The idea of renting software – known as software as a service (SaaS) – has quickly gained ground in some areas of the enterprise.
Customer relationship management (CRM), in particular, has become a competitive market for on-demand software, with companies such as Salesforce.com, Netsuite and RightNow Technologies all active.
But although industry analysts expect companies to rent an increasing percentage of their business software, rather than buy capital-intensive and inflexible licenses, few enterprises appear to be outsourcing financial management applications on a significant scale.
“There is a lot of opportunity for software as a service in the mid-market,” says Paul Hamerman, a vice-president at industry analysts Forrester Research. “But even there, most successes have been in CRM or human resources applications. We are not seeing as much uptake in financial applications.”
There are several possible explanations.
SaaS or software on-demand offers companies an inexpensive and quick way to set up their infrastructure, paying simply a monthly rental according to the number of users and removing the need to invest in hardware. But this has to be set against the potential disadvantages, especially from the CFO’s point of view.
Finance directors may be understandably cautious about handing over control of their key IT tools to a third party.
Such concerns might be reinforced by the fact that although the SaaS market is growing rapidly – analysts estimate that it is worth between $7bn and $10bn annually – there are fewer vendors specialising in providing on-demand financial software than there are in other sectors, such as CRM and human resources.
CFOs might also have memories long enough to recall the hype around application service providers (ASPs) towards the end of the last decade. Financial software and ERP software were at the core of many ASPs’ business models but few of those companies remain in business today.
“The ASP providers didn’t own the intellectual property and so were entirely at the mercy of the software company [whose applications they hosted],” says Jim McGeever, chief financial officer of on-demand software vendor NetSuite. “It is almost impossible to host the software for less than the original developers.”
Companies that did turn to ASPs often found that costs were higher than they expected, and service levels rather lower, not least because they were forced to handle multiple applications in order to make money. “In ERP and financial applications, keeping the server up is not the problem. It is what happens if the database becomes corrupted or a back-up fails to restore.”
CFOs may well argue that it is the finance department that is best placed to manage financial software, although Mr McGeever says that a growing number of smaller companies are turning to NetSuite and other on-demand applications, in order to reduce costs and increase agility.
“A lot of the time, it comes down to control,” he says. “We call these people ‘server huggers’, who worry that if they let their financial system go offsite, they will lose that control. And these are vital systems, which, if they do go down, will cause significant problems for companies.”
Outsourcing-based companies such as NetSuite argue, of course, that they can provide higher levels of service than most companies’ in-house IT departments.
One advantage of SaaS, especially for small and mid-sized businesses, is that the service provider knows the software intimately and in all probability, better than an in-house IT team could. The service provider can also add levels of redundancy, security and business continuity to their data centres that all but the largest enterprises would struggle to match.
Nonetheless, significant challenges remain for companies that want to outsource their financial infrastructure.
For smaller businesses and start-ups, especially those operating in multiple markets, the SaaS model offers a lower cost and quicker alternative to setting up in-house financial management systems in every office, networking them together and staffing the departments.
NetSuite, for example, teamed up with an outsourcing company in the Philippines to handle its accounts payable and invoices as it expanded outside the US. The model has been so successful that Netsuite now offers this as a service to other companies.
For larger companies with established processes, however, moving to an outsourced financial system is less straightforward. The uptake of hosted versions of large enterprise resource planning applications, from the likes of Oracle and SAP, is growing.
But integrating such systems with in-house applications, especially older programs running on mainframe or Unix computer systems, is not easy. Often, IT departments feel more comfortable undertaking such integration work when the entire infrastructure operates in house.
And for CFOs, there are well-established alternatives to software outsourcing that can reduce the costs of operating the finance department without the risk of a loss of control.
Business process outsourcing, in particular, allows organisations to buy in non-core services such as accounts payable, invoicing or even payroll without the need to hand over the financial management or ERP system to a third party, and there are a wealth of companies offering such services, including the large professional and business services firms.
“There is a lot of value in outsourcing accounts payable or invoicing processes, which are not core to your business,” says Melvin James, principal consultant at technology consultancy Morse. “Why would you not do that? It frees up your own people to work on more difficult tasks. But you don’t want to outsource the management of your finances.”
