Tipping Point for Cloud Accounting

June 27, 2018

By Blake Oliver

In sociology, a tipping point occurs when a group rapidly and dramatically changes its behavior by widely adopting a previously rare practice. You may be familiar with the term thanks to Malcolm Gladwell’s popular book, “The Tipping Point: How Little Things Can Make a Big Difference,” published in 2000.

In his book, Gladwell focuses on fads such as teenage smoking, but the principle of the tipping point applies to just about anything, including the world of business. Once a significant minority of the population begins to strongly believe in something, it’s only a matter of time before the majority follows suit—and often very quickly.
So how many people does it take to make an idea go viral? According to a Rensselaer Polytechnic Institute study, just 10 percent. Scientists there found that “when just 10 percent of the population holds an unshakable belief, their belief will always be adopted by the majority of the society.”

So, where do we stand in regards to the tipping point when it comes to cloud accounting technology?

A Majority of Small Businesses Will Have Adopted Cloud Accounting in 2018
Let’s take a look at some trends in the world of small-business accounting, which we’ll define for simplicity as businesses with less than $10 million in annual revenue. These businesses are typically customers of small-business accounting platforms, such as QuickBooks and Xero.

Intuit’s quarterly numbers offer some insight into cloud adoption in this market. The company finished its third quarter (ending April 30) with more than 3.2 million QuickBooks Online subscribers, up 45 percent from the same time last year. How does that compare to the desktop installed base? It’s difficult to get numbers for QuickBooks desktop, but according to an article by QuickBooks expert Randy Johnston published in Accountex Report in 2014, QuickBooks Desktop user counts were approaching 5.2 million at that time, with Intuit forecasting no more than a 25 percent decline in desktop licensing through 2017. That decline would put the desktop count at around 3.9 million users in 2017. 

If its current growth rate holds, QuickBooks Online subscriptions should easily surpass desktop installations within 
the year.

Meanwhile, Xero’s 2018 Annual Report shows strong growth internationally, posting up 47 percent growth in the UK, 43 percent growth in North America and 49 percent growth in the rest of the world, with total subscribers increasing to 1.4 million. 

Together, QuickBooks Online and Xero total more than 4.5 million users globally. Within 12 months, assuming a steady growth rate, the total number of global users of the two cloud accounting platforms will easily exceed 6 million, which is greater than the total number of QuickBooks desktop licenses in its heyday. That puts cloud accounting in the small business market close to or past the 50 percent adoption mark—well beyond the tipping point. 

According to Everett Roger’s “Diffusion of Innovations” theory, that means cloud accounting has already been accepted by not just the innovators, but also the early adopters and most of the early majority. For cloud accounting as far as small business is concerned, it’s all downhill from here. But what about larger companies?

Midsize and Enterprise Companies Following Close Behind
To see how cloud accounting is faring with midsize and large companies, let’s take a look at some research from Gartner on Enterprise Resource Planning (ERP) adoption. 

In 2014, Gartner published a survey showing that 47 percent of organizations planned to move the majority of their core ERP systems to the cloud within five years, though only 2 percent had already done so.

Back in 2014, those 2 percent were the “innovators” according to Rogers’ terminology. They had bravely migrated to cloud ERP systems before just about anyone.
According to the survey, 45 percent more companies planned to adopt a cloud ERP within the next 5 years. That would put cloud adoption in larger companies close to that of smaller businesses. But did they? 

In April of this year, FloQast polled 196 accounting and finance professionals and asked the question, “Is your GL or ERP system cloud enabled?” A majority—54 percent—answered “Yes.” Now, this was not a scientific poll, and FloQast customers and prospects tend to be more tech-forward than their colleagues, but even discounting the results, the survey suggests a significant percentage companies have implemented cloud ERP in the five years since Gartner’s survey ran in 2013, when only 2 percent of companies had moved to cloud.

Surely at least 10 percent of the market in most industries has moved to cloud accounting. And that means we’ve already passed the tipping point in the midmarket. The “true believers” are now influencing their non-cloud professional colleagues, who will inevitably make the switch. The same trend in smaller businesses is now taking place in larger firms.

API Integrations Accelerating Cloud Accounting Adoption
There’s more to cloud accounting than just implementing a cloud general ledger or ERP. Most of the benefits come from integrating applications to eliminate data entry and automate formerly manual processes. 

Moving to the cloud is a journey that passes through a number of stages. Here’s how we define that journey at FloQast:
  • Stage 0: No financial cloud applications.
  • Stage 1: One financial cloud application or multiple applications with no integration.
  • Stage 2: Multiple applications with some integration.
  • Stage 3: Multiple applications with full integration.

According to a recently released survey conducted by Dimensional Research and sponsored by FloQast, accountants in companies that have reached Stage 3—those companies that have a true cloud accounting department—are far more likely than accountants at Stage 0 to view technology changes as good for their career. 
In fact, 97 percent of accountants at Stage 3 view technology in a positive light, and they are five times less likely to view technology negatively.

What’s even more dramatic is the ability for cloud accounting to increase job satisfaction for accounting teams. Some 92 percent of accounting teams that have advanced to Stage 3 of cloud adoption agree that cloud-based financial applications make the team more satisfied at work, compared to 66 percent of accountants at Stage 1, where they are using at least one cloud app but without any integrations.

It’s clear from the data that integrations are the key to making cloud accounting a positive experience for all. This is where the battle for cloud accounting is being fought now. According to our survey, just 11 percent of teams have integrated all of the cloud-based financial applications, and 68 percent are part of the way there. 
That number—11 percent—is the answer to our question about the tipping point. These are the teams at Stage 3 that have fully moved to cloud accounting. They are seeing significant productivity gains and enjoying a better quality of life. Naturally, they are the “true believers.” 

As Gladwell uncovered in his book, and scientists confirmed a decade later, once a minority develops an unshakable opinion, they inevitably spread their new point of view to the majority of society. 

The majority of smaller businesses using accounting software are already firmly in cloud. And for larger businesses, we’ve now passed the 10 percent adoption threshold. From one perspective, we’ve already passed the tipping point for cloud accounting in the broader marketplace. 

Now it’s just a matter of time.
Blake Oliver is the senior product marketing manager at FloQast. Subscribe to his weekly newsletter.

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