2018: A year is a long time in tech

A year of transition, consolidation and executive departures prompts John Stokdyk to investigate the underlying trends.

In the world of technology, accelerating changes have reduced industry planning horizons down to 3-5 years, so each 12-month period represents a significant epoch in its own right. On AccountingWEB, we usually don’t pay a lot of attention to executive changes since our working assumption is that what goes into the software is more important than what happens in the boardrooms.

But looking back at the 2018 headlines, it’s been hard to ignore the toll of executive departures. It’s almost like we’re watching one of those Agatha Christie plots that are so popular at this time of year: one by one, an unseen corporate hitman seems to have been working their way through the boardrooms of accountancy’s software houses.

Let’s play the role of armchair technology detective and pick through the clues and see what they tell us about where the industry is going.

A hard year for software CEOs

The departure of sitting CEOs and MDs from Xero, Sage, Intuit, Thomson Reuters and IRIS made 2018 a good year for executive headhunters but pushed suppliers beyond misfortune and carelessness into a twilight zone of uncertainty and fear. What could be the motivation for these changes and is there an underlying pattern to explain them?

Stephen Kelly swooped into Sage in 2014 straight from the top executive job in government – just as it was planning a major digital tax initiative. Kelly brought a bit of showbiz glamour and vision to the company and galvanized the troops by vowing that they would discover what it took to write software again and leapfrog ahead of the competition with products like Sage Live and the Pegg chatbot assistant.

There was a buzz about Sage for the first year or so of his reign. But then all the different initiatives seemed to slow down or be overtaken by newer, more exciting software developments.

The apex of Kelly’s regime – or perhaps his ultimate vanity project - was the Sage Summit in Chicago that drew 10,000 customers and observers to the aircraft hangar-sized McCormick exhibition centre in June 2016. The summit was deliberately set up to be the largest ever accounting software event and the cost ran to tens of millions of dollars, but aside from showing off how big and glitzy Sage could be, it left little lasting legacy in terms of product launches or strategic direction.

With product names and brands changing, Sage has slipped back in AccountingWEB’s software rankings just as Xero, QuickBooks and FreeAgent have enjoyed growth spurts on the back of Making Tax Digital. Sage reverted to its old acquire-to-grow habits by splashing out £654m on cloud ERP developer Intacct as 2017 year end neared.

“It hardly clarifies things,” commented a UK salesman who was responsible for selling Sage X3, Sage Live and Sage 200 – confirming that it wasn’t only customers who were becoming confused.

In May 2018, on the back of disappointing interim figures, UK and Ireland MD Alan Laing and 30 other mid-level execs were canned in a bid to address “poor execution”. Four months later Kelly was on his way out of the door too.

Former FD Steve Hare, who landed the full-time Sage CEO job after taking it on an interim basis, said that the software house had been trying to do “a bit too much all at the same time”. Seen as a safe, if uninspiring, pair of hands Hare has spoken of refocusing on delivering the company’s cloud transition. Advice to investors in this year’s accounts warned: “As the business accelerates the pace of transition towards subscription, the organic revenue growth rate may decrease in the short-term,” read the statement.

More recently Andrew Flanagan left his job as managing director for tax and accounting at Thomson Reuters UK. IRIS CEO Sion Lewis was not far behind as he parted company with the private equity-owned software group in December.

Since Digita became part of Thomson Reuters, longstanding customers bemoaned the way it turned its back on smaller practitioners as it chased business among larger firms. Then it experienced a messy transition to new UK GAAP just as cloud rivals started to make their presence felt in the tax and accounting marketplace.

IRIS, meanwhile, is well and truly entrenched in the lucrative accountancy mid-market but looked in danger of becoming trapped there as smaller, more nimble cloud rivals nibbled at its market share.

Lewis responded with a surprise acquisition of his own by buying Taxfiler, the award-winning accounts prep and tax suite that was making the biggest dent on the marketplace.

Elsewhere, Xero founder Rod Drury has been encouraged to hand over the reins and play a more advisory role as chairman, while charismatic Intuit CEO Brad Smith followed the same path, handing over to more thoughtful, understated successor Sasan Goodarzi.

Aside from a few controversial acquisitions, there are few obvious links between all these executive transitions. Perhaps we should take a look at the deeper forces at play within our software drama.

The MTD effect

The user feedback coming out of our annual awards and software reviews has highlighted the “MTD effect” that stimulated cloud accounting adoption within the profession – which has more than doubled since the original 2015 Budget announcement.

Over the 18 months since Treasury minister Mel Stride announced the switch in direction from MTD for income tax to VAT, the proportion of respondents in our survey using cloud accounting, practice management and expense capture tools has dipped, with the latter down by a third from 21% in 2017 to 14% this year. The percentages of entrants to our Accounting Excellence Awards using these tools look like this:

Subsequent analysis of the accounts production, tax and practice software markets tell that while there’s been an MTD for VAT dip, lower cost cloud tools are beginning to infiltrate the practice market. The effect has seen Thomson Reuters, Wolters Kluwer, Sage and IRIS all drop back in this year’s survey as small practices started to embrace lower-cost cloud alternatives for their internal systems.

This is known in the industry as “disruption” and senior executives who fail to turn back the tide are often sent packing when it happens.

As it happens, the finance side of the profession did not succumb to the 2018 MTD dip, and cloud accounting, forecasting and expense management tools all continued to rise this year.

A decade on from the financial crisis, business accountants are beginning to move towards the cloud in what looks to be a wider culture change to a more collaborative and, dare we say it, strategic approach.

GDPR and data security

The biggest tech story of the year spawned several other mysteries. As we asked in our 2018 podcast retrospective, does anyone remember GDPR?

As the 25 May deadline for compliance approached, accountants trawled AccountingWEB for any insights they could get about the new data regime. After that date, in a classic example of the compliance panic scenario, traffic figures dropped off a cliff. Can we, therefore, assume that all our readers are fully compliant?

Probably not, but in truth, the Information Commissioner’s Office (ICO) that is responsible for enforcing the regulations was not really ready either, only producing one of its key guides a fortnight before the deadline. Five months on, it continues to release new guidance.

For all the dire warnings of the ICO’s powers to fine companies up to 4% of their turnover for breaches, the ICO may have employed an unofficial “soft landing” approach. Most organisations should be able to avoid the direst sanctions if they co-operate with investigations and show a willingness to improve.

Nevertheless, the ICO has been staffing up its enforcement arm and is now issuing a steady stream of enforcement actions.

The year started with a pre-GDPR £400,000 fine for Carphone Warehouse after hackers gained access to the records of 3.3m mobile phone customers.

In June the hackers were back. “If I had been asked to put money on the most likely candidate for the first post-GDPR breach notification, then Dixons Carphone plc would have easily made my top five,” wrote our data protection commentator Stewart Twynham.

Rapid growth had left Dixons Carphone with what Twynham called a “huge technical debt” that needed to be put at the top of the boardroom agenda. “Until that happens, our personal data will continue to be put at risk by an organisation which is big on promises but fails to implement basic measures,” Twynham wrote.

Before leaping to add your condemnations for Dixons Carphone, remember that there are probably thousands of organisations that suffer from the same blind spots. Could yours one of them?

It’s also worth remembering that the data protection regulation is based on the idea that personal data belongs to the individual, and that organisations holding it do so only with their permission. As Twynham pointed out in March, the activities of Cambridge Analytica and Facebook tested those principles to the limit.

Another organisation that features regularly in data protection headlines is HMRC and 2018 was no exception. A lot of readers will have enjoyed their regular calls to the tax department at this time of year – or be looking forward to that pleasure between now and 31 January. But privacy campaigners raised the alarm in May about HMRC’s voice data tracking. Initially, the department didn’t see any need for seeking permission from its “customers”, because of course it could be trusted to protect the information and use it only to serve them better.

After GDPR was introduced, HMRC was forced to publish a post-GDPR privacy notice acknowledging its activities and has been “working with the ICO” to clarify its internal procedures.

Employment law specialist Annabel Kaye described the notice as a “small and belated step in the right direction” and told AccountingWEB that “in the absence of clear consent and a simple way to withdraw it, the voice IDs collected before this are not being lawfully held”.

The ICO confirmed that it was investigating a complaint from campaign group Big Brother Watch. But even if HMRC is found to have breached GDPR rules, any action taken is likely to be minor.

Open banking, AI and fintech

One of our favourite concepts on the AccountingWEB tech desk is the “hype cycle” devised by industry analyst Gartner. And this year has produced a vintage crop, starting on 18 January with the official imposition of Europe’s revised payment services directive (PSD2).

With the official requirement for nine leading high street banks to allow access to their transactional data via an open application programming interface (API) standard, the age of open banking has begun.

That was certainly a trigger for a massive amount of PR and investment activity as the old banking dinosaurs in the City of London started pumping money into the “Silicon Roundabout” neighbourhood in Shoreditch, but aside from NatWest RBS buying FreeAgent last year and the successes of online lenders such as MarketInvoice and iwoca, we haven’t seen much evidence of it yet.

It’s worth bearing in mind the advice of AccountsIQ managing director Darren Cran, who advised that open banking “will take a year or two” to make much of an impact.

The other great tech hope for 2018 has been artificial intelligence (AI). The tech triggers happened a year or so ago, with the introduction of software assistant “chatbots” in 2016 and the wave of machine-learning tools that were being written into accounting software in 2017. Maybe you’ve used one of those programs that autocode transactions for you or suggest the most suitable classification? Machine learning.

We’re sure to hear a lot more about AI in 2019, but to be frank we’ve probably passed over Gartner’s “peak of inflated expectations” and are heading for the “trough of disillusionment” on this cycle. Maybe MTD is to blame again, by distracting accountants from more pioneering technology experiments, but aside from the autocoding phenomenon, evidence of actual usage has been minimal this year.

We did hear from two entrants in our Accounting Excellence Awards who were using chatbots to handle website queries. But maybe you’ve experienced their like on consumer shopping sites, where a bubble appears with a cheery, “Can I help you with anything?” text message. Younger correspondents assure me that these interventions are very welcome for mobile users more used to text chat interfaces, but the ghost of Windows paperclip past hovers above the screen for users of the Windows 97 generation.

“Chatbots are really bad at service,” commented NatWest RBS executive Wincie Wong at the FinTech Connect event in December. “Will they ever be ready to substitute for the long tail of customer relations?”

The fever of conflicting enthusiasms at the East London fintech event reinforced Darren Cran’s “give it a few years” advice, but as AI and blockchain technology continue to infiltrate payment, banking and accounting systems, major changes are definitely going to happen and they will probably happen more quickly than we expect, as they always seem to.

The only question as we look ahead to 2019 is what shape will those changes take? Will the big software vendors like Intuit and Xero replace the old banks as providers of small business finance, or will challenger banks like Starling, Tide and Countingup take their place instead. Or with the amount of funds at their disposal, will the NatWest RBS/FreeAgent bank-accounting software model prevail?

And don’t forget HMRC. As tax gets more digital, it's increasingly likely we will soon see a centralised electronic invoice register for VAT. Could that become the business accounting database of record and all the other stuff will just plug into it?

The trouble with modern tech is that you can try to imagine the most outlandish scenario possible in the sure knowledge that someone is already building it.

All we can promise on AccountingWEB for the year ahead is that we’ll continue to speculate about these possibilities, and seek out insights from people who know more about them.