Trailblazers though they were, finance departments have quickly become technology laggards. How did this happen? Believe it or not, corporate finance was once in the vanguard of technology adoption. By the end of the middle of the 1990s, nearly every large organization had some form of ERP (enterprise resource planning) system in place; even small and midsize companies relied on finance or accounting software installed on their desktop PCs. Why? Because the global economy had reached a tipping point where the risk of doing nothing was greater than the risk of change.
As business needs changed, however, the systems had to change, too. Most often, this involved rewriting the application’s source code. According to a 2014 survey from Panorama Consulting Solutions, 90% of ERP users have incorporated some level of customization into their systems. And with customization came complexity, cost, and an inability to easily change direction.
With the advent of the Worldwide Web and the Y2K bug, many companies upgraded their on-premises ERP systems—and, quite frankly, they found it painful. All of their custom-coded changes disappeared and had to be reprogrammed. This involved hiring teams of developers from consulting firms, spending a lot of money, and then waiting 18-24 months for the new system to come online.
Understandably, many finance executives are reluctant to embark upon this level of disruption again. Their 10- or 20-year-old systems might be slow, clunky, and reference a chart of accounts that is laughably out of date, but employees can limp along with what they have, using manual workarounds, spreadsheets and Post-it notes to get the job done.
Employees can be persuaded to wait for change. The business world, however, cannot.
The Return of the Tipping Point
We have once again reached a tipping point where seismic market shifts—led by the emergence of the digital economy—are outpacing most companies’ ability to respond.
It’s time for finance to take the lead, once again.
Today’s competitive landscape means that the risk of doing nothing is once again high. Companies that stick with the old ways of doing business run the risk of being disrupted by new, digitally-enabled businesses, of losing the best talent, and of being outmaneuvered by more nimble competitors.
The need today is not just to automate the finance function, but to digitize it; not just to focus on operational efficiency, but on operational velocity. And this is driving more and more CFOs to look to the cloud.
Among the business drivers we see most often, the reasons for moving finance to the cloud fall into three broad categories:
- Operating model shift. With the digital revolution has come a surge in new business models: the sharing economy (Uber, Airbnb), the digitization of products (Apple, Netflix), and the social explosion (Facebook, Snapchat) to name a few. New business models require new key performance indicators, data modeling, customer support, sentiment analysis, mobile purchasing, and countless other “back-office” functions. Legacy ERP systems were simply not designed to support these new business models—or even to enable rapid change to existing ones.
- Subscription billing. A gaming provider, for example, might move from selling games on CD to streaming them over the internet for a monthly fee. This would require new billing and collections functionality to support a subscription-based model.
- Mobile enablement and social collaboration. Many of today’s ERP systems pre-date the digital revolution. Some of them even pre-date the web. But with the explosion of user-friendly apps on touch-friendly smartphones, today’s employees expect the easy-to-use social collaboration tools at work which they’re accustomed to at home. Employers who don’t provide these run the risk of losing top finance talent.
- Revenue management. The recent IFRS 15 / ASU 2014-09 accounting standard introduces rules to ensure that companies use a consistent method of recognizing revenue from contracts. Especially if your business creates complex sales contracts with multiple and distinct performance obligations (aka deliverables), there will be new calculations to perform and processes to follow. Legacy ERP systems are not optimized to handle the new requirements.
- Global expansion. If your growth is defined by global expansion, you will experience increased financial complexity with distinct accounting, reporting and compliance requirements, likely necessitating changes to your existing systems.
- Mergers and acquisitions. Information technology is generally the single biggest cost element in an M&A event, and can be the single biggest enabler of synergies. The heavy reliance on ERP for business operations, management information, and financial reporting make it a priority item in the M&A agenda.
- New market entry. New markets require understanding new customer needs that drive different back-office support models.
- Scale and hyper-growth. Customer growth requires systems that can keep pace, and the cloud provides scalability that companies will not outgrow, without an oversized upfront investment.
- If your firm is going public, the right systems and processes must be in place to provide financial transparency, attract investment, and support increased regulatory scrutiny.
- Subsidiary strategy. Companies often have subsidiaries, regional divisions, or recent acquisitions that are using a different ERP system from the head office. This disrupts the flow of data and necessitates manual workarounds such as spreadsheets. Consolidating on the cloud can provide a single view of operations without the cost and lengthy implementations that inhibit on-premises ERP.
- On-premise upgrade avoidance. Many on-premise ERP systems are facing the end of their lives and require an upgrade—a long project with a substantial investment. The cloud can offer a quicker, more cost-effective alternative to an on-premises upgrade.
- Shared services initiative. Launching a shared-services model in which your team provides core back office support to the entire company can be provisioned more easily via the cloud.
- Infrastructure investment avoidance. Many fast-growing companies soon outgrow their small business accounting packages and need to move up to something with more capabilities. They look to ERP in the cloud in order to avoid the purchase of costly hardware and the expense of an internal IT team.
- Multi-ERP rationalization. Companies that have, over the years, acquired multiple ERP systems may want to standardize on the cloud, using the built-in best practices the software offers.
- Improved security. Understandably, many finance executives are reluctant to trust their confidential finance data to a third party. Yet according to KPMG, large cloud vendors can offer security that “is many times superior to what companies are able to provide themselves, because vendors’ economies of scale allow them to spend much more.” In addition, at least one cloud ERP vendor (Oracle) owns the full stack, so they can manage security from the applications down to the very microprocessors that power the servers.
Even with all of the above business drivers, there is resistance. Finance is at the heart of the business, and any changes made to these systems have ripple effect on the rest of the company. Some finance leaders would rather live with the devil they know than take the risk that something worse might happen—something like an 18-24 month replacement project.
Taking a Phased Approach to Mitigate Risk
But the beauty of the cloud is that you don’t have to replace everything at once. You can start in smaller units and build on those over time. Large companies with multiple entities are choosing to migrate finance to the cloud in some of their satellite offices, such as Canada, China or Mexico. If you want to keep your core ERP on premises, you can move some independent finance applications to the cloud, such as planning and budgeting, narrative reporting, financial reporting compliance, and more.
And even if you do make the leap to migrate your core ERP to the cloud, the timelines for such a project can be much shorter than an on-premises replacement. Some customers have made the move in as little as 10 weeks.
The cloud is the innovation engine for today’s digital economy. Once in the cloud, lengthy upgrades can become a thing of the past, as up-to-date software is delivered over the internet on a subscription basis. The reasons for making the move are many, but the results are typically the same: faster innovation, greater scale, lower costs, and operational excellence.
The question for today’s CFOs is: How much longer can you afford to wait?