Cloud reality check: Where we are in 2016
Cloud accounting has become a daily part of professional life. But has it all been plain sailing? And where is the trend leading us? This article sets the scene for June’s cloud reality check on AccountingWEB.
According to AccountingWEB’s archive of data, it’s been just over a decade since the first members started picking up on online accounting applications such as KashFlow and FreeAgent.
As we have reported extensively since then, around half our members now use cloud accounting tools of some kind in their daily working lives. The trend has been hailed as the most significant technological transition since the introduction of the PC in the early 1980s. NetSuite CEO Zach Nelson went even further in a recent speech when he said cloud represented the “last architecture” in the evolution of computing.
But we can see that many accountants and AccountingWEB members are still reluctant to make that move and a flattening adoption rate suggests that the bandwagon may be encountering some hurdles that are holding up its progress within the profession.
For the next month, AccountingWEB will be looking more closely at those issues on both sides of the Atlantic in what we are calling a cloud reality check.
Over the summer, we intend to present a clearer picture of cloud use within the profession. We’ll be talking to cloud accounting users, suppliers and sceptics to find out whether the tools are living up to expectations, and where any sticking points might arise.
In spite of his occasionally overblown rhetoric, Zach Nelson does make a strong case that we are heading towards an era of utility computing where processing power is available on tap via the net. To become truly universal, however, technology also needs to accommodate the whims of contrary human beings and their working habits.
Getting under the skin of the cloud phenomenon means going into finance departments and accountancy practices to find out how they are using these tools. You can play a part in this research by adding your comments and observations to our series of articles. Also keep an eye out for case studies that show how accountants are making their firms cloud-ready, and what happens to them when they do.
Within accountancy, it’s hard to escape the link that is constantly being made between online collaboration with clients and the “trusted advisor” approach to providing business advice rather than purely compliance services. Thanks to AccountingWEB’s Practice Excellence Programme, we can draw on five years’ worth of data to confirm that firms embracing cloud tools are the ones moving fastest down the advisory path.
Results from other recent surveys suggest that around 15% of members firms have adopted this approach. There is a bigger group of practices - around 35% - who are interested in change, but are still just dabbling or deciding what direction to take. The rest of the profession is made up of what we call “status quo” firms who recognise that their current situation may not be perfect, but they’re content to remain as they are.
That is their choice, which is often influenced by factors such as family commitments, work-life balance issues, or an acceptance that they’re reached a point where they’re winding down for a semi-retired twilight where they limit their work to a few favoured clients.
But the reality for status quo firms that have not adopted that “lifestyle” option is that audit threshold changes, relaxed financial reporting rules and the imminent digital tax regime are also eroding their profit margins, and many are experiencing a squeeze on their fees.
While automation can help firms counteract fee erosion by enabling them to do more work with fewer staff, firms with more traditional working processes are also beginning to feel the effects from competitors who are applying cloud tools in new ways.
The Sage effect
But the status quo is sustained by a significant technology barrier too. It has become fashionable to snipe at Sage. Xero frequently does so with reports that it will overtake Sage 50 this year as the most commonly used accounting application in the UK (aside from Excel). But no one can argue with the hold the Newcastle-based developer continues to have on the UK profession.
Between the early 1990s and the advent of cloud accounting, an entire generation of British accountants learned bookkeeping with Sage desktop products - and are finding it hard to let go. Changing core software systems imposes extra cost on firms, along with the difficulties of learning new tools and finding people who know how to use the applications - unlike Sage.
Many Sage users also argue for the superior functionality of desktop products, which are often embedded within highly customised workflows and reporting environments that they cannot replicate in the cloud. The final phase of the accounting cloud revolution will only happen when firms are able to migrate to applications that are compatible with their existing practice tools, or someone is able to break down the many barriers to seamless data exchange.
Is the profession ready for digital plumbing?
The need to understand and manage business data flows in the cloud led US practice consultant Matt Heggem to redefine a new breed of modern accountancy practitioner - the digital plumber. It’s a clever concept that puts accountants right at the cutting edge of the cloud transition. The practitioner/adviser should be able to diagnose a business’s digital pain points and prescribe the right combination of cloud remedies to cure them.
Some UK firms like Pillow May, Carpenter Box and Valued Accountancy are pursuing this model successfully, but they are pioneers willing to risk a few mishaps to discover new solutions.
Firms with less enthusiasm and aptitude for the new accounting tools are understandably cautious. They are accountants, not digital plumbers and their professional training taught them not to approach complex situations without a full understanding of the situation and a command of the skills needed to address them.
The sheer volume of available cloud accounting apps and add-ons adds to this anxiety. How can a practice possibly keep up with the state of the art with so many new tools coming on stream every month? An unfortunate slip-up or oversight could cause data blockages, leaks or overflowing pipelines that will result in irate clients and expensive emergency call-out fees to fix the mess.
Developers of the big, global cloud accounting engines - Xero, QuickBooks Online, Sage and Exact - are aware of the add-on overload problem. They took part in a quiet, but intense race in recent years to recruit as many developers to their camps as they can to broaden their reach into specialist markets.
More recently their emphasis has shifted from quantity to quality by promoting leading add-ons as “preferred partners” or key solutions for particular industries. In many cases, add-on providers are operating in packs. And if the developers haven’t organised themselves in this way yet, some accountant/digital plumbers are doing it for them.
Sussex-based Carpenter Box, for example, deploys a standard line-up of Xero (general ledger), Receipt Bank (bookkeeping automation), Chaser (credit control) and CrunchBoards (KPIs/forecasting). If further specialist functions are needed, Carpenter Box will bolt in favoured tools such as Vend (retail), RocketSpark (ecommerce) or FarmFlow (agriculture).
Carpenter Box partner Nathan Keeley told AccountingWEB: “It’s much more compelling than the traditional, ‘We’ll do your accounts for you and it’ll cost you X.’ With the bundle of packages the fee is the same, but the client feels like they get a lot more.”
Chart your own path into cloud
The digital plumber pathway is a compelling one that reflects the excitement surrounding the transition to cloud accounting. But it’s not the only way to embrace cloud technology. AccountingWEB’s joint Cloud Challenge last year with Receipt Bank last year encouraged firms to explore their own strengths and to plan their cloud strategy accordingly.
Those more interested in high client volumes - particularly in the sole trader and contractor marketplace - are using cloud tools to transform themselves into compliance factories, while we have already seen many in the Practice Excellence camp using technology as a platform for providing proactive business advice.
Many specific industries or disciplines can provide lucrative niches for practices, and even those who just want to focus on providing top class, personal care for their clients can usually do a better job and improve satisfaction levels by using appropriate cloud tools.
What are alternatives?
The transition to cloud accounting has come as a shock to many accountants, who are more comfortable operating within the structures and processes that helped them grow successful firms.
Remaining in a state of denial is no longer tenable. If you and your clients are not ready to embrace the new wave of automation, HMRC’s making tax digital initiative is going to force it down your throats within the next couple of years. The government has decided that accounting data must be digital, and Excel no longer qualifies under its definition.
If you haven’t done so yet, start examining how the latest accounting technology works now. That is the biggest reality check of all this summer.
What’s your stance on the transition to cloud accounting? Are you one of the early adopters, putting your finger in the air - or still in the anti-camp? Help us compile a proper cloud reality check by telling us how your business is adapting to online accounting.
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AccountingWEB’s Head of Insight 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.