Some background for those unfamiliar with our relationship with Xero. I am particularly interested in Xero and Xerocon for a variety of reasons. Xero is a company I have followed since its earliest days and especially when it arrived in the UK. That has given me something of a unique insight into how the company has developed and grown the market.
A few years ago, I visited Xero in Australia at a time when it was experiencing explosive growth, so I have that knowledge. I never quite made it to the company's Wellington HQ. Maybe one day. In 2015-16, I visited the company's US offices in San Francisco a few times and saw first hand what Xero is trying to do there. This year, I attended Xerocon UK while both Jon Reed and Brian Sommer attended Xerocon US. Jon filed this interesting partner story. Expect more to come.
The US presents unique challenges
When Xero pitched its tent in the US I was worried. I've seen so many non-US software companies get burned in the US that I feared the same might happen to Xero. Xero hasn't been burned but it's had its share of being singed and, despite the massive market opportunity for SMB accounting software, Xero has had one heck of an uphill struggle. Why?
Over the years, I've talked to US colleagues a LOT about Xero and Intuit, the incumbent 800lb gorilla and elephant all rolled up in one. Time and again I'd hear the same story: "Intuit may be annoying, expensive to maintain and a general pain in the backside but it gets the routine accounting job done and helps file my taxes. It has enough going for it that I can (just about) live with it." The problem for Xero and just about everyone else in this market is that Intuit is ingrained into the SMB psyche to the point where I have seen customers jump directly from Intuit to enterprise-grade systems without taking an intermediary step. And when what you really care about is compliance, then once you've made your accounting software decision, that's pretty much it.
For its part, Intuit made a dog's breakfast of moving to the cloud but that didn't help any competitor because Intuit has such a stranglehold on the market. That changed when Intuit got serious about Quickbooks Online. Heck, I used it while in the US for a couple of years. Why? My needs were straightforward and QBO quickly learned how to categorize my bank entries. I would argue that based on my experience, if anything, Intuit made it harder still for any competitor to get a serious foothold.
Xero reasoned that as a new kid on the block with a differentiated experience on offer, that it could do well if it pitched up in the Bay Area. That turned out to be less alluring than the company expected and as a result, the leadership was something of a revolving door. More recently, the company moved its HQ to the much cheaper Denver area. That saves costs while at the same time allowing Xero to keep close to a good sized and well-respected tech center. What else has changed?
A tipping point?
I asked Jon to tell me his impression of where Xero is at and he relayed that Rod Drury, CEO Xero believes the company is at a tipping point in the US. Quite what that means is open to debate but the fact the company has crossed the 100,000 user threshold in the US is unquestionably an important milestone. However, that number masks a departure from growth in other regions. Check out the stats from the company's recent half-year report:
Subscriber count growth in the US was an impressive 43% but was eclipsed by the UK at 54%. What's more, revenue arising out of growth didn't track the user growth numbers, (see below) only rising a meager 22%. No explanation was offered in the slides that accompanied the Q2 FY2018 results although Xero talked about continuing investment at its Denver HQ.
How Xero grows
Two major factors contribute to Xero growth in all its territories. First is its bank integration and automation of line item posting from bank statements. Today, that facility is table stakes for a cloud accounting solution and as I noted above, Intuit offers the same capability with its QBO product. Xero needs to get more banks on board in the US and here I am thinking about integration with Bank of America. It already has CapitalOne, Wells Fargo, and Silicon Valley Bank but BoA would be a huge draw.
Second, once Xero figured out how to win the accounting professional fraternity then it started to accelerate adoption. The US market is different to others in the sense that accountants and tax preparers are not always the same 'thing.' US professional accountants are much more concerned about potential litigation than in other territories, a factor I always felt would make growth in the US a problem to be solved for Xero, which likes to see its solution as a gateway to professionals as advisors.
A retiring profession
However, some remarks by Brian Sommer on the chat with Jon Reed gave me pause for thought. Brian has been a regular speaker at professional accounting events for some time. He notes the same as I did in the UK and that is partners in most firms are both risk-averse and nudging towards retirement. That cocktail makes it hard for a new software entrant to get attention because as Brian notes:
These firms like their technology changes in small, incremental steps.
In that context, Xero represents both a radical departure and a hurdle to overcome. The UK has managed to get over that hump.
Brian also notes that the young graduate accountants he comes across want to become advisors. They don't want to serve out their training days stuck in front of a photocopier on audits. While I didn't see that in the UK when I first met Xero-based firms, I noted that those who are the most successful, see compliance as table stakes for their advisory offering to businesses that need help. In short, the mindset of those who will become the best partners for Xero is very similar in both territories.
That leads me to believe Xero will likely see a similar pattern of adoption in the US to the one it sees in the UK. The question is one of timing.
The US is a vast country and making strategic office placement is critical. Today Xero has offices in San Francisco, Denver, New York City and Austin, TX. It needs more. Accounting for SMBs is still very much a local business and presence matters. At the same time, Xero has to navigate the numerous state chapters of the US accounting profession, each of which is nominally connected to a national organization but which often act independently of one another. That's a challenge I discovered back in 2010. Nothing I see in the landscape today makes me believe that things have changed.
The platform advantage
The good news is that today, Xero is much more of a platform play than it was a few years ago when the UK was in early growth mode. It can get alongside the SMB that is tech savvy and provide the basis of a complete system of doing business, not just the back office. Xero has integrations to payment processors like Square, PayPal, and Stripe. Each of these services is popular in the US and again, as Brian noted, a significant number in the Xerocon US audience use those services ahead of anything the banks provide. One final observation. On the extended podcast, both Jon and Brian talked about the fact SMBs are not always feeling the bounce from the Great Recession of 2008-10. The SMB priorities, therefore, are rooted in day-to-day cash management. Brian:
Seems the number one priority in business is cash is king. They care. That's the one metric they do watch every single day because they've gotta make payroll. They've got bills to pay and keep the lights on. That was number one and number two is probably is how do I grow and you can tell, these customers have a hunger to figure out how to make that happen successfully.
I know from my own experience of working with US businesses that what Brian says is bang on the money (sic) and that reinforces the need for further bank integrations in my view.
Noting similarities and differences between territories is an important aspect of understanding what works and what doesn't. Xero readily acknowledges that it got a surprise in the UK when it discovered how many banks it needs to cover. The same holds true in the US although the inclusion of payment processors is a big step in the right direction and important to attracting customers in the US.
Brian and Jon largely confirm what I thought but at the same time provide enough by way of clues to suggest that Rod Drury's 'tipping point' might be closer than I imagine. As always, we will have to wait and see. But in the meantime, it is worth noting that Xerocon US attracted 500 people. I remember the first Xerocon in the UK. 100 people turned up for that. This year? 2,000.