Wade Roush for Xconomy.com writes: If you run a small- or medium-sized business and it’s big enough to have bookkeeper, chances are he or she is using QuickBooks,
the desktop accounting program sold by Intuit since the mid-1990s.
QuickBooks has a market share of around 90 percent in North America,
making it one of the most powerful and long-lasting near-monopolies in
the world of business software.
When Intuit’s QuickBooks division looks over its shoulder these days,
the company it probably sees looming largest is Toronto-based Freshbooks,
which started out as a simple invoicing tool for non-accountants but
has added many bookkeeping functions. The startup claims to have 5
million users, although it doesn’t say how many of those are paying.
But while the Freshbooks threat is very real, there’s another company
trying to sneak up on QuickBooks, from an unexpected direction: New
Zealand. Wellington-based Xero
offers a cloud-based business software accounting package that earns
around $87 million in recurring subscription revenues from 300,000
paying customers around the world. At the moment, only about 18,000 of
those subscribers are in North America. But the U.S. market is so
central to Xero’s growth plans that it has put nearly a sixth of its
600-strong workforce into its North American headquarters, on Green
Street in downtown San Francisco.
Xero is a public company in New Zealand, where it has a market
capitalization of more than $3 billion, and over the last two years it
has collected $200 million more in private funding from the likes of
Peter Thiel and Matrix Partners. That leads Jamie Sutherland, president
of Xero’s U.S. operations, to compare the company to a speedboat that’s
zooming forward while bigger and smaller players—read: Intuit and
Freshbooks—bob about in its wake. “We’re well-funded and
well-capitalized, with the right talent,” Sutherland says. “The big
players are fumbling around figuring things out, and then there’s a
whole slew of smaller companies that aren’t well capitalized but try to
play in our space.”
As someone who’s been following Intuit for a while—I wrote a long piece in 2012 about the financial-software giant’s efforts to keep innovating
even as it enters its fourth decade—I’ve been intrigued by Xero’s bold
move into one of the two U.S. markets that Intuit still convincingly
dominates (the other being online tax accounting through TurboTax). The
basic value proposition at the Kiwi startup, founded in 2006, is that it
understands the Web-based software model and user-friendly design in a
way that Intuit and other established competitors, such as UK-based Sage and Australia-based MYOB,
never will. But just being new isn’t enough in a market as conservative
as business accounting. If any company is going to steal QuickBooks’
market share, it will have to win the hearts of accountants and
bookkeepers, since they—not their clients—are usually the ones who
choose an accounting package. So I’ve been spending some time talking
with Sutherland and his colleague Peter Karpas, Xero’s U.S. CEO, to find
out more about the company’s strategy.
Rod Drury, a prominent serial entrepreneur in New Zealand, conceived
Xero after difficulties communicating with accountants in his previous
businesses. “He was frustrated that he couldn’t get a sense of what was
going on with his business in the desktop world,” Sutherland says. “He’d
send a question to his accountant and it would take three or four days
to get the answer back, and by that time the information was out of
sync. That problem doesn’t make sense in our day and age of cloud
computing, when you can have all the data in one location.”
With no product, no customers, and barely an idea, Drury and his
co-founder Hamish Edwards were able to raise money to start Xero in an
IPO on the New Zealand Stock Exchange. (Just try doing that in the U.S.;
Sutherland said it was only possible on the back of Drury’s track
record as the founder of successful New Zealand software companies
Glazier Software and AfterMail.)
Xero took off quickly in its home region, displacing a
QuickBooks-like product called MYOB in New Zealand and Australia and
then making inroads against Sage in the U.K. and Europe, Sutherland
says. Good design and usability were among Xero’s selling points from
the beginning. “We wanted to make accounting easy and fun,” he says. “It
isn’t this old, legacy desktop application where you cringe when you
look at it. It looks and feels like a consumer application.”
A case in point: Xero’s interface for reconciling a business’s
internal books with its bank statement, which is one of the first things
many small business owners do every morning. It’s usually a
mundane and annoying task, but Sutherland says Xero’s interface makes
it feel like a game. “The transaction is on the right and what you
expect at the bank is on the left and it’s just a game of matching,” he
says. “It’s sort of like Tetris. We’ve heard people saying they’re upset
when they’re done that they have nothing left to reconcile.”
The consumer-like features extend into Xero’s mobile app, which lets
users enter expenses into the system by snapping a photo of a receipt.
Because the system is cloud-based and accessed from a Web browser,
there’s no on-premise software to download or maintain—another feature
that cements Xero’s resemblance to Mint, Check, and other popular
consumer money management apps.
Intuit offers a cloud-based version of QuickBooks, but its
architecture dates back to the desktop days, and it’s been known to
suffer downtime, including a four-day outage in 2011
that paralyzed many small businesses. “I think there are systemic
issues in the core of that product, largely because it was built in the
early days, before mobile took off,” Sutherland says. “They basically
ported their desktop product and put it online and didn’t rethink how it
actually works.” Xero was born in the cloud, which means the startup
has a more natural understanding of how information flows between
accountants and small business owners, especially those who are on the
go, Sutherland says. [Update 6/30/14: Steve Sharp, Intuit's
communications manager for small business, contacted Xconomy to dispute
Sutherland's characterization of QuickBooks Online. Sharp says the
company "launched an entirely new, rebuilt from the ground up and
made-in-the-cloud version of QuickBooks Online last September."]
But as fun as Xero is for business owners, it’s accountants who
choose what software to use to keep a company’s books—which is why
they’re the main focus of Xero’s sales strategy.
Under Xero’s business model, the basic cloud software is free to
accountants, as is some extra client-management software for running an
accounting practice. It’s only when an accountant brings a new client
onto the system that’s Xero starts charging a subscription fee. (Prices
range from $9 per month to $180 per month, depending on the number of
employees a company has and the amount of file storage it needs.) The
more customers an accountant brings to Xero, the larger the discount the
startup offers to her clients. It’s a clever model, since winning just
one accountant can meaning winning all of his or her clients.
Karpas acknowledges that there are hundreds of thousands of
accountants who have been using QuickBooks for years and aren’t about to
defect to Xero or Freshbooks. But he thinks there’s plenty of room for
Xero to compete in two other segments: new businesses that aren’t using
any accounting software yet, or are only using Excel spreadsheets, and
businesses served by accountants who are dissatisfied with QuickBooks,
or who see it as the choice of an older generation of accounting
professionals.
“The accounting practice that is run by the person who is in their
60s and is thinking about retirement and has used QuickBooks for 20
years—they are not going to switch,” Karpas says. “But the younger, more
aggressive accountants, meaning people in their 20s, 30s, and 40s, who
are looking to grow their practices, are very open to talking to us and
are looking for an alternative to QuickBooks, which has acted like a
monopoly.”
The classic “disruptive” startup, as defined by Harvard Business
School scholar Clay Christensen, starts out by offering a product that’s
inferior to the incumbent, but is so much cheaper it draws users away.
That’s not the scenario with Xero, which is actually more expensive and
more feature-rich than QuickBooks Online. Rather, Xero’s strategy has
been to frame itself as the modern, mobile-friendly, consumerized
alternative to a stodgy 1990s brand.
All it needs now is more name recognition. “Our biggest issue now in
the U.S. is that we are not famous enough,” Karpas says. “We are the
first legitimate competitor to QuickBooks in at least a decade, and you
could argue even longer. We have invested over $200 million over eight
years in building this product, and we have traction around the world.
What all that means is, if people hear about us, they can know that we
are going to be around. And then we will win more than our fair share of
bakeoffs.”
Becoming famous is a different problem in the U.S. than in other
markets, mainly because there are so many small businesses here: 23
million, according to the Small Business Administration. So Xero’s big
challenge in North America is to decide which sectors to go after, and
tailor its software and sales pitch accordingly. Xero has a plan,
according to Karpas, but he demurs about the details—he says that’s the
startup’s “secret sauce.” If he and Sutherland can get more American
accountants to take a look at a little-known service from a Southern
Hemisphere country with a population smaller than Houston’s, they may
yet become a bigger worry for Intuit.
