Mid-market shies away from cloud

Autumnal serenity - all quiet in the mid-market
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The market for enterprise financial management suites is stagnant, according to Garnter. John Stokdyk delves into the Software Excellence Awards database to find out why.

“The market for core financial management suites has been static for many years,” declared industry analyst Gartner in its June Magic Quadrant report for the sector.

Having identified this inertia, Gartner has also seen the emergence over the past 12-18 months of “post modern ERP” applications that are supplanting the monolithic, suite-centric on-premise ERP solutions. Instead, looser networks of cloud financials applications are linking to online HR and CRM [customer relationship management] systems to achieve similar functionality.

Over the past year or so, AccountingWEB has reported on promising developments in this part of the software market. But when we examined the results of our 2017 Software Excellence Awards (SEA17) survey, there was solid evidence to support Gartner’s stagnation analysis. The overall proportion of mid-market and enterprise participants in our survey fell from 14% of the accounting software population in 2013 to 5% in 2017.

Unlike Gartner, we have not seen “post modern” developers such as FinancialForce.com, NetSuite or Sage Live stepping in to fill the gaps left by declining mid-market desktop users. These cloud suppliers barely made a dent in our 2017 survey. Instead, the UK mid-range and enterprise accounting software market that AccountingWEB sees is becoming increasingly fragmented between small camps, typically 3-4% of the total, of Sage 50, Pegasus, Access, Exchequer and other client/server products.

A key difference is that in Gartnerworld, “large” equates to companies turning over $50m up to $5bn. The typical organisations in our mid-market and enterprise survey sample turned over just under £3.5m a year (less than $5m).

The evolution of cloud add-on ecosystems around Xero, QuickBooks and Sage could be having an impact. With bundles of add-on applications beginning to challenge integrated ERP suites with comparable functionality at considerably lower fees, the post modern model is becoming a viable alternative at the lower end of the market – even if risk-averse finance managers aren’t quite ready to embrace them.

The recent decision by Exact to retreat from the UK market provides a commentary on the current stagnation. The Dutch developer spent 2-3 years and large sums to establish a market presence in the UK, primarily focusing on industry-specific solutions for manufacturing, distribution/warehousing and professional services.

Exact has been getting good feedback from mid-size accounting firms on the lookout for a “next step up” accounting engine to cater for growing clients with complex needs. Exact did gain some traction in AccountingWEB’s 2017 Software Excellence survey.  Along with Sage 50 Accounts (a desktop product), Exact Online was one of the few accounting applications to be represented in both the small company and mid-market/enterprise accounting software categories.

But after putting in all that effort to break into the UK, Exact found big camps of Xero and Sage 50 users acting as barriers to the small business market. Instead of trying to compete with them by appealing directly to practitioners as an SME sales channel, Exact is retreating back to its core region in the Netherlands and northern Europe, and will work with resellers and larger accounting practices to carry forward its strategy to develop the UK mid-market.

Forecasting and analytics growing slowly

The forecasting, planning and analysis market is subject to some of the same forces, but is at least showing signs of life, with steady increases in usage – up from 3.6% of software survey respondents in 2013 to 8.5% in 2017.

The take-up on the business side of the profession has been desultory since 2013, but on the practice side we have tracked a steady rise. Pactitioners accounted for more than half the FP&A user population in our 2017 SEA survey. The proportion of Practice Excellence Award entrants who indicated they use these tools rose from 11% last year to 16% in 2017.

New wave cloud forecasting and analysis products are leading this movement and appear to be prospering at the expense of the grand old names of the enterprise market. The “ecosystem” players – including SEA17 category winner Float, Futrli, Fathom and Spotlight Reporting - all gained higher NPS ratings and shares of the Software Excellence population than Cognos, Business Objects or Hyperion. 

To understand the challenges faced by suppliers in this market, it may be worth a short history lesson. Ten years ago, the enterprise software market was going through a period of post-consolidation stagnation after the “business process re-engineering” boom of the 1990s. The millennium bug scare sold a lot of new accounting software in 1998-9, but induced a much higher level of cynicism and suspicion among customers.

With little action in the core accounting market, in 2007 the big developers SAP, IBM and Oracle saw the opportunity for new growth in the analytic applications market and each swooped on a different business intelligence developer: Business Objects (SAP), Hyperion (Oracle) and Cognos (IBM).

Then came the global financial crisis, when most business customers were more interested in day-to-day survival than exploring new frontiers of corporate performance management. And it appears they still haven’t shaken off that mindset.

Are you a business accountant caught in the enterprise software slump? What’s holding you back from investing in new financial processes? Or do you have evidence that contradicts our gloomy analysis for this sector?

About John Stokdyk

AccountingWEB’s global editor has been with the site since 1999 and likes to spend his time studying accountants’ technology habits. When not nerding out, you can find him exploring obscure indie music and searching for the perfect organic sourdough loaf from his base in Brighton, UK.

Replies

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14th Dec 2017 10:28

The lack of mid-market cloud solutions is a frustration. Exact looked very promising and has bailed out just as mid-sized businesses were starting to look for an alternative when they outgrow Xero and QBO. It's a gap that someone should be looking at seriously - is this going to be where Sage regains market share?

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By Halex
to nigel
14th Dec 2017 11:03

Let's hope it's not Sage. Really could do with an alternative.

Forecasting is also another one where the I'm not sure that Futrli is the best fit.

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18th Dec 2017 09:42

If mid-market by this definition is c. £3.5m turnover, the business population thins out fairly rapidly at this level and enterprise-level applications need to be able to charge a lot for each licence to get a return.

I don't think client firms at this lower end will be able to justify the cost of a NetSuite / FinancialForce level of application as they are over-engineered for such requirements.

It's more likely that an lite-enterprise version of Quickbooks or Xero-style products (which I know is not currently on the cards) - eg having better user management, permissions, controls, etc. - could be the key to this segment.

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18th Dec 2017 09:35

Hi John, not sure how you arrive at some of your conclusions. Gartner very bullish about mid market postmodern ERP sector.

Along with NetSuite and FinancialForce we seem to be dong OK with over 2500 users in 34 countries accounting now for some £533 billion of business on the Aqilla platform.

Last year we logged 506k sessions, up 70% on the previous year. I'd hardly call that shying away.

Maybe people are just too busy to respond to surveys or something.

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19th Dec 2017 14:43

The reason the mid market is not being well served by Cloud Financial Management Software [FMS] comes down to functional complexity and the agility required by growing mid-market businesses.

The higher end FMS solutions carry big costs in terms of implementation, maintenance and licence costs, which are simply too scary for most fast growing mid-sized businesses and often have functionality that demands complex processes, engineered for the particular environment and requiring resources to run those processes.

The entry level systems are designed to be easy to use for early stage companies and simply don’t have the functionality required as businesses grow and get more complex. To serve small and micro businesses well, they need to concentrate on simplicity and therefore avoid complex processes around FX, consolidations, inventory, Project Costing, inter-company etc. This requires knowledge of these complex processes from a design perspective as well as a professional on-boarding service that has the right skills to implement them.

The existing mid-market solutions were built around the VAR model [Value Added Re-Sellers] that offered implementation, customisation and key account support, with VARs participating in upfront licence revenues. The mid-market has been slow to dismantle this network and adopt Cloud delivery and to re-engineer complex desktop software that often took hundreds of man years to develop. Mid market cloud solutions have therefore been confined to innovative companies that have invested in developing solutions with the domain-knowledge of the requirements for growing more complex businesses, that takes time to validate. They are therefore passionate about successful outcomes, and tend to get business through referenceability and word-of-mouth, rather than big marketing spend.

At AccountsIQ we have built a team with that domain knowledge, that is passionate about its technology with customer success as part of its DNA. Our Cloud FMS has been built over 10 years and is targeted specifically at organisations with turnover between €1-100m that have a requirement for multi-location, multi-currency, Consolidation, Inter-Company, Advanced group wide Reporting, Integration, Approval workflow, Project Costing/billing etc. What’s different about our customers and partners is a joint passion and collaboration to building a fantastic Cloud FMS that is agile enough to grow as they grow.

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03rd Jan 2018 15:45

Could the size of the marketplace have a bearing on all this?

Micro businesses make up almost 96% of the UK business marketplace as confirmed by the latest data from Parliament (published at the end of December).
5.445m micro businesses out of a total 5.695m

From a volume perspective suppliers have much more chance of recovering their development costs if they focus exclusively on this market rather than on larger businesses.

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09th May 2018 15:48

I agree Mark Lee about the size of the addressable market. However, as some of the other vendors who have posted above have confirmed, there are in reality a number of mid-tier providers who are achieving traction, and have some fantastically happy customers. At Xledger, we are enjoying a fantastic win rate as people see the value of automation within finance teams.

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