Accounting software: the road ahead.

In the accounting software business, about the only thing that's constant is change. The products get more powerful each year -- taking on more financial chores and doing them better and faster with each upgrade.

But if you think the changes so far have been dramatic, brace yourself. The developments programmed for the next few years are going to be even more significant. Initially, the changes are coming from the high-end (so-called tier 1) products -- those used by Fortune 500 companies. Some of those changes are so compelling -- from both a marketing and a technical point of view -- that the developers of midlevel accounting software (the so-called tier 2 vendors) are seeking ways to adapt them, too. The upcoming changes fall into four categories:

* High-end vendors are enlarging their market focus by packaging slimmed-down versions for smaller customers.

* Applications software will be delivered not on disks or CD-ROMs, but through the Internet from central facilities.

* Increasingly, customers will be able to mix and match modules from different vendors -- and the software will be fully compatible.

* New products will add more focus on business analysis, the Internet and group use.

Let's look at each trend.

DOWNSIZING SOFTWARE

If you think your company is too small to benefit from -- or even afford -- a high-end accounting software package, wait a while. In time, you may be able to afford such an application, but not necessarily because your company has grown. Many high-end vendors are marketing scaled-down packages with lower price tags specifically designed to penetrate the vastly larger middle market -- not only organizations smaller than the Fortune 500 but even smaller than the Fortune 1000.

What's behind this radical move.7 It's a strategy designed to expand the market for high-end software. These vendors (companies such as SAP, PeopleSoft, Lawson) have competed in a limited market: generally, those on the Fortune 500 list. Not only are their software products designed to handle the complex finance needs of giant businesses but only those big businesses can afford the premium prices. Although revenue from sales of such products (a single module often starts at about $250,000) is significant, for years these vendors have been eyeing the vastly larger tier 2 market, which roughly comprises organizations smaller than those on the Fortune 500 list but larger than mom-and-pop shops or those that are comfortable using Peachtree and QuickBooks -- products that see in the under-$250 range.

The move to scaled-down versions of the expensive software is also linked to the realization that the elite members of the Fortune 500 list come and go. In the last 15 years, for example, more than half of those companies have changed -- they have gone out of business, been acquired or just shrunk and been dropped from the business titans club. By packaging scaled-down versions of their software, the purveyors of these high-end products figure they can penetrate a larger potential market: tomorrow's Fortune 500 members -- businesses that can't yet afford (but soon will be able to) the six- and seven-figure prices of tier 1 products. The high-end vendors further reason that these up-and-coming customers would be wise to buy "starter" versions of the pricey products to give them the advantage of being able to step up easily to complete versions of the applications when they do graduate to Fortune 500 size.

In repackaging these lower-priced applications, the vendors are being careful not to dramatically cut muscle from the software's functionality. What is being trimmed are the expensive extras, such as customization, extensive hands-on support and maintenance. Vendors claim the stripped-down products are nearly as powerful as the full versions, which is why stepping up at a later date would be so easy.

While the software behemoths seek to move into this lucrative middle market to attract customers from tier 2 vendors such as MAS 90, Great Plains and Solomon, you can bet the tier 2 vendors aren't waiting idly. They're busily adding more functionality -- and higher price tags -- to their products, too, in an effort to keep pace with the needs -- and larger budgets -- of their growing customers. Clearly, then, tier 1 and 2 vendors are on a collision course.

So who benefits?

In all likelihood, all customers will gain as these two groups of software vendors look to move in on each other's turf. The benefits will be in two forms:

* Eventually pricing will be very competitive as competition grows.

* The more technically advanced vendors will race to outdo each other with better, more powerful products.

THE SOFTWARE UTILITY

Can you imagine how expensive and inconvenient it would be if every home and office had an electric generator in the basement, and every time you wanted to turn on a light or toast some bread you had to crank up the generator?

Of course, that's not how we buy electricity. Your power utility has a central facility that generates electricity day and night. When you flip on a light switch, electricity from the utility is right there, and a meter reads how much you use. At month's end, you get a bin for only what you used. The utility handles maintenance of the central generator and the cables and transformers that deliver the power to your home or office. Not only is it very convenient but compared with the investment and maintenance of running your own generator, the utility's power is far cheaper.

Now think of how you use application software. You buy some floppy disks or a CD-ROM from a vendor and then copy it onto your computer. The application works part-time (the rest of the time -- nights and weekends -- it sits idly on your computer); yet you own it full-time. If a software problem arises, you have to solve it. Each time the software is upgraded, you have to buy replacement disks and load them.

But what if you bought your accounting software the way you buy electricity? When you turn on your computer and click on the accounting software, the vendor, possibly thousands of miles away, transmits to you only the parts of the software you need to do a job. So, if you are doing accounts receivable, only the code for that application is transmitted via the Internet or some other transmission vehicle (such as the fiber optics of a cable television system or special high-speed digital phone lines). The rest of the program -- payroll or payables -- remains at the vendor's server computers until you need another application. A meter clocks how much of the vendor's software you used and how long you used it. At month's end, you get a bill for your use.

If the software needed to be upgraded or some other maintenance was required, you wouldn't have to roll up your sleeves. The work would be done by experienced experts at the vendor's headquarters. You wouldn't even be aware that an upgrade or maintenance was under way. All you'd know was that the software worked and was being kept in top-notch condition ready to work when you flipped on the switch.

Science fiction?

Hardly. In less than five years, it's likely that some of the larger high-end vendors will be offering such a utility service to their largest customers.

Aside from possible savings on the cost of the software and the convenience of having the vendor handle all maintenance, how will this benefit the customer?

The computer sitting on a user's desk would not need a hard disk to store the application. No need for floppy drives. The customer's desktop workstation would be far simpler -- and maybe cost half as much as today's personal computers. Such stripped-down machines -- called network computers (NCs) are currently being built today at about $500 a clip. The only high-technology component they will need is lots of random-access memory, which is cheap and getting cheaper.

BEST-OF-BREED APPLICATIONS

It didn't take long for chicken processors to figure out that some people like the leg of the bird and others prefer the breast. So, in addition to selling the whole bird for those who liked both, they packaged the components separately and, to their delight, sales soared. Bottom line: Both chicken processors and customers were satisfied.

Accounting software developers are learning that lesson, too -- but slowly.

For years, accounting application vendors offered customers the whole package -- from the general ledger to payroll. But often one of the modules did not meet the unique needs of a customer. The customer could have invested a lot of money and time to customize the module, but more often than not such customization was less than adequate and such customized software usually was unstable or bug-ridden. Or the customer could have turned to another vendor that had just the right module, but too often it wasn't compatible with the rest of the accounting software. Again, the customer could have invested a lot of money and time and hired a programmer to build a bridge between the two. but often that was problematic, too.

Worse, when the vendor upgraded the basic package, the foundation for the bridge was undermined and it sagged, swayed and often collapsed.

For years, vendors resisted efforts to make third-party modules compatible with their packages. After all, they figured, if any module could be plugged into their software, that would be an open invitation to the competition. This shortcoming did not please customers, who wanted to be able to buy modules that met their unique needs rather than spend a fortune trying (and often failing) to customize their current packages with third-party applications.

Software vendors are finally taking a clue from the chicken processors. While there is still a long way to go before all accounting packages achieve real compatibility, an increasing number of vendors are starting to recognize that, in the long run, compatibility pays off. It's better to have 90% of a customer than no customer at all.

For the user, being able to mix and match software modules is a major benefit. No longer will the user have to settle for a package when some of its modules really don't fit very well. Instead, users will be able to shop around for the best-of-breed modules and feel confident that products from different vendors will speak the same language.

SOFTWARE THAT REALLY THINKS

In the early days, accounting software was focused on transactions: The software was designed to accommodate data input, and basically all it did was record transactions and then add the numbers quickly and accurately. Today, the focus is on analysis: What do the numbers mean; What trends do the data show? What business decisions can be inferred from this collection of raw data?

To accomplish that goal, future accounting software will be designed to accommodate more collaboration -- allowing multiple, remote users to work on the same file through a company's network, its intranet or the Internet.

That collaboration need not stop at the company's door. Tomorrow's software will invite a company's suppliers and customers to collaborate with the company users -- sharing mutually useful information.

Clearly, technology is changing the way finance departments work. Computers have taken over many of the manual chores -- especially recordkeeping and collecting historical financial data. And now, increasingly, the trend is to have accounting software focus on helping the financial managers run the business more effectively by providing both up-to-date data and analysis.

If there is any obstacle to this development, it's not the technology itself: It's people's resistance to the technology, which often takes the form of trying to limit computers so they will not do more than what people did before technology entered the workplace. As should be evident from the above trends, however, computers can take on more sophisticated business chores, supporting users to do what they do best: think, make decisions, invent, solve problems and final efficiencies.