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.
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