To get a sense of where we are in the cloud computing revolution, consider the latest financial results of New Zealand’s Xero Limited, which sells online accounting software for small businesses and their advisors.
In the year to March 2017, Xero reported net additions of 318,000 subscribers worldwide, up 44% from fiscal year 2016, to more than 1 million. In constant New Zealand dollars, subscription revenue grew 52% year-on-year to NZD$290 million.
What resonate with CFOs and accountants with regards to the cloud are mobility, ease of use, automatic updates, integration with other systems, and the ability to access and analyze financial and non-financial data
Then there’s behemoth Oracle. After a couple of years of falling earnings and sales, the 800-pound gorilla of on-premise solutions surprised the market last week by reporting a 15% increase in fourth-quarter net income to US$10.8 billion – helped mainly by a 58% surge in cloud revenues to US$1.36 billion.
Some two-thirds of Oracle’s cloud users are new, with the remaining third large on-premise customers shifting to the company’s cloud offering. Larry Ellison, Oracle’s founder and current chairman, concedes that existing on-premise users are moving to the cloud slowly.
But, he declares: “I believe that we will get all of our existing customers on-prem, roughly speaking, moving to our cloud infrastructure over time.”
Opex vs. capex
It seems that cloud computing for accounting and finance is reaching critical mass, as the smallest businesses to the largest conglomerates grow more confident about processing financial transactions and storing financial data on public cloud platforms using solutions like Xero’s and Oracle’s.
Cost is not the only impetus. Cloud vendors do talk about the advantages of no longer having to allocate large amounts upfront to pay for servers, data centers and IT support and maintenance staff, along with software licenses. On the cloud, such capex gets turned into opex.
But in the long run, the opex costs can turn out to be larger in comparison with capex, since opex is open-ended while the capex investment is a one-off that gets amortized and ends at some point (and in some jurisdictions, are eligible for tax concessions that are not always extended to opex).
Still, the idea of parceling out expenses over time and, in effect, outsourcing the purchase and maintenance of data centers and other infrastructure is appealing to many organizations.
“The principle is pay-as-you-go, and you pay by credit card,” says Matthew Li of accounting services and financial firm Nova Group in Hong Kong. “You don’t have to buy software that you don’t know how long you will use.” Subscription to Xero’s cloud accounting software starts at US$20 a month.
Beyond cost savings
What resonate with CFOs and accountants are mobility, ease of use, automatic updates, integration with other systems, and the ability to access and analyze financial and non-financial data.
When you use cloud software, says Paul Gardner, founder of accounting services provider Fresh Accounting in Hong Kong, “you can log in anytime as long as you have Internet coverage.” And you are not limited to a desktop in the office, but can work anywhere using a laptop, tablet or smartphone.
Providers of cloud-based services tout the ease with which the software is updated, similar to how Windows and Apple automatically update their operating systems. “You come back to the office on a Monday and we already had updated the software over the weekend for each and every subscriber,” says Zakir Ahmed, Vice President and General Manager, Asia, of cloud ERP company NetSuite, which has been acquired by Oracle.
That’s a big plus for finance teams that have to respond quickly to changes in the regulatory environment such as new tax rules. “For teams like finance, it becomes a big pain point if you have to do a lot of manual processes to meet the statutory local requirement,” says Sandeep Aggarwal, CFO of India, Asia Pacific and the Middle East at consulting multinational Aon Hewitt.
“In a cloud-based platform, the vendor itself looks at those changes and provides new releases and updates,” he continues. “You can check them in a test environment without impacting your live data. If those work, then you can take them on. So you are almost always up to date.”
“I am personally much more comfortable when data resides in Amazon Web Services protected by huge amounts of auditing and IT security investments . . . When was the last time [your server or desktop PC] had a virus scan or a security update?”
Cloud software is especially useful in places where the communications infrastructure is not mature. One logistics CFO in Manila notes that accessing on-premise systems can be slower than accessing cloud software because local connections are often congested. “The flow of data to and from the Philippines to Singapore and the US can be faster than from Manila to Davao [in the country’s south],” he says.
What about security?
But it is that connectivity that also raises worries about security. Data could potentially be accessed as it is sent and received over the public Internet. That is why cloud providers recommend that customers use VPN (virtual private networks) when accessing cloud accounting and finance software remotely, for example.
“Security was a big issue three or four years ago, but people are now becoming more comfortable,” asserts Alex Campbell, Managing Director, Asia, at Xero. “Think about the server or the desktop PC in your office that’s got all your data in it. When was the last time that had a virus scan or a security update?”
“I am personally much more comfortable when data resides in Amazon Web Services protected by huge amounts of auditing and IT security investments that we have made,” he says.
Xero’s founder and CEO Rod Drury is forthright about the security risks. “All the big data providers are being phished all the time,” he says. “What we’ve seen is that a chain is only as strong as its weakest link. An accountant or a small business owner may not know much about cybersecurity, so they may get socially phished and give out their credentials.”
“We’ve gone from assuming that we’re keeping baddies out of the gate,” he says. Instead, the approach is to embed controls inside the software. These include two-factor authentication (for example, plus a one-time password sent to the user’s registered phone number) and automatic alerts to administrators when a bank account is changed.
It seems to be working. “I can say to you that we have never had any instance of cyber hacking,” says NetSuite’s Ahmed. If there have been intrusions, the weak link is often at the user level. “The underlying platform is super secure,” insists Campbell. “What people are attacking is the user-level access to the system and that’s where we have put a huge amount of investment.”
It is the brave and stubborn CFO that insists on remaining on-premise when the competition is shifting to the cloud and reaping the benefits of agility, efficiency and productivity. But this does not mean that you should rush to the cloud just for the sake of being on the cloud.
Don’t lose sight of the ultimate reason for putting your financial and non-financial systems on the cloud: the ability to access and analyze data to make better forecasting, planning, pricing, marketing and other business decisions
CFO Innovation editors have discussed the issue of the cloud for accounting and finance in various forums, roundtables and interviews across the region. The on-the-ground experiences and advice of CFOs and other users include the following:
One size does not fit all. Cloud works for some companies, on-premise is better for others, or you can have a cloud/on-premise hybrid, says Francisco Castillo, Senior Vice President and CIO at Philippine water utility Maynilad Water Services. He was speaking at the 4th CFO Innovation Philippines Forum earlier this month.
There are many factors to consider, including total cost of ownership, regulatory issues (some governments do not allow data to be stored outside the country), the specialized nature of your business (cloud software do not allow much customization), and where you are in the technology refresh cycle (have you extracted all the value from your expensive on-premise investments?).
Track record of the cloud provider. Conduct due diligence not only on the vendor itself, but also on its outsourcing partners. Accounting and finance cloud software providers typically do not own or operate their own data centers, for example, so it is important to check where your data will reside and what platforms power the app. The leading partners include Amazon Web Services, IBM Cloud Computing and Microsoft Azure Solutions.
Integration with other systems. Will the accounting and finance cloud software be able to extract and share data from the ERP and other systems? Is it compatible with the e-commerce interface? Is it connected to your banking partners, supply chain, customers and other partners?
Cloud providers say they have connectors for integration, but make sure this is indeed the case. It is not a bad idea to speak to other CFOs that have worked with the same vendor and its partners on their experience.
Incumbents versus cloud-natives. There are two groups of accounting and finance software vendors on the cloud: on-premise incumbents that are switching over to the cloud as delivery platform, and cloud-natives that pride themselves on being born there.
The cloud-natives mock the incumbents for what they say are clumsy cloud versions of on-premise software that do not really work. Incumbents say their cloud products are streamlined counterparts of their on-premise software (they try to avoid cannibalization) that interface seamlessly with on-premise systems.
The takeaway: Do your homework. Some incumbents do a better job of cloud conversion than others (and are acquiring cloud-natives). Some cloud-natives write code for the web and the cloud better than their peers. This issue will disappear as cloud and on-premise standards converge, but that is still some time away.
The real prize. Don’t lose sight of the ultimate reason for putting your financial and non-financial systems on the cloud: the ability to access real-time and historical information, analyze the data and make better forecasting, planning, pricing, marketing and other business decisions.
The initial cost-savings, efficiencies and productivity gains are really just a nice bonus, compared with this grand prize.
About the Author
Cesar Bacani is Editor-in-Chief of CFO Innovation.