Back to the Future–FreshBooks is Accounting

Disclosure – the accounting space is an area I follow closely and one in which I have spent time consulting with a host of different vendors. Full details on my disclosure page but suffice it to say I have consulted to a number of companies covered in this post – in particular MYOB, Intuit and Xero

On my first ever trip to the Bay area, six or so years ago, I attended the, now defunct, Office 2.0 conference. At the event I moderated a panel looking at what Accounting 2.0 actually meant and the value it could drive. The panel was a who’s who of the space and included folks from bill.com, Mint, FreshBooks and Wesabi. As an aside it’s interesting to see where those companies are today – both Mint and FreshBooks are still around and growing well while remaining independent. Mint was famously acquired by Intuit while Wesabi has sadly departed.

During the panel, Mike McDerment, founder and CEO of FreshBooks eloquently articulated their rationale for remaining laser-focused on being purely about invoicing and not jumping into the full cloud accounting space. It is a strategy that I’ve been dubious about ever since FreshBooks launched – I believe invoicing is only on part of the broader financial system requirements of an SMB and to miss out the other integral elements (accounts payable, general ledger etc) was somewhat of a half baked concept.

I always figured that the company knew best and their rampant growth was an indication that they were right, and my ideas were flawed. Bear in mind that FreshBooks boasts of customers in 120 countries, has built a 90 person company and has more paying customers in the US than any other accounting/invoicing application apart from QuickBooks.

News from an open letter to the FreshBooks community from McDerment recently changed all that. In the letter, McDerment told of a fundamental change within the company, a move to changing the way they describe what they do from being Cloud Invoicing, to Cloud Accounting. McDerment notes that over the last few years the company has slowly introduced more non-invoicing specific functionality – expense tracking, profit and loss reporting etc. He reflects on the fact that many FreshBooks customers are using the product as their “accounting system” and hence the company is now articulating what they do as accounting software.

Semantics or a Fundamental Shift?

While some might suggest that this is just marketing spin, designed to offset the increasing threat of full-blown SMB accounting solution Xero, I believe that there is more to this announcement than simply branding. FreshBooks has built out a very rich level of functionality for invoicing, but it has discovered, I believe, that SMBs want to tick off all the boxes of their accounting requirements from one vendor. While this is something of a departure from a company that has long been an advocate of the best of breed style of SMB software (FreshBooks is a foundation member of The Small Business Web, an affiliation of software vendors selling to SMBs who all adhere to a viewpoint about integrations and point solutions), it is a logical one. Businesses don’t want to have to invoice in one application but to go into another application to reconcile their bank accounts or provide their data to their accountant – they want to do all of that in one application, with one user interface and experience.

Reassessing the Accounting Landscape

Cloud accounting for SMBs is a largely untapped potential market, particularly in the US. While Xero is the biggest global vendor, with 100000 customers it is an important, but tiny player when compared to the desktop behemoths, MYOB, Sage and Intuit who together account for around six million business customers. No one has yet really got to scale in this space. Enter now FreshBooks who can boast that five million companies have used their product over the time of their existence. While FreshBooks has a massive free user base, and clearly a large number of those five million have dropped off, it’s fair to say that in terms of mindshare, FreshBooks beats Xero hands-down. What Xero does have, is a strong channel and partner strategy with accountants, and this is something that FreshBooks are starting to talk about now. In his letter McDerment stated that;

While FreshBooks will always be designed for you, the business owner, we are going to make it easy for you to work with your accountant, and make it easy for your accountant to work with FreshBooks. So while your FreshBooks account won’t have all the advanced features that accountants need at their fingertips, and it won’t be mired in accounting jargon that’s confusing and complicated for you, we’re going to build bridges between your FreshBooks account and the complex tools your accountant needs.

That’s an aspirational message, but a difficult one to deliver. Accountants are notoriously conservative and at the same time concerned about threats to their traditional revenue. This is something that Xero has battled over the years and generally managed to obviate through their very strong messaging about accountants being their route to market and trusted partners – indeed, while Xero surely has a direct sales strategy for part of its operation, this is somewhat understated and the accounting partners sit front and center.

Not so FreshBooks who haven’t needed strong ties into accounting practices – a move to full accounting changes this and FreshBooks will need to carefully balance their self-service, SMB-led uptake, with the concerns of accounting partners who are undeniably something of a gatekeeper when it comes to choosing software for SMBs.

Crystal Ball Gazing

The space just got a little more interesting. In the US Intuit has largely been asleep at the wheel and doesn’t have an overarching compelling cloud story. While the Intuit Partner Platform is interesting, it hasn’t seemed to set the world on fire. Xero on the other hand is still an unknown in the US. It has reached a global figure of 100000 customers which is impressive, but US growth and go-to-market is still largely unknown, especially so considering how fragmented the US market is and the fact that Xero follows a strong strategy of using accountants as a sales channel.

And now FreshBooks ponies up and seeks to translate its massive customer base (both paid and free) into something much bigger. So does intuit acquire FreshBooks in order to both gain a compelling Cloud solution and counter the threat from Xero? Perhaps – Intuit has, after all, shown a history of acquiring companies to further their product portfolio. Note though that FreshBooks is well funded and firmly entrenched. A land-and-expand strategy which sees them remain independent but leverage their footprint in the invoicing space to become the new uber-accounting vendor is also plausible.

And what does it mean for Xero? The fledgling in the US market? Well in many ways it is positive, FreshBooks now helps it to articulate the benefits of Cloud accounting and does so in a more direct-sales model which isn’t overly threatening to Xero’s channel strategy.

Time will tell – stay tuned for updates!