CLOUDY, WITH A CHANCE OF PAIN

The Truth About Cloud Accounting and the Dangers of Bundling

An abbreviated version of this article was published in the August 2014 edition of the Maine Eagle, a local community magazine serving the central Maine area. Get your free copy at many local businesses.

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What is Cloud Accounting?

In the past five years many companies have switched to so-called "cloud accounting" type systems. A cloud-based accounting system is a new model for providing accounting software to business. Cloud systems are based on "software as a service" (SaaS) unlike traditional accounting software that is purchased and owned by a business, and used with the company's computers. Major cloud-based accounting software providers include QuickBooks Online, Intacct, Freshbooks and Netsuite (click on any of these for further information.)

There are many advantages to cloud based accounting:

(1) Information is readily available anywhere, including through mobile devices;

(2) Redundant data-entry processes are eliminated;

(3) The business deletes the cost of buying software and maintaining related IT systems.

But there are important dangers inherent in this relatively new technology, including significant security issues and the risks of bundling. Further, I have received many complaints from clients who switched to the online version of QuickBooks, which is designed differently from the traditional version. (It's painfully obvious that Steve Jobs, or his equivalent, was NOT involved in designing the online version of QuickBooks.)

Risks of Cloud Based Accounting

If your business is considering switching to cloud-based accounting here are five major risks you should consider:

(1) Who Owns Your Data? What happens if your cloud-based provider goes out of business? Can you get your crucial accounting data back from them? How long would this take and what would it cost?

(2) How Secure is Your Data? Data stored on the internet is only as secure as the weakest link. (People are the weakest link.) You must consider not only the risk of a massive data breach like what recently happened to Target Corporation (over 40 million credit and debit cards were compromised) but the additional risk that competitors could acquire access to your sensitive accounting reports and proprietary information. How would your customers react if they found out that their own personal information (stored in your business records) is leaked or hacked? It is likely your customers will blame you, you will blame the cloud-based provider, and they, in turn, will blame someone else.

(3) Downtime. Every major cloud accounting provider claims that their systems have little or no downtime where the software is shutdown. The truth is that all the major providers experience both scheduled and unscheduled downtime for system maintenance and upgrades. During downtime periods your business will not have access to its own real-time accounting reports and data. Can you deal with this and what is your Plan B?

(4) Bundling Risk (discussed in further detail below). Most cloud-based accounting programs will want to link your business bank accounts to the accounting software. This means you will need to give the cloud software provider the access passwords to business bank accounts. In effect, you have bundled (combined) banking with accounting. How comfortable are you with this?

(5) Who Controls Functionality? Your cloud-based provider is likely to have complete control over the system they are, in reality, renting to you. This resembles in some ways the relationship between a landlord and a tenant. By renting software from a third party provider your business has become a tenant and lost a degree of control over whether, when and to what extent accounting software is changed in significant ways.

Businesses that do NOT use cloud-based accounting software may decide to skip upgrading to a new version of a program because they don't like its features or functionality. For example many of my clients have decided to postpone switching to Microsoft Windows 8. With cloud-based software you probably won't be able to avoid changes imposed by the provider.

Risks of Bundling

Many providers of goods and services offer "bundling", which is adding another product or service or extended warranty on top of the primary item sold. Bundling offers convenience, greater efficiencies and may save money for the buyer while increasing profits for the seller.

But there are major risks involved in bundling. These risks emerge because the buyer gets a good thing from bundling (convenience and efficiency) by giving up another good thing: diversification.

What does it mean if your doctor is also your dentist, nurse, pharmacist, insurer, paramedic, ophthalmologist and life insurance salesman? It almost certainly means you have too many eggs in one basket. You have traded away the peace of mind and assurance of diversification for the convenience and efficiency of one-stop shopping. You have gone too far and exposed yourself to significant risk.

You could find out first thing tomorrow morning that your bundler has bungled, and become the next Enron Corporation, WorldCom, Adelphia Communication, MFS Global or other corporate villain that stole money, compromised customer privacy, or violated major ethics rules.

When individuals commit crimes of this magnitude they go to jail for a long time. When large, publicly traded corporations commit exactly the same crimes they either go bankrupt or pay large fines which are absorbed as a cost of business.

You should use caution and good judgment when considering buying bundled products or services, including cloud-based accounting systems. Bundling will become a risk proportionate to the degree to which crucial information and control is placed in the hands of a third party who may, or may not, be a reliable performer in the long-run.

Until the day arrives when true Artificial Intelligence is achieved, the best technology in the world will never be better than the people who operate and control it.

"Amateurs hack computers, professionals hack people."

Kevin Mitnick
(At the time of his arrest by the FBI in 1995 Mitnick was the most wanted computer criminal in U.S. history.)

P.S. - The concerns discussed in this article have been confirmed by recent events. On August 6, 2014 the news media revealed that Russian hackers have stolen 1.2 billion user names and passwords. See:

1.2 Billion User Names and Passwords Stolen

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