What is it?

While the concept of cloud computing is straightforward – the on-demand delivery of computing services over the internet – as with many technology trends, there’s not necessarily a clearly agreed-upon definition, explains Ian Pay, ICAEW’s Head of Data Analytics and Tech. “What we tend to find is that the way it’s defined is a bit more technical – you’ll hear terms like Software as a Service and Infrastructure as a Service,” he says. Cloud computing is also a bit of a misnomer, he adds. “The crazy thing about the cloud – and this is a genuine question that’s been asked of me – is, ‘Is the data actually stored in a cloud?’ No. It’s still ultimately stored on a computer, on a server in a data centre somewhere. It just happens to not be your data centre in your office.”

Within cloud computing, the three main categories you may come across – Software as a Service (SaaS), Platform as a Service (PaaS) and Infrastructure as a Service (IaaS) – are fairly self-explanatory, offering increasing levels of control and responsibility. With SaaS, for example, you are simply buying a piece of software. “But, rather than in the olden days buying it on a disc or downloading it and installing it on your machine, you’re buying access to that piece of software that only exists in the cloud,” Ian explains. PaaS is the next level up, a relatively open space that enables you to develop and manage applications within an operating system, while IaaS is a ‘blank canvas’ of computing power where you can effectively build and store whatever you want.

What do I need to know?

The first thing to be aware of, says Ian, is that the subscription model of cloud computing has implications from a finance and accounting perspective. “It’s a very different way of treating the expense,” he explains. “A traditional software or hardware expense would be a one-time purchase on your P&L, and you get an asset on your balance sheet. All this cloud-based stuff is more intangible. You don’t get an asset because you don’t own it, but you have an ongoing cost.” The subscription business model is growing in all kinds of areas, adds Barry Iacovou, a chartered accountant and CEO of BDO Cloud Services in Cyprus. “There’s an interesting thing happening in the US with assets as a service, where rather than buying a car, for example, you can pay a subscription and have access to different cars,” he says.

At work, most students will already be using cloud-based software. The big players in the accountancy space – such as QuickBooks, Sage and Oracle – are gradually transitioning away from traditional desktop applications to cloud-based solutions. “It’s a change that has very much started with smaller businesses and is now spreading across the whole market,” Ian says. Barry likens it to the transition from petrol and diesel to electric cars. “It’s going to be a slow process, but eventually they’re all going to get there,” he says. “Xero was the first to be built in the cloud in 2006, and now everyone’s following suit. Even the mid-tier platforms are now seeing the benefits, and dragging all of the market in that direction.”

To take the analogy further, adds Ian, “In the car space you’ve got the distinction between a company like Tesla, which has never made a petrol car but went straight into making an electric car, and making the best possible electric car they could. Xero is similar in a way, because they went straight for cloud accounting. Then you’ve got the incumbents, the BMWs and the Fords and all the rest, that are having to pivot and change their business model. And some are doing that better than others.”

What are the benefits?

The advantage of Software as a Service is that you’re always on the latest version. As long as you’re subscribing, you have access, and as soon as new functionality comes out, you get access to that new functionality straight away. Updates are also typically included within the subscription price. Another advantage is scalability: as your business grows, you can grow with the same platform – particularly useful in a profession such as accounting where there is seasonality. “If you have more staff in a busy period, you can scale up your licences and then scale them back down again once you’re out of it. Or if you need to scale up computing power, you can do that very easily through cloud-based services,” says Ian.

Accessibility is a huge benefit, too. “Effective collaborative working is only really possible in cloud environments. In this post-Covid, hybrid-working world, there will be students who are having to log on to a virtual desktop or use a VPN because it’s an on-premise system – or, in the worst case, are only able to access that system when they are physically located within the office. Cloud systems are primarily web-based, so you can access them from anywhere.” It enables businesses to embrace true remote working, adds Barry: “It’s that concept of the digital nomad – you’re able to travel all around the world, and you’ve still got access to your office wherever you are. That flexibility has proven very popular – and I think the hybrid model is the sweet spot now.”

Cloud-based solutions also enable greater integration between software applications, with APIs (Application Programming Interfaces) creating an ecosystem where any application can ‘talk’ to any other. “In the accounting space that’s really, really powerful,” says Ian. “It’s basically how Xero is designed, a kind of marketplace that works on this principle of APIs with thousands of connected third-party apps being able to exchange information very, very fluidly.”

What are the risks?

The biggest perceived risk of cloud computing is security. “Even though it’s commonly accepted that it’s safer to have your data in the cloud with the biggest providers – because their levels of security and the resource they’ve got to throw at it are immense – some people I speak to still cite security as the reason why they prefer having their data in a server in their office,” explains Barry. “Their argument is: ‘I’m a small business. Why are they going to hack me? They’re more likely to go after Microsoft or Xero.’” While it’s true that the risk of an issue occurring is lower, the impact of that risk is significantly higher for a small business. “Yes, you are less likely to be a target, but the likes of Microsoft and Xero have entire teams dedicated to ensuring that infrastructure is protected 24/7,” says Ian. “And if something does happen, it can normally be rectified very quickly, such that the level of impact on most businesses is minimal.”

Environmental impact is another commonly cited disadvantage of the cloud, but it’s a tough one to establish, says Ian. “If you’re using the cloud, it’s like outsourcing; you’re effectively reducing your Scope 1 and 2 emissions, but increasing your Scope 3 emissions,” he explains. “There is an economy of scale – the difference between 50 people having 50 servers and one company having one server to serve 50 people is that that one server should be more efficient from an environmental perspective – but that isn’t always necessarily the case.” With the vast majority of the world’s data concentrated in storage run by the ‘big three’ of Microsoft, Google and Amazon, it’s “in their interests to be environmentally conscious and do better”.

There’s another grey area around data ownership. While GDPR regulations in the UK and EU clearly state that you remain the owner of your data stored in the cloud, “You don’t necessarily have absolute control over it,” says Ian. “You can’t just go into Xero’s offices with your USB stick and say, ‘I want my data, please.’” There are also potential problems when providers increase their prices, or if you want to switch platforms, something known as vendor lock-in. “Migrating years’ worth of financial data into a new platform is extremely difficult to pull off. So you’re kind of stuck,” says Barry. “That’s a risk that a lot of people don’t look at when they enter – they don’t think about the exit.”

Where next?

The developmental journey of cloud computing is slightly more linear and predictable compared with other technologies such as AI and blockchain. Now that the market is more mature, it’s about consolidation, says Barry. “We’re seeing different players broadening their service sets, or their functionality, and eating into areas that other players were dominating,” he explains. He also predicts that a new cloud-first entrant will come in, like Xero did in 2006, and disrupt the status quo. “There’s a developer in Cyprus who is challenging the whole concept of the Xero ecosystem with a new way of building. His argument is that these platforms were built wrong in the first place, and he’s adopting a completely different approach – and bringing functionality online extremely quickly.

“These kinds of capabilities are being built by small teams. The younger generation are looking at what the older generation built and saying, ‘I can do that much better.’ That’s going to just continue. And with the power of AI and what that can bring, I think it’s going to really escalate.”