Analyst Perspectives

In a recent note on virtualizing the close, I observed that finance and accounting organizations that can operate in a virtual mode are better able to adapt to changing circumstances and overcome obstacles. Having systems that people can readily access remotely to collaborate and execute processes virtually makes it easier for departments to meet their commitments with confidence. The core technology underpinning the ability to work in a virtual mode is the cloud. That’s because the cloud eliminates the constraints of having to be in a specific place at a specific time; work gets done when it needs to be done.

Cloud-based software (sold on a software-as-a-service or SaaS basis) should be the first choice for finance organizations unless business, regulatory or functional issues prevent this form of deployment. Most organizations will find that this isn’t the case. A cloud-first approach applies to all software components: ERP, consolidation, managing the accounting close, budgeting and planning, treasury, tax, expense management, reporting and analytics.

Unfortunately, our Office of Finance benchmark research finds that finance executives and managers prefer to deploy software on premises by a wide margin. When it comes to ERP, 52% said they prefer on-premises systems compared to 28% that prefer the cloud. For planning and budgeting the gap is even wider: 56% and 22%, respectively. Why? Well, I think that many finance executives — especially older ones — harbor misconceptions about the cloud.

While the cloud isn’t always the right answer and every business has its own requirements, I see a lot of outdated and misguided rationalizations for keeping core systems on premises. At the top of the list is this one: “I want to be sure that my computer and my data are safe in that locked room down the hall.” I was more understanding of this attitude a decade ago because the cloud was relatively new and there were fewer proof points available on which to make a fact-based decision. Today, I think this rationalization is flat-out wrong and even dangerous. An on-premises system is demonstrably more vulnerable to hacking and disasters such as floods and fires than a cloud-based system is.

This is because all but the largest organizations lack resources, security skills and systems that are comparable to what certified cloud software providers have on staff. Cloud-based vendors must have strong security because their business will be over if they don’t. To be sure, cloud firewall misconfigurations (by the business entity or its cloud software provider) are the leading contributor to enterprise data breaches. The misconfigurations range from lack of access control (anyone can view the data) to not turning on security controls provided by the CSP. However, this issue is more still manageable than risks posed by a pure on-premises environment. In addition, data theft is often an inside job, which is substantially easier when thumb-drive capacity is measured in terabytes. Many data breaches happen because an organization failed to apply a security patch. Every CFO should be asking how long it takes for their IT department or service provider to install a patch after it’s been released.

Disaster recovery is another area where the cloud is far superior. Organizations don’t always fully back up their systems and data. Even if they do, CFOs should understand how long it will take for their organization to recover if a flood or a fire winds up wrecking the server room. That contingency should not be an issue with a cloud-based system if the vendor has fail-over capabilities. Moreover, cloud-based systems are available even when employees can’t get into the office.

Finance and accounting organizations will find that they have multiple options for cloud-based software for consolidation, managing the accounting close, budgeting and planning, treasury, tax, expense management, reporting and analytics. Unfortunately, it’s more challenging to migrate an ERP system to the cloud. Regardless of how it’s deployed, changing ERP software is time consuming, expensive and not without risk. For these reasons, organizations replace these systems only when absolutely necessary. Sales of cloud ERP systems have grown rapidly over the past five years, but this rate of growth is off of a small base. Most organizations are still deploying this application on premises. Our research finds that half of companies that deployed their main ERP system within the past two years prefer on-premises deployment compared to 42% that prefer the cloud. Our research shows that in 2019 the average age of an ERP or financial management system was six years and one-fourth of companies had an ERP system that was installed nine or more years ago.

I advise organizations with an aging ERP system to seriously consider replacing it with a cloud-based alternative. Organizations that have a system that’s nine or more years old should assess the risks associated with changing their systems — along with the risks of not changing them. In addition to addressing business continuity risks, a newer system may offer better functionality, greater efficiency and lower total cost of ownership.

Regards,
Robert Kugel