This content is part of the Essential Guide: The essential guide to ERP for small and medium-sized businesses

Cloud financials taking hold in public sector, SMBs

Analysts say that with security concerns mostly allayed, government, academia and service companies are becoming heavy users of cloud financials, especially SaaS.

There's no question that today's companies operate in a demanding, dynamic environment. New regulations, a greater focus on growth and increased competition for talent all create a need for more Agile finance systems. Cloud financials promise just that: A financial management system that can adapt and scale as business needs change, and provide a real-time view into performance.

Among the options for cloud financials, software as a service (SaaS) is a trend with legs. "The market for multi-tenant private cloud for financials is growing faster than the on-premises market for ERP, yet it's still a small percentage of the market," said Robert Kugel, senior vice president of finance and business at Ventana Research. The past five years has seen a transformation from heavy-duty skepticism about the notion of running financials in the cloud to general acceptance that it's an option, Kugel added.

"Both the changing role of the finance team from transactional to analytical and the maturity of cloud-based finance systems are driving greater adoption," said Betsy Bland, vice president of financial management products at Workday, a SaaS vendor. More and more, organizations are beginning to realize the opportunity and cost efficiencies associated with the cloud in providing valuable insights to help them make more informed decisions and, ultimately, drive growth, Bland said.

In addition, SaaS offerings are attractive to companies of all sizes for a vast variety of applications, because they allow users to avoid the need to maintain and run applications on-premises. Another bonus is the ability to eliminate associated infrastructure and software licensing expenses. Scalability and flexibility round out the expected benefits.

Companies that make products or move them around a complex supply network are less likely to choose cloud financials, Kugel said, because many companies fitting this description have already made heavy investments in on-premises ERP. The enticements of cloud alone won't be enough to get companies in this boat to switch -- not any time soon, anyway. Also, manufacturers are less likely to be able to use a non-customized version of financial applications. 

Adoption of cloud financials is slower than that of cloud-based human capital management (HCM) systems, according to Scott Furlong, a partner at Information Service Group, a research and advisory firm. The disparity is likely due to the on-premises ERP systems installed at most midsize and large enterprises, Furlong said.

"Ironically, for some companies that have done the analysis, the implementation costs of a SaaS financial system can be only marginally higher than the upgrade cost for their existing systems without giving them the benefits of a SaaS model," he said. But the impetus to make the move may not be great enough, especially for large companies, in the near term.

The most common implementers of SaaS cloud financials to date have been in the public sector -- state and local governments and academic institutions -- and some leading-edge private-sector companies, according to Furlong. Business-service companies of all types are also finding SaaS financials too good to pass up, added Kugel.

Data security no longer a top concern with cloud financials

For many years, the discussion of migrating core financials to the cloud was derailed by security concerns. After all, what could be more sensitive than a company's financial data? CFOs tended to take a dim view of handing over control of financial data to a SaaS or other cloud financials provider.

Slowly but surely it is dawning on CFOs and business executives generally that security is probably better in the cloud than they could achieve in-house, Kugel said, provided they select a reputable vendor with appropriate certifications and controls. "With a cloud provider, you have much less chance of a disgruntled employee going into the data center and downloading whatever they want to download onto a high-capacity thumb drive." 

The reasoning is that it is better to have dedicated experts whose only job is to maintain, patch and update the security environment. "If I had heart surgery, I would want to go to a place where they do 12 of them before noon every day, not the place where they do two per year," Kugel said. The reality is many small to midsize enterprises just don't have the resources to maintain security at the highest levels.

Unlike some of his consultant peers, Kugel is not one to believe that cloud financials will completely take hold, however. Too many companies need more customization than cloud financials will likely ever allow. "For the next 20 years, we will see very much a hybrid environment where they operate on-premises or in the cloud, depending on what makes sense."

Next Steps

Read more on cloud-based financial software

Prepare to run financials in the cloud

Choose the right SaaS financial software

Dig Deeper on Cloud-based ERP systems