A discussion about web-based options for
an accounting system or ERP solution

By J. Carlton Collins, CPA

 

Web-based accounting is very intriguing. When the first web-based solution appeared in 1998 with NetLedger (now called Oracle Small Business Suite),  I thought that it would eventually change the way accounting software is marketed, sold, and delivered to end users. Since then many web-based solutions have been launched, only to find a luke-warm reception in the marketplace. I still think that web-based solutions may take-off in the future, but only after several important hurdles are solved. This article addresses web-based accounting solutions and seeks to answer these three questions: 1.What's the fuss all about? 2. What are the pros and cons of web-based accounting? and 3. What needs to happen for web-based accounting to take off? 

Before proceeding with this article, 
I recommend that you first read through my article entitled 
Brief History of Web-Based Accounting

What is Web-Based Accounting?

A web-based accounting package is a complete accounting system that resides on a web server. Anybody in the world can access that accounting system with a simple browser to set up and run their own company. Instead of paying large sums of money up front for hardware and software, the user pays a smaller monthly rental fee. It is an interesting concept and there are many inherent benefits, some of which are listed below:

What Are The Benefits of Web-Based Accounting?

1. You Only Need A Browser - To use web-based accounting solutions, you need only a browser on any computer and a connection to the Internet. This makes it very easy to deploy the system throughout your organization. Remote users can even access the system through computers located at the airport or in a cyber cafe. It is the ultimate thin client model and virtually no effort or expense need be incurred to deliver access to everyone in your organization.
    
2. Lower Up-Front Costs for Software - Customers avoid paying larger up front costs to purchase the software. Large fees for annual upgrades are avoided as well. Instead, the actual cost of the software is spread over time to achieve a better matching of expenditures to the benefits produced by those expenditures.

3. Lower Up-Front Costs for Hardware - Customers avoid paying larger up front costs to purchase and implement a file server and network software. On going costs to add RAM to the file server, replace the server’s hard drives, maintain the systems, etc. are also avoided.

4. Lower Administration Costs – Customers avoid the need to hire an expensive IT professional staff or consultants to maintain the system. Typically systems that run on the higher-end Microsoft SQL server and Oracle databases require an IT professional on staff or on call. Salaries for this caliber professional can range from $75,000 to $125,000 and up. With the web-based model, certified engineers are on staff night and day to maintain your system, and their cost is included in the monthly rental fee. 

5. Shorter Implementation Time Frame - The implementation time frame is significantly reduced because the system is already up and running. The customer need only log in and begin entering data. The training requirement will remain the same whether the system is running locally or via the web.

6. Lower Costs for Multiple Locations – In the past, companies with multiple locations were forced purchase expensive solutions such as Citrix or Microsoft Terminal Services Advanced Client to accommodate remote access to the accounting software database. These remote access solutions alone cost $15,000 to $30,000 and higher, which prices these solutions out of reach for many small businesses. With the web-based accounting model, even the smallest of companies can achieve data entry into a single system from multiple locations at affordable prices.

7. Work From Home - This solution is also ideal for small business owners who occasionally want to work from home. Suppose a child is sick and cannot attend school on a given day. Web-based solutions make it easier for the parent to stay home with the sick child, and still access the web-based accounting system to process payments, print reports, input transactions, etc. As another example, a web-based accounting system might make it easier for a working parent to leave the workplace early, for example at 3:00pm, and continue working from home in order to miss the rush hour and to be there when the children gets home from school.

8. High-End Databases – These solutions run on the world’s most robust and secure databases – such as Oracle and Microsoft SQL server, yet these solutions cost as little as $9.95 per user per month. One of the common shortcomings of low-end accounting systems has been that they incorporate weaker database technology that does not scale nearly as well as higher-end databases. Today, all web-based accounting solutions use the same high-end database that power the largest companies in the world. In other words,  small businesses need not worry about outgrowing the system’s capacity.

9. No More Backup Worries – With web-based accounting solutions, backups are maintained on a frequent basis which further protects small businesses in the unlikely event of data loss. Studies show that only a small percentage of small businesses perform regular back ups properly and store them off-site. With web-based accounting, the company can still maintain their own local back ups if they want, even though the web-based accounting publisher performs rigorous back up procedures religiously.

10. Up-to-date Application Code – Under this model, web-based accounting solutions apply enhancements and patches to their product on a continuous basis compared to the older method in which customers receive patches and enhancements once or twice a year. The result is that web-based solutions can be more responsive to the customer’s needs and the application itself always reflects the latest version. There is no more need to pay consultants hefty fees to come in and implement system upgrades - this occurs automatically on a timely basis and with no additional cost to you.

What Are Some Examples of Web-based Accounting?

1. Oracle Small Business Suite
2. QuickBooks for the Web
3. ePeachtree
4. Intacct
5. ACCPAC Online
6. mySAP
7. Integral Accounting
8. Peachtree Web Accounting (Combination local & web-based)
9. Microsoft Small Business Manager (Combination local & web-based)

What are The Problems with Web-Based Accounting?

There are several problems with web-based accounting as follows:

1. Speed - Dial up access to the internet is not enough. It takes cable, DSL, or business class high-speed internet access to make web-based accounting work at acceptable levels of performance. If you have dial-up access, don't even bother. On April 3, 2002, Mark Cho of Intuit reported to me that Intuit does not even target small businesses with dial up access - they actually tell them that QuickBooks for the Web is not for them. This is a valid concern which is very easily solved - order high speed internet access today. I am usually a very polite person, but when it comes to this particular issue, I have to say that only an idiot would use dial up access anyway. 
    

2. Reliability - Web-based accounting relies 100% on the internet being up and running and available. I can assure you, the internet is not always up and running and available. Ask yourself, how many times has your internet access been down this year? If the internet is down - you are down, and most likely your business is down as well. Ouch! This is a valid concern and there really is no answer other than employing a local/web solution such as Peachtree Web Accounting or Microsoft SBM.
    

3. Viruses - because of rampant viruses and media attention, many people fear that they might be at a higher risk to contract a virus if they run their accounting system on a web-based system. There is little basis for this. Yes, viruses are a serious threat. You should be running virus protection software and a firewall device anyway. Theoretically, you are at the same risk level of contracting a virus whether your accounting system is on line or stored locally. The threat of viruses is not a very valid concern in my opinion.
    

4. Security - Most companies are very concerned about sending their data over the internet. They fear that their data will either be viewed or compromised. The reality is that with 128 bit encryption, sending you data over the internet is probably far safer than whatever you are currently doing now. If you currently keep your data on a file server at the office, the thieves could steal the computer, fire could destroy the computer, unauthorized employees might access the system, janitors or security guards may access to your system at night, back up tapes could be left in non-secure environments, etc. While nothing in this world is 100% safe, security experts agree that web-based accounting results in a more secure solution than most traditional file server based systems. Security is not a very valid concern in my opinion.
    

5. Weak Reseller Incentives - Web-based accounting has a difficult obstacle to overcome in that the reseller is cut out of the profits when the end user pays a monthly fee directly to the vendor. The result is that the reseller has no incentive to promote the web-based solution, else they cut themselves out of the profit on the sale. To address this issue, many web-based accounting software vendors have created revenue sharing plans to allow the reseller to participate in the revenue. However, this is not enough. For example, when the customers pays $24,000 up front for the cost of the software, the reseller pockets a healthy chunk of that - usually 50%. However, if that same customer pays just $650 a month, it will take a very long time for the reseller to accumulate $12,000 profit on that sale - maybe 3 to 5 years or longer. Most resellers are not in a strong enough financial position to wait that long for their profit. 

Carlton Predicts the Future of Web-base Accounting

The web-based accounting model opens the doors to virtually anybody to jump into the accounting software market. Previously, a company needed not only a product, but also an extensive distribution channel to promote, sell, and support the product. With the web-based model, any company can throw a web-based application on a web server and theoretically reach millions of businesses. Accordingly, I speculate that some non-traditional companies may jump into the web-based accounting game. In the future, you may see free or nearly free web-based solutions offered by companies such as American Express, Time Warner/AOL, Yahoo!, and maybe even UPS. Why not? This is a clever marketing gimmick that would allow these companies to get their hooks into small businesses. Than about it.

When NetLedger first came out, I theorized that they had started something that could not be stopped. I expected these new web-based solutions to dramatically change the face of accounting software in the years to come, opening the floodgates to a wide range of changes. For starters, I thought that the new web-based accounting model would ultimately allow higher-end products to effectively target small businesses. For example, ACCPAC on-line is a higher-end product that is readily available to anyone via the Internet. Now that this solutions is in place, the incremental cost of allowing additional small businesses web access to these solutions is very small. For example, a single user could subscribe to 8 ACCPAC Online modules for the monthly rate of just $500, compared to a purchase price of $24,000. 

I speculate that in the future, fees for renting web-based accounting systems will be based on the size of the data or on transaction volume – a proven pricing model which is currently employed by companies such as Earthlink who offer web site hosting.

I also speculate that in the future, industry-specific versions of the various web-based accounting solutions will emerge. For example, Peachtree may create different versions of their products designed to meet the specific needs of churches, hotels, restaurants, insurance agencies, property management organizations, etc. By deploying these different versions on separate web sites, users need only access the version that most closely meets their needs. The accounting software industry has long desired to create industry specific versions of their products, however the logistical problems related to packaging and maintaining multiple versions of a given product have prevented companies from moving forward with this idea. Because a web-based solution avoids packaging problems completely and makes centralized management of the software code relatively easy, industry specific flavors of various products may finally become a reality.

Another change that we are likely to see in web-based accounting systems is the introduction of embedded hotlinks and banner advertisements. I am not suggesting that this change will be a good one as we are already inundated with advertising everywhere we look. However these changes could produce powerful benefits if implemented correctly. For example, assume you are using a web-based accounting system and the built-in analysis tool observes that your insurance expense is rather high for a company of your size and industry. A pop-up alert box could warn you of the problem and offer a link to the vendor’s web site which instantly quotes you lower insurance rates for the same coverage you are currently receiving. A similar alert may monitor your interest rates and offer refinancing alternatives to you. Other alerts may instantly hotlink you to an employee leasing options, co-marketing opportunities, or sources for discounted supplies. We’ve seen consumers offered free computers, which constantly run advertising banners across the screen, therefore it is not difficult to foresee that ultimately there will be many web-based accounting systems offered for free in exchange for tolerating built-in advertising banners.

Web-based accounting systems may eventually impact the accounting software consultant and reseller community as well because this model circumvents the traditional reseller channel to offer product directly to the consumer. Many vendors are concerned and are taking steps to preserve reseller profits. For example, when Great Plains first launched its’ hosting solution in 1997, resellers were largely left out of the resulting revenue stream and as a result, resellers had no incentive to promote the web-based solution. Great Plains later re-designed the pricing model to allow resellers to share a portion of the monthly rental fee. Still, the implementation and training aspects of an installation engagement has always generated the lion’s share of the reseller’s fees. Web-based systems do not appear to pose much of a threat to this source of revenue.

Conclusion

In my opinion, web-based accounting is here to stay. How big of an impact will web-based accounting have on the industry is difficult to say at this point in time. So far, results have been fair to dismal.