This week, I attended Xerocon London for the first time in several years. I well remember the very first, at Chartered Accountants Hall, London where I presented a vision of an accounting profession that was advisory led. Back then the professional accounting trade body, ICAEW, said that only 3% of accountants were into this cloud accounting thing
At the time, Xero managed to get about 100 souls into the hall, (they claim 200 but heh – we forgive the rosy colored specs of the marketing machine) sat around large tables to make the place look full. If memory serves, there were a handful of partners. This year’s Xerocon attracted 2,000 people to a piece of ExCel next to London City Airport, of which 1,600-1,700 were accounting customers and 60 plus partners.
Today, Xero counts 250,000 UK customers out of a total 1 million worldwide.
Whichever way you cut it, Xero can be rightly proud of its success in the UK.
But what really struck me was the overall reported adoption rate. Xero now claims growth at 55%, no doubt fueled by the Make Tax Digital initiative in the UK but also the clear value that Xero reported coming from those who use cloud based systems. According to one slide shown during Anna Curzon, Chief Partner Officer at Xero presentation, businesses with an advisor grow profits 23% faster than those that don’t and partners serving clients online grow revenue 80% faster than those that don’t.
Having said all that, there are still some who are stuck in the past. Gary Turner, European MD and the person who has steered most of Xero’s UK growth made a startling observation.
About 18% of accountants still use pen and paper ledgers. That means our good old friend Luca Paciolo would still get a job at one in five firms today.
For those unfamiliar, Pacioli is largely credited with inventing the double entry accounting system that we all still use today as the basis for all accounting and which will survive well past my lifetime. That was in 1494. Go figure.
Xero is rapidly commoditizing and modularizing the tools needed to run a professional accountant’s business and support customers. It gives the professional accountant the tools they need in exchange for encouraging those accountants to onboard their portfolio of clients. As part of what’s called XeroHQ, the company has selected a set of what it believes are best in class partner applications such as ReceiptBank for expense tracking and Spotlight Reporting and integrated those directly into XeroHQ, along with alerts so that practitioners can follow up with clients to solve queries and provide report support. In addition, and acknowledging the accountant’s reticence for marketing, XeroHQ includes BOMA, a set of prepackaged marketing content that professionals can use in their broader marketing efforts.
Alongside, Xero is building out some capabilities of its own that compete with its partners. So for instance, Rod Drury, CEO Xero showed an in-house developed expense module.
In a later analyst session I asked Drury about the risk attached to this given that any business today will need multiple services that add significantly to the base accounting cost. My argument is that bolting apps together using Xero as the platform may well work for professional accountants but it still means that end users have to punch out to other apps to do the associated data entry or look ups. Building functionality like expense handling is one way to solve that but it then pits Xero agains its partners. My assumption is that not only would Xero provide a better experience, but also, if the add-on apps are at functional par with the best of breed add-ons, then Xero will almost certainly undercut the current partners on price. It doesn’t make sense to do otherwise. Customers and Xero win, partners lose. Xero wins in partiuclar because as Drury pointed out, the incremental cost of functional additions is now very low. What he didn’t say is that the marginal cost of distribution is zero. Ergo an expense app that today costs $5 a user could readily be sold for $1-2 adding an instance $12-24 million a year to the bottom line. Aggregation Theory anyone?
While Drury didn’t address that directly he is insistent that the open Xero platform allows the best possible opportunity for smart developers to build businesses based upon Xero:
What we see is the platforms ends up creating more horizontal apps. So what we’ve done for the last three years, been educating our add-on partners. There are very few companies that can add millions of customers, and you need a big team and hundreds of millions of dollars capital to make that happen. What we see is the add-ons need to swing towards the verticals, where they build industry solutions. Where they can have a 50 person company, make good money, use the commodity investment in the horizontal stuff, but get a higher price by integrating across vertical industries.
OK – but that’s some time off and Xero is already encroaching upon their territory.
One area where partners are flourishing is reporting. Xero had several cracks at reporting but failed. Spotlight and Futurli are now leading that effort with good success. Sppotlight for instance has an API of its own that allow for the ingestion of third party data such as Google Analytics. That should allow commerce customers to readily track campaign effectiveness if they can programmatically represent Google data back into the spotlight dashboard. I’m told that’s do-able. That would be an incredibly useful view.
On to the data and another question. Xero makes much of the data it collects and the fact it has proven valuable to wider economic interests such as the New Zealand and Australian governments. I have long argued that the data solutions like Xero collect is far more valuable than the applications they run. In that context, Xero is offering benchmarking data from which professional accountants can run their own analysis templates. But in order to do that, Xero had to map the 10 million account codes in its single ledger representing all customers back to the few hundred it uses as standard.
That’s an interesting insight because it demonstrates what any professional accountant already knows – account code structures are infinitely variable and if I have the chance, I’ll create structures that are just right for me.
I still think that Xero misses a trick with natively embedded reporting. Yes, it provides basic charts and the like but that will never be enough. My sense os that in order to do what I envisage, Xero has to go back to the drawing board. That’s not likely to happen any time soon. However, what you should expect to see are more Xero information services that add value to the professonal accountant’s toolkit that are geo and SIC code specific. That aligns with Drury’s vertical market vision and should encourage further plays n the third party apps market.
We’re now to the point where we’ve done most of the accounting engine, we’ll always make it better, and better, and better. We can now choose where we deploy our capital in the highest-value horizontal segments.
The U.S. cluster
But it’s not all sweetness and light. I’ve lost count of the number of leaders Xero has gotten through in the U.S., each one lauded as the best thing since sliced bread, only to find they couldn’t grow the business. My view has always been that tempting though it may be, the U.S. is a dangerous and expensive market for in-comers. It’s sheer size and the absolute dominance of Intuit alongside the very different channel dynamics makes for the U.S. being a potentially expensive money pit. And so it has proven.
While Xero will point to some success, it has scaled back its ambitions, retreating to Denver rather than continuing to fund a large San Francisco base where the costs of dong business have risen dramatically. That’s sensible because despite the 2011 headline investment of Peter Thiel, one of Silicon Valley’s rock star investors, Xero utterly misread the market. And was closing in on losing its shirt in that market. Earlier this year, Thiel scaled back his investment to less than 5%.
Overall, I remain as bullish on Xero as I have always been. The long term vision of a digitized accounting profession remains as true today as it was five, 10 years ago. The recent spotlight (sic) on machine learning for example, and its ability to reduced routine data entry and processing, has only served to add impetus to a market that still has plenty of road ahead. How Xero navigates the next phase will provide us with insights into just how innovative Xero is as a company in the crusty world of accounting.
Image credit - the author