Article:

The Xero Revolution

11 April 2016

Craig Gower , Advisory & Information Technology Partner, Information Technology National Leader |

Xero has built a reputation as one of the world’s most innovative companies, showing us that NZ technology companies can be successful in the international marketplace.

Xero’s impressive trajectory from start-up in 2006 to global company with a customer base of nearly 300,000, more than 11,500 partners – and one of the top 10 companies on the New Zealand Stock Exchange with a market cap of around $4 billion.

Now, as Xero pushes into the United States market with its revolutionary business tool with the goal of reaching one million customers, the expectations are huge. Hailed as the “definitive software platform for small business worldwide” by David Goel, a managing member of Matrix Capital Management which last year picked up shares in Xero – having invested billions in tech firms over its 36-year-history, its successes including being an early investor in Apple Computers.

Indeed, Xero has revolutionised the way small to medium businesses work, utilising the power of the ‘cloud’ to create an active and connected platform that is efficient, engaging and empowering. Xero’s competitors, such as MYOB and Quickbooks have cloud products and large customer bases, so it’s only a matter of time before they and other providers push aggressively into the market to combat Xero’s success.

The challenge for Xero now is to stay ahead of the pack. They are well positioned to penetrate the global market with a goal of reaching

a customer base of 1 million by pushing further into the US and UK markets,supported by an aggressive recruitment drive to double its more than 700 staff over the next year.

So why has Xero been so successful and indeed, what are its limitations? While Xero is justified in its tagline as the ‘beautiful’ accounting software, it’s certainly not suited to every business.

From the outset, one of Xero’s strengths has been its user-centric approach to development. Xero have asked important questions: What do small and medium business owners really need from accounting tools? How can Xero make their lives easier and deliver better business outcomes? To find the answers, Xero have built an open platform that can ‘talk’ to systems that businesses are already running in order to deliver a seamless end-to-end customer experience.

As a cloud-based system, Xero enables multi-site, multi-person instant access. You manage your accounts from your smartphone and connect and collaborate in real-time with your accountant or advisor from anywhere and from any device. This integration also extends from business to business. Invoices from one Xero business to another business are exchanged and entered immediately, and business owners can choose to pay directly using Xero.

These are quick, smart capabilities that have been transformative.

One of Xero’s greatest innovations is automatic bank feeds, which provide businesses instant access to their financial data. Xero worked tirelessley

to get trading banks to give them access to that data so they could feed it into the cloud accounting system. Having real-time financial data gives businesses much greater control over cash flow.

This level of innovation embodies what Xero is about, working on behalf of business customers. Indeed, Xero works well with over 300 third-party ‘add- on’ products covering Inventory, CRM, Point of Sale and reporting to name

a few. While many of the desktop incumbents have forced customers to fit into one system, Xero has a very different philosophy. Chances are, that whatever system or requirement a business owner needs, there is a third-

party ‘add-on’ product that will ‘talk’ to Xero. Potentially Xero can become the core general ledger system doing the debits and credits alongside ‘add- ons’ for specific processes which may range from a specialist POS system for retail, an ERP system for manufacturing, to a sales or CRM system.

An added benefit of Xero as a cloud-based system is ease of use and low- cost entry. Anyone with a PC, laptop or tablet can set up a Xero account and be up and running very easily without any need to invest in hardware or applications, or have IT personnel to install. Xero currently costs NZ$50 per month (or $25 per month for a package with transaction limits). This business model is part of the attraction of Xero compared to the traditional model of a licence fee to buy the software and annual maintenance to receive upgrades.

For Xero, this business model will ultimately underpin its success, the ongoing revenue from monthly subscriptions continuing to build along its growing subscriber base. Once this reaches a critical mass, Xero has positive cashflow.

That said, as a fully online-only solution (or SaaS – “Software as a Service”), some users may have concerns about data safety. Indeed, according to a recent survey by Snap Business looking at how New Zealand companies view cloud-based services, while most are fully aware of the benefits,

50% are concerned about privacy and security issues and 31% about data sovereignty, namely where their data is stored and under who’s control. Other common concerns include inability to have an offline backup and how easy or difficult it is to access data should they cancel the service.

That said, Xero’s software has never been breached and they have never lost any customer data.

However, with all its benefits, Xero does have its limitations for larger businesses and does not necessarily suit every business. It can run about 1000 transactions per account, per month, but beyond that it will start to run slowly, even timing out when completing tasks such as running reports.

Xero may not always be the best solution for businesses with highly complex and specific needs. Take a manufacturing firm for example which has inventory and warehousing, detailed customer pricing requirements which may include a discount matrix, different customer groups, product groups and inventory locations that all need to be managed with an accounting system. While Xero could provide a solution with add-ons that caters for these needs, it may not be the best fit. Likewise, it’s not necessarily the best solution for a multiple company environment which demands the processing of volume transactions, supplier invoices recharged between companies and reporting across different company databases.

Xero’s reporting functionality is also limited. For companies needing to produce consolidated reporting and cash flow forecasting, Xero would require an add-on product which may still have limited ability to customise reports.

Indeed, while add-ons do allow Xero to cater for complexity to a certain extent; things can become unwieldy and costly. A business might reach the stage where it has four systems – Xero plus three add-ons along with other systems that it integrates with. So, they may be better off investing in a package that covers all processes in one system..

Technical support with the multiple vendors that come with add-ons can also be challenging. A business owner may need to contact four or five different people to ascertain where the problem lies and who is responsible for solving it. Xero’s technical support can be frustrating in itself, everything done remotely or via email, so there is no one person to call if you’re seeking a quick fix.

As a basic general ledger system, Xero has limited depth of recording and analysis compared to others. A large ERP system for instance will offer branch, department, cost centre, project, and analysis through the general ledger. Whereas Xero is built on a simple database which doesn’t have defined dimensions within the general ledger, though it does offer simple cost centre reporting via tracking categories.

Neither is there a great depth of security with Xero, with limited ability around defining detailed user roles and restrictions. Xero also has limited ability for users to customise or design their own reports, there are add-on products that will produce more analytical reports and visual graphical reports.

A final and important observation is that while Xero is smart, it’s not as clever as some users believe which can result in inaccuracies. Loading in transactions and expecting that the information will be accurate is not enough. A level of accounting oversight from someone with training is essential. To have credibility with the likes of bank managers, it’s advisable that an accountant reviews and signs off Xero reports.

So, yes, Xero is a success story, home-grown software hitting the world stage. Will Xero continue to it be successful? Yes, because its business model works, it has a loyal customer base and with its core accounting system reaching maturity it is now adding and integrating new products such as time-sheeting and reporting software into the platform.

Will it be so successful to justify its share price and should someone buy some shares in it? That’s not for us to comment on.

If you would like to discuss Xero or accounting software requirements for your business in more detail please contact your BDO advisor.