Cloud accounting software company Xero has around 1.2 million subscribers, with over 250,000 in the UK and over 110,000 in North America. ZDNet talked to the MD of Xero UK, Gary Turner, to find out more.
ZDNet: Can you give us a little of the background to the company?
Turner: Most people in the UK have only heard of Xero [pronounced Zero] in the last two years, although we have had a business in the UK for eight. We started in New Zealand.
At Xero we said we can create a set of complex business apps in the right environment using a browser, and the marginal cost of delivering software over the internet means that it is now economically viable to sell accounting software to small businesses. Up until that point, the cost of distributing CDs in cardboard packaging to be put on a shelf for the reseller channel meant that selling to the smallest SMEs was not a profitable business.
Now, the most popular software for SMBs is still Microsoft Excel. So, often for an SMB -- a small business, the self-employed and so on -- a piece of accounting software is not on the top of their list of vital purchases.
So what's happened in the last ten years is we've been building Xero so that it has achieved some kind of clarity in terms of function.
We are now past the point of acceptance where things have just exploded for us as we have got more and more people onto the platform.
I think the whole sector has become more interesting as the cloud has come of age. People have become habituated to it. If you are putting your photos on the cloud then you know what it is and we don't have to explain it anymore.
Now, if you are starting up a business you are more likely to go for Google or Microsoft Office 365 or Salesforce, but your key software is going to be cloud-based. You're not going to go back to File Server and install Exchange on that. The cloud where we are.
Where did Xero start?
Wellington, New Zealand. When I first heard of Xero, even though I had been working in software for so long, my pre-conception was: 'that's really interesting but it's well away in New Zealand and I have never, ever knowingly used New Zealand software'. The whole dynamic was that you either used American or European software, and so I dismissed the idea.
That was when Rod Drury, our founder, checked out some people in Europe and then he tapped me on the shoulder and talked to me about how the cloud was coming and small business software was ripe for disruption.
Our revenues in the UK in 2009 were £50,000. We had three members of staff and probably about 500 customers. A couple of weeks ago I ran a customer conference in the UK and worked out that we now have over 250,000 customers in the UK.
We have been listed on the New Zealand stock exchange since day one, so we have always been a well-capitalised startup -- there's always been money in the bank. That means we don't have to compromise on hiring people or designing product. And it gets to the point where it's no longer just a printing application that goes on a web browser but a platform with a whole load of other service providers.
We're now at a scale where we have so many businesses on the platform that it's no longer just an accounting application that runs in a web browser but a platform that a whole load of their service providers run into. We now have over 600 apps that connect to Xero and each add some other functionality.
So you're in there and the competition is Sage, but how do you think you can be different from them?
We recognised that the whole service proposition is what plays in the small business world. If you think about how many small businesses there are in the UK -- there are five and a half million of them -- the majority of them don't employ a full-time accountant because they are too small for that.
So, historically, they have sourced that business to a public practice accountant of which there are 20,000 in the UK. And so what we were able to do is decide that we're not going after the five million SMBs.
Predominantly we are getting to them through the relationship they have with the accountants.
That means, in our case, it is around 20,000 who are the gatekeepers to, or the influencers of, the five million.
We provide the accountant with a complete set of software tools so that when he is with the small business he has the complete details of the cash flow, the earnings, and so on. That allows you, the accountant, to much more efficiently service the customer.
Not only that but while you, the accountant, are providing these services to your customers you are also becoming much more efficient yourself. We have a two-sided market.
Xero presents differently to the accountant than it does to the client. And what that means is that your relation with the SME is no longer a quarterly or annual 'your tax bill's due in a fortnight, please send me all your bank statements, your paperwork and I want all of your tax returns sent to me'.
Instead, you have a working relationship between you and the client and, by working in a cloud product, you can be working on things all through the year. Then the tax bill isn't a surprise at the end of the year.
You are no longer chasing around for all the paperwork because it is coming in discretely, all the time. And all this happens automatically because of the connectivity. And the relationship between the accountant and the client completely flips around. Now we have thousands of accountants as customers who are recommending to their clients that they should be on Xero.
About 65 or 70 percent of our customers in the UK have come through that channel.
Is that true for your companies around the world?
Identical. Our differentiator is that we offer something that did not exist before.
The software is also flexible enough to handle the fact that the accountants' businesses vary. Some are very generalised but some are very specialised so they will want a system that can be tailored exactly to the way they work. That is what we offer. Whatever type of business you are, our software can accommodate and enhance it.
Some accountants are very generalised and some are very specialised like in the creative industries, or agriculture or specialists in retail. A good example of a Xero business is Shoreditch Grind, a coffee shop with a branch next door to ZDNet's offices. They have been on Xero for four or five years and use it as their back-end system of record.
They have retail, point-of-sale, tablets, and that's the beauty of having a platform that can then connect industry specific, bespoke solutions.
For a really obscure one, we have an app provider for equine dentistry. Horses need dentists and there is a whole industry of equine dentistry. Very specialised, obviously, and it's not anything like retail. So if you are the only retailer who cares about equine dentistry, you've got to build your practice management system around software that is suitable for dealing with horse's teeth. You also have to do the accounting, but the value you add is in the specialist stuff.
What they did was back-end Xero as the accounting engine and that means that Xero, plus their specialised software, is a custom application. Then the cloud connects it all together.
It's a completely different way to think about software in that business context and that's why this business had just exploded in the last three or four years. That's why we can cost effectively service the small business community.
How do you charge for this?
It's a monthly subscription. Now we are in a great market. We think there are at least 200 million small businesses globally. But, unlike consumers, they are bound by obligations. Things like the need to file their tax returns on time, to not go bust, to pay their bills, to manage their payroll, and so there is a compulsion there.
Now, many small businesses are not very good at accounting -- it's very complicated, it's a chore for some, it takes them away from servicing their customers, and so on. We have been able to come along and say, 'don't worry about that, we can do that for you'. And for many, for the first time they can properly see what is happening in their business.
They can turn their phone on and we have an app that lets them see exactly what their bank balance is because we're connecting to the bank every day and recording the previous days banking transactions automatically. Xero manages all that for you.
For our small business customers this is great because every day they can finally see where they stand.
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