Xero Undercuts the Practice Management Suite with Xero HQ

The release of Xero HQ’s API for third-party apps is sure to cause problems for Australian software companies selling practice management software.

As Xero increases the number of practice-side apps, accountants will have more choice in how they want to run their own practices.

The spate of innovation brought about by cloud software has made it virtually impossible for any software company to create a practice management suite that is cutting edge on all fronts. Even Xero, which claims to have spent $1 billion on software development, is still far from achieving this goal.

As evidence consider the number of Xero Platinum firms which have bought Karbon, a communications and workflow tool, to work alongside Xero Practice Manager.

And yet the latest iteration of Xero HQ will certainly swing market share towards Xero. Firms can now connect one of the most advanced client accounting apps (Xero Blue), a customisable notifications engine (Xero HQ), Australia’s most popular online tax program (Xero Tax), one of three client reporting apps (Fathom, Spotlight Reporting and Futrli), and soon no doubt a CRM (Insightly? Salesforce?). Plus tight integrations with accounts payable apps Receipt Bank and HubDoc and others.  

The functionality in such a suite will be far greater than anything offered by the incumbents Reckon, MYOB and Sage (HandiSoft).

Of course, accountants would need to put up with all the issues of a best-of-breed solution. Namely, multiple user interfaces and a hefty monthly bill from all those subscriptions.

It is also true that Xero’s practice suite still needs more work. It is still evident that Xero Workpapers and Xero’s payroll function, both acquisitions, carry the legacy of external code. Xero Practice Manager hasn’t had the investment it needed, giving room for competing apps to establish a toehold.

And yet the combined potential of Xero HQ offsets these drawbacks. It’s worth noting that HQ is a way to elevate friendly apps and shut out competing ones. Xero can make one app far more attractive by admitting it to the Xero HQ club.

That will make it tough for direct competitors to pick up Xero-focused firms, the number of which grow daily.

From rivals to partners

Xero may still have a way to go in PM but its growing weight is already making an impact. Witness Wolters Kluwer’s decision to make CCH iKnow, the online version of its treasured tax “bible”, available within Xero Tax.

This is quite a concession given that CCH sells the only other online tax solution for small and medium practices.  

The deal signifies a change in the weather between Xero and Wolters Kluwer, owner of CCH Australia. In 2013 Xero CEO Rod Drury reacted to CCH Australia’s acquisition of practice management software iFirm by announcing a similar content deal with Thomson Reuters, though it was never consummated.

CCH used iKnow as a weighty carrot to tempt firms to switch to iFirm. Xero is still growing at a rate of knots. It has already racked up 31,000 accountants and bookkeepers in Australia. It has 135,000 partners globally. This makes it a very large market for Wolters Kluwer to ignore.

“We looked at the opportunity in the market and it was unrealistic to get 100 percent penetration of content as well as software,” Daniel Wyner, director of tax and accounting, at Wolters Kluwer Asia Pacific. “There are two tax providers in the market with online tax. If they still want to use the Xero Tax product then we want them to use our content.”

The second reason is that CCH iFirm may not be selling as well as Wolters had wanted. Several firms have mentioned off record that CCH Tax Online is still having teething issues.

Xero Tax, on the other hand, has been one of Xero’s fastest growing products. Although Xero bills itself as the home of the small partner or bookkeeper, its software is attracting larger firms than expected, says Matthew Prouse, solutions manager for practice tools.

“We have partners using Xero Tax in the mid-tier space. Now they can remove a Reckon or MYOB Tax program and use Xero,” Prouse says.

Word on the street is that this is already happening. Reckon APS is losing a steady stream of clients; this year EY was the most notable casualty.

CCH at one stage hoped to compete in client accounting software with iBizz, part of the 2013 iFirm acquisition. That plan was quietly dropped. Now that CCH is signalling the priority of revenue from content rather than software, will it walk away from iFirm too?

Or will iFirm appear as an app in Xero HQ?

“We are building the relationship (between Xero and CCH) but this deal is squarely around iKnow,” Wyner says.

I think it’s pretty unlikely in Australia. However, Xero has decided not to push its own practice management tools outside Australia so in some markets it may make sense.  

The playing field is more level outside Australasia. Xero isn’t making a Workpapers, Tax or Practice Manager for other countries. It will need to stand out from client accounting apps based on the quality of its integration. The notifications engine in Xero HQ is a unique and effective way to do this.

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