Let's examine financial software's role in maximizing IT investments in the cloud era.
Organizations are steadily increasing their adoption of cloud applications, using both public (multi-tenant) and private clouds. The cloud can offer a variety of compelling advantages over the traditional on-premise computing model, including the following:
- Access to a growing number of rich applications accessible over the Internet, without the headaches and costs associated with running hardware and maintenance, or having to hire staff with new IT skills
- Ability to reduce IT costs
- Capability to focus precious existing IT resources on new, innovative projects instead of maintenance of on-premise systems
Although we have seen some smaller companies adopting 100 percent cloud strategies, midsized and larger companies cannot walk away easily from their investments in on-premise software and hardware. These enterprises will tend to adopt a gradual approach to the cloud, particularly in those organizations where mission-critical systems are working well and are embedded in the company's business. Survey data backs this up: in a recent cloud survey that UNIT4 completed with more than 700 medium-to-large organizations across 12 countries, 54 percent expected less than half of their back-office applications to be cloud-based in 10 years.
Organizations that have significant back-office systems in place and that rely on ERP to run their business will also approach cloud adoption with careful consideration. Despite the hype and the considerable benefits of cloud computing, most enterprises will take a hybrid approach for the foreseeable future: part cloud, part on-premise. Most cloud applications today have not achieved feature parity with industrial-strength enterprise applications, and because of this, companies often deploy point solutions in areas where cloud applications have matured or where cloud platforms offer a unique advantage, such as CRM.
That is likely to change in the next few years. Forrester Research predicted in April 2011 that the global cloud market will grow from $40.7 billion in 2011 to $241 billion in 2020. Further, Forrester's data identified Software as a Service (SaaS) as a tremendous growth area, forecasting the global SaaS market to grow to $92.8 billion in 2016, up from $21.2 billion in 2011.
For companies that have invested in large, established infrastructures—such as those based on IBM Power Systems—transitioning toward the cloud by taking a hybrid approach is also an attractive route. Hybrid cloud computing offers greater flexibility to meet the changing data and user needs that most companies experience, and it can provide a smoother transition for those concerned about controlling mission-critical functions. The key is leveraging existing IT assets while creating a foundation for future cloud initiatives when the time is right. By maintaining mission-critical applications in-house and gradually moving some functions to the cloud, companies can reduce the associated risks while remaining agile. Integration, as always, will be crucial.
Power Systems companies are well-positioned to support a hybrid cloud infrastructure, with powerful servers and the associated network infrastructure required for a mix of cloud and on-premise computing. It is essential to know which applications to focus on and how they should best be deployed. Applications in the cloud era often run in a variety of locations, on different platforms disbursed throughout the Internet and outside corporate firewalls. This can lead to divides between applications and systems at many levels, creating a challenge for CIOs and CFOs to maintain control of the following: processes, master records, and other common data shared across systems; transactional data flow; and reporting and business intelligence.
Control Is Key; Without Integration, Manual Workarounds Proliferate
One unintended consequence of cloud computing is that it can put more reliance on people and ad hoc systems to fill the control gaps, if the disparate applications are not properly integrated at the levels of process, data, transaction, and reporting. Without proper integration in the back office, for example, accounting teams will reach for tools at their disposal to fill the gaps—from complex spreadsheets and ad hoc Microsoft Access databases to sticky note reminders, conference calls, and email.
A lack of integration between cloud and on-premise applications—across front and back office and across business processes—will create an abundance of offline or manual processes with an over-reliance on spreadsheets that lack systematic controls and data integrity. Many of these activities occur virtually and require high volumes of email and conference calls to keep processes coordinated.
The answer to this challenge lies in the choice of finance software. This makes good sense because the accounting system is typically the system of record for key business and accounting information, e.g., what is the exchange rate or tax rate used today? It's vital to choose a finance system that is capable of filling the control gap among on-premise, Power Systems–based solutions and cloud applications and that will act as a virtual accounting and control service for other applications that require accounting business rules, reference data, and transactional interaction. For example:
- Financial systems need to serve as controlled reference points for this data, providing Web service access and/or coordinated synchronization of master data to disparate systems.
- Wherever possible, the interaction between systems should be in real time; nobody wants to step back to the mainframe, batch-processing era.
- This will require a financial system that provides 100 percent of its functionality through APIs via Web services.
Hybrid and multi-cloud computing models can also create gaps in business processes and activities that cross clouds or systems. CFOs need to introduce process controls that overlay the systems as well as the activities conducted by everyone who works on them.
For example, the "order-to-cash" process might involve two or three systems that could be running on different hardware environments (for CRM, ordering/billing, and accounting). Process controls must be in place to ensure that each system has performed the transactional handoff properly and that a reconciliation process has occurred and been approved by the appropriate personnel. Ideally, this control should be a systemic control, whereby approvals and any supplemental materials, worksheets, and/or notes are captured electronically in an iron-clad audit trail. This will allow auditors to easily follow controls across various cloud applications and the divides between systems. Automating these controls eliminates manual processes, manual reminders, spreadsheet version control, etc.
Another complication of most cloud computing environments is that reporting data is now spread across a greater variety of systems. With systems distributed across the Internet, reporting can become more difficult for both Generally Accepted Accounting Principles (GAAP)/International Financial Reporting Standards (IFRS) and managerial reporting. Although this situation may cry out for a data warehouse, more practical and immediate solutions exist, particularly when it comes to financial reporting, profitability analysis, management reporting, and the like.
Financial Modeling vs. the Flat Chart of Accounts
Modern financial systems are now able to function like a customizable data warehouse, in which the system can track a variety of financial and statistical information in summary and in detail. This capability is particularly handy when a central repository is needed to combine information from a variety of systems typically seen in cloud environments.
The most critical capability required, however, is flexibility in the financial system's chart of accounts to accommodate the variety of systems encountered in the hybrid or multi-cloud environment. In the hybrid situation, on-premise and cloud point solutions might have quite different financial tracking capabilities. Some systems can provide a treasure trove of detailed information, while others are quite limited. For instance, a high-end CRM system might be able to track customer orders by product line, product, promotion, customer location, and salesperson. A low-end system may be able to track sales only by product and customer.
The high-end system would allow users to leverage the CRM system's granularity and produce profitability reports by salesperson, customer location, and more. The low-end system might force a user to zero fill or plug dummy account numbers to run something similar, cluttering the general ledger to make the low-end system fit in with a more expansive corporate chart of accounts. Either way, the financial system must accommodate a variety of structures or details that may not map directly to the simple, flat structure found in most charts of accounts.
Not Your Father's Chart of Accounts
In today's environment, the chart of accounts needs to vary according to the underlying systems and type of information being tracked. It will need to expect diversity in overall length and segment length, yet still tie together neatly from a reporting perspective. Overall, it will resemble a more multi-dimensional structure like a financial model, not a linear or flat arrangement found in older or low-end financial systems.
Flexibility was key for the Fashion Institute of Design & Merchandising (FIDM) when it was selecting its financial management system. "FIDM takes a best-of-class approach with all of its applications," said Roxanne Reynolds-Lair, CIO, Fashion Institute of Design & Merchandising. "We had two additional requirements for our financial management system: it had to run on the IBM i, and it had to have a flexible chart of accounts."
This requirement can be a big problem for traditional accounting systems. Older financial systems were designed to provide a common chart of accounts across a suite of modules and systems, sitting on one platform, usually from one ERP supplier. In many cases, the chart becomes fixed once it is decided upon. It may be fixed in overall length or fixed for a particular segment. This can be a severe limitation in the cloud computing model, limiting both GAAP/IFRS and managerial reporting capabilities.
Cloud Computing: Benefits and Challenges
In summary, financial systems need to play an interactive and overarching control role in the cloud computing era in order to help businesses maximize their current IT investments. While there are considerable benefits to cloud computing, there are also challenges. These challenges can be easily overcome with a financial system that is designed to co-exist, integrate, and interoperate with both cloud and/or on-premise applications. By taking this approach, organizations using IBM Power Systems can gradually transition to the cloud while exploiting the value of their systems' investment in the future.
Financial systems must be able to provide centralized controls across a heterogeneous and virtual computing environment. This includes the ability to connect with other systems via Web services to synchronize accounting rules, master information, transactions, and reference data. Furthermore, control processes, particularly those conducted by people, need to be overlaid across the mixture of systems in an automated manner.
And finally, businesses transitioning part of their operation to the cloud environment will require more flexibility, particularly in the chart of accounts area, from a data collection and reporting perspective to accommodate the various data streams generated by different applications a company will inevitably encounter.
Power Systems users have powerful tools at their fingertips and must carefully evaluate their options for the best combination of cloud and on-premise services to meet their needs, keep the organization moving forward, and make it as competitive as possible.
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