After the initial shock of yesterday’s announcement that Xero will be “winding down” its U.S. payroll product and replacing it with a “strengthened partnership” with San Francisco-based Gusto, the sentiment around the Xero community is one of optimism and excitement.
While it appears that Xero’s current payroll users will have to phase off its payroll platform by the end of the year, Xero assures its customers that they will see benefits from a seamless Gusto integration experience, including single sign-on, cash flow management and accountant collaboration. The details of the integration are unclear, but Gusto Chief Operations Officer Lexi Reese notes that Gusto is “developing new features with Xero as part of our partnership to make the customer experience even better.”
Strategically the partnership makes sense. In a sea of accounting practitioners who have to be convinced that the cloud is secure, these two platforms long ago took the innovative path and created an option for those of us who believe in flexibility and growth. Xero’s strategy over the long haul has always been to build a rich general ledger and allow other apps to tap in via an open API. It has been such a successful approach that it likely inspired Intuit to do the same with QuickBooks Online. It makes sense that they would effectively outsource payroll to a proven partner.
However, at several points during Xero’s journey in the U.S., it appeared that the company doubled-down on native payroll. So it was a bit of a surprise that Xero would walk away from presumably millions of development dollars and partner with Gusto some five years into the development of U.S. payroll.
Unlike payroll regulations in Xero’s other major markets, compliance in the United States is undeniably complex — a federal government, 50 independent states, plus some additional municipalities. The native payroll product never could catch up to the functionality that advisors expected, and it was beginning to erode trust.
Having been a Xero advisor since 2013 and a Gusto advisor since 2014, when both platforms were fairly young, my practice has scaled alongside them. They have been integral app partners in my firm’s growth. (In my firm, Aguillard Accounting, all of my clients are on Xero and about 90% use Gusto.) In my opinion, this is an absolutely critical move for Xero in the U.S. While Gusto is not perfect — there were reports of struggles with customer service issues around the time of their HR launch — it is far and away a more sophisticated payroll platform than Xero could offer.
For readers who think that perhaps Xero bought equity in Gusto as part of the deal, the answer is “No.” As Gusto’s Lexi Reese confirmed, “The partnership does not represent any exchange of equity. Gusto has been selected by Xero as its preferred payroll provider in the U.S.”
I see this move as a tangible demonstration of Xero’s commitment to U.S. small businesses and I look forward to seeing how it unfolds.