Cloud reality check: Will firms pass the MTD test?
The latest figures from software vendors and AccountingWEB all point to the inexorable rise of cloud accounting. Drawing on these sources and a recent BlueHub survey, Richard Sergeant looks below the surface to find out how the great transition is playing out within UK practices.
With Xero, Intuit, Sage and FreeAgent all talking up impressive subscriber growth figures in the run-up to the launch of MTD for VAT, endorsed by AccountingWEB’s analysis of the MTD effect, BlueHub’s Matt Flanagan set out to test how firms were thinking about their new cloud technology.
As a specialist app integrator, BlueHub works with firms that are using cloud accounting and the associated apps, so the point of its research was to take a temperature test of where those firms are now and how they see things developing in the future.
Service delivery is the priority
Of the 160 UK firms (across a spectrum of sizes) surveyed, 44% identified cloud accounting as the “primary software tool the firm runs on”. This was just ahead of practice management, which 40% of firms put in the top slot. Another 14% prioritised accounts production software and 2% chose tax.
More than twice the number of firms participating in AccountingWEB’s awards and software surveys use cloud accounting compared to practice management software, so the BlueHub survey result highlights a possible shift in perceptions within more tech-focused practices.
System integration emerged as a major issue for cloud-focused practitioners, across both client-facing and internal systems. From the top-down, the most pressing priorities for investment and integration were:
- Data entry, receipt capture and payments (87%)
- Insight and forecasting tools (72%)
- Compliance tools (51%)
- Practice management and CRM (51%).
“Accountants can be quite inward-looking, so you might assume practice management would come out higher than cloud accounting. Integrations to the pre-accounting or financial control processes are where there is most crossover with the delivery of service,” said Flanagan. “If you look at these headline results, it suggests that the priority is geared to what impacts clients over efficiency for the firm. It’s an intriguing hint that the client experience is becoming more prevalent.”
The cloud accounting MTD trap
Flanagan thinks that while MTD has undoubtedly encouraged firms to steer clients into the cloud, many accountants have overlooked the deeper implications and potential gains in their drive to attain the compliance goal.
“My concern is that clients are being slapped on cloud because of MTD, but there is little time spent on changing the way the financial processes are working. So users are gaining new software but not the full advantages,” Flanagan said.
With regulation creating more complications for business, some practitioners are grasping the opportunity to do more of that work for their clients.
“We’re converting a lot of new clients to the cloud, but have no desire to force clients to do something they’re not comfortable with. Many older, more resistant clients that we have converted to the cloud generally don’t do much of the data entry. We do most of it,” said Robert Stell of Bradbury Stell.
For Holden Associates director Jason Holden, the worst-case scenario is that cloud accounting systems are being used as nothing more than glorified bridging software: a way to file the VAT numbers without gaining the additional advertised benefits.
“I would venture for many, behaviour and process have not changed and cloud bookkeeping software is acting as bridging software,” said Holden.
This short-sighted implementation path opens the risk of exposing firms to unhappy clients, who have to go through the pain of adopting new software that doesn’t deliver any gains. But in Holden's wider view, “cloud software is driving positive change and I don’t just mean clients keeping better records. I am referring to the next logical steps – like the online banking/accounting route that Countingup and the like are taking now. This is where the game changes and processes and behaviour will follow.”
Refining the cloud commercial model
In that context, it comes as no surprise that cost was one of the biggest hurdles to cloud implementation, mentioned by 56% of the survey respondents. However, Flanagan suggested another dynamic might be at play than the usual sensitivity to price.
“The apps and vendors are great at delivering the training and supporting the sharing of knowledge, and firms are doing a good job in getting the core components and functions. But what we don’t see yet is real confidence in the model and the commercials,” he said.
In other words, firms are getting the education, but need to take the next step by figuring out how they and their clients get returns on their investment – and ensuring they charge clients appropriately.
Calculating the returns on investment are not straightforward, especially as the layers of apps and integrations grow, Flanagan acknowledged. But whether it’s putting in place a quoting-onboarding-billing tool such as Practice Ignition or churning through annual accounts from cloud trial balances, accountants need to factor in the underlying time costs.
“If you look at the accounts production process, a lot of preparers are stuck in the data. If you automate, you’ll get gains further down the line, but it’s hard to quantify because that’s not tangible.”
His advice to firms is to ask themselves: “‘What is the service that clients are actually buying?’ so cost becomes bound up with the whole value conversation.”
Firm-side efficiencies are yet to come
Focusing on client needs is a good priority to have, but it does leave some practitioners wondering when they’ll be able to quantify the benefits of cloud accounting for their own firms.
“The market has yet to come up with cloud compliance solutions that everyone is happy with. There is huge potential, but no one has cracked it yet,” said Flanagan.
Cloud practice software including Capium, Taxfiler, Sage and (among larger firms) Wolters Kluwer are heading in that direction, but among the wider pools of small business users, questions are still be asked whether Xero Tax will be complete enough and whether Intuit (which has a track record in US and Canadian tax software) can develop self assessment and accounts production tools that will support businesses using other bookkeeping systems.
The acid test
The first big wave of MTD for VAT returns in early August will set off a barrage of messages from vendors and HMRC on how things have gone.
But based on the results of his survey, BlueHub’s Matt Flanagan is looking longer term. In his view, the value of cloud is likely to be measured by the relative success of VAT return filings rather than by how practices reap the potential fee and client growth.
“First and foremost, cloud accounting and integrated client-side tools enable a better service experience,” he said.
With the right processes and infrastructure in place, efficient cloud practices should be able to scale up their operations as MTD extends beyond VAT to incorporate income tax and corporation tax in the 2020s.