Analyst Perspectives

One of the prominent salesforce.com partners on display at the recent Dreamforce in San Francisco was FinancialForce.com. It’s one of a growing list of providers of in-the-cloud accounting and finance packages built on the Force.com platform. Like other of these accounting vendors (such as Compiere, Intacct, Netsuite and - to some extent and eventually– Workday), it aims principally at companies that have outgrown entry-level accounting software such as Intuit’s QuickBooks. (I covered the emerging use of cloud-based applications for finance departments here.) However, there are key differences. One major difference is that FinancialForce offers customers the choice between buying accounting functionality as a complete package or doing so à la carte. This approach derives from its strategy of going after two types of customers.

One target customer segment consists of companies that are clearly better off with an in-the-cloud accounting package – those whose main channel is on the Web or are sales and distribution organizations. This builds on the integration and strategic relationship between FinancialForce and salesforce.com. It also reflects the advantages of having accounting processes occur in parallel with business processes “in the cloud.” Such an arrangement can be more efficient and provide greater control for users than when these transactions are recorded on premises if the connection between the paperless, online transaction requires manual steps to record it in a financial system. Poorly integrated, manual processes are likely to be error-prone, less secure and more time-consuming.

The second target customers are those that need a piece (or several pieces) of accounting process and functionality to support a business process executed in salesforce.com, such as executing a sales order accounting process while taking an order. The accounting details of the sales order are programmed to follow the user’s desired process with the desired structure and metadata, and the transaction’s data is then passed directly to the company’s on-premises ERP system. The most commonly deployed are those supporting invoicing, cash collection and customer service.

The challenge facing FinancialForce is the same confronting every cloud-based ERP vendor: Only a small minority (about 15% in our research) of companies prefer to have their accounting or ERP system in the cloud but is growing every year, while most prefer on-premises deployment. At present, cloud-based systems represent fewer than 10 percent of the market measured in U.S. dollars. As I’ve noted, I expect this to evolve over time as financial executives become more comfortable with the cloud concept and recognize inherent weaknesses in on-premises deployments. In the meantime, I think that going after the salesforce.com-heavy segment of the market makes sense since these sorts of companies have business needs that are well aligned with Financial Force’s offering and are presumably less squeamish about cloud-based systems.

While FinancialForce is new, it has a mature financial application that is an adaptation of CODA, a longstanding U.K.-based ERP system. One point of differentiation adopted early on by CODA was to use a multidimensional database as the data store, a “single ledger” construction that requires no routine reconciliations between sub ledgers. This enables transaction data to be reported on in real time and (in the case of FinancialForce) enables complete drilling down and back. Interestingly, Oracle recently adopted use of a multidimensional database as a hub for collecting data from disparate ERP systems and feeding it into analytic or performance management applications.

In addition, FinancialForce recently announced it is acquiring Appirio’s professional services automation (PSA) package. I think this is a great fit. Although it has been around for decades, PSA has been a slightly adopted software category in part because a large percentage of professional services companies have been too small to make the investment in a formal, on-premises system. Although there are no bright lines between sizes, by my reckoning, “too small” includes almost all companies with 10 or fewer billing professionals and a majority of those with 25 billing professionals. Cloud-based PSA changes the economics for such companies (or the consulting arms of product or service companies) because few of them can invest in the IT infrastructure (including people) needed for such systems. One of the important economic benefits gained by using PSA systems is faster and more accurate billing, which improves cash flow and visibility of it, which are critical capabilities for these organizations since they are usually self-financed. In addition, PSA software makes it easier for companies to plan and manage their resources – chiefly people – so that utilization rates can be higher. With small professional services organizations this is less of an issue because there are fewer billing professionals whose time must be allocated and therefore the issue is much less complicated. However, when there are more than a dozen or two of these people it becomes harder to juggle and, more significantly, re-juggle assignments as situations change.

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Regards,

Robert Kugel – SVP Research