Let’s examine the state of online accounting software and how Xero plans on taking it to the next generation.
In Part 1 of this series I examined—based on what I learned at Xerocon San Francisco 2016—How Xero views its own “ecosystem,” its target market, how the product is evolving, what Xero is doing for their accounting partners, and Xero’s ambition and plans to become as dominant a player in the US market as it currently is in other global markets.
Charlie Russell will be presenting the session, Recent Developments in QuickBooks and Looking Ahead, at Accountex 2016.
In this article I’ll be covering the following topics:
- Is Online Accounting Software Still Lagging?
- Xero and the next generation: A look at the Xero platform and why they believe they are ready to take over the marketplace.
- Waiting for the Big Leap: Can Xero take online accounting to the next level?
Is Online Accounting Software Still Lagging Behind?
We often see people compare what they now have in desktop accounting software with what is available in online accounting software, and in many cases they find that the online software is lacking. The problem is that we are looking at the situation in a “traditional” view. We count features, and—by themselves—online products tend to have fewer features.
For example, did you know that neither Xero nor QuickBooks Online support finance charges on statements (at the time I’m writing this)? That is a problem for some businesses. If your business depends on those features, then that certainly can be an issue.
In the online environment the lack of features is often made up by add-on products. Don’t see what you want? Get an add-on. Integration between products tends to be easier in online products these days. However, from the traditional view, that isn’t what people want to see. They want a vertically integrated product that has a lot of bells and whistles, rather than a basic product where you have to pay more to get an add-on product to obtain features you want.
However, counting features isn’t the right approach when you are evaluating online accounting products. Rather than using the traditional approaches you may find that with an online product there is a different solution that may be more efficient. Your software doesn’t support finance charges? You need those because people aren’t paying you on time. Rather than complain about not having this feature, you should look at features (and add-on services, perhaps) that will improve client payment processing, making it easier for clients to pay you on time. There are new features available to us with online accounting products, we just need to learn how to use them.
Xero and the Next Generation
When I go to a product-centric conference like Xerocon, I get caught up in the rousing enthusiasm. There is no doubt that the folks at Xero are enthused about their product and excited about what is coming up in the next generation.
In his keynote presentation at Xerocon, Rod Drury talked about the four things that you need to be successful in the online accounting marketplace:
- A well-designed multitenant relational database.
- A single global platform.
- Utilize a major PAAS (Platform as a Service) provider (Drury specifically referred to Amazon Web Services).
- Build for machine learning.
Let’s go into some detail on each of these and explain how Drury thinks Xero meets these requirements.
Multitenant Relational Database
Xero’s system has been developed as an online accounting system from the very beginning, and the core of their product is a solid double-entry ledger multitenant relational database system. This provides features such as multiple currency support as a core feature, the ability to generate reports on both a cash and accrual basis easily, and a way create uniform reports (report templates, coming soon to the US market) for multiple companies with disparate charts of accounts.
Multitenancy refers to an architecture where a single instance of the software is running on a server and services multiple tenants (each “tenant” can be a group of users sharing, for example, one company file), but that each tenant can only see their own set of data.
Single Global Platform
You don’t want to have a different core product for each of the global communities you serve, you want to have one core product that fits all markets. You can “localize” the product for each market by adding features, translating how some features are presented, but there should be one core database product for all markets. This is Xero’s approach, and has been from the very beginning.
Utilize a Major PAAS Provider
PAAS (Platform as a Service) is a cloud computing service that allows customers to develop, run, and manage applications “in the cloud,” without having to develop their own infrastructure. Drury didn’t just say “PAAS,” he specifically mentioned Amazon Web Services (AWS), which is one of the largest PAAS systems in the world (along with Google and Microsoft). Xero is moving customers over to AWS. In an article in the August 28 edition of Technology This Week (a paid subscription newsletter that I highly recommend), Rick Richardson talks about how there is a “growing sense that things may be more secure in the public cloud,” referring to services such as AWS.
Moving to AWS provides you with a global platform that is easily scalable, provides superior uptime, reduces cost, and is highly secure.
With changes like the move to AWS, Drury says, “I think we have taken a four-year leap.”
Build for Machine Learning
This is the “next big step” for Xero. As Drury says, “Our discovery into Machine Learning is showing us that we can solve the next big accounting problem: Reducing the need for small businesses owners to code with no loss of fidelity for the accountant.”
What does this mean, exactly? Essentially, Xero is putting a lot of research into how working with Big Data can help them automate many of the daily tasks that users and accountants have to perform now. They want to fundamentally change how we work.
As an example of how they are moving in this direction, look at the Find and Recode feature and how this is impacting Xero. This feature (only available to Xero partners through the Advisor menu) allows you to change the coding of transactions in bulk. Since it was introduced in 2015, over three million transactions have been “recoded,” and Xero has been tracking these corrective transactions.
This is great, but having your accountant go through transactions and recoding them to correct mistakes, even if done in bulk, still means that the accountant has to do that work. More efficiently, yes, but it is still the same basic process we’ve been doing all along. What if you can keep the mistake from happening in the first place?
With the data that Xero gathers from examining these recoding actions, they are looking to improve the auto-classifying of transactions coming in through bank feeds. That is, when transactions come in, Xero tries to classify that transaction automatically, so you don’t have to spend time in choosing the proper attribution for the transaction or correcting a client’s mistakes. Xero can auto-classify a huge percentage of transactions now, and they believe that bank reconciliation will go away within a year as they improve their system. This is their vision, to use “Machine Learning” and Big Data analytics to gain automation, so that you don’t have to perform the day-to-day work that you do now. Is this the “next big step”? We’ll have to see how this works.
Waiting for the Big Leap
Regarding the online accounting marketplace in general, what I’m looking for is “the big leap” in online accounting software, something that will be a quantum leap beyond what we can see in the desktop. YES, there are advantages with online accounting software when compared to the desktop. For example, product integration tends to be easier in the cloud than the desktop, and bank integration usually works better. But those are incremental improvements, not big leaps.
We’ve been told that moving to online accounting is going to revolutionize our lives. My pessimistic view (as a long-time desktop user) is that after several years of promises, at this point we still have essentially the same kind of software processes online that we’ve been working with on the desktop for years.
Xero believes they are on the cusp of achieving that big leap. They believe that Machine Learning will lead them to revolutionary changes in how online accounting software works.
So there you have it, my impressions of Xero’s pitch to accounting professionals at Xerocon 2016.
It has been interesting watching this company over the past several years (my first review was published in 2013). The product has grown significantly since then, such as with the addition of inventory and the find/recode feature. The company itself has matured also. Instead of just “poking the bear” and chasing Intuit, they now present themselves as the technology leader in the online accounting market.
I like what Xero is doing for accounting professionals (Xero Partners), and I’m very intrigued to see where Machine Learning will take them.