Joseph Schumpeter was a German economist who lived in the early part of the 20th century. In books that he published between 1939 and 1942, he explained and popularized the idea of creative destruction. In Capitalism, Socialism, and Democracy, he wrote, “Capitalism is by nature a form or method of economic change and not only never is but never can be stationary. […] The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates.”
The business world is witnessing creative destruction in the software industry. With the advent of cloud computing and Software as a Service (SaaS) business models, the old method and cost curve associated with the delivery of IT resources is being destroyed. This is leading to a revolution in new goods and markets because it allows small companies to save money by outsourcing the IT department, but at the same time to increase their overall computing power through shared resources and services. SaaS models are the fuel feeding the capitalist engine that powers all of these new markets and goods that Schumpeter predicted.
To understand this creative destruction better and the advantages it provides to companies that embrace it, let’s examine what is gained by moving only one department, the accounting department, into the cloud.
Reduction in the cost of compliance: As we noted in previous posts, accounting rules are constantly changing. The simple rules outlined by GAAP revenue recognition rules have become more complicated, particularly for software companies. Regulators and auditors now request to review the vendor specific object evidence (VSOE) calculations laid out in SOP 97-2.
So how can the cloud help? By using a SaaS ERP like NetSuite, accounting departments can automate the revenue recognition for each line item based on its revenue recognition rules. For example, on multi-element sales, the system can track and support “units of accounting” and selling price. Or the system can recognize revenue as the job is completed, depending upon percentage of completion-based revenue recognition. By automating this process, accounting departments save both time and money, allowing them to focus on strategic financial matters.
In addition to these savings, accounting departments also do not have to delay implementing new accounting rules. Under multi-tenant architecture, the ERP is updated by the vendor as accounting rules change instead of when IT receives a new software patch from the vendor.
Reduction in the cost of data entry and keying errors: For software companies that are operating on spreadsheets or primitive accounting software, keying errors are more common than anyone cares to admit. Cloud based accounting software eliminates the need for data entry into the ERP system. Instead, where possible, processes are automated through “live feeds” such as those available from banks and credit card companies. Not having to key everything manually also reduces those instances in the database where three different master files exist for the same customer because sales, accounting, and customer service all made their own entry. Customer information is entered once and then shared with the other groups.
Reduction in Strategic Risk: According to the Decision Analytics Blog, ‘strategic risk is a business discipline that drives deliberation and action regarding uncertainties and untapped opportunities.’ Financial groups need to be concerned that they are prepared to support the decisions management makes when a strategic risk is identified. Companies must have both the capital and the resources to be able to respond. If the accounting group is on a system like NetSuite, they will be prepared to support management.
Cloud based SaaS accounting software updates data in real time, not as part of some nightly batch job. Since accounting data is not lagging behind reality, companies have greater knowledge of their business. This knowledge allows them to respond to emerging strategic risks with confidence.
Schumpter also wrote that “situations emerge in the process of creative destruction in which many firms may have to perish that nevertheless would be able to live on vigorously and usefully if they could weather a particular storm.” The advent of cloud computing is an emerging situation that your company should not ignore. If you are interested in living “on vigorously and usefully” you might want to learn more about Bi101 and the products we support.