Xero’s Three Waves Point to Platform Play: Xerocon 2022


For more Xerocon 2022 coverage, see:

The first Xerocon after a three-year, pandemic-induced absence was a major opportunity to set expectations. What vision would Xero lay out for the future? 

Xerocon Australia avoided the big product reveals of conferences past. Instead of tactical improvements, the focus was on long-term strategy.

CEO Steve Vamos described Xero’s strategy with a metaphor of three waves; cloud accounting, applications and services, and trusted insights. 

“Wave one – the system of record (in) cloud accounting, (and) the collaboration (between) advisor and small businesses. Wave two – applications and services that extend and enrich the customer's data in the Xero platform. Wave three is an opportunity. It's a horizon which says that we can take the data in Xero and create new applications, new services that leverage AI and machine learning, and the capabilities we have in our talented Xero to find trusted insights, trends and important next step actions that can help you advise your clients better.”

It was a little difficult to understand the difference between the second and third waves. Or why the first wave was an external factor (migration to the cloud) while the second two were internal (Xero development directions).

After discussing with Xero staff after the event, I think the best way to understand these waves is as a guide to Xero’s investment, by country. 

The first wave is about the migration from desktop to cloud accounting software. Vamos and chief product officer Anna Curzon both mentioned that Europe and the US are still riding that wave. Consequently, Xero’s announcements in the US focused on basic building blocks such as new bank feeds. Bank feeds power automated bank rec, the killer app of cloud accounting. Xero also announced features and products needed to meet market requirements; Xero Go, Xero’s first app for sole traders, for the UK market, and building a stronger inventory solution for the US.

The transition to the cloud is a once-in-a-lifetime opportunity to build massive customer bases. Hence the many millions of dollars Intuit, Xero and to a lesser extent Sage are pouring into marketing and global expansion.

The three companies are battling it out in the Americas, Europe, Africa and Asia to amass the largest base. Intuit claims the lead with 9 million subscribers, Xero following second with 3.3 million. 

Australia has mostly passed through that first wave. There are still thousands of businesses using desktop accounting software but the bulk have made the jump to cloud. Xero has direct connections to 300 financial institutions [ED: Xero says this is a global figure, not Australia]; bank feeds are well established.

Building an integrated platform

The second wave, “applications and services”, is about bringing apps into the Xero experience. At a basic level it is adding payroll and payment providers, then covering more functions to build an app stack through the Xero App Store. 

"Your clients expect us to address other important jobs to be done outside of core accounting, as we continue our journey onto wave two," Curzon said in her keynote. "Like time scheduling, and attendance inventory, or facilitating access to capital. So you've seen us act with ... acquisitions like Waddle, Planday, Tickstar, and of course, building an amazing ecosystem of over 1000 app partners."

The Xero App Store replaced the Xero Marketplace in August 2021. It provides a unified (and App Store branded) checkout process for all apps. These apps now pay Xero a fee for revenue generated through the online store.

Xero's investment is focused on acquiring apps that cover key functions such as invoice lending and job management and developing the Xero App Store to monetise its relationships with those 1,000 apps.

The third wave comprises two parts; to display data from third-party applications within Xero itself, and then to create new experiences in Xero powered by combined Xero data and external data.

The rationale behind displaying third party data in Xero is that it will reduce the tabbing between applications. Xero’s goal is for everything to happen on its own platform. This data integration will create a better experience for users, Xero says. 

Curzon gave three examples. 

  • Xero contacts will display key data pulled from an external CRM. 
  • Xero invoices will show detailed transaction information from payments providers. 
  • Xero credit notes will have a link to trigger a refund process in an e-commerce app.

Xero is not the first company to attempt this. Intuit went down a similar path in 2015 with QuickBooks and KeyPay, the Australian payroll app. 

Users clicking on the payroll menu would see KeyPay screens and data within the same QuickBooks interface or “skin”. (Time and attendance app TSheets later did the same, with KeyPay’s assistance.)

Xero’s approach sounds slightly different. Rather than moving whole pages from external applications into Xero, Curzon said that third-party data would appear within Xero screens.

The second part of the third wave is to combine various data to create new experiences. Curzon gave two examples in other domains to illustrate what that would look like. 

  • Instagram began as a simple way to share photos with friends. It is now a heavily used platform for e-commerce. 
  • Google Maps was initially used for route planning. It is now a search engine for finding restaurants, service stations and other areas of interest.

In Xero these experiences will most often appear as reporting analysis (insight) or forecasting and recommendations (foresight).

There is already one example of the third wave in Xero Analytics Plus. It creates short-term cashflow forecasts by combining trends in transaction history, upcoming bills and invoices, and PAYG and BAS (i.e. tax) information drawn as a feed from payroll. 

Forecasts that can draw on larger quantities and different types of data will be much more accurate. 

What could this look like in accounting? Intuit had a great video at its 2016 conference in San Jose that demonstrated the combination of various data sources, scenario analysis and voice-driven interface. 

Two points are clear from this video – the potential is enormous, and it will take a hell of a lot of work to make the full vision a reality. Intuit may have a headstart but as Apple shows, the winner isn't always the inventor of the technology. It's whoever gets it right.

The third wave is already here but will take some time to play out. It’s likely that many ideas will be non-obvious and will emerge from the more successful second-wave experiments. 

Domains are greater than the whole 

Vamos didn’t give a timeline for wave three. However, given that it will in some cases require significant updates to the core code of Xero Blue, wave three will likely start very slowly and won’t fully break for 12 to 24 months at least.

From my interview with Curzon and CTO Mark Rees, it sounds like the third wave is partially contingent on splitting Xero into separate domains. Xero is essentially one big bundle of code, where different functions are interdependent. This slows down the pace of development because you have to run some projects linearly rather than in parallel.

Every software company constantly rebuilds their software. Xero is gradually separating functions into separate domains. Developer teams will be able to work on domains independently of each other which should increase the rate of feature updates.

It will also address long-standing complaints such as the lack of a single client record for Xero Practice Manager, Xero HQ and Xero Tax. Xero has now given a rough date (H2 2023) for this single client record. Xero is also working towards a single contact record across all 12 Xero products. The first fruits of this include the announcement of multiple addresses, another highly requested feature. The single contact record across all 12 products will likely arrive after the single client record.

The domains-based structure will create more room for developers to build deeper integrations and redesign Xero’s interface to display third-party data, enabling the second and third waves. 

Separate domains may lead to a more modular design. Modules are central to the design of ERPs (enterprise finance and operations software). This is not necessarily an indication that Xero will move up market and compete with Oracle NetSuite and the like. However, it will make it easier to execute Xero’s strategy of upselling modules within Xero, such as Expenses, Projects, Analytics, and soon, Inventory. 

Xero's app for sole traders

A major announcement from Xerocon London was the release of a mobile app for sole traders and the self-employed. This is a serious commitment to the UK market. Xero has avoided building this kind of product for at least six years.  

Intuit first released Intuit QuickBooks Online Self-Employed in 2015 for freelancers and independent contractors in the US. At the time, the gig economy was in full swing. Uber was just five years old and had launched Uber Eats the year before. Research had shown that 43 percent of the US workforce would operate as self-employed businesses by 2020 “led by an increase in the on-demand economy, such as ride-sharing, peer-to-peer rental, project-based job platforms, and online retail platforms”. 

(You can get Intuit QuickBooks Self-Employed in Australia, too. It’s a great app; Intuit is leading the accounting software market by a long way when it comes to mobile interface design and experience.) 

Xero decided not to release a competing mobile app at the time. Even though the total addressable market for sole traders/self-employed is enormous, the average revenue per user and lifetime value of the customer is extremely low. 

Instead, Xero put all the wood behind one arrow and focused on building its small business base. It requires investment to launch a new product and more importantly splits the marketing message between two apps. Rather than build more products, Xero has tried ways to increase the average revenue per user (ARPU). The add-ons in Xero Expenses, Projects and Analytics are accretive features that don’t split your marketing budget between different products. There was just one message – buy Xero.

It looks like the UK market forced Xero’s hand. The UK tax office, HMRC, has introduced legislation compelling landlords and contractors to submit quarterly tax returns electronically. Xero couldn’t afford to leave this “pre-accounting” market to QuickBooks Self-Employed. A percentage of sole traders will eventually hire staff and move down the pipeline to the full accounting product.

In Australia there are several options for sole traders looking for lightweight accounting tools. Reckon One, Rounded and QuickBooks Self-Employed have co-existed for a number of years, and Xero has had little interest in competing. Xero Go will come to Australia and the US at some point but I would doubt it’s a priority. 

Building a better inventory

Xero made an interesting choice with the Nov 2021 acquisition of LOCATE Inventory. In going for LOCATE, Xero passed over several extremely strong inventory applications in its home market for a US alternative. 

Three of the four big inventory apps in the Asia Pacific had been acquired in the previous 18 months: Intuit snapped up Trade Gecko (Aug 2020), PE software aggregator The Access Group purchased Unleashed Software (Nov 2020), and inventory software Cin7 bought its competitor Dear Inventory (Feb 2021). 

Was Xero too slow or outbid on Unleashed and Trade Gecko? Not according to Curzon. She says these types of applications weren’t the right fit; Xero was looking for a lower-end product that was easier to use. LOCATE was chosen specifically because it didn’t have all the bells and whistles of the larger inventory applications which compete in functionality with lower-end ERPs. 

Xero has tasked the LOCATE team with building an inventory module natively into Xero, Rees says.

Xero again is chasing Intuit QuickBooks here. The latter bought Lettuce Inventory in 2014 and integrated it into its software in 2015 to appeal to e-commerce businesses. And as mentioned above, it bought a second inventory app Trade Gecko just two years ago.

This is how Intuit was pitching its new inventory to retailers back in 2015 when it added it to QuickBooks Online:

  1. Better inventory. QuickBooks Online now has product categories, SKU number tracking and in-app stock updates. When you create an invoice QBO tells you how much inventory remains. You then know what you can sell and when to reorder new stock.
  2. Automated POS feeds. QuickBooks Online automatically imports sales transactions from QuickBooks Point-of-Sale (the rebadged Revel iPad app) and e-commerce apps such as Shopify and BigCommerce. Other apps can connect to QBO for value-added inventory and order management functionality.
  3. On-demand loans. Intuit’s lending arm, QuickBooks Financing, can add inventory data to its analysis of a business’s financial performance. This will make it easier for businesses to get loans during hard times. It can do short and long-term loans, lines of credit and invoice financing.

While Xero does have a lending capability through its Waddle acquisition, it doesn’t have the depth of experience Intuit has in this area. So lending may not be a part of the inventory product but it’s likely the other two features will be on the list. Otherwise it will be hard to convince US accountants and bookkeepers to consolidate their whole customer base on Xero.

Australia/NZ no longer Xero’s R&D lab?

A major revelation was that Australia and New Zealand may no longer be the testing ground for new features in Xero. This would be quite a shift. [ED: Xero has responded that this is no change in strategy here and that the company will make the best choice globally for each product at that time.]

It was a point of pride that the Australasian countries have had the fastest take-up of cloud accounting. “Cloud adoption in Australia and New Zealand is miles ahead of the rest of the world as a result of what we've accomplished together,” Vamos said in his keynote. Xero harnessed the power of that wave to prove out its killer feature, automated bank rec, before releasing it to the rest of the world. 

But now Xero’s focus is fixed on the northern hemisphere. Xero Go, the sole trader/self-employed mobile app, was released in July at Xerocon London. Xero’s upgraded inventory module will be launched first in the US. 

One could argue that Xero was just responding to local demands that will help it win market share. (Xero Go in particular addresses a major change in UK regulations.)

However, even core features long requested by Australian and New Zealand partners will be released first overseas. The single client record across Xero Practice Manager, Xero Tax and Xero HQ, due in H2 2023, will be released first in the UK. Australia and New Zealand are now on the “rest of the world” list.

If this is a permanent change in R&D strategy, there are some obvious consequences. If you really want to know what Xero’s product strategy is then you need to follow the activity in the US and the UK. Both countries are still early in their transition to cloud accounting. Market share is up for grabs. They are priority markets with the greatest potential and fiercest opposition. 

It would be a loss for the early adopters in Australia and New Zealand who enjoyed helping shape Xero’s trajectory and blaze trails in the accounting profession. Many of them wholeheartedly embraced not just cloud accounting but fixed-price/value billing, client app recommendations and dashboard-based advisory. This bullish adoption of client-focused services signalled to other accountants around the world what was possible. 

Xero has tried to distil this relationship into a formalised structure with the Xero Partner Advisory Council. XPAC is a committee of progressive firms that Xero uses to bounce ideas and draw feedback. Can Xero replicate the symbiotic nurturing of accounting, as a product and a profession, with its oldest and broadest user base? 

Updates not unveils at Xerocon

In Xero’s breakthrough years, 2016 to 2019, the company hit milestones such as $100 million in recurring revenue, 1 million subscriptions globally, its first profitable 12 months. Heady times at Xerocons, where co-founder and former CEO Rod Drury would reveal a swag of new features with a ringmaster’s flourish. 

The big reveals that drove the buzz at those events are over, at least in Australia and New Zealand. Payroll audit history and Job Manager, two of the three product announcements at Xerocon Australia, were released weeks or months, respectively, before the event.

 Xero’s philosophy now is to release value when it's available, says Curzon. “We're not going to hold stuff up for one event because that's not fair on our partners.” 

Xerocons will now review updates released earlier in the year and preview those in the next quarter or two. The primary delivery mechanism for product news will switch from live events to online. [ED: Xero has since clarified that it isn't basing its product release strategy only around Xerocons. Xero says it may release things at Xerocons at times.]

No doubt there are practical reasons behind this change. You can’t announce blockbuster features three months in a row as the Xerocon caravan moves from the UK to the US and back to Australia. 

And in dominant markets, Xerocon needs to target the late majority and laggards in the move to the cloud. The message changes. Perhaps that sweet, dopamine hit of product news is not a priority. 

However, every change has consequences. Without big feature releases there is little incentive for early adopters to attend. And its early adopters that bring the buzz that makes an event like a Big Day Out/Glastonbury/Coachella. Their excitement and interest in new ideas is infectious; it adds energy to the conference floor, cheers to the presentations, and enthusiasm to the breakouts. Tough to replicate that with a webinar. 

It is illogical to hold onto features for a single event – unless there is a measurable difference in feature engagement and adoption. Every business runs on an armada of software. Lose the attention of early adopters and they will just find something else to play with.

Perhaps feature engagement and adoption doesn’t matter as much in markets where a software company has dominant market share. If engagement isn't as high as it used to be it won’t result in a drop in subscriptions – and that’s the number that matters most. 

Cloud accounting software is very sticky. No firm is going to switch over all their customers to another accounting software without some huge improvement in productivity. 

This is why Xero is throwing everything at the US and the UK. You only move to the cloud once.

Corrections: An earlier version of this article confused Xero's two waves. It also referenced an internal project at Xero and misstated its interaction with feature updates.

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