Head of Insight AccountingWEB UK
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Xero Digs in for Long-Term Rivalry with QuickBooks

Jun 11th 2015
Head of Insight AccountingWEB UK
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When New Zealand-based cloud accounting developer Xero said last week at its Xerocon event in Denver that it now supports more than 500,000 users worldwide, Intuit put out a statement the next day saying QuickBooks Online had reached 1 million.

Whether or not Xero can break the stranglehold that QuickBooks desktop and QuickBooks Online have on North America is the big question facing Xero and its investors, who earlier this year coughed up more money to ensure the company had $200 million-plus in cash to fund its expansion plans.

As Xero CEO Rod Drury notes: “The accounting industry has been sleeping for 20 years. Suddenly it’s one of the sexiest places with money coming in.”

The United States is Xero’s No. 4 market, contributing less than a tenth of its total user base. But as Drury suggests, accounting software is no longer just a local concern; it’s a global race in which Xero is competing not just with Intuit but with Sage, European challenger Exact, and numerous national contenders.

The USA Challenge: It’s a Big Country
Although his territory is Xero’s smallest, US President Russ Fujioka is happy with progress since he took over in September 2014, noting that Xero added 40 percent of its 35,000 US users since he joined. If you compare US growth with Xero’s other territories, it is already ahead of their early adoption rates, he said.

Out of a worldwide total of 15,000 accounting firms that partner with Xero worldwide, the US contingent is 1,800. It’s a healthy number, but indicates that Xero’s American accounting and bookkeeping partners support fewer users than their international counterparts.

That could be because they tend to be younger, smaller firms. The Xerocon delegates included a lot of tech-savvy accountants and non-CPAs around the age of 30 who are drawn to the business advisory message that underpins Xero’s marketing.

Xero is deliberately playing to this generational shift. For example, vice president of global education and AccountingWEB contributor Amy Vetter designed a practice Accelerator program to put curious older accountants together with younger cloud pioneers who can show them the way to what she calls the “connected practice." But more traditional practitioners could be less open to getting practice development tips from jargon-spouting whippersnappers.

Fujioka is fully aware of the challenge. “When we came to the US with the same playbook, we found the cloud adoption and acceptance state was different. It’s a slower burn,” he said.

Aside from the dominance QuickBooks enjoys in the US market as a 30-year incumbent, Xero executives identified three important factors they need to overcome:

  • The payroll and sales tax regimes, in which the 50 states operate much as independent countries for tax purposes, not to mention the complexities added by local taxes.
  • Slow uptake of cloud applications within the profession and beyond. Enthusiastic accountants and bookkeepers using Xero are not enough to lead the wider market into Xero’s hands, so the company is putting more emphasis on building awareness among small business users. Larger geographic distances weaken word-of-mouth referrals that have worked well for Xero in smaller territories, such as New Zealand and the United Kingdom.
  • The fragmented banking and payments environment. Plugging directly into bank data feeds helped Xero make inroads in New Zealand, Australia, and the United Kingdom. The United States lags behind the rest of the world in payment and reconciliation technology, with a three- to five-day hold until payment is recognized in the accounts. At the same time, new electronic players, including PayPal, Apple, and Google, are disrupting the payments side of the equation. As Xero and its software partners expand their payment capabilities, Xero vowed to support all these payment mechanisms.

Xero addressed a couple of these factors at the Denver event. On the sales tax front, Avalara and Xero announced a partnership to incorporate the tax specialist’s sales tax rate data within the bookkeeping application to let users calculate the sales tax due on their invoices. In addition, Avalara will integrate its TrustFile tax return program with Xero to speed up the production of sales tax returns.

As for market credibility, the Xero team pointed to a strategic development agreement with Apple in which Xero will enhance its core product to enable a range of “mobile­first” solutions for the iPhone and iPad. These include a retail ordering and payment suite demonstrated by Vend and Deputy at the Denver show.

“Why Apple engaged with us explicitly is because we’re a global company attacking four markets,” Drury said. “They know we’re 100 percent focused on the future. There is no multiple codebase. They’ll partner with competitors, sure. But they started with Xero.”

No Baggage to Slow it Down
Xero’s business platform strategy and add-on “ecosystem” give it a competitive advantage, he continued: “People assume incumbents are well-equipped. But they are slowed down by legacy code and users", Drury said. “We don’t have to deal with legacy stuff, which means you have to intellectually drain one talent pool to feed another ... . It’s hard for incumbents to zig and zag.”

Rather than getting into an “arms race” with QuickBooks, chief product officer Angus Norton said his mission is to optimize Xero for the trends that are likely to hit small business in the years to come.

For example, the launch of Xero’s Business Performance Dashboard will bring the benefits of big data to users who “haven’t been able to take advantage of data in a meaningful way until now." Norton’s development team is also working to connect Xero to the “financial web", opening the door to closer relationships not just with banks, but alternative providers of loans and capital.

Xero will continue to add more ingredients to support “more collaboration, more data, and more mobile", he said, including integrating with Gmail and Microsoft Outlook so Xero users can dispatch invoices directly to their customers from within the accounting program.

“Because we were born in the cloud, it’s important that we continue to innovate rather than just do what the other guys do,” Norton said.

Which brings us back to the 1,200-pound gorilla standing in Xero’s way in the United States.

“In every market our competitors are very large and very well-entrenched,” commented chief marketing officer Andy Lark. “It’s a battle to win hearts and minds of small businesses, accountants, and bookkeepers who are disenfranchised by existing suppliers or coming into market for the first time. That opportunity is enormous.

“When you have a vibrant, competitive market, Xero grows", Lark added. "People view it as a negative; it’s really a big plus. Every time they market, we benefit. We don’t want them to go away because they drive volume.”

Drury warmed to the same theme: “They’re having to take people to the cloud, and once they bring that topic up, we become part of the conversation.”

A lot of analysts and observers question Xero’s ability to dent QuickBooks in its home market, but Drury noted that Xero has doubled its user numbers in North America for the past few years. At that rate, the company could  reach 100,000 US users within 18 months, he said.

While the plucky Kiwi challenger may come from a smaller country, that works to Xero’s advantage, Drury said. Xero handles $70 billion of transactions in New Zealand - equivalent to a third of the country’s GDP - and is able to observe what happens “at scale,” he said.

“We’ve seen it before, so we know how the US will play out. Don’t mind if it takes time. That allows us to build the brand.”

Related article:

Xero Launches Business Performance Dashboard

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aBIZinaBOX Inc.
By aBIZinaBOX
Jul 1st 2015 19:13

Xero is going to be doing more than entering the space. Its the first real challenge that Intuit has had in a dozen years or better.

All I can tell you is that I can't get my clients off of QBOnline fast enough.

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