Ronald Hudson - Fotolia
An early move to ERP was once a way for aggressive organizations to distinguish themselves from competitors. By tying financials and accounting to operational processes, CFOs created opportunities to manage resources more effectively and perhaps boost profit margins. But over the years, sprawling, highly customized ERP systems can quickly turn from leading edge to legacy, giving a new generation of agile companies a chance to leapfrog industry leaders with the help of cloud financials and other modern systems.
Digital disruption and other market realities are now encouraging all CFOs to consider cloud financials. "There's a lot of baggage inherent in a system you implemented a decade ago," said Paul Hamerman, vice president and principal analyst at Forrester Research. "CFOs are approaching cloud adoption as an opportunity to innovate and grow the business through real-time visibility into the revenue stream."
Motivations like these help explain surging adoption of cloud financial and accounting systems in recent months, according to analysts. Forrester surveys found that 19% of executives had replaced on-premises financial and accounting systems with cloud financials as of 2015. Some individual industry sectors are seeing even higher rates. Sixty-five percent of executives in manufacturing said they were most likely to consider software as a service (SaaS) for their company's system of record, said Cindy Jutras, president of Mint Jutras, a research company that specializes in ERP. Only 26% of manufacturers would now consider a traditional on-premises system, she added.
The lure of cloud financials
Interest in cloud financials and accounting isn't limited to strategic, digital-innovation projects. SaaS-based financials also offer tactical benefits, such as jumpstarting big-data and predictive analytics capabilities, said Jonathan Gross, vice president of Pemeco Consulting, an ERP project management firm.
In particular, CFOs are interested in the processing power of in-memory databases that support many cloud ERP services, including those from traditional vendors such as Microsoft, Oracle, and SAP and from cloud-exclusive providers, including NetSuite and Workday.
"The desire to do more big-data analyses and perform near-real-time transaction processing is a catalyst for large companies to move their operations into the cloud," Gross said. "That's important for CFOs because ultimately that's going to allow them to more effectively control budgets and spending."
Analysts said another attraction is having cloud financials updated regularly by cloud providers, which keeps CFOs current with changing industry regulations, such as recently updated International Financial Reporting Standards (IFRS) 15 and Accounting Standards Update (ASU) 2014-09 revenue-recognition standards. "Some SaaS providers handle those rules better than others, but most vendors are aggressively working to keep current with these features and functions," Jutras said.
Cloud-versions of the core accounting system are often more flexible for important activities, such as creating a chart of accounts. "Companies that use the cloud typically don't have to build a lot of logic into the account structure because they can use the metadata included in the service-to-surface information," Hamerman said.
Fundamental choices await CFOs
Cloud interest may be growing, but CFOs face tough decisions before leaving legacy financials behind. One is whether or not to move just financial and accounting modules to the cloud while keeping other ERP capabilities on-site. "ERP's chief benefit is having that full, integrated flow of information going to accounts receivable, accounts payable and general ledger," Gross said.
As a result, one approach is to go all-in on the cloud with a complete migration from an ERP on-premises platform. A less radical alternative is to maintain core financials in-house, while enhancing them with cloud services for related needs, such as budgeting and forecasting, treasury management, and reporting, Gross said.
Either way, finance executives must also decide whether to adopt cloud services offered by their on-premises vendor or send requests for proposals to all relevant cloud providers. Each option presents pros and cons that CFOs must weigh against their particular goals. For example, Hamerman said financials designed to run on-premises may not match the flexibility and advanced analytics of newer services designed for the cloud. Also, cloud services are often easier to configure and don't require the hard-to-maintain customizations of traditional software, he added.
However, analysts gave cloud versions of traditional systems high marks for their mature financial and accounting capabilities. The underlying technology may be another plus. "If your existing vendor has standard interfaces between its cloud solution and your existing system, that's a benefit compared to a cloud service that will require a middleware layer that adds architecture complexity," Gross said. "On the other hand, if you already have an architecture strategy that involves a middleware layer, then maybe it's not a big deal."
The final choice may be less about the individual platforms and more in favor of particular vendors. "If you have a good relationship with your existing ERP vendor, the simplest answer is to look to that company first for a cloud solution," Gross said. "The key is how competitive is its functionality, support and services versus the others."
No matter which vendor gets the nod, contract negotiations will be key to properly managing critical financial information in the cloud. Security is no longer a barrier to adopting cloud financials, analysts said, but it must be vetted thoroughly. Vendors should spell out what level of encryption will be applied to the financial information, how frequently backups will be performed and the physical locations where data will be stored -- in the primary data centers as well as those used for backups and recovery.
Gross said that many cloud ERP contracts he's reviewed put clients in a weak position for recovering damages and assuring protection of financial data if problems arise. That's an area that will need greater attention. "As companies become more mature in understanding the cloud and the risks, we're going to see contracts evolve to become more favorable to customers," he predicted. "But I'm not seeing a lot of that yet."
Read more on trends in SaaS financial software
Learn how companies moved financials to the cloud
Get a handbook on cloud budgeting and forecasting