On the heels of Xerocon San Francisco 2016, let’s take a look at where Xero stands today and how they plan to be at the forefront of the next generation of accounting software.
Charlie Russell will be presenting the session, Recent Developments in QuickBooks and Looking Ahead, at Accountex 2016.
Accountex Report spends a lot of time looking at new product features and how to get the most out of an accounting system, but it also is important for us to delve into how the developers of these accounting systems view the marketplace. What direction are they headed in? Will they find a way to shake things up? Where do they see the marketplace heading?
Here’s my interpretation of how Xero sees the next generation of accounting, based on interviews with Rod Drury (Xero CEO and Founder) and Russ Fujioka (President of Xero Americas), as well as from presentations at Xerocon. In this two-part article I’ll talk about:
Part I (this article)
- The Xero ecosystem: Xero’s view of the world they live in and support.
- Xero’s target market: We talk about the “small business market,” but can Xero cast a wider net?
- The Xero product: Xero’s development philosophy and how Xero has advanced recently.
- Xero and the US Market: Xero is a world leader in online accounting, but what about in the US?
- Xero Partners: There is a huge emphasis at Xero in working with accounting professionals. Where is that headed?
- 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?
To set the stage, let’s look at how Xero views the world they live in. Every major accounting software provider has a diagram that they use to explain their “ecosystem.” Here is the latest from Xero, followed by my interpretation of what Xero is trying to convey in this diagram.
- Accounting: This is the Xero product itself, the core ledger and it’s supporting features.
- People: This is the universe of people involved with Xero—business owners and their employees, customers, suppliers, and accountants.
- Payments: You are in business, so payments are a major factor in the success of your business. Payment systems have to work with your accounting system, and they have to be useable by your customers and suppliers.
Connections: These are the relationships between the people (businesses, employees, customers, and vendors), the interactions between them and your accounting system, and the integration with payment systems.
Looking at this, my first reaction is that it is missing a component—Tax. Xero doesn’t produce their own tax product for the US market, and I believe that this kind of integration is a key element for accounting professionals and small businesses. They do have a tax product for Australia, but that market (one unified tax system nationwide) is very, very different than the US market (50 states plus the Federal tax system).
Xero’s Target Market
We think of products like Xero as being aimed at the “small business” market. Everyone has a different definition of what that market is, of course.
Here’s a slide from Rod Drury’s keynote address that talks about markets and where Xero fits in.
This pyramid is fairly typical of what we’ve seen before, but it is interesting that Xero is pointing out that while they currently address the “small business” market, they are finding their product used more and more in the “a bit bigger” market. Xero views this “a bit bigger” market as businesses with a few hundred to a few thousand users, an area where you wouldn’t expect to see a small business accounting product.
Xero considers the mid-market vendors, the next higher bracket, as being built with dated technology. Because of the pricing and innovation gap between small business apps like Xero and the mid-market ERP systems, Drury believes that Xero is moving into the larger business market when supported by integrated add-on products like payroll, CRM, purchase order approval workflows, and more. Xero, plus add-on products, can provide the features that are needed in this market but at a lower price, based on newer technology.
Looking lower, the bottom of the pyramid is the “micro” market. This is the “pre-accounting” market where you have independent contractors, freelancers, Uber drivers, people in the gig economy. This is where products like Xero TaxTouch fit in. Some companies, like Intuit, are heavily focused on this market. Rod Drury stated that, in his opinion, this market is hard to make money from. Xero is finding that these kinds of users don’t grow up to become a full-time business as often as you might think.
So, Xero believes that in addition to dominating the small business market, they are going to expand into the larger markets with the aid of their add-on partners, as well as looking to develop their own add-on products as a layer of code above their core accounting engine.
Xero Product Developments and Philosophy
We’ve talked about the details of Xero in many articles over the years, starting with Doug Sleeter’s introduction back in 2011 and continuing with Greg Lam’s in-depth reviews. The product has developed at a very rapid pace during this time. In fact, at Xerocon San Francisco 2016, Xero touted the assertion that they’ve made over 1200 improvements in the last year alone.
What is interesting to me is that Xero is very open about the changes they are working on now, which is a refreshing change from what we get from some other software developers. Here are some improvements and new features that we can expect to see in the coming months:
- PayPal Express Checkout for Xero – a major partnership with PayPal to allow customers to pay a Xero invoice with just a few clicks. Customers won’t have to log in to a separate website to pay via PayPal or credit card. In addition, the business user can automatically view and reconcile PayPal transactions and fees from within Xero, in conjunction with the Bank Feeds feature. See the press release PDF.
- Report Templates, a new feature, currently available in Xero in other worldwide markets, is coming to the US. Accountex Report will be going into this in more depth in the future. Essentially, this feature allows you to create a standard report template (for example, of a financial statement) that you can use across multiple Xero client organizations even though each client organization may have a different chart of accounts. It also allows you to create custom formulas for columns and rows. This will only be available to accountants via the “advisor” menu. See the press release PDF.
- Adding transfer rules to bank feeds. This will allow you to automate bank transfers in your bank feeds, which can be a big time saver for some businesses. The more you can automate something, the more accurate the process will be, and the less time it will take to manage.
- The ability to “clone” a Xero organization into a new one, which can be a major time saver for an accountant onboarding a new client.
- Printing checks via Microsoft Word, using merge codes. Printing paper checks with online accounting systems can be a pain, given that there are many different check layouts that people use. This feature will let you use the “mail merge” feature in Microsoft Word to print your checks from Xero.
- Printing checks on blank stock is another approach to solving check printing issues.
Continuing to expand Payroll state coverage.
Twelve hundred improvements in 12 months, with more coming. That is a lot of change to deal with. Of course, many of those improvements will be small, incremental changes that few people will notice. However, even a small change can incur some risk, and many changes could affect how you work with the product. That means that users and accountants are going to have to deal with all of these changes.
These changes don’t come out in one or two big annual updates, though. Xero’s development philosophy is “release early, release often.” Which is something that makes me nervous. According to Herman Man, global VP of product (payroll), “What is implied in this approach is releasing new functionality often, but not breaking existing functionality, and then testing the change with a small subset of customers.” Some features will be released often to everyone, some big changes will be staged (big changes, particularly user interface changes that affect everyone). According to Man, “You layer on a lot of testing and don’t release until you are confident that you won’t break anything.”
This is not a new approach to software development by any means. However, when the concept is brought to the forefront, it can make people uncomfortable. Heck, I’ve been a software developer myself and I’m not sure I like this approach. I brought this up with several accounting professionals at the conference and most agreed that there was some level of discomfort over the process. However, when I asked Greg LaFollette (one of the leading accounting technologists in the US) about this, he wasn’t worried. He quoted Voltaire – “The best is the enemy of the good.”