Into this world of localised (and dare I say in antiquated) small business accounting software comes a truly disruptive company from New Zealand called Xero.
Xero offer a cloud-based accounting package to small business. There are plenty of reasons why cloud-based is superior. But the initial top-of-the-list is the ability to run your business without a dedicated server and on any device.
But there are some big advantages with cloud based software. For instance, if our business had to pay workers compensation insurance to some insurance company we may set up a direct debit (through our accounting software) and make the payment to what is - at least to us - just a bank account number. If we accidentally type the wrong number in that could of course be a disaster. However, Xero have almost certainly had the correct number typed in twenty times before and they can - using a little artificial intelligence - warn us that the number is wrong and get us to type it in again. That is the direction this is heading.
Xero is a minor miracle - a powerful small business accounting software package with an intuitive and elegant interface. Nobody ever said doing their accounts was fun - but following the Xero hashtag on Twitter almost makes small business accounting seem cool. Pushed on that, customers note it saved them the drudgery of the shrink-wrapped solution it replaced.
Anyway - Xero from inception had a problem. It was based in New Zealand. New Zealand is not exactly the centre of the universe. And trying to run a global software company from New Zealand was a challenge. Besides, when Xero started it was diabolically short of money for expansion.
So they made a decision which seems obvious in retrospect, but was innovative at the time. They made the system open-architecture. They allowed people to put their own apps over Xero to meet specific functions.
For example there is an app for doctors’ practices in Australia. There are lots of small business management practices that are specific to a doctors practice in Australia - for example the classification of and collection processes for government reimbursement of medical procedures. Xero wouldn't know enough about how a doctors practice works in Australia to write that software - but someone else does - and they just plug it into Xero. Slogan: "there is an app for that".
And there is an app (often given away) for ordering building materials for a small construction firm. This app builds into the billing and bidding software and also to the ordering software. It is given away because it locks in customers.
And of course there is an app for payroll too. That app will (necessarily) be country-specific because tax laws and court orders and all the other things that you need to withhold from payroll are country specific. In countries where Xero is pervasive Xero might build or acquire a payroll app and will wind up owning a good part of the system. In countries which are a long way from New Zealand it is likely that there will be a third-party payroll system.
Payroll is particularly difficult. You might have an employee in California who is resident in Oregon and has a court-ordered salary withhold in Texas. No small business can comply with that and so they send their payroll to a payroll processor (such as Automatic Data Processing or Paychex) and the payroll processor complies with that. But there is no reason why this can't be done with cloud-based software. Indeed that is what Ultimate Software does. Ultimate Software (NASDAQ: ULTI) is a rocket-ship stock and is the bear case for (say) Automatic Data Processing.
Bronte (our business) does its payroll on Xero and functionality is more than sufficient. Xero have a payroll program with limited functionality in the USA - but you can have payroll apps on Xero with much broader functionality - see this list. Note in this list ADP is a plug-in for Xero but the one with the worst reviews.
The end-game for an open-architecture accounting system is that there is an app for every function that is hard to comply with. If for example private schools have to separate their building accounts from their general accounts and other things there will be an app for that. If a doctors practice needs to invoice simply 70 different insurance companies there will be an app for that.
And owning the open-architecture backbone will be a stunningly powerful (and ultimately stunningly profitable) position. Profits will - as per most of silicon valley - follow relevance.
Xero offer a cloud-based accounting package to small business. There are plenty of reasons why cloud-based is superior. But the initial top-of-the-list is the ability to run your business without a dedicated server and on any device.
But there are some big advantages with cloud based software. For instance, if our business had to pay workers compensation insurance to some insurance company we may set up a direct debit (through our accounting software) and make the payment to what is - at least to us - just a bank account number. If we accidentally type the wrong number in that could of course be a disaster. However, Xero have almost certainly had the correct number typed in twenty times before and they can - using a little artificial intelligence - warn us that the number is wrong and get us to type it in again. That is the direction this is heading.
Xero is a minor miracle - a powerful small business accounting software package with an intuitive and elegant interface. Nobody ever said doing their accounts was fun - but following the Xero hashtag on Twitter almost makes small business accounting seem cool. Pushed on that, customers note it saved them the drudgery of the shrink-wrapped solution it replaced.
Anyway - Xero from inception had a problem. It was based in New Zealand. New Zealand is not exactly the centre of the universe. And trying to run a global software company from New Zealand was a challenge. Besides, when Xero started it was diabolically short of money for expansion.
So they made a decision which seems obvious in retrospect, but was innovative at the time. They made the system open-architecture. They allowed people to put their own apps over Xero to meet specific functions.
For example there is an app for doctors’ practices in Australia. There are lots of small business management practices that are specific to a doctors practice in Australia - for example the classification of and collection processes for government reimbursement of medical procedures. Xero wouldn't know enough about how a doctors practice works in Australia to write that software - but someone else does - and they just plug it into Xero. Slogan: "there is an app for that".
And there is an app (often given away) for ordering building materials for a small construction firm. This app builds into the billing and bidding software and also to the ordering software. It is given away because it locks in customers.
And of course there is an app for payroll too. That app will (necessarily) be country-specific because tax laws and court orders and all the other things that you need to withhold from payroll are country specific. In countries where Xero is pervasive Xero might build or acquire a payroll app and will wind up owning a good part of the system. In countries which are a long way from New Zealand it is likely that there will be a third-party payroll system.
Payroll is particularly difficult. You might have an employee in California who is resident in Oregon and has a court-ordered salary withhold in Texas. No small business can comply with that and so they send their payroll to a payroll processor (such as Automatic Data Processing or Paychex) and the payroll processor complies with that. But there is no reason why this can't be done with cloud-based software. Indeed that is what Ultimate Software does. Ultimate Software (NASDAQ: ULTI) is a rocket-ship stock and is the bear case for (say) Automatic Data Processing.
Bronte (our business) does its payroll on Xero and functionality is more than sufficient. Xero have a payroll program with limited functionality in the USA - but you can have payroll apps on Xero with much broader functionality - see this list. Note in this list ADP is a plug-in for Xero but the one with the worst reviews.
The end-game for an open-architecture accounting system is that there is an app for every function that is hard to comply with. If for example private schools have to separate their building accounts from their general accounts and other things there will be an app for that. If a doctors practice needs to invoice simply 70 different insurance companies there will be an app for that.
And owning the open-architecture backbone will be a stunningly powerful (and ultimately stunningly profitable) position. Profits will - as per most of silicon valley - follow relevance.
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