Is Business Software Really an Expense?


The introduction of cloud-based (and cloud-priced) solutions have muddied the accounting waters again, such that a $4M software implementation project must be expensed if the customer is implementing a cloud application, but can be capitalized if implementing the same software on premise.

There’s an accounting answer to whether software applications – especially enterprise software applications, should be expensed or capitalized – though it seems to change from time to time. The introduction of cloud-based (and cloud-priced) solutions have muddied the accounting waters again, such that a $4M software implementation project must be expensed if the customer is implementing a cloud application, but can be capitalized if implementing the same software on premise. Personally, I’d argue that there is something wrong when you need $4M to implement a software application – though many of you that would consider the same $4M implementation expense a bargain.

I asked the question because the software that runs your business today seems to be considered a cost of doing business (i.e. expensed), where a dozen years ago we still ‘invested’ in ERP and similar systems. So what’s the difference? Back in the 1990s and early 2000s, organizations invested millions into ERP solutions to reduce the labor expense associated with processing information. The reduced work and error rates associated with ERP solutions – especially compared with manual approaches or non-integrated alternatives – drove significant savings for most businesses. The impact of this technology can be seen clearly in the productivity metrics captured by the government, and analyzed by the experts. US productivity continued to climb at increasing rates from the early 1990s (when the first integrated ERPs started to be adopted) through the early 2000s. Then productivity starts a long decline – even going negative in two of the last five years. I’ll argue that the revolutionary changes in administration and information processing related to the introduction of integrated ERP solutions was a major contributor to this productivity growth – and that the lack of any really new innovation in ERP solutions since that time has been a major contributor to the decline.

At this point, I’m ready to take on anyone who wants to argue that the enterprise application market has been a hotbed of innovation over the last decade. Cloud is a huge impact on the enterprise software marketplace just like everywhere else, but running substantially the same software on somebody else’s computer is no way to drive business productivity. And “pay-as-you-go” pricing models, as great as they are for accountants, do more for cash flow than productivity. Is any investment money going to firms dedicated to improving business productivity? A look at a current list of Unicorns (private companies valued at over $1B) shows new technologies driving disruptive business models aimed at consumers (Uber, Airbnb, Theranos, etc.), not technologies that might improve the productivity of most American businesses the way ERP did 25 years ago. University of Chicago economics professor Chad Syverson summed up the decline succinctly: “The second [productivity] wave hasn’t come yet. We have to figure out new ways to use technology and reconfigure the way other things are done.”

The second wave of productivity will arrive when we figure out how to dramatically reduce the time and effort workers spend processing information even more than the traditional ERP has. How? The next wave of ERP will leverage automation, integration, and machine learning to create a self-optimizing information processing machine that can manage the information related to the business. If we can create a car that drives itself, we can create an ERP that runs and adapts itself. A solution that did that would be worth the investment!

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