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
Sholto Macpherson