When it comes to accounting software, it’s easy to get caught up in the numbers. How many digits can the account number contain? How many reports does the software produce? How many users can the application support?
You get the idea. Since the accounting staff which will select the software are “bean counters,” let’s give them some software with which to count the beans.
It’s hard to find fault with this approach. Traditionally, it’s features and service that sell software. While that focus is not likely to change substantially, at least in the near future, some of the major vendors of accounting software to the nonprofit market see other factors assuming increasing importance.
Is bigger better?
One way that the nonprofit software market is evolving is that software giants such as Microsoft and Best Software are achieving an increasing presence, largely through the purchase of ongoing companies.
Microsoft’s Director of Vertical Strategy-Not for Profits, Patrick Fitzhenry, said that he believes that the size of vendors, such as Microsoft and Best Software, provide them with economies of scale in research and development, as well as in providing a variety of products at different needs levels to the nonprofit accounting software market. In particular, Fitzhenry mentioned a new back-end accounting product using Microsoft.Net technology that is under development.
“At some point in the future,” he explained, “a new product will come out that will really be a consolidation of all of our accounting products. People who are customers of all four of our current products will have an upgrade to move to that single product.”
B2PCommerce Corporation’s CEO Jason Saul, also believes that the consolidation that’s gone on in industry is a good thing. “So why is Microsoft paying attention [to the nonprofit accounting software market]? Why is Intuit paying attention? Why does Sage (Best) care? Because this is one of the last great untapped business markets out there,” said Saul.
This “fresh meat” attitude is understandable once you consider the statistics. According to the Internal Revenue Service, there are roughly 1.8 million tax-exempt organizations in the United States.
Even though some of those nonprofits already have accounting software, those that don’t, or which really need to upgrade existing software, represent a lot of sales. Estimates of the potential spending in the nonprofit accounting market range in the hundreds of billions of dollars, according to Saul.
Even some of the smaller vendors appreciate the consolidation that’s gone on in the industry, though for a different reason. Cougar Mountain Software’s Director of Marketing Jim Stone admitted that, “With the few vendors that are left, it is easier for us to carve out our very specific niche in the marketplace, where we are best suited, and put together a good proposition for our customers.”
At the same time, the very size of software giants such as Microsoft and Best can sometimes work against them. Saul said he believes that many of Microsoft and Best Software’s independent software vendors (ISVs) have a better understanding of the needs of nonprofits than the giant companies with which they can partner.
According to Serenic Software’s CEO and President Jay Malik, whether the organization is small or large, the capability needs are going to be similar. The key is to get the functionality to all organizations, whether it’s a direct sale of software, or via subscription models.
One size doesn’t fit all
That understanding of the market is vital when you consider that the nonprofit accounting software market is actually very complex. There are nonprofits of all sizes and configurations. These range from a local, two-person church-based food kitchen to national organizations such as the American Red Cross and United Way. The accounting needs of these organizations are very different.
Churches and other houses of worship are usually considered nonprofit organizations, but so are cities and municipalities. Both types of entities have revenues and expenses. How these are handled in each type of entity is very different.
While nonprofit accounting software is by itself a vertical market, that market is very stratified as well. The for-profit accounting software market has a considerable amount of sales of off-the-shelf product, which is sold at retail through computer and office supply stores. In the nonprofit market, much of the software is sold through value added resellers (VARs) that have an understanding of the differences between various types and sizes of entities, and how the software must be adapted to meet their needs.
Software vendors need to know what is important to each type of entity at each size. As Serenic Software’s Malik said of his years spent in this software market, “What I learned was that there was a lot of point functionality that was very critical to the nonprofit sector.” This type of experience and knowledge translates into a more successful solution for the intended customer, he explained.
American Fundware’s Vice President Michael Potts said that he sees “An increasing demand [by customers] for specific understanding of specific sub-segments (i.e., human services, religious organizations, and governments.)” In turn, Potts said that this as “driving a feature set that can be tailored to specific industry needs, and supplementing that design with segment-specific content such as customized charts of accounts, special allocations, and the like. The industry must stop selling ‘vanilla’ products, and deliver specific, concrete solutions to targeted segments.”
Communication in the triangle of customer, reseller, vendor is important.
“We work closely with our reseller network — and speak to about 1,000 nonprofit professionals a day — to stay current on trends and issues,” said Robert Sywolski, CEO at Blackbaud. “By truly understanding the challenges different kinds of nonprofits face, we are able to develop complete software solutions that meet those needs and customized options based on organizations’ specific needs.”
Accountability and oversight
Probably the most far-reaching trend in the nonprofit accounting software industry is a result of the
anticipated effects of the Sarbanes-Oxley Act on nonprofits. The Sarbanes-Oxley Act (sometimes abbreviated as SOX), which kicked in during November 2004, was a result of all of the corporate misadventures of the past several years, such as Enron, Tyco, and Worldcom. This act requires publicly-traded companies to meet new standards of reporting on internal controls and operating procedures, and holds the management, the board of directors, and the auditors of the company much more accountable for the reported results of operations.
Many pundits believe that it is just a matter of time before many nonprofits are subject to similar legislation.
Many states are in the process of enacting legislation along the lines of Sarbanes-Oxley, especially in the areas which provide protection for whistle-blowers. California has already passed The Nonprofit Integrity Act, went into affect on January 1. Similar legislation is being considered or has already been proposed in New York, Massachusetts, and several other states, while the Senate Finance Committee is also considering reforms in this area. MIP Software’s Interim General Manager Ray Bechtold voiced the attitude that many of the other vendors also hold. “There is a lot of nervousness in the market right now with the whole accountability and transparency issue. There is concern by nonprofits and their boards with being accountable,” Bechtold said.
This push toward better controls and a more open understanding of where the money is going doesn’t necessarily depend on legislation. To some extent, even with the Sarbanes-Oxley type legislation being considered or enacted at the state or federal level, many nonprofits are simply too small to be subject to many of the accountability provisions.
While various government agencies are getting into the act, at the same time there is a growing desire of donors for accountability from charities and other participants in the nonprofit sector.
It’s not just about legislation and pressure from donors. Today’s nonprofit senior executives and boards of directors want to have better information about how their efforts are paying off.
“The rules have changed for nonprofit CFOs. Instead of just worrying about managing solid financial operations, CFOs know they must provide an unmatched level of transparency and comply with strict new regulations,” said Blackbaud’s Sywolski. “Failing to do so can mean the loss of vital funding sources and, at the extreme, their nonprofit status. CFOs must find more efficient ways to operate, absorbing the high cost of compliance while providing better information to their boards, auditors and stakeholders.”
Serenic Software’s Malik, hit the nail on the head. “It is indicative that these customers are trying to understand what [the software] is going to do for me other than give me a better accounting system. How is it going to improve my efficiency?”
Malik also noted that “There was a lot of influx of CFOs from for-profits into the nonprofit world. They obviously came from more modern technology sorts of business applications, so I think that the customer base got a little more data hungry.”
Saul from B2PCommerce agreed that the accounting software customers need more than financial statements. “That trend is changing accounting from tracking just how money was spent, to reporting the value that was created. And that is the linkage between accounting and performance or accounting and results.”
According to Saul, “The most powerful trend in the industry is the transforming of what accounting really means to the sector. Some of the consolidation that is going on is [the result of] trying to address some of those concerns by providing a more complete, or suite-orientated, or integrated solution. Because accounting isn’t just counting numbers anymore.”
Saul also pointed out another fundamental difference between for-profits and nonprofits. “A nonprofit isn’t about cash generation. The outcome of many nonprofits is to create an initiative. So therefore yes, financial accounting is a piece, but it is only a piece. You need a broad solution to measure the actual impact that this organization is having.”
The net result is that you can expect accounting software, especially in the nonprofit arena, to change to accommodate this increasingly desirable accountability.
This is a departure from what is currently happening in the for-profit accounting software market. In the markets in which most of the vendors queried by The NonProfit Times operate, most are not publicly traded, and therefore are not currently subject to the provisions of Sarbanes-Oxley. Because of this, most vendors are not actively incorporating large feature or structural changes to their for-profit accounting software products to accommodate increasing documentation and better internal control needs mandated by Sarbanes-Oxley. But, some of the vendors of nonprofit software are already in the process of integrating this capability into their accounting software offerings.
Software vendors are thinking about the best way to implement this operational transparency. They also need to decide just how far to carry it. When a chaity sends out its solicitation mailing bemoaning the fate of Pedro, the three-legged Chihuahua, will it really need, or even want to have to follow up with a report on the family that eventually adopts this homeless animal?
Come together, right now…
The apparent need and desire for more transparency and accountability in applying funds and quantifying results is also pushing some of the consolidation that’s going on in the industry.
According to Blackbaud’s Sywolski, “Nonprofit CFOs care deeply about being more effective and efficient in how they manage their organizations. By default, that means having not only the best nonprofit accounting solution, but also having easy access to information from other critical operations.”
Suites of software are starting to become common, and will become even more so in the future. These suites consist of components that perform the
operational function of accounting (ledgers, financial statements, etc.), a component that performs operations required by the type of nonprofit entity, such as donor management, endowment management, membership management, or event management, and a component that allows data from all of these constituent components to be accessed and applied as a team, rather than as bits and pieces.
Some vendors, such as Blackbaud and Best/MIP, have been working on this approach for years. Others, such as Kintera with its acquisition of American Fundware, are acquiring the pieces, intending to meld the technologies into a coherent whole.
However, assembling an integrated suite of applications that enhance the accounting function is not the end goal for several of the software vendors. B2PCommerce’s Saul said that he believes that many nonprofits are now, or will soon be looking beyond the software tools and applications. “What organizations are looking for now is a solution — tools that are integrated into what the organization does. A lot of the time the issue isn’t that the tool doesn’t work well. It’s that it doesn’t fit into the work flow of the organization.”
At the bottom line, Saul said, the approach software vendors take will have to change. “It’s the difference between providing a tool, and providing a solution.”
One area that’s often overlooked when assembling a suite is the commerce aspects of many nonprofits. Many nonprofits are partially or even wholly funded by sales of products. Cougar Mountain Software has been addressing this market for years with its point of sale (POS) and e-commerce capabilities, something that has not been entirely overlooked by other vendors, such as Blackbaud and Best Software, which have their own POS applications.
“A lot of nonprofits have some kind of retail function, like gift shops or other kinds of sales.” Cougar Mountain Software’s Stone explained. “We are finding a large number of our nonprofit customers are also buying our Point-Of-Sale module.”
With many nonprofits falling at the lower end of the range in terms of size and financial resources, all of those interviewed for this story agreed that price is an important consideration. Most were also in agreement that a low price alone does not always, or even usually, represent a good value.
Serenic Software’s Malik claimed that customers want software that offers more than just price. “Yes, they want more value, and they also want more technology.”
Cougar Mountain’s Stone agreed with Malik and said that he believes that many nonprofits will benefit financially from a suite solution. “Face it, most nonprofits are on a limited budget and having a single set of software, from a single vendor, means that you are probably going to pay less for the overall suite … You are also probably going to have an easier time maintaining that system, and that’s got to mean lower cost overall.”
B2PCommerce’s Saul noted that nonprofit software vendors must concentrate on the highest return on investment (ROI) components.”
MIP/Bests’ Bechtold added, “There is always price sensitivity, but I think the real issue is value proposition. Organizations understand that the sole objective is not to go out and find the least expensive software. Ultimately what matters is that the software that gets put into place meets their needs.”
American Fundware’s Potts also thinks that the market is not particularly price-sensitive. “Small clients tend to focus on cost, because of limited resources. Larger clients focus on functionality and ease of use, and might use price as a tie-breaker.”
With some software, you can shop for a better price for the same piece of software because of the VAR network. They are independent vendors who compete for business.
“In the partner model any publisher can publish a suggested list price. The prices may differ (between VARs) but it’s not an issue of making more money,” said Serenic’s Mailik. “Price has to come down to meet different customers’ needs.”
Room for improvement
While many experts believe that software for performing the accounting function in a nonprofits is largely on a par with that available at for-profit entities, they also concur that there is still room for improvement. They do, however, diverge a bit in exactly where they expect this improvement to come.
One area that everyone seems to agree on is that there is a continuing need for improvement in usability. Microsoft’s Fitzhenry explained, “Most nonprofits don’t have an IT (information technology) department. They have a controller who might do IT some of the time and accounting the rest of the time. So who is the IT department? Probably a couple of volunteers who are computer consultants in the area who come in and help to update the version of Windows.”
It’s important for staff to be able to run reports without help, he said.
Usability is only one side of the coin. Keeping systems up and running, frequently only with the availability of volunteer help, is a often a major problem, especially for many smaller organizations. Cougar Mountain’s Stone put it succinctly: “I would submit that for many nonprofits, getting integrated solutions that work and are easy to maintain is one of their most important concerns.”
The crystal ball
To some extent, nonprofit accounting software trails a bit behind what is available in the for-profit market. That means that nonprofit accounting software users can expect to see lots of features in the next generation of releases. These will bring a greater level of integration with the Internet than now exists, as well as a greater amount of integration with stand-alone customer relationship software applications (CRM).
It’s not that better CRM integration is necessarily needed, nonprofits embraced CRM long before the for-profit world. They just called this application by another name, such as donor or member management. Now that CRM is such a big part of the for-profit accounting market, you can expect more of these relationship management features to be included at the lower and more affordable end of the market and embedded in the accounting application rather than as a separate module.
“Nonprofit CFOs are increasingly turning to us for more than a software solution. They are asking us to partner with them to rework the complicated internal processes that have evolved within their organizations over time,” said Blackbaud’s Sywolski.
Software vendors are also concentrating on how to leverage the Internet better. You’ll see nonprofit accounting products that are more useable over long distances, so geographically distant chapters of an organization can more easily and affordably consolidate results, rather than operate have hundreds of chapters doing their own accounting or outsourcing it.
Both Cougar Mountain’s Stone and Microsoft’s Fitzhenry predicted that many accounting applications will incorporate Internet portals to open up the accounting and information system to widely dispersed users.
Application service provider (ASP) applications, where the application is located on host servers and accessed over the Internet exist in the for-profit market, and are likely to migrate into the nonprofit market as well. This eliminates the need for the nonprofit to perform such tasks as software updates or even data backup, which will be a huge draw for smaller groups with highly limited personnel resources.
MIP/Best Softwares’ Bechtold also pointed out another major area of focus that will impact the nonprofit accounting software market in the near future — planed giving. With this aspect gaining increasing importance in the market, it will also gain increasing prominence with the vendors which service the market.
If the past is any indication, the things that you can count on in future software releases are that nonprofit accounting software will continue to become more feature rich and functional, and that this enhanced functionality will continue to become easier to use.