Online accounting software or the Cloud is a term virtually everyone has heard before. The question being asked is a little more difficult. What are the implications of online accounting software from a business perspective? What is online accounting software? How can the Cloud assist firms become more efficient, effective and nimble? Does it make sense to move to online accounting software? What are the risks of moving to the Cloud?
“Cloud computing is a model for enabling convenient, on-demand network access to a shared pool of configurable computing resources (e.g. networks, servers, storage, applications and services) that can be rapidly provisioned and released with minimal management effort or service provider interaction.”
National Institute of Standards and Technology (NIST), October 7, 2009
There are hundreds of very well written articles regarding online accounting software. To filter out search results that are marketing oriented rather than educational, you might want to use GoogleBlogSearch to find other articles and blogs that relate to the Cloud or online accounting software.
I’m a business oriented person, not an IT guru so I’m more interested in the practical applicability of the Cloud; specifically as it relates to online accounting software. The Cloud is a means whereby the resources required to support the accounting software requirements of a business are provided by others.
In most instances people think of online accounting software as a means whereby they can access via the Internet accounting software applications that are provided (hosted) by a third party provider. This is Software as a Service (SaaS) and we normally think of this in terms of a Public Cloud whereby the third party provides everything; hardware, software, data backup and finally both hardware and software updates. Everything is provided by a single entity and all the user has to do is open their browser.
Actually the hosting of an online accounting software system doesn’t necessarily have to be provided by a third party. The firm itself can create a Cloud environment that replaces the traditional on premise network based infrastructure. It operates in exactly the same manner as a Cloud, but the firm retains all ownership rights (and responsibilities) to everything. It’s just a different way for users to access accounting software applications and stored data.
Since this post is really about operational issues, not IT issues, let me conclude this introduction by saying that there are also other variations such as Platform as a Service (PaaS) and Infrastructure as a Service (IaaS). In all instances these service model are designed to assist firms stick to what they do best and partner with others to provide the rest.
What Can I Do in the Cloud?
The simple answer to this question is that you can do anything in the Cloud. The more realistic answer is that you have to decide what makes good business sense. While our focus is online accounting software, there are other possibilities.
Backup and Recovery
Backup and recovery is an excellent use of the Cloud. Prior to the development of the Cloud most firms backed up their data to tape drives. This has proven to be difficult in many cases, particularly when programs and files are being restored after a natural disaster or system crash. Cloud providers that specialize in backup and recovery have developed solid systems that are more reliable and ultimately less time consuming than the tape option.
While guarding data associated with a firm’s primary business applications such as online accounting software or ERP systems must be a primary concern, one must remember that there are a significant number of other data and application sources that need to be protected (desktops and laptops).
This is to some extent an extension of the backup discussion. There is a wealth of data that can be retrieved from a system, but the process has been difficult. There are firms that offer services and software products that organize and archive data and then let users search and retrieve information from these Cloud repositories.
Self Sufficient Software Applications
Probably the most significant growth area for Cloud computing has been the deployment of specific point solutions such as CRM, office suites and other stand-alone software solutions. If you are evaluating a move to the Cloud, this might be a viable test environment. You do need to be a bit careful as the connection between online accounting software applications and these point solutions is growing rapidly.
CRM solutions could operate independently, but this would create a disconnect between customer information, quotes and orders located in the CRM system and similar information in the accounting or ERP system. If you are evaluating a Cloud based CRM system, but want to maintain your on premise accounting software or ERP system, you need to build a link between the two.
The next four business applications or processes all have one thing in common. They utilize data from the accounting software / ERP system to help people do their jobs more efficiently or effectively. A well designed AR Collections Management application reads invoice and payment data and places it in an application that can be accessed via the Cloud.
This gives people the ability to access this data, track a customer’s payment history, contact customers and solicit payment. Rather than making contact from an office, a Cloud based AR Collections application can even be accessed when you are sitting in front of the customer.
An effective Exception Management system will highlight issues that need to be addressed. As an example if inventory turns is below expected levels, the system will notify a named individual and give them both the condition that needs to be addressed as well as a form of a task manager that helps people track their actions as well as the progress they are making.
This is perfect for the Cloud. In addition, a Cloud based Exception Management application can support collaboration so that multiple people can be working on the same issue at the same time and share responsibility and ideas.
Since Business Metrics is not tied to a specific accounting software application, but is instead just a form of reporting, all metrics related information can be posted to the Cloud and accessed anytime anywhere.
Although Business Metrics is probably best suited for the Cloud, there is no reason why people cannot access more standardized business reports via the Cloud. This is particularly true if these reports are converted to PDF or spreadsheet format and opened as required by users.
Advantages and Disadvantages of Online Accounting Software
While there were only a very few online accounting software options a few years ago, users now have a growing number of Cloud alternatives, but care needs to be taken when considering a move to the Cloud. Keep in mind one fact. In just a few short years it appears as though the Cloud is going to be the only option.
Public Cloud vs. Private Cloud
If you include hosted applications as viable online accounting software alternatives, then the field is wide open. Hosting as most people understand the concept is the transfer of operational responsibility from the user to a third party. This is just a form of a Private Cloud.
A true Public Cloud is a multi-tenant system whereby all users share the same software application, but have their own data repository. Product updates and fixes are processed once for all user firms. That can become quite attractive, particularly for firms that want to implement their system as quickly as possible.
Private Cloud options could include any number of alternative deployment methods as we have mentioned earlier. In many cases the Private Cloud is operated by a firm that specializes in one or a limited number of accounting software or ERP products. They are responsible for all operations, including updates, product fixes, backup and archiving.
Depending on the nature of the agreement reached between the user firm and the Cloud provider, the user could purchase the software outright and then just pay for hosting and other services. Alternately the online accounting software provider could own the software, provide updates and user support and charge a monthly fee.
Ownership of Data
Regardless of the deployment option selected, it must be agreed in writing that the user has an absolute right to their online accounting software data and a right to receive their data in an agreed upon format and within a specified time frame. There have been several instances whereby the user’s data has been almost held for ransom or the data is so jumbled that importing it into a new accounting / ERP system is almost impossible.
Third Party Applications
This is a bit of a tricky area. Virtually all accounting software / ERP vendors rely on third parties (ISVs) to supplement the functionality of their core system. In some cases these ISV products provide functionality that is “critical”, meaning that the core system would not have been selected if the ISV applications were not available. Other ISV applications could be considered to be “nice to have”, but not necessarily critical.
Here’s the dilemma. What do you do if the ISV solution is not compatible with the next release of the core online accounting software / ERP product? Actually this is just as significant an issue for traditional on premise accounting / ERP systems as it is for online accounting software solutions. Similarly if you want to move from your current on premise solution to an online accounting software version and the ISV solution isn’t going to be ready for six months or more or the ISV only supports on premise deployment, what are your alternatives? The same issue might arise for upgrading from an existing Cloud solution.
When online accounting software application were first released, customization was not generally available. That is not the case today. Cloud vendors have developed their systems to the point where customization is supported. Just like on premise software though, the buyer must be cautious. Customization isn’t easy and you need to make sure that the firm doing the customization really knows what they are doing.
How do I Evaluate the Cost of Online Accounting Software?
Online accounting software is no more than a method by which information and applications can be accessed or protected. There is a cost associated with Cloud computing and that cost has to be quantified. Actually you need to calculate the cost of doing business under any deployment option. Since our primary focus is online accounting software and ERP systems, let’s just stick to that alternative.
One of the most alluring aspects of online accounting software (and every other Cloud application) is the fact that there might not be a significant up-front purchase investment. Instead firms pay a monthly per user fee.
While this seems attractive, keep in mind the fact that online accounting software is no more than an alternate financing arraignment. Someone has to pay for the software itself, updates and day-to-day management of the entire system by trained IT experts.
The cost of on-premise software comes in “chunks” (initial investment and annual maintenance fees) as well as on going payments for IT personnel and system maintenance.
How do you then compare these two alternatives? Actually there are several alternatives depending on the nature of the online accounting software solutions you are evaluating. A public Cloud bundles most of the costs into a single monthly usage charge (per user) while the various Private Cloud and hosting alternatives may include any number of services and payment options.
In all cases you need to calculate the total cost of the deployment model and take into consideration when these expenses will occur. Calculating the Net Present Value of each alternative seems to be a viable model.
First we have to select a time period. For the sake of this example, let’s assume a contract of five years. That takes into consideration all of the significant costs of each alternative. Then let’s assume that we can invest our money at 5%. Now let’s calculate the cost of each alternative in each of the five years. The cost of Year 0 expenses will not be discounted since they occur at the beginning of the contract. However, the cost of Year 2 expenses will be discounted since we could have invested those funds and generated a return of 5%. Year 3 expenses will be discounted even more and so on. There are many ways you can access the tables and formulas to calculate Net Present Vale. Just use the search term “Net Present Value Calculator”. I have provided one such web site or you could access an article I wrote about Cloud ROI.
Since there are published tables and formulas that we can use, we can take the cash flow in each of the five years and discount them according to the formula, add them together and calculate a Net Present Value in today’s dollars. This then gives us a method by which we can calculate the cost of each alternative and compare it against other alternatives.
There are probably other methods by which these uneven cash flows can be turned into a total project cost for an online accounting software system, but the objective is still the same. You need to utilize some method by which the timing of an expense is taken into consideration.
As you are making these calculations, please make sure you take into consideration all associated expenses and cost savings such as the cost of IT personnel, system maintenance support, network costs, implementation, data conversion and customization. In some cases (e.g. implementation) you might have costs with any alternative, but they might not be the same.
Am I Going to be Forced into the Cloud?
Although our future seems to be in the Cloud, that’s not going to happen in the short term. Online accounting software will gradually pass on premise deployments. Vendors who now publish on premise accounting / ERP applications will continue to do so for some time, but the choices will shrink over time. I would suggest that ten years or more might be a good planning horizon.
Vendors of installed software have far too much invested to precipitously drop their existing on premise applications and more importantly the revenue stream from their existing on premise clients. There are hundreds of thousands of users that are quite satisfied with their current on premise systems and see no compelling reason why they need to shift to online accounting software.
While demand for Cloud applications will continue to grow, it’s going to take some years for the Cloud to overtake on premise as the deployment option of choice.
There is no question that the Cloud will continue to grow rapidly. It’s an easy way to disburse computing resources and follow the maxim that firms need to concentrate on what they do well and leave non-core aspects of their business to other experts. While online accounting software will continue to evolve, we are not going to be forced to move to the Cloud, at least not in the next five years. I think we should look at online accounting software as an opportunity and decide for ourselves how and when we can utilize this new resource to our advantage.