Heads in the cloud
28 Jun 10
Rachel Fielding rounds up the latest developments in accounting software for organisations large and small, including a look at the rise of cloud computing and the step up to iXBRL.
by Rachel Fielding
Today’s feature-rich accounting software packages are far more than glorified adding machines; they allow businesses to create detailed reports, handle broader business operations, access accounting functionality on the move, and perform a host of other essential key tasks, so the suppliers say, to keep a business on the straight and narrow.
But sorting the wheat from the chaff is no mean feat, as accounting software providers promise no end of killer functionality to secure a deal. The question is, what are the key trends that are driving changes in accounting software right now and in the foreseeable future? And of those, which should be significant factors in your – or your clients’ – purchasing decision. And which are little more than hyped-up buzzwords that have little to offer in the way of business benefits?
Here, we look at some of the factors that could help you decide.
Cloud computing
Of all the new technologies being offered to business users, Cloud Computing is the one that far and away dominates discussions. The Cloud frenzy led IT analyst Gartner to dub it “the biggest buzz phrase of 2008, [but] little understood until 2009.” But just what is it and how does it link to accounting applications?
At its most basic, Cloud computing is the ability to use software and data on the internet – or “the Cloud”, to put it another way – instead of having it residing permanently on a hard drive or server. In practical terms, it allows businesses of all size to tap into a growing swell of business applications residing in far-off computer servers in exchange for “pay as you use” monthly fees.
“Software-as-a-service” (SaaS), has long been available to big companies. Now that computing power has reduced significantly and with near ubiquitous high speed Internet, the race is on to deliver business applications via the online delivery model to companies at the lower end of the scale.
Despite the hype, interest in Cloud computing and SaaS is not yet proving to be a nail in the coffin for traditional computer software. To date, Cloud has failed to translate into huge customer numbers for online accounting applications in the UK, as concerns about security, loss of control and reliability prevent customers taking the massive leap of faith.
“Online accounting has been going for 10 years, but it hasn’t really taken off,” says veteran business software analyst Dennis Keeling. “Accountants don’t like losing control of their systems.”
However, Keeling is also keen to point out that he doesn’t think the loss of control argument is a justifiable concern. “I think it is inevitable that Cloud computing will take off.”
One of the major benefits of Cloud is that, for a modest fee, suppliers assume the burden of keeping programs updated, secure and readily accessible, allowing customers to (if you’ll pardon the cliché) do more with less.
Although the pricing structure of Cloud represents a huge change for companies and can quickly escalate with use, the potential cost savings are, by all accounts, not to be sniffed at. However, David Turner, marketing director of Unit4, the parent company that includes Cloud-based offering FinancialForce.com admits the platform isn’t suitable for everyone. He says: “If you were starting from scratch, it completely makes sense. But if you’re an established SME [small to medium-sized entity] with an infrastructure in place, it won’t save you money.”
Ian Lucey, founder and CEO of Dublin-based Lucey Technology, a provider of Cloud-based services for the enterprise market, is confident that the cost benefits of Cloud computing will soon win apprehensive, risk-averse users over. Nor is he alone in believing that the security concerns have been blown out of proportion. “The vast majority of data isn’t much use to hackers. I think it’s important to keep it in perspective.
“You also have to realise that your own staff are your biggest security weakness.”
Nonetheless, Lucey urges businesses to quiz suppliers on their security; in particular, you need to check that the data sent over the wires is encrypted (128 or 256 bit encryption.) “And find out where their servers are based. They have to be in the EU for data protection reasons.”
Although Cloud computing offers the theory of being able to chop and change suppliers at the drop of a hat, the reality is that you’re going to want the relationship to work for the long term. However, it’s essential to establish who owns the data and what happens to it if your supplier goes out of business. “Always ask how easy it is for you to get your data out again,” Lucey stresses.
Julian Shaw, head of marketing with Arithmo Online Accounting Solutions, says: “Cloud accounting applications will perform all the functions as ‘on-premise’ apps, but with additional benefits. There is no software to install, as the applications work through a browser; the latest version is rolled out to all clients instantly; security is very high; backups are automatic and safeguard data well, allowing for excellent disaster recovery procedures (Arithmo’s are half-hourly).
“Generally, as the apps work through a browser, they work on almost all computers, including Mac and PC.”
Bryan Richter, country manager of accounting software provider Mamut UK, says Cloud computing represents the biggest revolution since client server technology, but also admits the concept is overhyped. “The real benefit is availability of infinite computing resource that you use and pay for as you need it. It’s still to be proven what that means for the SME.”
Like Lucey, Richter believes that “lock in” – the extent to which users may find it difficult to change to a new provider – is an issue that users need to be aware of. Mamut is a member of software developers’ association BASDA, which recently put together a voluntary code of standards for members offering Cloud-based applications to clients. Richter says: “It’s about helping users make decisions about which model is best for them and giving them some security in the choices they make.”
The UK market leader in accounting software, Sage, withdrew Sage Live, its Cloud-based accounting application, early last year over security issues. Independent service provider Online50, however, has been hosting the Sage 50 accounting package as a Cloud application since 2003, enabling a firm and its clients to share data over the Internet.
Rob Lambden, chief executive of Online50, recommends combining this with The Ambition Elastic Computing Platform (ECP), which means you can buy computing capacity on a monthly subscription for as long or as short a time as it is needed, and run a variety of different applications. Lambden says: “Cloud computing provides an opportunity to integrate your own back office functions with client-facing systems securely and easily.”
Ken McManus, assistant director in the members’ services department at ICAS, sees some strong benefits of Cloud computing – particularly the ability for advisers and their SME clients to work collaboratively using the same version of the software.
But he also has security concerns.
“Software companies are being a bit disingenuous about the security of their services.
“It’s an https upload on the one side and an https download on the other, but when the data is sitting there in the Cloud unencrypted, there are confidentiality issues and it’s a huge risk,” McManus says.
iXBRL
You’d be forgiven for not having heard of iXBRL, but these five letters are proving something of a nightmare for the accounts production software industry. For end users, they could quite simply determine whether or not you are able to file your tax returns next year.
HMRC is introducing a new rule, whereby corporation tax filings after 1 April 2011 will need to be submitted online using iXBRL (in-line eXtensible Business Reporting Language), a computer tagging format that allows easier comparability of financial information. The problem is that most software vendors have yet to produce all the technology needed to meet the taxman’s requirements (see page 26 for more on this).
“The impact on the industry is enormous,” says Shez Hamill, sales manager UK and Ireland at Caseware. “There are still certain sections of the accounting industry that haven’t woken up to the fact that it’s happening. I’m concerned that at the smaller end of the market, companies haven’t really grasped the ramifications of iXBRL.”
It’s a concern shared by Phill Robinson, managing director of IRIS. “There is a general concern that not all packages will meet that deadline and it is probable that most SMEs have no idea about what the implications are – that they won’t be able to file their accounts.”
A survey by information and software provider CCH found that while around a third (31 per cent) of accountancy firms submit corporation tax returns for third parties, only 8 per cent have decided how they will convert this accounts information to iXBRL format before submitting it electronically to HMRC. More than half of them receive information from their clients in paper format.
CCH says nearly three-quarters of the firms could be exposed over any errors because their engagement letters do not cover this issue.
Andrew Ross, head of business development with tax software specialists BTC, says: “Agents that are already filing online should be able to adapt easily enough – provided they can readily produce final accounts in iXBRL. Those who currently file on paper will have a much steeper learning curve.
He adds: “HMRC are already saying that there will be a “soft landing” this year and those who are not ready will not be penalised. This being the case, one could argue that they are actually trying to enforce too much change in one go, with a move to both compulsory online filing and this new technology.”
Green IT and environmental functionality
With the IT industry widely acknowledged as generating the same level of carbon emissions as the aviation industry, estimated at two per cent of the global total for man-made carbon emissions, it was only a matter of time (let alone social conscience) before technology suppliers looked to address the issue head-on. For accounting software vendors, the green agenda is certainly shaping the products on the market.
Now accounting software providers are starting to recognise that linking accurate and timely carbon management data into financial accounting, forecasting and reporting could not only give customers the ability to better manage their emissions, but also tackle head-on the costs and the cash flow implications of carbon.
Legal obligations to report and reduce carbon consumption have, to date, been limited to the bigger end of the corporate market, but responsible businesses of all sizes stand to benefit from integrated sustainability and online accounting. To that aim, online financial software supplier FinancialForce.com has teamed up with a carbon management business, CloudApps, to offer an integrated accounting and environmental package. It’s a trend that others are looking to follow.
David Turner, marketing director of FinancialForce.com parent company Unit4, says: “This isn’t just about hugging trees. Companies need to worry less about the accuracy of their carbon reporting and instead focus on understanding the trends in their business and put in place processes to deal with them. It’s about focusing on the quick wins to make progress and reap business benefits, not just cutting energy bills but being a supplier of choice because you have a lower carbon footprint.”
BASDA is preparing to launch Green XML, a tagging taxonomy to allow companies to better report across a wide range of sustainability indicators. “It will allow them to look at the life of a product and, for example, put a carbon value on it,” explains Jairo Rojas, director general at BASDA.
To date, 35 accounting software suppliers, including Sage, Access, SAP and Microsoft have signed up to the standard. “Companies can’t do anything about reducing their carbon footprint until they start to measure it, and this is a step in the right direction,” Rojas says.
BASDA is also in discussion with Trucost with a view to using its environmental statistical models to give businesses an indication of the cost impact of their carbon footprint.
Mobile functionality/iPhone and BlackBerry
There’s an app for that, but the question is do you really need it? With the BlackBerry, iPhone and their competitors taking the business world by storm, it was only a matter of time before the accounting software industry looked for an excuse to take remote working a step further.
Already several providers allow users to access their accounting software not just via the web, but also using the iPhone and BlackBerry. However the premise of being able to “analyse, organise and take action on vital business information,” isn’t enough to convince everyone.
“Accessing customer information when you’re on the road, for example to see your financial position with them or details about outstanding orders, is relevant,” says Mamut’s Richter, “but I can’t see too many people having to do journal entries while they’re on the move.”
Breadth and depth of offerings
The advent of online accounting services is more than just a technology revolution, it’s also having a dramatic impact on the relationship between SMEs and their accountants.
Cloud computing is one technology area that is making it easier for accountants and their clients to share a real-time view of their business to facilitate an ongoing dialogue about more than compliance, but also broader business advice. IRIS launched its own Cloud-based offering for the practice market, IRIS OpenBooks, in May. “Within three years I’d expect 50 per cent of our 14,000 customers to use it,” says Phill Robinson. “It redefines the relationship between accountants and their clients to offer higher-value business advice.”
IRIS OpenBooks is based on online accounting product FreeAgent (thanks to a tie up with the latter, an independent developer) launched in March. Ed Molyneux, CEO of FreeAgent said: “Having a single source of data allows you to do things like exception reporting and that creates a different dynamic for the relationship between accountant and client. It will become uncompetitive for accountants not to offer these sorts of value-add services.”
Mamut’s Richter says: “Accounting software is a critical piece of software for any business. Increasingly it will be seen as an integral part of a business solution so it will need to integrate with stock control, the website, customer systems, etc.”
It’s great, in theory. In practice, the reality of integrating disparate applications continues to provide challenges.
“The ability to integrate to other systems easily, either from one company or multiple suppliers is key,” says Unit4’s David Turner. “All the suppliers say their systems are flexible – and they are when you set them up. The last thing an SME wants is to have to pay for consultants to subsequently make changes for them.”
“At the SME level of the market, a lot of systems have the same standard functionality and there’s little to choose between them,” says Stephen Bain at accountancy firm Henderson Loggie. “Vendors are now pushing business reporting and offering dashboards to ‘add value’ to customers but I think there’s still a gap between what the industry is trying to push and what the users want.”
“It’s essential for users to think about the wider impact of using technology, including security and the people and cultural issues,” says ICAS’s Ken McManus. “Technology vendors are very good at selling you solutions for problems you didn’t know you had.”
Survey - It's virtually started
Financial and business systems provider Castle Computer Services surveyed Scottish-based senior IT professionals in May this year, to see to what extent business users have taken to ideas such as “virtualisation” (an approach that makes it possible to run multiple applications on the same hardware, creating several “virtual machines” running on the same server, either based in-house or remotely sited) and Cloud computing (Internet-based applications – see left).
Based on the survey responses, Castle expects to see a 78 per cent growth of Cloud computing in the next two years in the larger enterprise sector, while in the SME (small to medium-sized entities) sector (those with 51-250 employees), adoption looks set to increase from 13 per cent to 18 per cent.
Overall, 27.4 per cent of respondents had no server virtualisation, 61.2 per cent had no desktop virtualisation and 80.6 per cent no Cloud hosted infrastructure. And, 72 per cent of organisations expect to have server virtualisation, with disaster recovery facilities, in two years’ time.
The greatest growth in uptake of server virtualisation in the next two years will come from small businesses with 50 or fewer employees, which expect to see a 50 per cent growth in up-take. “Cost savings” and “business continuity” were given as the main reasons to choose server virtualisation, while “ease of management”, “cost savings” and “better service for users”.
For desktop virtualisation, Castle predicts a 57 per cent increase in the next two years among SMEs with 51-250 employees, and a 78 per cent increase in uptake of Cloud computing by Enterprise organisations with more than 251 employees.
Source: Virtualisation Survey 2010, Castle Computer Services
Due diligence is essential in choice of service provider
Choosing a package
Whichever accounting package you opt for, you’ll want your relationship to be for the long term.
Or, at least, be in a position to decide when you pull the plug, rather than having the rug pulled from under your feet because the software supplier went out of business or was acquired by a rival vendor.
Consolidation in the accounting software market continues apace, with the recession responsible for significant casualties across the sector. “There were 2,000 business and accounting systems in the UK two years ago and there are less than 600 today. And of those, only 200 are in full development mode,” says Dennis Keeling.
While it is impossible to guarantee the long-term viability of a supplier, what you can do is spot the signs of a product that’s in terminal decline, says Keeling: “Look at when the last upgrade took place and try to pin down the vendor on what the future holds in terms of investment in the software and product development.”
The principles that you use when selecting any supplier should not be ignored, warns Stephen Bain, a director of corporate finance and consultancy at Edinburgh-based firm Henderson Loggie. “Look at their credit rating and get copies of their accounts. It’s particularly important if you’re going for a product that is going to be customised.”
“It used to be that you changed your accounting system every five years to take advantage of the latest technology. Then companies realised they weren’t getting much added value from switching suppliers,” explains Jairo Rojas, director general of BASDA.
“Cloud computing is giving people the opportunity to make shorter-term decisions, so vendors are having to ask, what are we going to do with the technology to make sure we keep customers?”
Now that’s surely good news for small businesses.