Riding the Xero horse

Rob O'Niell for Stuff.Co.Nz writes: The world’s major technology companies attract their own constellations of smaller developers, keen to hitch a ride into global markets.

Many New Zealand developers play in that world, creating products compatible with those of giants such as Microsoft, SAP, Oracle and Google. But until the arrival of cloud accounting system Xero, New Zealand had never really created its own ecosystem.

With 350 certified add-on partners, it is a remarkable success, and some of those partners are now also raising capital and going global in their own right.

Being part of such a community allows developers to punch above their weight, technology evangelist and investor Ben Kepes says. But there are also risks.

That horse you hitched up to might turn around and bite you.

It happened with Twitter, which encouraged other developers to integrate with it via what are called “application programming interfaces”. A bunch went out and delivered new platforms from which to publish tweets, monitor social activity and manage multiple accounts.

Then Twitter bought one of these, Tweetdeck, for US$40 million. That’s great if you get the exit payoff, but not so good if you don’t and are left stranded.

Kepes points out that Xero has also bought functionality from its ecosystem partners or bought them out entirely, as it did with WorkflowMax. It is aiming to add payroll functionality as well, which could put other noses out of joint.

But business is full of risks and these have to be weighed against the opportunities. Add-on partners such as cloud point-of-sale developer Vend have gained a lot more attention and customers than it might have on its own, Kepes says.

Community membership can kick-start a business, and the relationship with Xero is not exclusive. Several add-on partners are also integrating with other platforms – for example, Vend and soon Spotlight Reporting (see case study) are integrating with Intuit’s QuickBooks Online.

Xero stole a march on established small business accounting software providers by developing for the cloud. It gained market share rapidly, particularly in Australia and New Zealand. However, those competitors are getting aggressive in response, with both Australia’s MYOB and Intuit in the US embarking on their own cloud transitions.

Platform players would like to have exclusivity over things like add-ons, but you “never read about that publicly”, Kepes remarks.

Be that as it may, Xero’s success has been a boon to the local development industry. It has helped create an increased awareness of technology and of startups and encouraged a raft of public listings.

Like Trade Me founder Sam Morgan, Kepes has reservations about some of those listings. Some “should not have got away”, he says.

Xero’s New Zealand managing director, Victoria Crone, says being in the ecosystem provides access to Xero’s roughly 350,000 customers. Those customers get an improved experience through deep integration, not having to re-enter information for different systems and being able to import data seamlessly.

Now Xero has launched a new marketplace to showcase products and services from its add-on partner community, allow a better search and rating function for the industry and make it easy for new solutions to get to users.

The only real requirement to join the add-ons ecosystem is certification for quality integration to ensure users have a good experience, Crone says. If complaints come in, these get fed back to the add-on’s developers for improvement.

One developer pondering joining the Xero world did express concern that it might force prices down. There are no requirements regarding pricing, Crone says.

“I can’t see we are doing anything to drop the price,” she says, conceding that if the product was complex, that could make it more challenging to sell through the ecosystem.

And as to that exclusivity question: “We don’t demand exclusivity at all,” she says.  

Urgent Couriers pivots into software

There is a term to describe a sudden and radical change of business strategy: to “pivot”.

But for a parcel delivery company to expand into developing and selling customer relationship management (CRM) software, the term hardly seems adequate. In May, this somersault saw Urgent Couriers’ exsalerate.com software enter the Xero add-ons ecosystem.

It began in 2010 when Urgent Couriers went looking for a CRM system to replace what founder Steve Bonnici describes as “add-ons to a database masquerading as a CRM system”. That need was driven by expansion of the sales team and the urge to boost their effectiveness on the road by providing a mobile CRM tool.

Bonnici looked around for such a tool, but found complexity and high costs everywhere.

Urgent Couriers had already created its own software systems and had developers in-house. It could either enhance that thing hanging off the side of the database, or start again and build something new.

Bonnici sensed that if he couldn’t find a suitable product, other businesses might be having the same problem. He asked around his industry mates and found few using CRM, but many needing to. The entrepreneur in him kicked in.

Development of what was to become exsalerate.com began. “It has to be the sales rep’s best friend,” Bonnici says. “The reason CRMs fail is because sales people hate them.”

In March 2012, Bonnici took exsalerate.com to a US courier conference and won some interest. He went back in September, set up a stand and won three customers. Twenty more signed up at the next conference in 2013.

The software can be used by any business but starting by selling to other couriers made sense because it was a business his team knew, Bonnici says. Exsalerate.com’s largest customer isn’t a courier, it’s a credit union, which is using the software to boost member retention.

In May exsalerate.com became an accredited Xero add-on partner, allowing it to coat-tail into Xero’s large and growing customer base.

Being a Xero partner lowers “CAC”, Bonnici says, immediately apologising for the acronym. He’s talking about client acquisition cost.

Xero integration is easy and makes life simpler for customers, who can immediately input customers from Xero and upload sales into they system as well.

Anyone can integrate with Xero, but to be an official partner they need to demonstrate customers using their software and allow inspection of their code. Official add-on partners can then deepen their integration

to make their products even “stickier” for customers.

Becoming an add-on partner takes just six to eight weeks, Bonnici says.

However, he acknowledges there are risks. Xero has already added some CRM-like functionality and may add more, potentially competing with exsalerate.com.

To date Xero’s approach has not been to dive deeply into areas adjacent to its core business. It also does not demand exclusivity - selling exsalerate.com on the Google marketplace as well “seems to be a no-brainer” and is a development priority, Bonnici says.

This year saw exsalerate.com win the Hellaby’s retail conglomerate and pick up customers in Australia, Canada, Ireland and even a coffee distributor in Myanmar. With 65 customers, profitability is a way off yet, but the team has an exciting ride ahead of it.

“We just have to make sure it doesn’t distract too much from our other business which is making money,” Bonnici says.

Spotlight on the business

Knowing where your business stands at any given moment is hard. Traditional accounting is geared towards periodic reporting for compliance, not delivering real-time insights.

Xero business intelligence add-on Spotlight Reporting was developed to help change that by the first ever Xero accounting practice, based in Petone, near Wellington.

Richard Francis was a chartered accountant by trade, but preferred to work “at the virtual CFO end of the scale”, delivering strategic advice rather than bean-counting.

“I was restless about the accounting industry not doing useful work,” he says.

Compliance-focused accounting was dying and being commoditised and going to the accountant had become a “grudge purchase”, he says. Accountants had to shift to help businesses grow and create wealth.

He’d always been interested in software, he says.

In his business advisory work he had found Xero to be a great product, but realised the value-add for firms using it would be in being able to analyse and visualise their data, thus delivering insight and clarity.

Spotlight Reporting does this and also helps consolidate accounts from multiple Xero-using entities, a facility which also makes it useful for franchises.

Spotlight became one of the first Xero add-ons, alongside the likes of cloud point-of-sale system Vend and job management software WorkflowMax, now owned by Xero itself.

It was and is one of the few business intelligence tools that are “Xero only”, he says.

“We backed the Xero horse.”

Spotlight’s close ties with Xero even extended to selling some of its development. In July 2012, it sold its Workpapers product, which streamlined year-end compliance. Francis worked for Xero for 18 months as part of that deal.

He predicts Xero will be one of a group of online accounting products with significant market share globally, but there will be others. Momentum is strong, he says, and so is Spotlight’s business, especially in New Zealand and Australia.

However, with global ambitions, Spotlight is listening to the market and aiming to integrate with other platforms such as Quickbooks Online or MYOB. To aid that expansion, it recently raised $3 million in a private placement and is hiring in the US and UK.

“We’re looking at Quickbooks integration in the short term,” he says.

That capital raising also added some heft to Spotlight’s extended team with MYOB founder and Xero director Craig Winkler, former Xero chair Sam Knowles and current Xero director Graham Shaw coming on board as shareholders.