In a comment to my survey post, Rod Drury, CEO Xero says:
In New Zealand and Australia we are seeing cloud accounting beginning to combine both client side and accountant side functionality. Up until now the incumbents have been logically structured as separate divisions selling each side. Client software to businesses and final accounts production and tax to the accountants.
The Accountant side products seem to be refreshing to heavy client server technologies and expensive re-licensing. Combined cloud solutions that do both sides on the same single ledger naturally disrupt the market by not needing to charge for the accountant side. Already this appears to be stalling revenue for the accountant divisions.
A further likely implication: If the cloud does combine both sides – which is compelling value to the accountant – does this change the entry point for SaaS accounting to require both sides. Is just doing the small business side enough without providing the accounting features?
He asks for my thoughts on this and it is worth surfacing this as a separate discussion.
There is a clear argument for a single provider to offer both solutions. The model already exists albeit in the manner Rod describes. Combining the two is not without problems. In a typical professional environment, practices will have established charts of accounts that reflect their portfolio needs across broad industry types. That’s particularly relevant for fixed asset reporting where for example farm stock is viewed as a quasi WIP/asset type (especially for tax purposes) or where construction industry WIP is based upon a variety of costing methods, depending on the type of construction. Then there is formatting for sole trader, partnership splits, limited companies both for full and exempt reporting purposes. The current professional systems allow for that flexibility in managing charts of accounts and reporting. The SaaS/cloud players haven’t figured that out – yet – though some are working on the problem. The real risk comes in the levels of complexity introduced by developing these accounting features. There is no real reason why a separation of ‘church and state’ is not possible but it will require some clever hiding of features in a single package for that to work out along with the need to shield users from the ability to change chart codes.
The incumbent players could do this themselves if they had the will to do so. To date, this type of application has been considered premium because it represents the tools with which the professional plies his trade although prices have trended down over time. Moving it to the cloud emphasises the commodity aspect. You could argue that a cloud shift represents a modernisation and therefore premium status remains. The counter argument is that most professionals are office based and can happily remain on older technology. I doubt that will work as a long term strategy for developers. Far more valuable will be the development of portals that provide insights into client activity, the ability to benchmark, filter, group and so on.
These are all requirements that lean more towards the world of analysis but that is where the initial value add comes. It is difficult to see how this can be done without moving to the cloud because keeping this type of application within the four walls of a practice is incredibly limiting and especially in the world of benchmarking. I would go further and argue there is a strong case for cross practice collaboration as a key weapon in pushing back on HMRC reviews. If you agree then the cloud is the only practical way to go.
That introduces new ways of looking at what applications might deliver. We have for example seen attempts to introduce social features into applications. Chatter inside Salesforce.com is one example. FinancialForce.com introduced ‘chatter boxes‘ based around Salesforce.com’s technology. NetSuite is integrating Yammer. The SME players have yet to make any move but they would do well to learn from the experience of their larger cousins. Which by the way have not really worked as a revenue generator. I believe that’s because the way it has been (mostly) integrated doesn’t work as well as the pioneers in this space thought it might. The profession is different and there are ways in which these communications technologies could work extremely well.
But that’s all in the future. Right now, the sample I took is giving a clear and strong message – get me to accounts production as fast as possible. That leaves Rod’s last comment somewhat irrelevant.