Is “Horizontal” Accounting Software Dead?

by Austin Merritt

Chief Operating Officer, Software Advice
June 23, 2010

Is "horizontal" accounting software dead?

Well, maybe not dead, but these days most organizations are looking for vertical solutions – software designed for their industry.

While every company needs accounting software, a surprisingly small number of firms are implementing horizontal (i.e. generic, cross-industry) accounting systems these days.

Back in the 1980s and 1990s, horizontal accounting programs were the norm. Most enterprises were running accounting systems that were often expensive, difficult to maintain, and independent of other software applications (i.e. CRM, project management, inventory control, etc.). However, software buyers are increasingly implementing accounting systems designed for their specialized needs and usually integrated with other applications.

I should point out that we have noticed that this trend seems to vary with company size. Most very small companies (with a handful of employees and less than $1 million in annual revenue) looking for a $200-$500 accounting system will opt for generic packages such as Quickbooks, Peachtree, or Simply Accounting. However, once buyers get above the $1 million to $2 million annual revenue range, they tend to seek out industry-specific or integrated solutions.

Intuit's strategy of offering vertical-specific editions of Quickbooks (contractors, manufacturing/wholesale, retail, professional services, and nonprofit) is testament to this buying behavior. The goal of the industry-focused editions is to keep users on Quickbooks and to prevent them from replacing it with an industry-specific system.

A review of buyer preferences in three of the industries Software Advice covers illustrates this interest. For buyers with more than $1 million in annual revenue:

93% of construction firms looking for accounting software prefer a suite integrated with other modules (usually project management, cost estimating, or service management);
100% of manufacturers prefer an integrated suite with MRP and/or shop floor control over a standalone accounting system; and,
98% of real estate and property management firms are looking for accounting software integrated with budgeting, facilities maintenance, and/or lease management.

While once prevalent among larger companies, the older, standalone accounting programs are becoming obsolete as new technologies and market conditions arise.

Here are 5 trends that are killing horizontal accounting software:

Executives don't want a standalone system anymore. Most seasoned executives are realizing that integration provides transparency across multiple aspects of the enterprise, and that having one system to cover multiple departments is a great way to achieve that visibility. It is also simpler and usually more cost-effective to maintain one system as opposed to several.
IT buyers want to see systems designed specifically for their "unique" needs. Everyone seems to think their business is different, even if it isn't the case. Standalone accounting systems are inherently generic. The specialty-specific features of a system are typically found in the automation of other processes (shop floor control, project management, inventory control, etc.) that are removed from accounting. As a result, buyers seeking specialty-specific solutions naturally shy away from "generic" accounting applications and implement complete packages.
The emergence of Software as a Service (SaaS). SaaS enables collaboration and communication that were either very difficult or not achievable with older client-server systems. This collaboration enables companies to implement expansive systems to tie the enterprise together more easily. Since a lot of these collaborative capabilities will be used by employees across multiple departments, SaaS systems tend to naturally offer much more than just accounting.
The consumerization of the enterprise. For those new to this phrase, I would define it as "the process by which consumer technologies become prevalent in the workplace, disrupting the status quo of outdated enterprise technology and practices." A number of research firms have reported that decision-makers are opting for systems that support modern technologies and trends (remote access with mobile devices, integration with social media, open, standard-based systems, etc.). This adoption will naturally squeeze out horizontal accounting systems because they can offer only one function or cannot support the "must-have" consumer needs.
Software vendors reacting to and further fulfilling the trend. As accounting software companies recognize this trend, they naturally begin offering additional modules and customizations built for specific needs and narrow vertical markets. Their customers then implement these packages, catalyzing the decline of generic, standalone accounting software. This is epitomized by the incredibly large number of options and packages available with accounting systems that were formerly horizontal: Sage MAS 90/200, Quickbooks, Microsoft Dynamics, Epicor, and Infor, to name a few. They all know that they need to go deep into industry verticals and other business functions to stay alive.

We expect the decline of horizontal accounting to continue indefinitely, as many of the above 5 trends are still young. See any other trends killing horizontal accounting software? Let me know below.

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http://www.BrendaRichterCPA.com Brenda Richter, CPA

As A CPA that works exclusively with small businesses, I can’t agree with you more.

Since most small business owners view accounting as a burdomsome necessary evil of business they look for an inexpensive solution. Entry level programs like QuickBooks and Peachtree fill the bill.

Owners and managers of medium sized businesses don’t think like small business owners. They recognize that there is a wealth of information available in the numbers. They also put more value on solutions that increase the efficiency and effectiveness of the organization. This will most likely be provided by an accounting solution that is industry specific.
http://www.sucpas.com Joel Ungar

Austin – I think your points are right on the money, or perhaps the debit. We are seeing the same things in our practice.

In the last 5 years I have seen only one company with revenues over $10 million stay with QuickBooks, and they were using the Enterprise version. I had two related clients using Peachtree which was a disaster for their situation (not knocking Peachtree at all – situation specific). Our smaller clients, including a lot of our SEC smaller reporting clients, are on QuickBooks. However once you get past a million or so, I am seeing them switch to very specific vertical market applications.

Your reason #2 – “Everyone seems to think their business is different, even if it isn’t the case” is also spot on. This was something I used to hear a lot earlier in my career. But with the plethora of industry specific applications, I’m seeing less customization and more of clients adapting where needed.

Excellent post.
http://www.axiomcpa.com/ Joey Brannon

Austin, I agree with you, but maybe not for all the same reasons. I am also a CPA and I took some time to respond on my own blog at http://www.axiomcpa.com/blog/are-you-too-big-for-quickbooks.html.

Thanks for the great content.
http://www.google.com/profiles/wayne.schulz Wayne Schulz

Microsoft in particular has been singing the vertical/specialization song for the last several years to their ERP consulting firms.

In the early days of ERP the selections tended to be very thin and some were awful. So the mantra was to buy generic.

Then packages matured and became better. Companies that really needed features like manufacturing and distribution struggled with generic (aka horizontal).

The next logical move was for these companies to look vertical – which most of them are doing now.

We’ve also seen a huge decrease in replacement cycles for ERP software. Most companies are tending to stick with what they have for fear that moving to another system will be fraught with hidden missing features or difficult conversion.
http://www.xero.com Gary Turner

My view is that it’s the age of the large, monolithic app that’s gone.

I’d even suggest that vertical focussed apps (which can also be monolithic) are a transitionary phase and componentized apps will probably prevail where best of breed for accounting & bookkeeping will work in conjunction and collaboratively with peer app components in other spheres.

Vertical apps have long since had a variable reputation for getting the basic financials elements right – it’s hard to build great vertical app functionality AND great financials.

The one-stop-shop app is certainly dead.
http://www.kshgs.com Ben Sady, CISA, CIA

Great observation and post – I think you’ve described it well. I still see Quickbooks often enough in small and med sized businesses. With that being said, I think it is a goal for many companies to find a more industry specific package as they grow to the appropriate size.

A problem I’ve encountered is that some vertical apps are produced by small companies that don’t always consider the appropriate IT controls during the design of the application.
That is something to look out for when choosing a new accounting software package.
http://www.freshbooks.com John Coates

Hi Austin,

At FreshBooks, we’re actually living this right now with a lot of success. We’ve built a vertical based billing and time tracking application for serviced based professionals (lawyers, dog walkers, marketing agencies). These business owners are using products more tailored to their business to save time by using simple tailored applications like ours, mostly in the cloud. It also makes it easy for us to develop as we can focus on the key features and use cases for this vertical – it’s a win all around.

These small businesses are also taking advantage of a lot of integrations between web based applications to cover their horizontal needs while focusing on their verticals to build a perfect online solution for their business (project management, CRMS, and form builders).
http://THRIVEal.com Jason M Blumer, CPA

Great article, and I do agree with most of it.

One of your points on the emergence of SaaS is huge. In fact, I don’t think its “emerging” anymore. Many are catching on that there is a better way to do business, and it is in the clouds.

I believe CPAs can assist with this “death of the horizontal accounting market” by researching and building new cloud-based solutions for their clients.

I don’t mean we have to “build” them, we just have to know what integrates and which tools are best for which client… and then sell it!

Great post!
http://getthebee.com Scott Miller

Good observation, Austin. I saw this trend with my previous venture, which was focused on ERP for the mid-market.

With my new venture, B2Bee, we are already seeing success offering a vertical for the “smallest of the small” service businesses, solopreneurs and freelancers. We are seeing a rejection of Quickbooks as a “one size fits all”. Offering a dead simple, web-app, for invoicing and light bookkeeping, and staying away from a traditional double-entry accounting system, makes all the sense in the world for our market.

The only question that remains is…..will the CPA community be open to solutions that fit their small clients better than Quickbooks. This is an industry that doesn’t change quickly and gets comfortable recommending one solution.

Thoughts?
http://www.peachtree.com Jennifer Doctor

While we offer flexible solutions, for both horizontal and vertical markets, what matters the most to us at Sage is that we offer the right solutions for the problems that are shared with us.

Most top-of-the-line “horizontal” small business accounting software packages, like our Sage Peachtree, are flexible enough to meet the needs of the majority of the smaller businesses. And, for those businesses with other needs, we continue to listen and respond through action supported by our strategy. To help with this, we currently partner with companies to help those small businesses who require market-specific software and serve a range of specialties. This partner relationship includes our own Sage family, with products including ACT! by Sage and Sage FAS (Fixed assets). And, we are committed to continue to work on specialized vertical solutions – including construction, distribution, manufacturing and nonprofits – to create niche solutions that solve market problems.
http://www.ginamarie.biz Gina Marie Mangiamele

From these posting experts, I have one very important question. If you were to direct an individual to get ahead of the accounting software curve, how would you tell them to proceed? What strategy of software training would you recommend for a re-entering accounting professional, who is being told I need to know quickbooks inside and out. If the trend is to move to the cloud, and I agree that this is the trend, what applications should I learn and become an expert at to be valuable to an employer? I’ve been refreshing my accounting skills and am targeting the small business advisory groups within a firm for employment. Your advice and comment is most appreciated.
http://www.earsys.com David Hobbs

Why reinvent the double entry accounting and GL wheel? I think great financials like QB and Dynamics will always be used, either on premise on in the cloud. Hanging cloud apps off these tried and true accounting modules is the way to go. DH.
http://www.devantiscapital.com/INTRO Tom Coyes

An accounting software is a one size fits all general purpose tool that is suitable for a small number of businesses: businesses that have a simple business process such as retail store, wholesale business, restaurant, small repair shop, etc… An accounting software, be it QB, PT, SA, ACCPAC, etc…, is unsuitable for a large number of businesses: businesses that don’t have a simple business process.
SMBs don’t realize this because their current system is so patched up and clunky that the problem has been blurred and buried ten feet underground.
The simple and undeniable fact is that if spreadsheets did not exist, the usefulness of your accounting software (regardless of the brand) would drop by at least 50% and in very many cases the accounting software itself would be unusable, I really mean unusable.
Why is it so? The answer is simple: An accounting software is an accountant’s tool not a business tool and as such its function is very limited. The best proof that its function is limited is this: In the majority of businesses, users spend a significant amount of time and effort extending its functionalities in order to bridge the gap between accounting and the company’s business processes by using multiple spreadsheets, databases, 3rd party add-ons, electronic files, etc…. QuickBooks payroll is no longer adequate? No problem, new spreadsheets are created and maintained by the payroll person or an add-on is purchased. The sales process is getting more complex and your MS Dynamics or Sage can’t handle it or is too complicated or heavy to reconfigure? No problem, another series of spreadsheets is created by the sales department. The result is a system that is patched up and stitched from nearly every side. That’s the type of result you get when you use a screw driver to drill a hole. Messy and painful isn’t? The astonishing part is that people do it naturally without questioning this nonsense. The not so surprising part is when a business commits the sin (they all do) of asking their CPA or a system reseller to suggest a solution, he/she almost invariably recommends another brand of screw driver…. and life goes on.