It's never been particularly easy to accurately segment the accounting software market. Traditionally, most vendors, users and pundits have maintained that the market segments into three strata -- entry-level, mid-market and enterprise.
But determining exactly where one stratum stops and the next begins has always been a bone of contention. Where one vendor differentiates entry-level from mid-market in terms of company income, another defines the break by the number of users or total employees in the company that will be using the software.
As a general rule, vendors and analysts tend to classify an accounting system based on it having a number of characteristics. These include modularity, the availability of a wide variety of extensions to the basic accounting system, such as enhanced inventory tailored for warehousing, distribution, or production. Multi-currency is also an expected characteristic of mid-market software, though this feature is often available at the entry-level as well. Other characteristics that define software as mid-market, rather than entry-level, are enhanced security, the availability of self-service features in applications such as payroll or human resources, and the need to go through the reseller channel for purchase and support.
One place where mid-market software has differed in the past from both entry-level and enterprise applications is scalability-the ability to add users. Entry-level applications have limited scalability - you can add additional users, but generally only up to a maximum of 20 or 30.
This limited scalability is a function of the underlying database that the software uses as a foundation. At the entry-level, the database underlying the application is most often a proprietary one. This both limits the scalability of the software, which in turn confines the application as far as the numbers of users, and also puts constraints on just how much of the underlying data is available to the user or a third-party developer.
For the most part, mid-market accounting software tends to use databases that have less expensive licensing fees. While enterprise-level software uses Oracle, IBM DB2 or SAP DB, mid-market applications tend to be based on less expensive SQL software such as Pervasive, or even Microsoft's MySQL.
Mid-market systems are also frequently characterized by providing a "best of breed" approach. While a particular vendor may not offer applications in every area of a company's need, most mid-market vendors work hard to provide integration with vendors of other applications that their customers might want to use, such as Salesforce's CRM.
CLOUDY WITH A CHANCE OF INNOVATION
One interesting trend, not only emerging in the mid-market but in the entry-level segment as well, is subscription-based licensing. This has actually been around for a while in the guise of Software-as-a-Service, but until fairly recently, vendors could almost be divided into two groups: those, such as NetSuite, AccountantsWorld and Intacct, that offered only hosted accounting systems, and vendors such as Sage, Intuit and Microsoft whose accounting applications were, for the most part, in-house-oriented.
These days, more and more vendors are offering cloud-based alternatives to in-house licensing. The basic client/server application model is still pretty much the same, except instead of having the actual application software and data storage in your or your clients' data centers, it exists "else ware." The vendors offering cloud-based accounting systems frequently have several data centers located in diverse geographic areas, with data and applications mirrored and running off of different servers. Data and application files are often shifted around to different servers and data centers to balance and spread the computational load over the vendor's entire network. And having extensive data center capabilities means that if one or more servers go down, there's an automatic roll-over to another server or server group. Downtime in a cloud-based environment is more likely to be an Internet problem than a server problem.
The cloud-based model is gaining in popularity for a number of reasons. One is the dispersed nature of the application. With all of the storms, floods and other disasters in recent years, using a vendor that can shift mission-critical data away from a possible problem area provides increased assurance of the safety of your and your clients' data.
And every vendor we spoke with pointed out the inherent advantages of not having to maintain a large in-house hardware set-up and support staff. Conventional in-house mid-market applications generally require a moderately sophisticated IT staff, both to contribute to the installation of the system initially, and to maintain the system once it's up and running. Ongoing training and user support can be another burden on an in-house IT department.
Moving to a cloud-based accounting system may not obviate the need for an IT department and support staff -- any company large or sophisticated enough to require a mid-market solution is also going to have network and computer upgrade and repair issues requiring in-house competency. But outsourcing the accounting application can reduce the need for a dedicated IT staff, and considerably reduce the load on the staff your client already has.
Sage Software's executive vice president and general manager of mid-market solutions, Joe Langner, underscores this by mentioning that with a subscription, customers are usually getting much higher-end equipment than they could typically afford, and that technology in the vendors' data centers is continually upgraded and updated. Another behind-the-curtain benefit that most customers don't usually consider is that the vendor who is providing hosting or subscription services has generally heavily invested in staff as well as technology. For the monthly fee, the customer is getting technical expertise that many of them could not afford if they were running in-house.
Cloud-based or hosted applications also are a win-win for the client and the vendor in both the areas of cost and revenue. On the client side, they have fairly fixed monthly costs with minimal start-up expenses or capital outlay. Unlike licensing an in-house product, all support and upgrade costs are included in the fee, and the client has no worries about performing upgrades or backups (though having your client occasionally do their own backup is always a good idea). New features and functionality are automatically rolled into the software, so your client knows that they always have the latest and greatest.
On the vendor's side of the transaction is a fairly reliable revenue flow. There's no guarantee that a customer will be with the vendor forever, but assuming that the vendor provides a good level of service, they have a good chance of keeping many clients on an ongoing basis. The vendor also doesn't have to resell the client every year on maintenance and upgrades. Given how many clients are using years-old software, that ongoing revenue stream could be exceptionally valuable.
Intacct's director of product marketing, Vijay Ramakrishnan, points out that their definition of the mid-market encompasses companies with between 10 employees and north of 1,000. Ramakrishnan feels that Intacct's ability to scale up and down quickly makes their solution offerings attractive to companies that anticipate quick growth.
Several of the vendors we spoke with also mentioned that a subscription or hosted approach allows them to provide their customers with a usage-based billing model, rather than a fixed fee based on an assumed number of users.
Sage's Langner pointed out that customers are already getting this in some applications, such as payroll, where you pay less to process 10 employees than you do to generate checks for 100 employees.
MOVING UPWARD (AND OUTWARD)
One trend that was mentioned by several of the vendors we talked with is that what we've come to consider as accounting software has expanded in scope over the past several years. The focus of accounting software, from its moment of inception in the 1960s and 1970s, has largely been on the financial aspect of accounting -- bean counting.
During the last decade or so, that focus has shifted somewhat to encompass the financial management of the entity. This has been reflected in the expansion of utility of the software, offering comprehensive reporting considerably beyond the old standard general ledger, trial balance, and financial statements. Dashboards and other management tools are now commonplace in accounting systems at all levels, whether entry-level or enterprise.
Even more recently has the awareness emerged on the part of vendors and clients that financial management is only part of the story. Regardless of the size of a business, from mom-and-pop to huge global entities, workflows weave in and out of financial management, process management and resource management.
This realization happened a bit earlier at the enterprise level, but mid-market vendors have also begun to see the light, and you can expect a greater level of integration between what is thought of as accounting software into a synergistic whole with other process workflows within your clients' companies. The result is an increasing movement toward corporate or entity management, with financial management (i.e., accounting) being only a part of the overall process. Just as cost accounting morphed into management accounting, so has accounting as a whole become understood as being a component of the operations of a business (or nonprofit).
HERE THERE AND EVERYWHERE
Since the beginning of the computer age, the trend has been to take advantage of the technology. As technology has improved, so have the capabilities and functionality of the software and applications we use.
Intuit's Ritesh Somani, the group product manager for QuickBooks, mentioned that while he considers QuickBooks Enterprise Solutions more of an up-market, rather than a mid-market, offering, he believes that some of the factors driving companies to the mid-market are an increased need for features like enhanced reporting and the ability to access the accounting system from geographically diverse locations and devices.
Accessibility is definitely one of the trends we're seeing not only in mid-market software, but in application software in general. Accountants were among the first professional groups to recognize the need for portability in accessing client data, and many who have been around since the beginning of the PC age can recall seeing, or being, one of the users of a "transportable" computer like the original Compaq, Osborne and Kaypro.
Accountants have also been quick to embrace laptops, smartphones and now tablets. With this quick adoption of portable devices by both accounting professionals and their clients comes a desire and expectation that the solutions they use, accounting included, will be usable from wherever they happen to be through the Internet, and by any of the browsers they happen to have on those devices.
Another area that's likely to become more of an issue in the mid-market is the language of the application interface. With the globalization of companies increasing, Intacct's Ramakrishnan mentioned that his company is looking to address the need to provide the user interface in an increasing number of languages.
This globalization was also mentioned by NetSuite's chief operating officer, Jim McGeever, as being a factor in a changing definition of the type of client that is using mid-market software.
McGeever noted that there is a growing trend for companies to become much more distributed and much more international at a point much earlier in their growth than has happened in the past.
IS THERE STILL A MID-MARKET?
It seems to be human nature to attach labels to things. Exactly where the shift occurs between entry-level, mid-market, and enterprise software is not only difficult to zero in on, but something of a moving target.
As mentioned earlier, all of the vendors we spoke with consider scalability one of the major differentiators between entry-level and mid-market solutions. Intuit's Somani agrees that scalability is one determining factor, but brought up another factor - usability. In his opinion, many mid-market products are inherently more difficult to use than an accounting application such as QuickBooks. This is one reason that Intuit stayed with a familiar user interface, even though its QuickBooks Enterprise Solutions application, which many consider a bridge product between entry-level and mid-market, offers additional functionality beyond the other editions of QuickBooks.
We heard a similar comment from Sage Software's Langner, who told us that the trend is for software to be super-easy to use and intuitive -- "Flick a switch and you're on." He maintains that a customer shouldn't have to be trained on the software -- they should be able to use it intuitively. There are probably a number of Sage's resellers and trainers who aren't all that anxious for that day to arrive, but it does get nearer all the time.
One characteristic that none of the vendors we spoke with brought up was functionality, though when we mentioned it, all agreed that it is also frequently a differentiating factor. That also ties somewhat into Somani's comments about ease of use, since as the capabilities of an application increase, in most instances, so does the complexity of using it. Microsoft's Gordon Macdonald, the director of Microsoft Dynamics ERP marketing, had a similar observation, addressing the "consumerization of IT" and noting that customers now have considerable experience using consumer-oriented applications such as social media. This, in turn, creates high expectations of how user-friendly and approachable they expect all of their applications, including ERP, to be.
While the size of the client or number of users is how many vendors separate entry-level from mid-market, vendors generally had more difficulty separating their mid-market offerings from enterprise-level software such as SAP and Oracle Financials. At that level, vendors address their software suite as Enterprise Resource Planning, rather than accounting. Software vendors started using the ERP terminology as they realized that an integrated set of applications that need to serve the entire workflow of the company went beyond the boundaries of just financial accounting, but also had to offer increased functionality in other areas of the user organization. These areas include human resources, supply chain management, project planning and management, and even systems and operations compliance issues such as Sarbanes-Oxley.
One interesting comment came from Intacct's Ramakrishnan, who pointed out that one thing that separates the mid-market segment from the enterprise segment is that vendors of enterprise software are starting with the assumption that their customers are already large, not that they need to accommodate rapid expansion on the part of their users.
Better data-mining and analytics are another area where the enterprise market has traditionally diverged from mid-market products. This is changing. Microsoft's Macdonald mentioned that he sees a trend in what he calls "Big Data" - a sharply increasing demand for sophisticated reporting and analysis capabilities within business solutions. And NetSuite's McGeever stated that the feature set for NetSuite's mid-market customers is no less complex in many cases than that for their enterprise customers.
All of which leads to a final question on trends in the mid-market -- is this segment of the market disappearing? The factors that differentiate the mid-market are starting to disappear. Scalability, especially with the cloud-based offerings, is becoming much less of an issue. So is functionality, as vendors improve connectivity between their systems and other systems that exist in the workflow of running a business. Vendor offerings are also becoming more comprehensive, with functions that we've frequently considered enterprise-level, such as logistics (supply chain management, Just-in-Time inventory), multi-currency, and advanced analytics finding their way into application offerings that have been traditionally considered mid-market.
The answer to this is far from clear. There's no doubt that some of the mid-market is being subsumed into the enterprise market space. Both Oracle and SAP, major players in the ERP space, have ventured into the mid-market. SAP has a number of offerings, including a hosted service for what it calls SME ("small and medium enterprise") businesses. And NetSuite, a major vendor to the mid-market, started out as Oracle Small Business Suite before the company was spun off and taken public.
At the bottom line, however, it doesn't really matter whether or not the mid-market is disappearing as a market segment. What is important is that the trend, in entry-level software as well as the mid-market, is to offer more functionality and easier use, for less money. And that's one trend that all of us would like to see continue.
