On Suites for Accounting Practices – Xero Invests

Xero yesterday announced a small investment in New Zealand based Max solutions, the company behind SaaS project management product WorkFlowMax. This investment, while small and regionally focused shows a growing trend for vendors. This announcement was part of a broader initiative called “The Modern Practice” tying together a variety of different tools to provide a semi integrated suite for accounting practices.

practice

Why is it happening?

Recently practice management vendor (and one time close Xero partner) Acclipse inked a deal with accounting software firm Saasu to package up client side and practice side software. MYOB already has the Australasian market covered with a somewhat integrated practice-side solution and so Xero was left, at least in the Australasian market, somewhat lacking in the practice management space.

This was especially trouble some as Xero has been at the forefront of the SaaS vendors, articulating the value of cloud based applications to businesses and to the practices that serve them. The accounting practices who invariably have to deal with businesses books at year end, are beginning to see the value that cloud based applications can bring. With this realization, practices are beginning to look at the applicability of connected applications to run their own practices. Xero had to respond quickly and seeing the existing players had already done deals with other vendors, their options where to build their own solution or help give someone else a leg-up to do so for them.

Analysis

The Modern Practice is a logical initiative – Xero have partnered with Microsoft which has been trying to gain some momentum or its own BPOS products in the region as a strategic blocker to Google apps the credibility and deep marketing pockets of Microsoft will help Xero’s own aims.

The WorkFlowMax investment is more interesting, especially since Xero’s stated ambition is to build a global accounting business – this investment is purely to build a New Zealand specific practice management product and leaves questions about Xero’s approach in other countries.

Similarly from WorkFlowMax’s perspective it is an interesting decision. They’re essentially giving up around 16% of equity in return for a $200000 custom development job. They’ll no doubt be hoping that this development will extend beyond the New Zealand market and the credibility of having partial ownership by Xero will help their own marketshare ambitions.

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7 Comments
  • Interesting take on it Ben. Unfortunately your statement of “$200K for a custom development job” couldn’t be more incorrect. This is a capital injection, that enables us to extend our product/IP into a space that gives WFM a more compelling offering in one of our key vertical markets. Oh and that investment is coming from the ideal go-to-market partner in that vertical in NZ.

    • Gavin. From the NZX announcement “while Xero could have developed the tax lodgement system itself, this functionality is quite specific to New Zealand and sits closer to the WorkflowMax product. We’ve decided Xero would be better to focus its resources on its international markets and make this investment in Max Solutions so it can grow its team in New Zealand” which reads very much like Xero outsourcing product development via investment (which makes sense and is a positive thing).

      Agreed the investment comes from a high profile GTM partner in the accounting vertical. If your ambitions are international however I’d contend that 15.9% is a big pound of flesh to give…

  • I’d agree, 15.9% is huge.

  • I struggle with what $200K will buy. In essence it’s one good developer for a year. Sure seems like a big slice for such a small amount of money.

    • David – agreed it seems like a big slice for a small bag of gold. The other concern is that it also limits WorkFlowMax’s possible moves in the future…

  • Crucial to Xero’s acceptance, like MYOB before, them will be the influence they have on the accounting fraternity. Look at the total package represented by The Modern Practice. Despite the hype it’s hard to believe it represents what Xero claim as ‘best of breed’ and even more extravagant that they, ‘cherry picked the best solutions possible’.

    By choosing the products they have and investing in WorkflowMax seems a knee jerk response to keep up with competitors, wanting to present something in the absence of anything. In aligning with those chosen Xero has drawn a line in the sand that must leave aspiring third party developers, gathered around the Xero honey-pot, wondering. If their aspiration is bringing a competing product to market to any of the chosen ones, what might they be thinking?

    The future will tell if this move isn’t a little hasty, however Xero in making The Modern Practice the focus of the Annual Partner Conference in February 2011 endorses it further. They even use the term beta for it’s suite of products – don’t quite understand how that can apply to a loose set of products drawn together. No, somehow this just all seems to patchwork to gain credibility. If this is practice management then best of breed it isn’t. Maybe Xero see it as sufficient to convince the accounting partners, but the more savvy ones will be unconvinced.

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