Sunday, July 29, 2007

Love Xero?

Scott Manages a website development business in London and answered a few questions for me about the recently listed software company Xero [XRO.NZ]and what its prospects might be for the future. He is not affiliated in any way with the Xero company.

About the software

Powerful connections. With Xero, you can access your accounts and run your business from anywhere in the world, 24/7. And your trusted adviser's can login and view your accounts too, providing valuable real-time advice when you need it most. No more confusion, no more delays. Say goodbye to barriers. Xero's intuitive work flow makes painful data entry a thing of the past. Seamless bank integration allows your statements to be loaded daily without even clicking your mouse. And Xero's powerful Dashboard gives you a real-time snapshot of your business at a glance. Peace of mind. Xero takes care of your data security and privacy, so you don't have to. Your data is stored on our secure servers and backed up every day, so even if your computer is lost or stolen your data is safe. You control who has access. The only people who can see your personal data are those you choose.

The Questions

To answer your questions, most of which require some degree of speculation...

Share Investor: How much market share, given time, do you think Xero can take away from traditional off-line providers?

Scott: Plenty, with time. Initially people like myself will become the early adopters, and if it really is as good as it potentially can be, word of mouth will spread it far. The advantage for Xero, what harm can there be paying a couple of hundred dollars to test it out for a few months, indeed they could easily offer a free month or two, once you are hooked (or you get to the point that it's easier to persevere than change accountancy systems) then you have a customer for a very long time.

I can see growth potential with payroll integration also, email payslips, the whole thing. Too many companies use a different piece of software for every different tasks. Then licensing fees, upgrade costs, etc.

One of the biggest costs with traditional accountancy systems is multiple users on multiple PC's. This cost is gone with Xero.

S.I. Is the Xero product so superior that it will take users away from other online providers such as Quicken and MYOB?

Scott: I think yes, eventually. So it is a long-haul investment. MYOB and Quicken will respond, Quicken already has an online model in the US. But they rely heavily on what I outlined above, once a user has coughed up the $ and implemented their business on a system, they aren't going to change in a hurry. Give them a compelling and easy change though, and who knows?

Xero's advantage here is they can make changes, fixes and upgrades quickly and efficiently, Change a few lines of code and instantly fix a bug or small problem. Spend a day programming a new feature, test it, and it's online two days later.

S.I. The costs to the end-user, are they lower than online software?

Scott: I think if you looked at the OVERALL cost it would be competitive, compared to the features and abilities available. Sure, you can spend $400-600 on MYOB or Quicken and use it for 5 years - or spend $600 a year on Xero. But what are you missing out on that your competitors will have over you during that time? Quicken and MYOB still have issues emailing a frieken invoice! Xero will probably be able to integrate into your company website... it wouldn't surprise me if they implement a Credit Card payment module for you to use...

S.I. Margins for the company, how good could they be once initial establishment costs are factored in and then overcome over time?

Scott: Fantastic. SaaS is a wonderful business model. If things are done properly you could have a handful of people run the entire company (as it is). They will have to hit the right mix of features, price etc and I think that they will. It will be very interesting to see what offers they come up with, really I should email Rod Drury to see if some of the things I have mentioned here are on the cards.

S.I. Is the only point of difference between competitors off and online products the fact that Xero is online?

Yes, and No. Being online does lean toward a whole other set of advantages, a few of which I outlined above. There are certainly advantages to having offline software, if you are stuck somewhere with a laptop and no internet connection, but is that the way of the future? No, I didn't think so either.

S.I. Will it be horrendously expensive and or technically challenging for prospective clients to switch from their current provider to Xero?

Scott: I hope not. There are several options, either you keep your existing accountancy software around, but stop using it on a certain day and transfer balances, stock levels etc to the new system. Or Xero can come up with a migration tool. Or simply target NEW businesses first or those without an existing system.

They would be smart to sell this to the accountants, who will then recommend it to their clients as a system they can easily access as well. The possibilities are limitless, but no changeover will ever be VERY easy... or, it could be, who knows?

S.I. What is the main reason why you want to use this software and why not shift your current business accounts to Xero as well?

Scott: I sold both of my businesses before leaving for London, and my Trust accounts are so pathetically easy I do them in Excel. However, When I return to NZ my next business will be Xero based. I will use it to eliminate the frustrations I experienced with other accountancy software I used, mainly user limitations, bank reconciliations, expense management, jeepers almost everything!

The value I see in Xero is that if a feature ALMOST works the way you'd like, theoretically they can have change online within hours after a response to user feedback. This will happen thick and fast on startup, as they vie to impress...

S.I. Are any competitive differences easily overcome by Xeros rivals?

Scott: If Xero's rivals are well aware of their weaknesses, why haven't they done anything about them by now? I think they have underestimated the online market, to be honest, as have many people in the past - I can see Xero's advantages, and have watched them closely since listing. Maybe there will be rumblings, who knows? I am willing to bet the people behind Xero intend to stay ahead of the pack no matter what, and they are off to a good start.

S.I. How will the likes of giants such as Google online apps affect Xeros entry into the marketplace?

Scott: Hard to say, multinationals often forget New Zealands special needs in these areas, so Xero may rocket here but find it hard to break the US and UK. A tough call.

S.I. What are the costs of continuous development of this software to stay ahead of the pack?

Good question, although I don't have the answer I would say they are attractive compared to version updating, releases and distribution from the big two...

To put it in perspective, I work for a company in London that uses a SaaS model, they don't really even realise it. The IT Dept consists of 5 staff, which is more than sufficient to manage the website and support new development. The online model is worth hundreds of thousands of pounds to their business.

They developed it themselves to replace the offline model, shooting themselves in the foot? No. Because they have happier and more dedicated customers, spending more money with them!

S.I. Given mostly positive answers above how long do you think Xero could take to become a market player of some substantial nature or even a dominant player in this sector?

Scott: I will get onto the Xero bandwagon soon, I think their listing price could still drop a little more while they are quiet and people get itchy feet, or don't really understand what they have bought into... Xero will show it's results when it is ready, I get the feeling it will have VERY rapid growth, next year(2008) should be an interesting year.


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c Share Investor 2007

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