Last week’s Xerocon launched the concept of “no-code accounting” where algorithms automatically assign transactions to accounts in the general ledger.
With invoicing, “when you start typing things in we can work out where that’s going to be coded. What blew us away is within four invoices our accuracy rate got really good,” Xero CEO Rod Drury told the audience of 2,300, comprising accountants and bookkeepers from Australia, New Zealand and Singapore. “We think the machine can do it better than small business owners and you guys can come and fix it up.”
Winning in biz software requires
3. Machine Learning/AI
Duration of multi-year projects will expose legacy vendors
— Rod Drury (@roddrury) August 10, 2016
Drury said machine learning could successfully code 90 percent of all transactions – a far higher success rate than most business owners would code those transactions themselves.
Instead of fixing up their clients’ mistakes, accountants and bookkeepers would only need to code the 10 percent that machine learning could guess automatically. That percentage would likely decrease over time as the algorithms behind machine learning became more sophisticated.
So confident is Xero in the ability of machine learning that it wants to remove the ability of business owners to code their own transactions – effectively banning them from the chart of accounts.
While other vendors have talked about machine learning, Xero’s bold statement is the furthest anyone has gone to explaining the implications of the technology. It is also a warning shot across the bows of accountants and bookkeepers that compliance revenue could shrink at a faster rate than anticipated.
The introduction of machine learning really will bring about a step change in accounting. Technologists have long talked about the coming automation of some tasks in professional services, and this is an early watershed.
It’s still unknown who will introduce it first; Xero has no official timeframe for no-code accounting.
The way Drury spoke about it at Xerocon many (including myself) thought Xero had already built it. Conversations with Amazon and Xero staff suggest that a full implementation is about two years away, with a prototype hopefully ready by Xerocon 2017.
Yet the manner in which Xero introduced no-code accounting said a lot about the challenges the company faces. Drury’s 50-minute speech contained several smaller reveals that Xero has kept pretty quiet about until now.
Before introducing the no-coding showstopper, Drury ran through these technical principles underpinning Xero’s database which Xero claims form a technological moat that will take competitors years to cross.
A review of Xero’s position explains why.
Battle of the Databases
Xero’s biggest issue is differentiation. It is harder to justify a premium price to small businesses when some of the distinguishing and best features in Xero – Find and Recode, the assurance dashboard, more powerful bank rules – are designed to help accountants.
Cloud accounting programs are standardising on the headline features that businesses search for. Xero, MYOB, QuickBooks Online and even Sage One mostly include quotes and invoices, expenses and receipts, basic inventory, payroll, etc. When Google says product A and B do pretty much the same thing but one costs a third more, businesses vote with their wallet.
The word internally is that Xero sells very strongly against the competition in Australia through its accountants but is perceived as overpriced in direct sales to small businesses.
Xero’s other problem is that the next great leap in accounting won’t come entirely from the vendor itself.
Machine learning is a critical technology that observes how software users behave, constructs and constantly updates its own set of rules to model that behaviour, and then preemptively carries out those actions.
The tricky thing for Xero is that machine learning is not a home-grown advantage. Machine learning is now another service you can turn on within Amazon Web Services. And Xero is not the only accounting software vendor to use AWS.
Xero’s main opposition in Australia, MYOB, ‘welcomed’ Xero to AWS and has been researching artificial intelligence and machine learning too.
So how do you differentiate?
At the heart of Xero’s argument for a premium price is its claim that Xero’s database is more sophisticated and better constructed than its competitors’. Xero says these advantages translate to more flexible and powerful reporting, accurate journalling, simpler account coding (and therefore reporting), easier reconciliation of multiple currencies, and lower risk from fraud.
The more sophisticated the database, the more opportunities to connect related financial services and to automate through machine learning.
The vendor which can move fastest with machine learning and other futuristic technologies will sell a more productive platform and give users a competitive advantage.
Xero appears the furthest among the vendors (or at least tied with Intuit) towards selling integrated financial services such as insurance, business loans, credit checks and so on. These represent big jumps in convenience, access and lower premiums for business users and potential areas for advisory services for accountants and bookkeepers.
It will be interesting to hear other vendors’ responses to Xero’s claims and if they are correct how long it will take them to replicate them (assuming they want to).
Capitalising on Culture
Drury didn’t mention another advantage Xero has enjoyed over the competition – its culture. Xero moves very quickly when it wants to, has a flat structure that avoids bureaucracy and attracts high quality developers.
Incumbents Intuit, MYOB and others have also been ingesting the startup go-go juice to revitalise their own corporate cultures. Given the breadth and depth of technology releases it is apparently possible to recapture the vitality of youth.
Will they be prepared to go as far as Xero?
Xero has been called “the Apple of accounting” and it is unashamedly following the Apple playbook. Practically, it makes sense to imitate the most successful technology company in the world. People want heroes, they want to believe in a bigger vision, and Xerocon delivered that in spades.
Drury, a technologist CEO, was introduced as “the Steve Jobs of accounting”; the experiential approach to running a conference was highly produced and flawlessly executed; there was even a keynote by an ex-Hindu-monk-now-entrepreneur in priestly regalia teaching how focus can help in your personal and business life. (Jobs visited an ashram in India and was an avid practitioner of Eastern philosophy.)
Apple’s greatest achievement has been building an unstoppable brand and Xero has been remarkably successful at imitating that. One accountant attending the conference suggested that the value of Xero’s brand had already transcended that of the accounting software. If true, it’s a remarkable feat for a company less than 10 years old.
Drury has repeatedly said that the accounting software was merely the first stage and that Xero was nearing the end of the beginning. Machine learning is the first chapter of the next. Given the countless millions of dollars and hours of programming pouring into accounting technology from global and local vendors, accountants’ greatest challenge will be reinventing their business models at a pace to match.