Xero marches on heavily

Xero marches on heavily contested mid-market

@AccountingBExpo

Sholto Macpherson is head of content for the Accounting Business Expo and editor of accounting technology blog

DigitalFirst.com

Just over a year ago, at Xerocon 2016, Xero CEO Rod Drury revealed a surprising fact that hinted at the company’s growing ambitions. While Xero has built its fortunes as an accounting software for small businesses, it was turning up in companies with more than 100 employees and revenues in the tens of millions of dollars...

“This is mind-blowing,”

Drury told the audience. “We’re finding we have customers with many, many hundreds of employees using Xero. It freaked us out because that wasn’t where we intended to build the product.”

Xero was faced with a choice. Should it ignore temptation and double down on its small business niche? Or could it successfully straddle small business and medium-sized enterprise?

Xero is betting that it can do the latter, with minimal investment, by leaning on its software ecosystem to supply line-of-business apps for specific industries.

At the heart of Xero’s mid-market proposition is what Drury calls the “commodity general ledger” – a sophisticated, highly connected engine that ultimately will automate much of the reconciliation process. Every small business accounting software company is trying to build the same thing using machine learning and other forms of AI and machine-to-machine data sources.

Companies that outgrow small business accounting software typically move to a suite of software called an ERP, or enterprise resource planning software. ERP software companies need to invest in multiple modules such as CRM, complex inventory, human resources, e-commerce, and so on.

R&D dollars, in other words, are spread over a broader area and not concentrated on the general ledger. This normally doesn’t matter because the battles in ERP land are normally fought at the edges. A contest of features where the software with the most specific functions for the customer’s industry is usually the winner.

Core accounting features such as daily automated bank feeds aren’t available or even considered. Or at least they weren’t considered, but apparently now that is changing. Drury noted in his speech that he had had breakfast with a Hong Kong firm called Fresh Accounting that had replaced SAP, an ERP found inside government departments and airlines, with Xero.

This trend was also spotted at the Accounting Business Expo by the CFO of Australia’s best-known e-commerce company, Kogan’s. Kogan’s David Shafer said in an on-stage interview that he had used Xero and inventory management app Unleashed up until the company was making AUD$170 million a year. (Kogan then switched to SAP.)

This example proves Drury’s point about the power of the commodity general ledger. It can scale much higher than equivalent desktop accounting software and in a way competes with ERP at the lower end of the market.

The ERP software companies are hardly worried about Xero’s incursions. They are in a oncein-a-lifetime frenzy of converting existing customers from server installations to cloud ERP. Cloud ERP company NetSuite has much more to gain by winning an onpremise SAP customer than beating off Xero for an SME.

SMEs will naturally want to squeeze as much out of their cloud accounting software before moving to ERP for one very good reason – ERP can be much more expensive. “Small and medium businesses really don’t want to go and spend 50 grand minimum or even a few hundred thousand dollars on a big ERP suite,” Drury pointed out. The advantage for accountants is to hang onto larger clients that otherwise would have bought an ERP and hired an internal finance team. The first accountants to understand how to service mid-size companies will see a big jump in their average revenue per client as well as top-line revenue.

The trick will be knowing when to recommend an ERP to your client. Oracle, SAP, NetSuite and others

are adding AI to supply-chain, chatbots, e-commerce and a host of other areas. These are the tools that build highly valuable IP that differentiates one company from another.

At the Accounting Business Expo you will see both sides. Xero’s ecosystem apps that help it punch far above its weight, and high-tech applications that create customer experiences straight out of science fiction. SAGE MYOB

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