20 minutes with Xero’s MD.
Four months into the job, former Microsoft executive Chris Ridd (on right) talks about his plans as Australian managing director of New Zealand-based cloud accounting provider Xero and explains why it was chosen as the exclusive online accounting software recommended to small businesses by the ANZ bank.
BoxFreeIT: How is Xero performing today?
Ridd: We just announced earnings a few weeks ago. It’s very positive. Globally we announced our customer numbers have doubled from 17,000 to 36,000 subscribers and revenues have tripled in a year. Revenues in Australia have gone up fivefold.
BoxFreeIT: What is the story behind your relationship with the ANZ bank?
Ridd: Xero is the ANZ’s exclusive online accounting system which is fantastic; it’s been going for about 12 months.
What the ANZ found was that if a small business wanted to take out a loan or another financial product quite often the feedback was, we’re not quite certain where we’re at with our business, we don’t have a particularly strong view of cash flow and profitability.
The ANZ went looking for a third-party solution that it could promote to help their customers. They found that they were able to help the business owner with cash flow by introducing them to Xero.
So rather than coming to the bank the day before they pay salaries saying ‘we’re going to run out of money’, small business owners are able to practically manage the business. And it helps the bank because they are able to promote more services and position themselves as trusted advisers. It works really well.
BoxFreeIT: Why did the ANZ bank recommend a start-up cloud company like Xero for its small business customers over the market leader, MYOB?
Ridd: I can’t speak as to how they evaluated other options, but we’re growing rapidly and I think it’s because we are providing a lot of innovation to an industry that has been starved of innovation for the past 15 years.
What we are doing is really starting to transform the relationship between small business owner and accountant with the concept of the single ledger, which lends itself really nicely to the concept of bank feeds (automatic entry of daily bank statements into Xero).
What we’re seeing play out now is Xero starting to bring together the bank, the small business owner and the accountant in a much more trusted engagement that is benefitting all parties. I think when they looked at what was available in the market they felt that we were the strongest option.
Read on for pricing strategies for bank feeds and why Xero charges more for its lower-end products.
BoxFreeIT: Bank feeds seem to be a crucial part of online accounting software. How many does Xero have, and how does it compare to competitors?
We’ve got direct bank feeds with the four majors (ANZ, NAB, Commonwealth and Westpac) here. We also use a service out of the US called Yodlee that gives us access to 140 financial institutions in Australia, 2000 globally and 11,000 account types.
The only (negative) feedback we have is that certain banks use multi-factor authentication for business credit cards and business bank accounts (which is incompatible with Xero’s bank feeds). We are just releasing something with the ability to support that.
BoxFreeIT: So all online accounting software has pretty much the same number of bank feeds?
Ridd: No, there’s different ways to do it. You’ve got BankLink and other products which charge by transaction. We pay Yodlee for the service, and that’s just provided in the Xero subscription.
If you’re using our $49-a-month product it has unlimited feeds. Others will charge differently – once you get to a certain number of transactions, those transactional charges start to increase.
BoxFreeIT: Xero seems a bit more expensive than competing products like Saasu. How is Xero priced at the low end?
Ridd: We think the medium product is well priced for what you get – it has unlimited bank feeds and unlimited invoicing. It’s a very comprehensive product.
There are a couple of players that will bring out a very price competitive product but they won’t continue to innovate, they won’t continue to bring out additional releases. I think there is a point of differentiation there.
The thing that you have to look at is the pace of innovation – it’s not insignificant the amount of R&D that you’ve got to throw at this. We’re bringing out releases every six weeks. You’ve got to look at the track record of some of the providers that will bring a product to market, you’ve got to look at the features, depth of the product and the pace of innovation.
BoxFreeIT: Isn’t innovation hard to sell? SMB owners aren’t normally interested in roadmaps but value at a point in time.
Ridd: Price to be honest doesn’t come up much at all because when you start to compare the alternatives, and we don’t charge for additional users or support, no upgrade cost, no maintenance fees, no contracts tying you in, it’s one flat rate.
When you start to put a cost on time and the amount you gain it becomes very compelling. I haven’t come across a small business owner that has questioned the price once start to use the product.
Read on for Xero’s strategy for winning over accountants.
BoxFreeIT: The key to success with accounting software seems to be winning over the accountants. How are you going on that front?
Ridd: It’s going really well. An accountant can manage all their customers on Xero for free, and they get a free copy for their own business. There’s a lot of value for them but the key one is that single ledger. The client and accountant are working on the same set of data so it means that the accountant has full visibility, they can collaborate but the the biggest one is the efficiency gain.
There’s a lot of friction between a client and accountant in the cost of managing a data file, synchronising it and getting the books finished at the end of the year, but there’s no value there for small business. Whereas with Xero, at a click of a button you’re able to product a lot of that end of year reporting, BAS statements, all those things.
What we’re seeing is accountants moving away from that commodity and compliance, “once a year we’ll do your books” work to fixed-fee accounting. Now they’ve got a handle on their costs, they are starting to bundle Xero with quarterly BAS preparation and managed reports and all these other value adds (for a fixed fee). That’s driving up their profitability and it’s giving them huge efficiency gains.
BoxFreeIT: How many accountants are signed up as Xero partners?
Ridd: We’re up to about 380 accountants and bookkeepers listed on our website and we have a lot more (who are testing it out). We are really only just scratching the surface.
If you have a look at our website one of the heaviest trafficked parts of our site is the adviser tab. We promote all our accountants that come on board. The listing is based on the number of clients they have, so you set the location to find an accountant in your area.
BoxFreeIT: What features are you adding in the next year?
Ridd: There’s a lot of minor things we’re doing. We’re very big on listening to the market and responding with point features. One of the big ones that we’re bringing out is annual accounts later this calendar year.
BoxFreeIT: What are annual accounts?
Ridd: Annual accounts are a more structured reporting format, it’s a requirement for non-reporting entities like trusts. They’re also known as XYZ reports and they will be automatically generated on top of what you can do today such as BAS reports and management reports like Profit and Loss.
We are also doing a fair bit with Google, such as single-sign on and we’ve got a 5 star rating in the (application store) Google Marketplace. You can provision Xero Accounting with all the other Google Apps.
BoxFreeIT: Which market is more important to Xero in the short term, Australia or the US?
Australia is a huge opportunity. We are already seeing success here in the last 12 months and we are seeing strong growth, really good feedback and positive reception on a number of fronts. We will probably do both in parallel, to be honest.
For more on Xero’s US plans, see Xero wins PayPal founder’s support in US push