The overall aim of a treasurer is to ensure optimal levels of liquidity for their company at all times. To that end, treasurers need to implement efficient processes in order to deliver an effective financial workflow. They need people with the right education and the ability to make these processes work. And, lastly, they need technology that helps the people with the right skills to implement and maintain the processes.
Making the right choice of technology is, therefore, pivotal and has a direct influence on what levels of efficiency can be achieved.
When looking for the best IT system, treasurers often face the agony of choice; they can choose between treasury functionality in the ERP system, specialised ERP add-ons, independent treasury tools, cloud-based solutions, software-as-a-service and more. These solutions often lead to confusion amongst those who actually have to decide on new software for the company. To be able to select the right software for your company’s specific requirements, a deep understanding of what the different technological models can do and what they cannot deliver is needed. Benchmark this against your intended workflow processes, the speed and timeliness of integrated data for management dashboard decision making then, you are starting to build the solution infrastructure topology to meet your needs. Features, functions and impressive user experience interfaces are part of this selection decision also, however, secondary in my opinion if the underlying workflow is compromised from a poor technology foundation.
So let’s have a look at the different options and shed some light on what is essential for making a company’s financial workflow work!
Demystifying the Solution Options
The wide range of finance software that is available today has created some misunderstandings in the corporate world: quite often, for example, cloud software is equated with subscription models and ERP software is considered as the on premise solution that requires an upfront investment.
What treasurers need to understand is that the way a software solution is bought – via subscription or via capital investment – does not say anything about the technology of the software solution. What is really important when choosing the right software is to be clear about the how of the technology delivery and whether the selected model is compliant with the overall IT corporate strategies and policies of your company.
The main technical delivery options today include:
- Cloud solutions
- On premise software
So, the question treasurers need to look at in the first place is whether they prefer the software to be installed on their premises or whether they have the trust that their financial data can be safely maintained in the cloud. The pricing issue is only secondary.
Each of the two software delivery methods has advantages. To provide some guidance on this, here is a short description of each of them.
Increasingly software solutions are provided in the “cloud”. Essentially, cloud solutions mean that a company no longer stores its data within its own premises, but instead transfers the data to external datacenters. Through this, companies can reduce their hardware and maintenance costs. Corporate entities in different countries can be more flexibly connected via the web and operating procedures can be simplified. The “cloud” does not necessarily have to mean that all corporate data is transferred to external data centers. Instead, companies can set up a private cloud whereby the software is centrally installed on company level and all users are connected via safe, internal webservers or via the intranet.
Transferring sensitive data to a public cloud is, though, still a difficult decision for many companies when considering European data protection legislation and the US patriot act. The main concerns revolve around how security for vital business data is guaranteed by the provider, particularly, if the provider does not maintain a separate datacenter for each customer but instead offers shared public cloud. A cloud computing contract between vendor and customer – which should clearly outline how the provider will ensure secure processes, manage risks and emergencies, document processes, change management et al – is required to safeguard the customer’s interests and ensure high-levels of data security. It is important that companies look out for providers that are not only capable of delivering intelligent software but they should also have the technical knowledge as well as the capacity to deliver highly secure systems and connections. Is my contracting supplier a fintech solution provider or a datacenter expert? Both are possible within the same contracting party but you should understand who is supplying what under the commercial contract you will sign.
With an efficiently and securely managed public cloud service, companies can save on hardware and maintenance costs. They do not have to worry about installing any updates on their systems; instead this responsibility lies with the provider. Cloud solutions are usually easily scalable so that companies can seamlessly scale up or down the services depending on their business requirements. Cloud solutions can enable customers to focus on their core business.
Shared cloud solutions means just that, in many cases one software version is applied to all clients using that service with a tag and drag commitment from the user companies. This means that a software upgrade for one will apply to all.
“On premise” means that the software solution is installed within your companies firewall (technology landscape). Through the local installation, the number of users can be clearly controlled and data security is safeguarded through a company’s own IT department’s competence.
The advantage of this solution model is that known high security levels and the full control over sensitive financial data are easier to achieve. Integration with other applications in use within your company can be achieved more easily enabling you to get the data in real time. If the solution you select is an extension of your ERP product then this should be real time without the need for integration services as the ERP plays host to the add-on product or service.
Cloud integration is also possible to in-house systems, as is cloud-to-cloud if you wish to share data between solutions you have contracted to from different suppliers via cloud options.
Treasury software needs to be able to talk to different systems, it needs to talk to accounting systems, to banking systems, to market platforms and data warehouses to name but a few. And it needs one set of central document archiving. On premise all these systems can be integrated well without any external host-to-host connections, thereby significantly reducing the risk of any unauthorised access. Data security is, thus, very high overall with on premise software solutions. On the downside of on premise systems, a lower degree of flexibility, the need for expertise in-house and higher costs for building and maintaining IT infrastructure have to be mentioned.
Managing financial data and processes within the company means, however, that data sovereignty remains within the company and not with an external provider who is out of direct control of the treasurer. With an on premise system a treasurer can be sure that the IT infrastructure is under full control. In case of cloud systems, it would be necessary to continuously monitor the external provider to be sure that he is still financially and technically stable and thus in a position to maintain their customers’ sensitive financial data.
Pricing Models – License vs Rental
As mentioned before, the way customers acquire software is not limited to a particular form of technical delivery. Both on premise and cloud solutions can be either bought or rented. In contrast to the technical delivery the pricing model is a matter of a negotiation between two parties, the vendor and the customer. So, the customer may not be able to influence the technical delivery of a software solution, but he may well have a say when it comes to how he has to pay for it.
Here is just a short overview of the two most common pricing models available today to provide some input for negotiations with vendors:
Licensed Software – CAPEX Model
The traditional pricing model when buying financial software contains an upfront investment in the software license (plus a regular maintenance and support fee). As capital investment costs are incurred in the licensing model it is also called the CAPEX model.
The often high initial investment costs for a software license may be challenging for a number of companies, and they might look for a less expensive solution initially. The advantage of the licensing model is that the ownership of the software installation and the data remains unequivocally with the customer. Moreover, licensed software is usually fully in line with the strategic direction of a company, because all key decision-makers were involved to approve the budget for the software.
Subscription Software – OPEX Model
Subscription models are increasingly being offered by solution providers. With rented software, only operating costs are incurred. It is therefore often referred to as the OPEX model.
As companies have to pay a lower monthly amount to rent the technology and therefore spread the costs of ownership, the entry barriers for companies are lower. What seems less costly in the first instance, however, may prove more expensive in the end. That is, discounts may not be offered and a finance charge applied by the provider due to the fact that they are financing your acquisition of their product. What does a 3-5 years cost of ownership look like for both models where discounts may be negotiated in return for a capex acquisition?
It is therefore important to thoroughly compare the costs and risks involved in each of the models.
Financial data flows are the lifeblood of a business. They are a precious commodity that companies need to look after well. If financial flows arrive too late, are inaccurate or corrupted or if they do not arrive at all at where they should be, this is a major threat to the business of every company! This is why companies have to look very carefully at what type of technology they need and what is right for their individual business. Whereas one company may fare better with a cloud solution, another may profit more from an on premise solution. In fact, there is no “one size fits all” in terms of financial software. It really depends on what the customer wants and needs to succeed in his business. The answer to our initial question “Cloud vs on premise – which is best suited to ensure efficient treasury processes?” has to be a clear “it depends”!
By Kevin Grant, Executive Board, Hanse Orga