A month or so ago I was asked to provide some comment for the Natonal Business Review to go with Xero’s full year financial report. I was positive but with reservations and comments. In response to my comments, Xero CEO Rod Drury made some ad hominem comments about me and questioned my credibility as a commentator in the space.

Several others wrote posts about the exchange – some questioned the tone of Drury’s comment (and specifically the personal nature of them) while others were positive about the way Xero is executing.

In some follow up replies, Drury highlighted why he believes I have no credibility as a commentator and gave three questions that he believed I had failed to answer (or more rightly, three areas that he believed Xero was executing well in that I hadn’t covered).

I’ve only just seen his comment so it seems right that, despite being a month or so late, I should answer Drury’s questions here on my blog. Here follows Drury’s questions and my answers. As always I’d be more than happy to discuss these and other issues should Xero wish to engage.

1. No commentary on what it takes to build a business of the scale. We are very very lean compared to the incumbents. (What does Intuit spend on R&D?)

I’ve covered Intuit’s R&D at length (refer posts about IPP). They are already a business of scale and a well executed strategy that sees them provide some kind of hybrid cloud/desktop offering could become the default solution (because of their incumbency). So, Xero sits in an interesting space. On the one hand it doesn’t have the market penetration that the incumbents do (regardless of spend on R&D), on the other it has a significantly higher burn rate than SaaS competitors (KashFlow, FreeAgent etc etc etc). That’s fine as long as the burn rate translates into customer acquisition cost (CAC) below the competitors – at this stage that is not the case with those I’ve talked with.

This isn’t to say that Xero can’t do it – they certainly can, but, as per my initial question, I’d like to see some strategy that gives me confidence that they can scale faster (in relative terms) than the competition. I’ve not seen that as yet.

2. Where have the incumbents innovated? What shots have they fired at us? Isn’t it that the Incumbents have spectacularly failed so far? How many real online customers does Quickbooks have? How many countries? When/will they deliver in Australia?

Quickbooks online is a red herring. I’ve reviewed it and clearly it’s not a winning model. The Intuit Partner Platform is and this is absolutely where Xero should be giving attention. Calling out QBOE is a diversionary shot that is meaningless. Sage and MYOB are the unknowns (disclosure – I’ve done some consulting work with MYOB around their cloud strategy) – I’m not seeing anything impressive from them yet but their cash reserves and massive customer numbers create a potential risk for Xero, should they prove able to execute effectively.

3. What more agile startups? Who else has raised money? Who else has delivered 60+ releases? Is Xero not the most agile?

Agile startups? Well, firstly raising money is a very poor metric for success in the marketplace. On a money raised to customers acquired ratio, Xero is falling well behind their more nimble competitors. This is fine so long as Xero scales their customer acquisition up in line with their spend. But to claim that raising money is a proxy for success is simplistic. As to agility – product releases were, in my view, significantly more impressive before Xero took what I believe was a futile side move to create Xero personal (that in itself deserves its own post but to summarize, personal financial management products have proven to not be a sales tool for SMB financial products). The Yodlee integration took longer than ideal and, more importantly, longer than Xero promised. SSO integration with Google apps has now happened, but it took a year and Xero went on record saying that they wouldn’t do it because of “security risks”. So yes, Xero is undeniably more agile than the triumvirate of incumbents (Sage, Intuit, MYOB) but I don’t believe it is significantly more agile than it’s stable-mates in the SaaS accounting space.

Ben Kepes

Ben Kepes is a technology evangelist, an investor, a commentator and a business adviser. Ben covers the convergence of technology, mobile, ubiquity and agility, all enabled by the Cloud. His areas of interest extend to enterprise software, software integration, financial/accounting software, platforms and infrastructure as well as articulating technology simply for everyday users.

6 Comments

Leave a Reply

Your email address will not be published. Required fields are marked *