries.

Other issues that finance executives continue to have with cloud-based systems include security and reliability. These are legitimate concerns, of course, but they ought to be considered in context. In an age when a 16GB thumb drive costs about $20, a company’s on-premises  financial data can be taken out the door and in someone else’s hands without detection in a matter of minutes. Also, on-premises systems are not necessarily invulnerable to fire, flood or some other catastrophe, especially if the backup tapes are sitting in the same room as the server. Cloud providers often have multiple locations and can save the client the cost of having its own remote disaster recovery site. To be sure, cloud providers have vulnerabilities, so it’s important to assess how effectively each vendor addresses them. However, companies should understand that their on-premises systems have vulnerabilities as well and are not inherently safer. 

Companies have a large and growing list of options to choose from if they are interested in moving their accounting systems to the cloud. This includes Acumatica, Aplicor, Expandable, FinancialForce, Intacct, Intuit, Microsoft Dynamics (available through its reseller network), NetSuite, Noguska, Plex and SAP ByDesign. If a finance organization is looking for budgeting and planning in the cloud, providers include Adaptive Planning, which partners with Salesforce.com, and Host Analytics.   

Leaving aside the hoopla, finance in the cloud is here and growing because it make sense for a large number of companies, only a fraction of which have decided as yet to go this route. I think adoption will be slow because of the innate conservatism of the finance function and because there’s no need to rush to replace financial systems that are running well. Still, I expect to see accelerating adoption over the next several years, as more companies understand the benefits. Companies small and large have been using the cloud for a range of dedicated applications such as expense management, budgeting and performance management. It’s just a matter of time before their accounting systems catch up.

All the best,

Robert Kugel – SVP Research