|Skills:||17+ years in tax & accounting technology, broad software knowledge & network|
|My Company:||Practice Connections|
|What I do:||Offer independent, frank and fearless advice to firms when choosing software and services|
|Goals for 2018:||2018 is to continue doing what I love; working with firms (it's been the most enjoyable part of my career) to make it easy for them to do business and for their client to do business with them|
Australia is an odd place for practice software. It is one of – if not the only – market where a suite of software from a vendor is the accepted norm. Around the world it is typical to have a best-of-breed set-up.
This trend started in the 1980s with Hartley Systems morphing into vendors such as Solution6, CeeData / Xlon to SageHandisoft, CA Systems (now MYOB Accountants Office), MYOB Accountants Enterprise (made up of Viztopia, Sol6 Tax and MAS reincarnated), CCH iFirm (Acclipse) through to APS.
All of these suites promised with varying degrees to have a single source of truth. Arguably APS probably did the best job of this. The industry joke is that some products offer a single source of truth – as long as you don’t mind manually updating six databases to achieve this.
The problem as I have discussed in previous articles on LinkedIn https://goo.gl/HZecCN https://goo.gl/Gb13Qw https://goo.gl/qPonnw is that no single element in any suite can be best of breed. They all have to have ‘just enough’ functionality to be saleable.
APS took the lead with practice management when they launched in Australia in 1999 and it was accepted they for many years had the best PM solution in the market. But in trying to be ‘’all things to all people” APS, like other suites, became bloated and forced compromises onto their clients – manual workarounds in particular.
Now we have a best-of-breed approach coming back to the fore with Xero (and QuickBooks Online rapidly imitating). The classic downside of best of breed is that users need to tab through multiple apps and interfaces in the course of their working day.
But the modules in suites aren’t necessarily connected – and with cloud software the different apps are essentially just different tabs pinned in the same window.
It boils down to convenience and easier maintenance (suite) versus the latest in productivity (best of breed).
So which is best for Australian firms?
Suites struggle in turbulent times
Some background: Over the past 30 years, generations of Australian accountants have learned to overcome limitations in their practice management software. These limitations appear in suite after suite.
All of the suites in Australia have fundamentally the same functionality going back to the Hartley Systems because many of the same software developers have moved from vendor to vendor. APS became a better version of MYOB AE which was an improvement on Solution6.
But as Peter Thiel noted in his book ‘’Zero to One”, “If you take one typewriter and make 100 – you have made horizontal progress: If you have a typewriter and make a word processor, you have vertical progress”. The legacy vendors are typewriter manufacturers that have only recreated an existing idea.
The pace of change has really exposed the suites’ limitations.
Most of the suites are administration top-heavy because they frequently added features through acquisition. Some popular solutions STILL are made up of a mix of 16-bit and 32-bit architectures. For you Gen X’s and Millennials, 16-bit is older than ‘old skool’. This causes complications and additional costs to access data stored with these tools.
Unfortunately, many firms look for the same suite-style experience with a best-of-breed solution and fail to understand new approaches to practice management.
For example, accountants frequently deride Xero’s reporting section because it is light in a direct comparison. But this misses the fact that Xero is aimed at the user not the administrator. The administration of Xero doesn’t require a stack of reports, particularly in the new paradigm of fixed fee/value billing. If you do need more reporting, needless to say there’s an app for that.
Another difficulty with suites is that the vendor drives development more than customers. The vendor drives the project in a particular direction and again forces the client to comply with the limitations of the vendor’s product. A vendor led installation is considered ideal for legacy solutions as it is dependant on the consultant’s knowledge which is often not transferable.
The risk for firms then becomes that all knowledge resides with one person, either within the firm or the vendor. When a consultant moves on from a vendor or the firm’s administrator quits, why does it feel like one of the walls is collapsing? An administrator-heavy suite leaves the firm at too much risk.
The problem with free software
Is Xero’s best-of-breed approach unique? No. Is it clever? Absolutely, but they’re not the be-all-and-end-all. They’re just the talk of the town at the moment.
Much like Reckon and MYOB tried to do – “get the accounting firm and we’ll sell our products through them’’ – Xero has a clever marketing strategy. When the price of your practice management software is $0 it instantly gives you a lead over quite expensive competitors.
Xero services the requirements of both the majority of accounting firms and commercial clients. This may suffice, but arguably vendors such as Karbon and Scoro will do a much better job in the practice management area.
The problem for everyone is that it costs next to $0 for accountants to purchase Xero’s practice management software but it costs much more than $0 for Xero to develop. I appreciate that there are some fees in the background, but to maintain the R&D expenditure and ARPU something has to change.
Paying $0 for functional software isn’t a problem for accountants but that means Xero’s paid client accounting software will be supporting R&D initiatives and a lot of staff. Practice management is therefore a long term revenue risk from an R&D and support perspective. Xero’s future has to be to increase ARPU (average revenue per user) otherwise the future for its practice management division looks grim.
One way Xero could achieve this was foreshadowed at XeroCon last year. Xero’s client accounting software added projects and expenses as paid options. Sure, Xero’s native solutions may not be as good as third-party add-ons, but for many firms they may well be good enough to do the job.
Key to this is that Xero captures the revenue not the add-on. If a firm pays even an extra dollar per user per month it will obviously improve their bottom line.
The gravitational pull of the suite
But this up-sell approach does come with a catch: I can also see an inexorable move to a suite. it may not occur quickly but projects and expenses on the client side are the tip of the iceberg. In an effort to increase ARPU (the average revenue per user) Xero will add features that ‘get the job done’ – and have monumental benefits to the bottom line.
Right now Xero is looking at the many third-party solutions that users are willing to pay $10, $15, $20+ per month – when they get $0.
The peril for firms (and add-on vendors) is if Xero acquires some of the more popular solutions in the market aimed at accounting firms. It could then build a suite and make it progressively harder to choose other vendors to connect to the API.
So instead of a choice of best of breed, firms will be limited to a select range of add-on partners.
It would also not surprise me if Xero was to also start charging for their API – oh what a tangled web we weave…
I think it would be great for Xero to clarify their objectives so firms that are venturing down the path have long-term clarity. We are still at the thin edge of the wedge here. My concern is that once Xero reaches a critical mass, things will change. There’s no such thing as a free lunch.
For the foreseeable future, Xero, Karbon and Scoro are the new mousetrap builders. Do your homework on which is the best for your firm. I can assist if you like.
Image credit: MailOnline
In what for some was as a surprise and others an inevitability, in November 2017 MYOB made a pitch to buy Reckon’s practice software division. MYOB’s bold move is to purchase the division comprising of Elite, aimed at smaller firms, and the so-called jewel in Reckon’s crown, APS, which runs many larger firms. (NB: The sale is still subject to regulatory approval.)
The move by MYOB is a little confusing – and the acquisition could spell trouble for APS firms.
Why would MYOB make this move? APS reached its pinnacle technically several years ago and Reckon has struggled to build a cloud based platform.
MYOB may be buying clients to dissuade new entrants such as Thomson Reuters or GreatSoft. Both companies have plans (some are advanced) to bring their global cloud-based suites to the Asia Pacific market. Securing APS’ market – which would suit these new competitors – could be a smart move.
An institutional investment adviser I spoke to theorised MYOB may be planning to lure back buyers such as Sage. MYOB may make an offer it will not refuse so MYOB can free itself from its VC shackles and get back to its knitting – SME and ERP accounting systems. “Owning the market” (ACCC/NZCC take note) would create a nice saleable offer.
Until these questions are answered and assuming the regulatory authorities sign off on the takeover, MYOB has the unenviable task of integrating yet another company into its “grow revenue by acquisition not innovation” empire.
Problems on the Horizon
It is my opinion that firms using APS need to be wary of tax, particularly the season starting from July 2019, 2020 and beyond. The 2018 tax season (should – in theory) be under control at this stage as the software companies have already incorporated into the development cycle any legislative decisions made by parliament. APS reportedly had issues with PLS in their tax release in 2017, so it’s possible that even 2018 will be affected.
It is the next raft of legislative changes to compliance that will cause challenges. Many of you might remember the tax-release disaster in the mid-2000s when Xlon/CeeData, was acquired by MYOB a few years earlier. Key people left the company after its sale to MYOB and the impact hit hard, with some firms unable to lodge any returns for many months.
But 2019 onwards is my forecast for trouble; the staff that know the intricacies of the solution will most likely have moved on, leaving firms using APS tax in the lurch.
Does that mean you have 18 months to spare? No. The immediate risk is for a firm to adopt a wait and see approach. I know of several firms who have started to work with alternate vendors to secure consulting dates into the future as they don’t want to be affected by the anticipated rush once the dust settles. To quote the wisdom of that famous cat Garfield, “Poor planning on your part does not constitute an emergency on mine”.
This takeover is a trigger event the likes the industry hasn’t seen for more than 15 years. MYOB and APS are already mixing the message to the market. APS is telling clients it is business as usual – an unfortunate choice of words as this is what caused them to be sold in the first place. MYOB is saying a rebranding will happen soon; clients and the market as a whole will want to hear more.
Firms In a Bind
APS firms can only feel disheartened for several reasons. Many firms moved to APS in the first place due to MYOB’s lack of development on its practice software. The current situation rubs lemon juice into an already open wound.
APS rapidly became the leader of big-firm practice innovation while MYOB still has not developed anything that really comes close. The takeover will now further delay MYOB’s development on the Connected Practice project as the various divisions come together to begin the process of reviewing, dissecting and merging products / software development teams.
I also expect a lot of key people in ReckonAPS to leave before, during and after this process and no product development for at least another two to three years.
ReckonAPS must surely rue the missed opportunities by failing to move to the cloud 10 years ago.
APS firms will no doubt be frustrated to learn that their (expensive) monthly maintenance fees – most of which was ostensibly for R&D – has just delivered compliance updates. The rest has been spent funding development of the Reckon One small business accounting product. A component of the sale price has already been directed to supporting this further.
The purchase poses additional dilemmas for larger firms watching the explosion of technology adopted by smaller firms. Practice software from Xero, Karbon, Account-Kit, Practice Ignition and many others is making headway into an increasingly busy market. This comes at the expense of firms who bought what was the pinnacle of practice software and expected a long term return. Fortunately there are solutions available that allow the best of all worlds and bridge the gap to stabilise the systems you have with cloud solutions your firm can benefit from.
Tough Choices Ahead
Many vendors are looking to capitalise on this trigger event. Intuit, Karbon, Sage, Scoro, Thomson Reuters, Wolters Kluwer (CCH) and Xero HQ have ramped up their marketing and alliances. From February 2018 onwards expect to see higher levels of activity from these vendors as they vie for attention. All that choice doesn’t help your need to plan ahead for your firm.
You need to understand that the best solution is dependent on the size and goals of your firm, as different solutions that can fit better than others.
In previous years vendors have tried to be all things to all firms. It resulted in a series of disappointing solutions aimed at capturing as much market for as little spend. The suites had just enough functionality to get a sale – sweetened by the promise of more to come, which typically never eventuated.
In the past five years the rise of cloud-based providers has been unavoidable with Xero having close to 600 apps that connect to its ecosystem. No accounting firm has the time to spend searching the ones suitable for firms. You need to either dedicate a team in-house (which typically fail quickly – a future story as to why) or engage a virtual CIO who sees firms of all sizes and the understands the tools that work for each.
What to do next? With the future cloudy (pun intended) I have been assisting firms of all sizes from getting a basic understanding of the current market to full strategy reviews.If you are either a Reckon APS user or a MYOB AE/AO user, it is wise to prepare for a tsunami of change. If you are not prepared for it you run the risk of being left behind.
Gather information, don’t rely on vendors alone to give you comfort – all they want to do is either sell you something or retain you as a client – so will tell you what you want to hear.
There are also solutions in the market which can combine cloud based apps and legacy platforms giving you the best of both worlds – the familiar and the tools to compete with cloud based firms.
Happy to chat. Unlike many vendors, I’ve been in the Australian tax and accounting for nearly 19 years and can put together a digital strategy review to work out a bulletproof plan for your firm.
I wish you a Happy 2018,
Let’s start with the main players. MYOB and Reckon APS still hold the lion’s share of the larger firm market (75 to 500+ users). Through luck rather than product design only because no viable alternative (as yet, see below) is there to replace them.
The loss by Reckon APS in October of one of their Big 4 clients who moved back to the perceived safety of MYOB, along with many more firms in the smaller end, has put a major dent in Reckon APS’ business revenues and market credibility. The original mantra at Reckon APS was, ‘Secure the big guys and the little ones will follow’. The flow of firms moving from both providers but especially Reckon APS to Xero is still rising and shows zero (pun intended) signs of slowing.
This has put business models and longevity of vendors under intense scrutiny on all fronts, including by institutional investors. There has been recent speculation about the sale of Reckon whose share price slide represents a sad decline particularly for a company that once had the accounting practice market at its beck and call. Below is a 12 month share price comparison from November 2016 to 2017 of three vendors, Reckon, MYOB and Xero.
Source: Google Finance – an updated view can be found by clicking here
MYOB are pumping a massive amount into R&D for accounting firms and with this and the associated payroll as well as carrying a lot of debt, they will be under pressure to deliver. When MYOB deliver their cloud practice management suite it will have reduced functionality in comparison to the existing (desktop) suite as it will be version 1.0.
MYOB have recently been picking up business from large firms by employing the Steven Bradbury approach of letting competitors fall down and picking up the win – a possible reason for the stability in their share price. I have concerns that MYOB’s cloud strategy for accounting firms will be too little, too late. In practice management software MYOB have only ever acquired technology, so developing from scratch may prove too difficult for them.
Adding difficulty for Reckon APS and MYOB is that, to make a full pitch for cloud, they will both require money from their investors. The conversation would possibly run like this:
Vendor: We need $15M to convert our client server solutions to cloud.
Board / Investor: What will our ROI be?
Vendor: In three years, the same or less than now as our main competitor has a jump on us and errr, also gives their software away for free…
Board / Investor: How about we just keep the software as it stands, make promises to the market about what we are doing and save $15M and run the business down and exit?
Reckon APS are rumoured to have been cannibalising their accounting firm monthly maintenance support revenues to prop up their SME product ReckonOne (as an accounting firm, I bet you’re happy to read that).
CCH (Wolters Kluwer) is struggling to gain a foothold among firms with iFirm. There are no doubts that it is a very clever suite in combination with its knowledge platform based on the CCH Master Tax Guide, iKnow.
The firms I have encountered using the platform have mixed feelings about it. It is still a blend of cloud and an on-premise software; key software developers have left so no product development in certain areas is leaving the product behind other vendors spending R&D dollars. Several firms have already changed or are contemplating moving from the platform.
The weekly sales meetings of all vendors can only be uncomfortable given Xero’s strategy of giving away practice management software. Free and in most cases more functional is proving hard to compete with.
CCH’s recent announcement linking iKnow to Xero Tax bolsters the traditional market for their print and subscription market which they have always owned. So no real advantage except to stop clients having an excuse to review the market from suppliers such as Thomson Reuters or Lexis Nexis.
It raises interesting questions if the Xero Tax-iKnow deal signals that CCH is recognising the writing is on the wall for its ambitions in practice management software. A lack of experience in this market could prove costly. It would also be CCH’s third failed venture in software, if you include the 1994 tax debacle and ProSystems in the early 2000s.
You must admire their persistence for the Australian market – although I am not sure the litany of disgruntled clients would. Thomson Reuters, which also hopes to enter the Australian market, may soon find out that unless you have something compelling there is no reason to change.
The international raiders
GreatSoft is a South African team that emerged from Solution6 South Africa. They were rumoured to make a splash into the market this year. They appear to have put these plans on hold to firm up local compliance toolsets which include Xero. Watch this space as they may be a sleeper.
They are being advised by a former senior executive with many years in this space. But I think GreatSoft has been shocked by the rise of Xero and would consider it a tough market to compete in the lower end. Their main aim would be firms with 200+ employees, an area they already service in South Africa. But sales like these don’t appear overnight – unless there is a compelling trigger event.
Thomson Reuters intend to release their new cloud based solution Onvio in Australia with local tax and accounts, although I would think this is still a few years away. The solution is the updated cloud version of their desktop CS Suite from the USA. It is rumoured to manage 500+ users, making it a player against MYOB and Reckon APS, the first time Thomson Reuters had tackled mid-size firms in Australia.
If ever there was a buyer for the Reckon APS business, it would be Thomson Reuters. It fits their preferred market (the top end of town) and would be a great match with their existing solution portfolio. Based on the current share price Reckon would be cheap for them. One to watch.
Intuit is the great unknown in the mix. With revenues of US$4.7B (yes that’s a B), Intuit may yet prove to be the sleeping giant in this market. Quickbooks in the SME market is gaining market share in Australia so one to watch if they decide to make a play.
Sadly, with the obvious exception of Xero, legacy vendors and new arrivals into the market are not delivering anything new. Creating something new is too difficult and it is far easier to copy rather than develop something special. The functionality and process flow are just emulations of what has been developed since the early 1980s when systems first came onto the scene.
That is why Xero has captured the imagination of firms. The traditional PM system was once integral to a firm for its timekeeping and billing. It is now taking a backseat to ancillary applications that are the actual business drivers for the business; business engagement, portal tools, workflow management, apps, etc.
Current and incoming solutions are built for a price that will maximise the vendors’ market share, no more no less. MYOB, Reckon APS, Sage, CCH and all legacy vendors are doomed to repeat the past as the industry they serve demands them to.
The gamechanger for the industry has been Xero. As the legacy players mimicked each other to create products that matched functionality in a race to the bottom it resulted in little differences between functionalities.
Just as the Apple iPhone did, Xero changed everything by creating an infrastructure for best-of-breed third parties to connect to. Xero has done what legacy providers have tried to achieve but couldn’t. Xero’s approach can be best defined as “all roads lead to Xero” where the end user chooses from many apps to suit their specific needs.
Xero also sees accounting firms as a component of their continued expansion. The difference in strategy between Xero and Reckon APS / MYOB from over a decade ago is that cloud computing can now make it work. The Xero ecosystem enables real-time advice and not just after the event compliance activities.
The evolution firms are not prepared for
In previous years it was the accounting firm leading the client. Clients deferred to firms for most compliance tasks and the basics of bookkeeping.
The democratisation of technology through the rise of cloud computing applications such as Xero, QuickBooks and others has created a generation of technologically sophisticated clients.
Today, starting from as little as $5 a month, a business can link bank accounts and get an
instant view of their business on their phone. Through the development and promotion of SME systems such as Xero, Intuit, Sage and Reckon One, and through no fault of their own, accounting firms now find that they are behind their clients.
The knock-on effect of SMEs becoming more tech savvy will be the rapid migration by firms from compliance to more advisory so preparing systems to manage this is imperative.
It is easier now than ever for a client to convert from manual, paper-based accounting systems to electronic ones. Along with these compliance activities that an accounting firm needs to do, the work is tending to be more strategy/review and fix based. The finalisation of a client’s accounts is low value work and should be automated as much as possible.
Compliance is not dead, it is the bedrock from which all other services derive. This is an opportunity for accounting firms which can use the client data held within the group more effectively. The client can only see information relating to their own business but has no access to the firm’s vast data across a database of hundreds or thousands of businesses.
Accountants can harness this tax and account information with matching data analytics. A business advisory service can create models and benchmarks that will help the client achieve their business goals.
Firms must take the lead in differentiating themselves from their competitors. They need to create best practices to proactively manage their client’s requirements. The crux of this should be a review of systems that offer a platform from which to increase revenues and profitability.
A firm cannot offer an efficient managed service business relationship without access to live or near-live information. An immense opportunity for managed services exists where firms inform clients of areas of concern in their business before they even know about it. This is the future of firms and shows why virtual CFOs providing this service is one of the fastest growing markets.
What do clients want? They want their advisor to tell them where their business is going. The dilemma for business owners is that most work undertaken by the firm is historical; they are learning about things in the past.
Clients want the firm to take information gleaned from tax returns, audits, etc., and mine it for information that can help grow the business.
The next few years will see rapid change. During this time, ownership during any transformation is an absolute must. Very little will change unless there is a push from management and strong partner advocacy – ideally by a benevolent dictator. This can help address resistance and other problems that arise during the transition process.
Firms must be prepared to spend money on marketing to promote their existing and new services as well as select the systems that best meets those needs. Do not rely on vendors to tell you what that system is.
Image credit: Prescription to Travel