One of the key selling points of SaaS ERP is the notion of operational efficiency and speed to market i.e. why invest precious resources in building an IT infrastructure when you can essentially outsource that function to a reliable vendor. While that concept is pretty clean, it does however assume one very critical thing i.e. the customer is actually interested in doing just that.  Huh, you might ask…? Why wouldn’t the customer want to do that? After all, if he can make more money in the process, and compete better, what is not to like. And while that is indeed true, it is only the half of the story. When customers document the gory details of their business and start putting things on paper including things like cash flows, customer acquisition details, profit margins, asset accumulations, taxed paid or not, they are documenting things about their business that perhaps they have never hitherto shared with anyone else. Perhaps not even their spouses, let alone the octroi assessor or the excise guy. And therein lies the rub.

In most emerging markets and the developing world, the notion of the “black economy” is a well established fact of life. According to a 2010 World Bank study of 162 economies, in 50 of them the shadow economy accounted for over 40% of total GDP output. Traditionally, economists have defined the shadow economy to include all market-based legal production of goods and services that are deliberately concealed from public authorities to avoid payment of taxes, social security obligations, and labor laws. That means SMEs and large enterprises, doctors, lawyers, greengrocers, construction workers and others from a broad swath of the economy that chooses not to report income and transactions. In the former Soviet republic of Georgia, over 72% of the economy was undocumented, while that number was close to 9% in the US. But with the relatively mammoth size of the US economy, even that 9% number translates to over a $1.2 trillion loss to the exchequer. And lest one thinks this is a trivial issue, witness the recent meltdown in Greece that was partially triggered by Greek individuals and businesses that choose to avoid paying taxes to the tune of almost 10% of the national GDP output, about US$30 Billion worth. Even in red-hot growth economies like India, there are entire sectors of the economy (e.g. real estate, the film & entertainment industry, electronic consumer goods, trucking etc) that function virtually in entirety on the basis of cash transactions. And despite several amnesty schemes intended to allow habitual tax offenders from coming out of the shadows, the situation only gets worse every year.

This brings me back to the world of SaaS ERP and how that could potentially help nations deal with this malaise. Countries lose tax revenue because of various reasons including unreasonable tax burdens, stifling regulations, generally high levels of public corruption and lack of enforcement. Whilst it will remain difficult to eliminate cash transactions (which are completely legal in and of themselves) at the consumer level, at least compliance can be stepped up at the business and corporate level to minimize egregious violations. With the right software in place, you can essentially cut off the oxygen that sustains this dark force. For e.g. if the local authorities knew how many housing units were sold by a builder, they could ensure that the appropriate “stamp-duty” was paid and the transactions were registered at the prevailing market price and not significantly lower. Earlier this week, the Indian state of New Delhi released new baseline pricing (locally known as “circle rates”) which will be the floor price against which the government will now collect tax revenues, essentially an attempt to plug the massive leak that was happening as a result of transactions being done in cash and only a fraction of the property value being declared. And that is where SaaS solutions can play a significant role. Imagine a situation where the tax collector doesn’t even have to go down to a company’s office to audit their books, he can merely access the records on the server and send them the legal notice via registered mail, thank you very much. Smell too much like big brother? Perhaps, but arguably we are already there in the developed west where privacy has been eroded substantially at the altar of national security and the "right" to free online content. 

As SaaS vendors go beyond the established western markets and start peddling their wares in emerging economies, they will have to explore creative ways to address such issues. How do they identify the right prospect who truly wants to improve his operational efficiency and compete on a global scale versus those guys who are wedded to the status quo? How do they start building trust in an environment where a business owner keeps his books on paper rather than automate them and risk revealing the innards to the taxman? How do they start building bridges with the government in such a way that they can introduce new technologies to the market without compromising the trust of their customers?  The guys who will win are the ones who can figure out the most reasonable solutions to these vexing issues; after all, no one wants to ignore the potential of these fast growing markets, no matter the color of their money.