Time to reboot the accounting profession

Profile picture for user gonzodaddy By Den Howlett January 13, 2014
Summary:
While the end user accounting market is changing with cloud players eating up growth, the professional market is stagnant. Will it change?

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Phil Wainewright's series on the technical distinctions between different cloud 'types' is prescient in the context of some work I've been doing around the professional accounting market. To recap Phil's central position:

Right from the beginning of my 15-year involvement with SaaS I have always said, this is more than a deployment choice; more than a relocation exercise. Once applications are in the cloud, they are able to connect more easily and that opens up opportunities and capabilities that were never possible when confined within the enterprise.

It also allows for the creation of all-new applications that were never conceivable in the client-server era. That is why so many of the new wave of applications in fields such as marketing automation, talent management and collaborative working are almost exclusively developed and delivered cloud-native.

For my part, I have been following the evolution of cloud/SaaS accounting solutions for some eight years. In that time, the panoply of emergent vendors have cleaned up all the organic growth I would have expected to see from the UK's incumbent. My current estimate is that the whole end user accounting solution market now accounts for some 100,000 businesses with ample room for growth in the coming years.

On the professional front almost nothing has changed. I say almost because both IRIS and Sage, which between them claim some 30,000 UK professional practitioner customers have made efforts to move solutions into a cloudy environment. In that sense, they conform to Phil's contention that:

...the applications themselves have largely become Web-enabled so that they can be accessed via a browser rather than through a Windows terminal session.

This is the modern deployment model for what I once called SoSaaS — Same old Software, as a Service. It delivers the economies of scale of utility cloud infrastructure and the convenience of cloud-based applications, without any need to re-engineer the existing software.

He goes on to say:

...Client-server SaaS still exists because it often remains the best fit for many traditional applications. In these circumstances, the lack of adaptation to the cloud environment is seen as an advantage, because the way the application behaves and is managed doesn’t change that much.

I fully understand that position but struggle to buy into it as it applies to the professional accounting market.

The incumbents and many of their customers will argue that the fundamental compliance work required of a professional accountant has not changed and therefore there is no pressing need to forklift into a new method of computing. They will reinforce that argument by noting that the technical principles underpinning the operation of professional compliance have not changed either.

Some users will argue that the suite approach of IRIS and CCH in particular are powerful reasons to stick with what they have. As conservative actors in this market, they will also argue that something relatively new introduces risk.

I see these arguments as little more than a reinforcement of the status quo in a market where the supply side (the end user market) has already spoken and where operational efficiency is trumped by client need. I've seen too many examples of new practitioners who are building transformational business models to believe that the legacy methods can survive in the long term.

So why haven't the new breed of providers steamrollered the incumbents? Here are some reasons:

  • So far, the new players are only providing limited solutions that address the basics. If they are to become large scale players then they need to follow the Salesforce.com route, building or buying additional functionality.
  • Following on from the above, the new players have yet to figure out how to translate the value add that buyers see and from which practitioners benefit into a revenue stream.
  • The market is fragmented. While the UK is dominated by Xero, FreeAgent and KashFlow, there are plenty of others picking up bits and pieces of the available market. Then there are the US variants that can play globally. That leaves the incumbents with plenty of wiggle room. Despite the mindshare earned by the cloud leaders, they are still very small in comparison to the incumbent both in terms of revenue and scale.
  • While it is possible to assemble services that can match the needs of the professional, many of those same services need to benefit the end user client as well. A good example is file sharing. But with so many choices, what direction should a new player take - partner or build?
  • Assembled services are not as attractive to the professional market as a suite approach where practice requirements extend well beyond accounts production. The large players have a massive lead in this regard with investments going back many years.
  • None of the new vendors have cracked the analytics nut. I have long held the view that the cloud/SaaS vendor which gets the value of analytics will capture significant market share. The accounting players will argue this is something that's very hard to do because of privacy concerns. Once again, I believe this to be a spurious argument because we already have the precedent in the public domain in the shape of filed accounts. HMRC has no qualms in looking for patterns in numbers submitted. Practitioners already have the wherewithal to undertake some analysis but it is always limited by the relatively small size data sets.
  • Despite the cloud/SaaS leaders being well funded, they cannot match incumbent resources. You can argue that having stripped the incumbents of growth and successfully drawn attention to themselves that resource doesn't matter. Not true. Being smart with meager resources is one thing. Outspending is another.

If I am painting what seems to be a pessimistic view then I'd caution. All but the last issue can and will be overcome. Last Friday, FreeAgent for example announced that their sole traders customers can file for self assessment from directly inside their solution. In the legacy world, this is usually handled by a separate application.

All the indications are that end user businesses will continue to prefer the newer applications but it remains open whether the vendors will be able to maintain previous growth rates.

In the meantime, I remain confident that the profession will be rebooted...it's just a question of time.

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