Cloud computing: Why now?
The reality is an increasing number of companies no longer have any accounting software on their servers. No, they haven’t returned to notebook ledgers and adding machines. The trend in financial information systems is the growing migration to web-hosted accounting software. With the software as a service (SaaS) model, there is no software hosted on premise. Instead, the SaaS provider hosts the software on a contract basis. Access to your financial tools and information is then delivered via the public internet.
Software as a service solutions transform financial software from a licensed, in-house product to a leased service. Since companies no longer own the software, they don’t buy it either. Rather than making a capital expenditure, payments are spread over time. As companies look to reduce overhead costs, while extending functionality to distributed workforces, SaaS is becoming a popular option. The increased popularity of SaaS is also the result of some larger technological trends. Confidence in the public internet has never been higher. Broadband access is ubiquitous. Web services have become commonplace. For the average user, banking, shopping, and conducting business on the internet is second nature. The software industry has responded to these changes and is increasingly making software available on a cloud basis.
Customer appetite for the cloud is growing too. Every year we talk to thousands of companies looking for accounting and business management software. In 2010, 10% of the buyers we spoke to indicated they “preferred” to have their software hosted externally, off-premise. In 2013, this percentage rose to 28%.
Evaluating the alternatives
While the popularity of SaaS solutions is growing, even early adopters of web-hosted solutions typically still maintain a mixed software environment, utilizing web-hosted software for some applications and network-based solutions for others. Though SaaS solutions are more popular than ever, there are still more network-based accounting software options on the market. The Aberdeen Group recently reported (free registration required) that 60% of ERP solutions are still hosted on site. Both cloud and on-premise approaches offer unique advantages. All things considered, it’s not a question of one approach being better than the other, but a question of which one is right for you.
The security debate
Experts are somewhat divided on the issue as to whether network-based or hosted solutions offer the best security. As the cloud computing model has matured and has been deployed in many Fortune 500 companies (Geekwire.com reported that 50% of the Fortune 500 uses Microsoft’s Azure cloud platform), many companies have set aside security concerns to embrace advantages of the platform. Proponents of software as a service point to the fact that web-hosted software is typically hosted from heavily secured data centers. Highly engineered data centers can offer increased physical and logical security beyond what individual firms may be able to afford. The presence of service level agreements also usually specifies specific financial penalties for security compromises under the SaaS model. Companies hosting their own software may not be able to similarly transfer these financial risks to a 3rd party. Additionally, organizations like the Cloud Security Alliance have been doing work to establish and publicize fundamental security principals and stardards to cloud developers and providers. Bruce Guptill, Senior Vice President and Head of Research at Saugatuck Technology, an IT consulting firm, summarized the thoughts of many experts when he noted: “The growing prevalence of cloud IT use, including communication and interaction throughout multiple ‘Internets of things,’ can deliver vastly improved security that reduces the risk of data loss and system breaches by improving the ability to secure, monitor, and manage devices and software.” (“Security Concerns: How Cloud Will Protect “The Internet of Things”)
On the other hand, hosted software does rely on information passing through the public internet, where it may be more prone to security attacks. In the same publication where Saugutck Technology lauded the capabilities of the cloud to improve security, they also presented research indicating that “data security / privacy concerns” still represent the primary concerns for cloud “acquisition and use” among IT and business leaders.
The question of which approach offers the best value is also a matter of debate.
Outsourcing the hosting of core financial applications eliminates a number of direct overhead costs. Dedicated physical resources such as servers are not required. As the responsibility for maintaining and updating the software is shifted to a 3rd party, there are also fewer human resource demands. Reducing the need for support staff can provide savings in salaries, health care, liabilities, and training.
Proponents of network-based solutions point out, however, that an SaaS solution doesn’t technically eliminate the costs of hardware. The argument is that SaaS options simply bundle the costs associated with hardware in with the licensing cost for the software. A similar argument applies to the human resources needed to maintain software. At the end of the day, experts still need to be paid, whether the costs of these human resources are bundled into the leased SaaS price or are part of a company’s payroll.
Many of the cost advantages associated with SaaS have to do with economies of scale. If your organization is a large company with significant human and physical assets in place already, you may not see the same impact from SaaS as a start-up who doesn’t need to hire staff or purchase servers because of SaaS adoption. On the other hand, if you are able to eliminate the operational costs of a data center from your operating budget, that may represent a significant cost advantage, no matter the size of your organization.
There is no easy answer to the question of whether network-based solutions or SaaS options provide the lowest costs. Ultimately, many of the same financial analysis techniques needed to compare traditional approaches to software will apply to making the decision about whether to select web-hosted software. For an interesting exploration of hypothetical costs related to different deployment options, check out the article, “ERP Software Cost Comparison” by Doug Johnson from Acumatica (a company which offers on-premise, hosted, and fully SaaS deployment options) at ERPCloudNews.com.
Spreading out costs
An important element of the cost consideration when looking at on-premise versus SaaS options is considering not only the question of how much the software will cost, but when payment is required. One of the most attractive aspects of the SaaS model to many buyers is the ability to pay for software over time. Instead of making an investment of 5, 50, or 500 thousand dollars upfront, companies can now access equivalent levels of functionality, transferring a majority of costs to a monthly bill. To simplify the math, rather than spending $50,000 outright, in some cases companies can make a $50,000 investment over the course of 5 years at under one thousand dollars a month.
The traditional approach for purchasing accounting software has been to make one lump sum payment for the capital expense. In a lot of cases the ability to pay for software over time isn’t seen as much of a benefit, if the capital to pay for software is in the bank. In fact, from an accounting perspective, many companies prefer to pay up front. Also, it’s worth noting that there are strategies for spreading the cost of a network based solution over time including leasing and financing.
Access for distributed workforces
Providing uniform access to technology for workers operating out of multiple locations has always been a challenge. The challenge of remote users has never been more more of an issue than right now, as a growing portion of employees work from home (16 million according to GlobalWorkPlaceAnalytics.com). The SaaS model offers a solution to this difficult problem. With web-hosted accounting software, all that’s needed to access the software is an internet connection, a web browser, and the proper authentication credentials.
SaaS offers a simple approach to extending functionality to remote staff, but it isn’t the only approach available. There are a variety of remote connectivity options available to companies that allow for remote staff to access software hosted within the network. Examples of remote access technologies include: VPN’s, Windows Remote Desktop, and Citrix Go to My PC.
For most companies, the software needs of today may not be exactly the same as the needs of tomorrow. Software as a service is well-adapted to this reality. SaaS enables applications and features on demand. The ability to add AND remove functionality, only paying for what is being used, makes SaaS a compelling option for the evolving organization. SaaS is also inherently scalable. Adding users does not require any client side software implementation. Changes to user counts can be made as required, allowing licensing decisions to be based on the needs of today, rather than guesses about the future.
While the SaaS model offers some unique advantages in terms of system scalability, so does the network based approach. By owning your own software and having it located in house, it may be easier to customize the software without relying on an intermediary. Additionally, many companies often look to augment accounting software with add-on modules. If the SaaS provider is not familiar with the other software, it may not be possible to create the necessary integration.