Crossing the Cloud Financials Chasm

This week, Brian Sommer and I took the opportunity to chew the cud over what we're seeing in the cloud financial applications space. It's an interesting market for several reasons:

Back in 2007 when I first started looking at financial applications, I was told by naysayers that cloud financial apps would likely never be adopted. At the time I felt there was a 3-5 year time frame over which I anticipated significant build up from what was then a miniscule base. I also said it would be the small business that paved the way.

It turns out I was right about the manner of adoption but wrong about accelerated take up. It is really only in the last 18 months that we have seen sizeable shifts that could be measured against what was happening among the established vendors. It is for instance clear that in the UK, Sage has lost all organic growth to a clutch of vendors, the three most prominent being Xero, KashFlow and FreeAgent. In fact it is going backwards as evidenced from its recent reported results. That trend will continue.

In the mid-market, things have been different. On the one hand there has been very little investment in new or replacement financials by volume but there have been signs that a trend was starting to develop with more businesses opting for solutions like NetSuite, the only real cloud ERP vendor with genuine traction. In the US, vendors like Acumatica, FinancialForce.com and Intacct are emerging.

In a piece that Sommer published yesterday he said:

Cloud adoption of financial software is crossing the chasm. The core financial transaction systems are seeing solid uptake in the SMB space. Larger enterprises are adopting solutions in the Treasury, Budgeting, Planning, BI and other areas.  I suspect all sectors will see uptake from all sized businesses especially as vendors round out their product lines and functionality.

During our conversation, Sommer told me about a study he undertook during the summer where he interviewed a broad spread of people in CFO and controller roles. About 30 in total so not exactly a huge sample. What was striking in those conversations was that all had experience of at least FIVE cloud apps. These ranged from financials to CRM with solutions like Salesforce.com, office productivity such as Office 365 and Google and an HR related solution like SuccessFactors for talent management.

In Sommer's words, the finance office is comfortable with cloud applications and now sees finance as the next prime candidate for replacement. Surprisingly, security is not a top of mind topic among this sample. In part this is because they are already familiar with cloud applications. That is very different from 2010 when vendors saw business having little appetite for cloud. Why now?

Sommer believes the single biggest driver is the ongoing cost of keeping legacy applications going. The upgrade, maintenance and consulting costs are now at a point where business no longer sees the same value that it once did. This was something I suggested back in 2009. Having had a taste of the way cloud can release capital cost, the finance office is no longer minded to go back.

We then discussed tipping points. None of us can predict with certainty when a market will tip over to becoming mainstream but I suggested we must be close to some mass change because the last time there was any significant financial applications refresh was in 1998-2000 when Y2K loomed into view. On the basis that the useful life of an on-premise application is in the 10-15 year range, it cannot be long before large scale replacement becomes a reality.

Some will argue - and with good reason - that replacing financials is not really something that is so urgent because the fundamentals have been hashed out in existing solutions. And regardless of bloatware, the upcomers are not as functionally rich. I think that is a temporary point that will become moot in the next year.

Following our discussion, I read through the transcript of the Workday financial analyst session. Towards the end, Aneel Bhusri, co-CEO commented upon the fact Workday is revisiting the mid-sized enterprise. He said:

I think it was really important to highlight just on that topic, we can continue to make the TCO better by reducing the implementation cost historically, implementation costs were five to 10 times the cost of software, we're getting it down to one to two times the cost of software...

...you go to markets like Germany you go to markets most of Europe, a lot of Asia, a lot of Latin America, it's a mid market. Most of the companies in these economies are between 1000 and 5000 and there that cost of ownership really is a great advantage if you can keep driving up that cost, so I think that'll open up international markets as well and that's why we're beginning to bump into the Great Plains Dynamics of the world as well on replacing those as we tackle that market opportunity.

He sees the same opportunity that Sommer and I have identified. In Workday's case and because the non-US markets are relatively behind the adoption curve, they don't have to be the pioneers of the past. They can leap frog and benefit from the development efforts put in by the Workdays of the world with far less fear than was the case say two years ago.

The question is - are we truly at a point where the cloud financials application market is about to cross Geoffrey Moore's famous chasm? None of us knows but it will be interesting to watch how this plays out.

In the meantime, the above video - which runs way longer than the five minutes we'd originally planned - provides more nuance on this topic. Enjoy.

Featured image credit: © Irina Yun - Fotolia.com

Disclosure: Workday is a premier partner and funded most of my travel to this week's Rising conference