ISG Software Research Analyst Perspectives

Intacct, which offers cloud-based accounting software for small and smaller midsize companies is starting to put more emphasis on addressing the needs of project-oriented, professional services businesses. One of the challenges that these companies face is getting their accounting systems to support their business at a functional level. To be sure, any ERP system can account for projects, in the sense that they can aggregate labor and material costs attributed in some subcategory such as new building or annual conference. However, unless they are built from the ground up to support businesses that revolve around projects, people in the finance department will wind up wasting time doing workarounds to overcome the system's deficiencies and companies will need to invest in adapting the system to offer the process support they need to perform routine business tasks. A lot of those workarounds will involve desktop spreadsheets which means there will be errors that will also take time to address and impose needless costs to the business. Project-like businesses are those that sell a service, sometimes in combination of a custom-built product - in other words, services that are not absolutely routine or items that are not built to stock. Often there are multiple, parallel threads of activities involved to complete the contracted work and therefore most confront time dependencies throughout their business: one or more parts of a contract or job cannot begin until some other is completed. To a greater extent than in other business types, time itself is a resource so there is a tangible opportunity cost if individuals, equipment or facilities are left idle. From an accounting standpoint, keeping track of costs and billing these to clients is more complicated and doesn't always follow the same revenue recognition or other treatments that would apply to a merchandise business. For years, larger project-based corporations (in aerospace, engineering and construction, for example) have had solutions available to them, notably Deltek for larger and some midsize organizations, and Microsoft's Dynamics-S or Sage for smaller midsize companies. There also are professional services automation (PSA) packages that combine CRM-like functionality for sales and project tracking/management capabilities with the accounting function. For years these have been out of reach for the large majority of professional services firms, which typically have 100 or fewer employees both because of to total cost of implementing and maintaining them as well as the complexity of using them. The latter should not be underestimated because smaller organizations want an out of the box solution that has the capabilities they're looking for and nothing more. In other words, it's exactly the flexibility and features of these packages that make them useful investments for large companies that makes them impractical for smaller ones. Moreover, smaller professional services organizations typically look to minimize the number of non-revenue producing individuals (such as an IT department) partly because of cost considerations but also because managing those individuals also reduces the time available for them to generate revenue. Intacct's new project management solution addresses mainly the accounting needs of smaller professional services companies, making it easier and less time consuming for them to accurately perform their cost tracking and billing functions. The company is also partnering with Clarizen, which offers cloud-based PSA software (including project scheduling/staffing, collaborative planning and budget tracking) that integrates with Intacct. One of the advantages of cloud-based applications is that they can bend the curve, providing smaller companies the ability to use a more capable solution that is affordable and meets their low overhead management requirements. I think this is especially the case with professional services companies that are too small for traditional on-premises software but also too big for Intuit's Quickbooks (which usually begins to happen when a company gets bigger than 40-50 people). Another advantage of cloud-based systems is that those companies that have a bookkeeper but use a part-time CFO (either someone who does that for a living or a CPA that handles taxes, financial statements and so on) will find this arrangement more convenient. But I think the main reason why small to midsize project-oriented professional services companies ought to look into improving their accounting systems is to enhance their cash flow. For a company that bills $10 million annually, cutting the average outstanding receivables by ten days frees up $274 thousand dollars. This can be achieved by sending invoices for time and expenses sooner or achieving faster acceptance because of more authoritative documentation or both. The money freed up is more than enough to hire another revenue producing member of the staff or fund other ways of expanding the business. In today's tight credit economy, where small businesses - especially professional services firms that do not have many tangible assets - this is a very cheap and readily available source of cash. Let me know your thoughts or come and collaborate with me on Facebook, LinkedIn and Twitter. Regards, Robert D. Kugel CFA - SVP Research

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