It was just a few years ago that cloud-based accounting software was a rarity, and there were numerous skeptics who were certain that it was just a fad. They were wrong.

Today, accounting and other applications reside in the cloud in ever-increasing numbers, and it’s the fate of in-house applications that is becoming an unknown. To establish the state of cloud-based accounting, and get some idea of where the industry is headed, we surveyed eight popular vendors of accounting software to find out what they had to say.

In terms of where cloud accounting is going in the next year or two, the majority of the vendors we surveyed believe that there will be developments in at least two major areas, with some interconnection between the two. One is access to big data, or being able to delve into the underlying data contained in accounting and other financial systems in order to allow accountants and their clients to make better decisions.

The other anticipated major development is the rise of machine learning and artificial intelligence, which will reduce the workload on accountants and make gathering and understanding data more efficient and effective, and also provide accounting practices with the time and capability of providing more and better advisory services.

William Schonbrun, senior director of product marketing at NetSuite, said that he expects adoption will continue to increase even more rapidly at the lower end of the market (companies with under $5 million in revenue). “We also see enhanced reporting/searching/pivoting of financial information moving from the domain of the few to the many,” he explained. “Rich cash management will move from stand-alone integrated solutions into core cloud-accounting applications. We believe this will also be true for features like intercompany reconciliation and continuous close.”

According to Herman Man, vice president of product and partnerships at Xero, “Automation and machine learning will continue to play an important role in the transformation of the accounting industry. With technology doing more of the time-consuming data entry work, we will see more accountants take on advisory and virtual-CFO roles for small businesses. The higher-level advisory services that give clients a better understanding and more control over their finances are a key human function that cannot be replaced by a machine.”

“Firms are moving beyond only the long-known benefits of offloading IT concerns, anytime/anywhere access, and business continuity planning, and expecting efficiency gains for themselves, and for their clients, especially small-business clients,” said Christina Wiseman, product manager of centralized services and transitions for Thomson Reuters. “Small-business clients are accessing information much more frequently, and through different mediums and in different locations. They want to be more engaged with their books and metrics, and are looking to cloud technologies to enable them to do so, from whatever device and location is convenient for them.”

Jennifer Warawa, executive vice president of partners and alliances at Sage, also believes that users need better access to the inherent data contained in their systems: “Business intelligence, especially predictive analytics, will move into core finance systems, empowering the finance team to discover business insights in real-time. This evolution will minimize the need for costly data warehouse projects and will tie insights to detailed transactional data, allowing for precise, highly actionable insights.”

But data mining is not the only area that she sees cloud accounting expanding in. “Many existing features will be more heavily used, such as the digitization of previously paper items, electronic notifications, and time clock features,” she added. “We’ll see much more e-commerce capabilities, in areas such as online bill payment and merchant solutions. We’ve seen data entry reduced by integration — we’ll see more elimination of data entry by technology such as bank feeds.”

Ariege Misherghi, director of product management for the QuickBooks Accountant Segment at Intuit, added, “Continued advancements in automation are what’s in store for cloud accounting near-term. Specifically, these automation advancements will revolve around the increased use of machine learning, artificial intelligence, chatbots and conversational user interfaces that streamline processes, enhance data flow, and proactively provide critical KPIs and insights to help make better business decisions.”

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Give Us More!

Most application developers spend a great deal of time and effort thinking up ways to improve their software offerings. But one thing that’s remained a staple in the accounting software industry since its inception is that many of the features and functionality that today’s software provide come as a result of customers asking for them.

Sometimes these features are very directly spelled out by users. “Common features we often hear customers ask for include payroll, advanced reporting and multi-currency,” said Xero’s Man.

Other times, these requests are more in the way of general directions. “Our accounting partners are increasingly asking us to develop features that reflect our vision for QuickBooks Online Accountant, which is to be the one place where accounting professionals can grow and manage all their clients and their entire firm,” said Intuit’s Misherghi. “More specifically, they are looking to us to increase how data flows not only across our products and services but with third-party apps and mega platforms. As accounting professionals have increased their use of third-party apps and solutions that improve workflows, so has the amount of time spent switching between and maintaining different tools. This leads to inefficiencies and less time delivering value for clients. We also are focused on how data flows into QuickBooks from mega platforms like Google, Apple and PayPal.”

Not Just a Stand-Alone

Integration is another important function that cloud accounting vendors are addressing. One approach is to put everything into a single large application, as Wave does. “For the small and micro-business, though, we’re confident that business owners largely prefer not to have to think about this. Wave’s strategy is to build all the tools a business owner will need for their finances (invoicing, payments, payroll, accounting and so on) into a single system, such that they all just work together instantly,” said CEO and co-founder Kirk Simpson.

Others take a more best-of-breed approach. Chandra Bhansali, CEO of AccountantsWorld, notes that easy and seamless integration between applications through APIs is an extremely important aspect of the cloud. “Because of that, we see a tremendous amount of integration of cloud-based accounting solutions with other applications like payroll, CRM, bank feed, employee expenses, electronic payments and so on. This has greatly reduced the time needed to collect data for accounting work.”

This sentiment is echoed by Sage’s Warawa: “Agile accounting systems are the future. Companies and users don’t want to be locked into a certain ecosystem of software products; they’re looking to build a specific cloud solution set using best-of-breed products. As cloud accounting adoption continues to accelerate, this factor will separate the good from the great.”

Is There Software in the House?

Many of the vendors we surveyed exist solely as cloud-based providers. Only Sage, Intuit and Thomson Reuters started out offering in-house accounting applications. And all of these vendors still do, though Sage recently acquired cloud-based software Intacct to add to its portfolio.

Still, these software suppliers very much believe that while the cloud does offer significant benefits, their installed client base of companies operating their accounting systems in-house have the right to select what’s best for them and not be forced into the cloud if that is not the direction that they want to move in.

Thomson Reuters’ Wiseman supports both the in-house and cloud approach. “The CS Professional Suite is available as a desktop solution, or firms can choose to have us host the suite (and Microsoft Office) through Virtual Office CS,” she explained. “We also offer Onvio, a completely Web-based solution, for many of the firm management tasks firms may have, and firms can easily have a mix of these products. While the majority of firms still have at least one major application in a local environment, cloud adoption continues to grow.”

Sage takes a similar approach. According to Warawa, “We want to make it easy for our existing customers to take advantage of the benefits cloud solutions offer, like anytime, anywhere access. At the same time, we recognize that they want to upgrade their solutions at their own pace, when it works best for them. This is why we have solutions that will enable existing customers to keep the existing product they know and love and simply upgrade to the “c” line cloud suite to benefit from new connected services like Microsoft Office 365.”

Intuit is yet another vendor that supports both cloud-based and in-house clients. “Accountants are in the best position to determine if cloud accounting or in-house software is the appropriate solution for their clients’ needs. Therefore, we will continue to support all our customers, regardless of the online or offline platform, and make investments to deliver the features and functionality they most desire,” said Misherghi.

Especially for You

One area where there was mixed responses was in the availability of cloud-based vertical market applications. The vendors with a target market of smaller businesses tended to have little interest in vertical market software. “In general with small and micro-businesses, verticalization isn’t the direction we see things going. It’s a cost/benefit question, and for micro-businesses, the value of vertical-specific accounting software isn’t usually there,” said Wave’s Simpson.

Intuit’s Misherghi tends to agree: “We are focused on developing an online platform that meets the needs of most customers, and our strategy for verticalization is to enable the unique small-business needs through third-party apps.”

That agreement wasn’t universal. Xero’s Man sees things differently. “As the cloud expands across industries, including legal and health care/pharma, we’ll see less of a limited concentration on engaging verticals in the cloud. Over time, we’ll see these industries latch on to cloud technologies as they aim to work more efficiently,” he said.

And vendors selling into a more upscale market, such as small-to-midsized businesses that have enterprise-level needs, were all much more positive about vertical software making its way in the cloud.

From an accountant’s practice viewpoint, AccountantsWorld’s Bhansali was very positive about the future of cloud-based verticals: “Since ultimately every solutions provider is going to abandon desktop software, everything, including solutions for vertical markets, will have to move to the cloud. More and more vertical solutions are already moving to the cloud.”

And NetSuite has offerings in a variety of areas. According to Schonbrun, “We go to market by verticals and are seeing cloud computing extending across industries including manufacturing, wholesale distribution, retail, software and services, and helping blur the lines between them as business models transform and adapt to the changes brought about by digital technologies.”

A Dollar Down, a Dollar a Week

One of the very different traits of cloud-based applications is that most of them are only available on a subscription basis, payable either monthly or yearly. It’s a far different revenue approach than the software industry has taken for decades. But when we asked our vendor panel how their customers were handling it, we universally were told it wasn’t a problem.

Thomson Reuters’ Wiseman offered a possible explanation: “Most people have experience with subscription models in other areas of their lives, so it has become a standard that is no longer a surprise.”

Only NetSuite volunteered that they occasionally get some pushback, but that it wasn’t really a problem. “We come across isolated cases, very early during sales cycle, where businesses who do not have much experience with subscription pricing sometimes ask for more details and cost benefit analysis versus the on-premise model,” said Schonbrun. “This is resolved quickly when we show value not only of upfront cost savings but on an ongoing basis. We have tools with real numbers to demonstrate the ROI.”

Back it up there

Another area we were interested in exploring was backup. In the early days of cloud accounting there was concern on the part of some accountants and their clients about ownership of the data. A fair number of both accountants and clients worried about losing their data if a vendor went belly-up, or exposing their sensitive information if a cloud accounting supplier was hacked.

In the current environment, these fears seem to have largely disappeared. Perhaps knowing that the CIA is utilizing Amazon Web Services’ secret computing service enhances confidence in cloud security (though given the leaks from a number of three-letter agencies, perhaps it shouldn’t). Many cloud accounting services are hosted by major service vendors such as Amazon, Microsoft and Google, which helps many users feel comfortable with their reliability and longevity.

Many users are also somewhat lax about performing backup. “For most micro- and small-business owners, backing up locally is one more chore they would rather not have to worry about,” Wave’s Simpson said.

Sage’s Warawa added, “Automated backup is one of the top reasons small businesses cite for wanting to move to the cloud. Accountants understand that their client data is extremely valuable, and that their business data is very valuable, and consequently, want to ensure it is always available. They like the idea of not having to think about backing up their system every day — the peace of mind that comes with knowing that it is always backed up is very important. That is why even in our connected cloud products, we enable automatic cloud backup as a core capability.”

Putting it Out There

While many users have their own reasons for heading to the cloud for their accounting, we asked vendors to list three or four reasons they believe that their clients have for using cloud-based, rather than in-house, accounting. While many of the answers were similar, Prashant Ganti, head of product management at Zoho Books, put it succinctly: “Anywhere, anytime, any device — a cloud service can be accessed from any device, be it mobile or laptop or desktop, anytime. Collaboration — accountants and advisors can access the books of their clients right from the comfort of their office or home. Integration —cloud solutions can integrate with each other much [more] easily. Data is not imprisoned within an application. Data can freely move from one system and present contextually in other applications. And artificial intelligence/machine learning — only cloud solutions can take advantage of latest advances in artificial intelligence, machine learning and deep learning technologies and ensure a much better experience for the users.”

AccountantsWorld’s Bhansali highlighted one of those advantages: “Client collaboration is an important benefit. If a client wants to share some work, like performing transaction entries, the accountant can set up and customize the system for that client based on their needs and ability. This greatly minimizes client errors and simplifies the system for the client.”

Where Are We Headed?

Finally, we asked our vendor panel where they thought cloud accounting was going over the next few years. Many pointed out that artificial intelligence and machine learning will change the way users interact with their accounting system. Given how Amazon’s Alexa and Google’s Google Assistant are changing the way that we interact with many of our devices, and even our homes, that’s pretty much a given.

NetSuite’s Schonbrun went a bit further: “Our biggest beliefs for the future of cloud accounting are around continually more refined focus. Vertical and micro-vertical specific editions or functions will go deeper into key areas. We think customers will be less and less OK with a ‘one-size-fits-all’ version of their solution. Following on the focus into verticals, we think solutions will go deeper by role as well. The needs of an AP clerk are quite different than a CFO. Lastly, we believe cloud accounting solutions will provide stronger roadmaps for organizations to grow and expand, especially into international regions — without having to change their solution, or purchase different solutions for different regions and integrate them all.”

Hopefully, the growth in cloud accounting will be paralleled by the growth and financial well-being of the practices and their clients who make the move.

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Corrected January 12, 2018 at 12:04PM: An earlier version of this story misspelled the name of Zoho's Prashant Ganti.

Ted Needleman

Ted Needleman

Ted Needleman has been covering technology for more than 30 years, writing frequently on software, hardware, and related subjects. He was previously editor-in-chief of Accounting Technology.