FinancialForce.com, the cloud applications company, today announced record results for calendar year 2012.  Within one year, FinancialForce.com increased annual revenue run rate by more than 90 percent, from 9 million in 2011 to 17 million in 2012, significantly expanding their customer base in Accounting, Professional Services, Billing and Media. Additionally, the number of customers using both Accounting and Professional Services Automation (PSA) grew by 120%.  Finally, 2012 also saw the expansion of FinancialForce.com’s enterprise customer base as average contract value rose by a significant percentage. 90% of the company’s growth is due to larger deal sizes.

The company also expanded its staff globally by 60%, across the United States, United Kingdom and Spain.  As cloud spending continues to be a top priority for CFOs and CIOs, FinancialForce.com is poised for aggressive growth again in 2013 and projects more than 100 new hires across the globe to keep up with its rate of growth.

Update – apparently it was an incorrect statement in the Financial Force statement about 90% of growth coming from larger deal sizes. Something to do with misinterpreted statistics.

The mid market is one that is very underserved by cloud accounting/financial vendors – NetSuite used to play in this space but is rapidly moving up the food chain leaving FinancialForce and Intacct to scrap over the mid sized customer base. These results are indication that there is an appetite in the marketplace for midsized organization to move to the cloud It’s also interesting to see that even FinancialForce is seeing a move to larger organizations as larger deal-sizes become more prevalent.

As expected, FinancialForce is enjoying the network effects of having customers using both financial and professional services automation products – and I’d expect this trend to continue – I’d also expect the company to add additional services that further increase the network effects of discrete, but closely integrated solutions.

It’s a compelling approach – likened, in some ways, to Facebook’s approach which sees people almost anywhere on the web able to share content with their social graph, without visiting Facebook itself. It’s an emerging theme for business applications, especially ones that sell into the SMB market – something that time tracking and invoicing vendor Harvest has noticed and is reacting to.

Harvest is today announcing a new platform that aims to help developers bring time tracking directly into their applications – by simply adding some Javascript and HTML to their code, developers can track time within their own applications – it’s kind of like “Intel inside” for time tracking. It lets a discrete business process become and integral part of workflow, rather than a jump to another system that entails a cognitive leap. The platform takes the Chrome extension approach that harvest used in their Basecamp integration,but delivers it directly within the application itself.

While this integration is just one little announcement, the general trend is interesting and one which I talked about length in the past when I was consulting with vendors of cloud accounting solutions – the concept that in the future they may have customers who never actually work within their application (or at least within the UI of their application). Finding ways to monetize, gain and retain mindshare and create a viable business when building to this hyper-modular world will change the world for incumbent vendors but it also has the ability to disrupt the new entrants in the space as well, people like Xero who have built their business by creating an ecosystem of connected applications – the Boocx approach of making an accounting system that is an integral thread within applications counters this approach. It’s akin to creating a real time and data-level infrastructure thread that weaves throughout a small businesses’ process and time – a big challenge, but fascinating to watch it being built out.

An added part of the roll out however was the introduction of a link at the top of online invoices which takes customers to a customer portal where they can see their invoicing history and amounts outstanding. Again a super valuable addition to the product. Things got a little unstuck however due to Xero’s understandable desire to track an audit trail around who is opening these invoices. The “link to other invoices” button takes end customers (ie the customers of Xero users) to a page which allows them to either login to Xero (if they’re already a user) or set up a free Xero login that gives them access to their invoice history.

This is a seemingly innocuous step, and one which, after the small hurdle of registering, will drive some real efficiencies for businesses. The problem, as shown from the large number of comments on the Xero blog post is that this is the first time that the customers of Xero users have been presented with anything that specifies the origination of the invoice. Previously emailed or printed invoices came in a fairly generic format that could have come from any number of accounting solutions (or a word template for that matter).

A number of commenters then saw this move as an attempt by Xero to utilize their business (ie the business that is a Xero customer) as a business development and sales channel. The account setup requires end users to create a Xero account – in this day and age when customer loyalty and customer data is sacrosanct, a number of people balked at the suggestion that Xero would, in essence, have a direct relationship with the customer. Xero justified this step by saying that:

The reason we require a login to view outstanding invoices is to give you an audit trail of exactly who has viewed those invoices and when they were viewed.

I’m not completely convinced the audit requirement argument is valid, if full audit trail was required then Xero wouldn’t be happy to email an invoice which can be forwarded ad infinitum. As it is, invoices are insecure and I would be surprised at any concerns from Xero customer in the event that the link to invoice history didn’t require a login.

In hindsight (and isn’t it always a great thing?) Xero would probably have been wise to have the “link to all online invoices” and hence the invitation to setup an account with Xero deselected by default – as it is removing the link from all invoices is a fairly complex and convoluted process that is likely more than many Xero customers really want to contend with.

Kudos to Xero head of design Phil Fierlinger who quickly wrote a post that detailed some of the thinking behind the functionality. There’s an interesting thing to look at here though, Xero now has over 100000 customers but has ambitions to service millions of customers – as they look for new ways to grow, introducing these sorts of viral features becomes attractive. In fact this is the way that their competitor FreshBooks has grown to its massive size. The difference is that a huge number of FreshBooks customers are using a free service, they expect that FreshBooks will, to a degree, leverage their networks to grow. The technique sits uncomfortably with Xero’s customer who are paying for the service. As one commenter said:

We pay a monthly fee – so in my view it’s not reasonable to use us to advertise your service. I think the online invoice should be on an unbranded domain without Xero links unless I choose to add them.

The bottom line is that online invoicing is an immensely useful tool and will be seen as the default way to do things in the future. But introducing new functionality like this needs to be done with a lot of thought, and vendors should always err on the side of caution, especially when attempting to leverage their customer’s customers. I suspect Xero will look at this release and think about the way it approaches these sorts of changes in the future.

A video of the workflow is embedded below

Sales Invoices from Xero on Vimeo.

In announcing the deal, Ed Molyneux of FreeAgent says that 60mo will be their entre into the US market, and FreeAgent will leverage the knowledge about US accounting and taxation that the 60mo team have. To fund the acquisition, FreAgent tool on a round of funding from Lightbank, a Chicago based VC.

60mo has now shut down new signups and according to Molyneux is building a US-centric version of the FreeAgent application, in doing so they’re squarely going to move into competition with Xero. FreeAgent intends to backwards-integrate some of the cashflow focused functionality of 60mo into its own product.

MyPOV

This is big news for the SaaS accounting space. UK is a busy market with a number of vendors competing for market share – FreeAgent has arguably the biggest slice of the market there, it’s 20000 or so customers making it close to twice the size of Xero with other vendors such as KashFlow also in the mix. Moving to the US now makes sense since no one has yet gained any real market awareness there. While Xero has been building a local US team over the last few years, it’s safe to say that they are very much still in the initial stages and haven’t cornered the market yet. For the record – since the start of 2011, FreeAgent have grown from 4000 to 20000 customer, a growth rate that puts them at the forefront of this nascent sector – that’s an indication of the validity of their approach, regardless of the fact that ny of those customers have been gained through a low-margin partnership with a UK bank.

It will be very interesting to see the approach that FreeAgent takes with regards their go to market. Xero is strongly focused on partnerships with accountants and the like. In the UK FreeAgent has varied approach that sees them partner with a variety of organizations (accounting firms and banks for example) but is also a strong direct sales company.

FreeAgent has a rabidly supportive customer base in the UK – if they manage to have users as satisfied in the US as those across the pond, it’s going to be super-interesting to watch as they go head to head with Xero.

News recently that Xero has nabbed Intuit executive Ian Vacin is a real sign that Xero is ramping up their US operations, but also that within the US marketplace Xero is more and more seen as the promising vendor. In a post announcing his appointment, Vacin speaks to this very points, describing the due diligence process he went through when looking at hiring on with Xero. As he said in the post;

It was only a few weeks ago that I decided to leave Intuit for Xero. I’ve made the change not only because I believe in the product but the team, the company and the vision.

While it’s true that Xero is a relative unknown in the US market – both at a client level and within accounting practices – the fact that Vacin led the QuickBooks ProAdvisor Program, the very program interfacing with accounting practices in the US speaks to the seriousness with which Xero is going after this market. While the incumbent player Intuit has great existing marketshare, their innovation strategy largely follows a consumer facing enablement path – their Intuit Partner Platform does a great job of enabling QuickBooks users to interface with SaaS applications. That strategy, while great from the client side, does little to tell practitioners a story that resonates with what drives them. Xero has that story and is now gearing up to deliver it into the marketplace.

Their path won’t be easy – the US is a large and fragmented market – but hires like Vacin speak to the growing chances of Xero to pull this one off.

Disclosure – I’m co-founder of a company that provides a migration path for organizations wishing to move from desktop to cloud based accounting software. That’s not really much of a conflict with this post per se, but in the interests of full disclosure and all….

To this end they recently announced the acquisition of Small Payroll a small SaaS payroll application based in Canada. Small is going to be rebranded as Wave Payroll and rolled out to the US early next year. Judging by the specification, Small Payroll seems to tick most of the boxes that SMB users require. In particular it allows;

• direct deposit to employees’ bank accounts
• calculations of wages and overtime
• withholding deductions; and monthly remitting to the government
• income tax forms (including the Canadian T4) and Records of Employment

Small Payroll founder Sean Walberg correctly identifies a hole in the market for a very simple and easy to use payroll product. As he says;

I had worked at a big payroll company, so I understood what needed to be done. Even so, I found it to be a pain to use the government’s online calculators and then keep track of things on spreadsheets. And the payroll companies are too expensive, especially for the little guys

In a departure for Wave, the payroll component will be a charged product. Wave is saying that payroll will be charged at “a few dollars per employee per pay run”, that’s not overly clear but Wave are promising that pricing details will be forthcoming soon. What fascinates me beyond the cost however is whether or not this is a tacit admission by Wave that offers-based monetization isn’t a sustainable model and that the future for their model lies in offering charged add-on modules the fact that Wave is stating that “Wave Accounting and Wave Payroll will operate as complementary but separate applications. Wave Accounting will remain 100% free” suggests that may be the case. If this is indeed the case that then changes the story significantly and, in my view, lessens the marked point of difference that Wave currently enjoys. I wonder if this move isn’t somehow tied to their recent $5M funding round and a much closer look at their prospects from their VC backers.

Either way it is good to see Wave building out their offering – so many SMBs employ one or two staff and having an integrated payroll offering is a no-brainer.

Much of those early conversations (the content of which I’m not going to divulge since they were private) centered around the opportunity for Xero and how they could really capture a significant customer base. My perspective was always that their was a massive opportunity to convert customers using existing solutions (at the time, before global expansion, I was primarily referring to MYOB).

Drury on the other hand seemed to be mainly focused on those prospects who didn’t use existing systems – the companies that were using paper based or perhaps excel-based accounting methodologies. I was always of the opinion that given the funding that Xero has attracted, this pool of “new entrants” wasn’t enough and that they’d have to actively start converting MYOB customers.

The major impediment to this of course is the immense pain that organizations have to go through to move from an existing system – both in terms of workflow but also basic data migration. Which is where an interesting post from Xero comes in. Andrew Tokely, who heads up the development team at Xero, wrote to the world at large soliciting approaches from people looking to help build conversion tools from MYOB, Sage or other accounting systems. Something that, in my opinion at least, is mind numbingly obvious.

As I advised Drury back in November 2008;

[the way forward is to start] offering the practices a free conversion tool that they can then implement for their customers as a value-add and the like

To help people get here, Xero has announced a draft XML format that gives people a starting point from which to wrangle the spaghetti that is  cross system migration.

Of course this isn’t an example of Xero being philanthropic. By creating this standard, they have opened the doors to third parties to invest the time and resource to create tools that will increase Xero’s own customer count – it’s the sort of move that a organization with 50000 paying customers can pull off.

Data migration is a complete no brainer – and with this announcement I’d expect Xero to gain a nice slice of recurring customers.

Anyway, MYON was acquired by private equity firms around three years ago which indicates that the timing is right for a divestiture, a fact that Xero CEO Rod Drury pointed out in a recent post.

Drury went further however to contend that the selling of MYOB indicated a changing of the guard and a stripping out of core assets. he went so far as to claim that;

…thousands of Australasian small business customers are going to be sold to a new business owner. It also potentially marks the end of the old Windows desktop software model in Australasia

I don’t see it that way – the acquisition of MYOB will only occur if potential suitors believe there is an ongoing and lucrative revenue stream apparent in the company. Were this to mark what Drury is calling the beginning of the end of the incumbent players, it would be very unlikely that Sage (one of those dying players in Drury’s mind) would either be in a position to buy, or have the desire to acquire another “legacy vendor”.

The comment from Drury that:

This is the most significant vendor flip the small business accounting space has seen in a generation. In Australia and New Zealand hundreds of billions of GDP are managed through these platforms – and now there is uncertainty on who will own those businesses. Two big customer bases are about to be sold out. Who will be the trusted custodian of these transactions?

also misses the mark in my view. Sage is a publicly listed company with a valuation of $5.5B, it’s a little disingenuous to suggest that the new breed of vendors (of which Xero is arguably the leader with a roughly $200M valuation) will give customers a higher degree of certainty than the incumbents – no matter who owns them at any point in time.

Rather Sage sees MYOB with an incredibly dominant (although admittedly more threatened than previously) position in the marketplace and sees the opportunity to acquire that revenue and invest in building technology to cement that position going forwards. Between the two companies there is roughly seven million customers (6M for Sage, 1M for MYOB) spread across the world – this deal, if it goes through, creates a massive amount of consolidation with (if handled correctly) some great potential technology synergies.

I do a reasonable amount of consulting work all around the world and have always found that the slowest part of the process was actually creating Statements of Work and general proposals and seeing these progress though to agreed contracts. Often this is because (in my case at least) I’m re-creating the wheel, copying text from different places, changing scope descriptions and the like. A new service I came across the other day looks like a really interesting solution to this problem.

QuoteRoller is designed to both automate and streamline the creation and eventual execution of proposals. The basic idea is that the user can enter some standard proposals (or edit public proposals that QuoteRoller provides access to) and thereafter produce a proposal quickly by using the proforma templates and simple editing project-specific details.

After entering he basic contact information for the organization, users can create standard templates with predefined blocks (“About the company” or “About the contractor” for example). They then simply enter the specifics about the particular contract (description, price, tax rate etc) and QuoteRoller does just that, creates a nicely laid out proposal that can be either downloaded as a PDF or viewed online.

I had a go setting up some draft proposals in QuoteRoller – while it is a little buggy still, the solution shows some real promise. I’d love to see some more integrations (QuoteRoller is currently integrated with FreshBooks, CapsuleCRM, Basecamp and Highrise) but the real value lies in the collaborative part of QuoteRoller – clients can interact with contractors when checking quotes and can also accept proposals online, once they have been accepted proposals can become draft invoices in the accounting/invoicing application or projects in project management software.

I’m not sure how much of a viable business QuoteRoller has – but the very fact that it is in existence is an example of just how enabling this new technology paradigm really is.

Intacct

Firstly Intacct, a company I’ve written about previously and one I am picking for a significant funding event sometime in the near future. It raised a further $12M funding round a couple of months ago, but I expect that potential acquisitors are sniffing… Anyway in Intaccts latest results, they boast of some pretty impressive numbers

• Q4 – 193% year-on-year growth for new bookings
• FY 106% growth in new bookings
• Intacct channel partners enjoyed 40% growth between Q3 and Q4

It’s not just financial performance that Intacct is crowing about though – they’ve always been quick to talk about uptime and other measures. This report sees;

• 100% availability for this quarter
• 99.995% availability for the entire fiscal year

Intacct occupied a relatively unique space. At the top end of town there are a number of players jostling for position – NetSuite, SAP and others. At the lower end of town there are a plethora of SMB accounting products – both for the incumbents like Sage, MYOB and Intuit, and also the new entrants – Xero, FreeAgent, IAC-EZ. In the middle space however there is a distinct lack of solutions that are suitable for the “bigger than small, but smaller than big” set. Intacct fits this space nicely and the opportunity for them is massive.

NetSuite

In other results released, NetSuite CEO Zach Nelson, in his inimitably charming way, was ebullient when announcing their Q2 results. The previously covered customer wins at Groupon and Qualcomm were brought out again to justify the contention that NetSuite not only provides a robust alternative for some of the biggest businesses around, but does so in a way that is far more agile than traditional alternatives. In terms of financial results, NetSuite reported;

• Record revenue of $57.8M – up 23% YoY
• 30% increase in billings YoY
• Q2 operating cashflows of $8.4M

NetSuite still reported an overall lose, in fact that loss has widened on last year (from $7.2M to $9.8M). While being a fan of profit-making ventures, given the growth potential for NetSuite, this isn’t a signficianct concern. NetSuite too has some non-financial measures that are perhaps even more indicative of where their trajectory is heading;

• An additional 328 customers were signed, the highest number for a couple of years
• Channel contributions to the revenue figures grew 50% versus last Q2 last year
• Global pipeline in the “big deal” category is up 85%
• Average deal size rose to $40K
• A record multi year deal to expand its footprint within tier two subsidiaries in a 45000 person business

It is this last category of statistics that gives a sense of the future trajectory for NetSuite, with a channel strategy that is absolutely turning on the gas, with customer signings on the up, with a pipeline that is bigger than ever before and with deal size rising ever higher, it is obvious that NetSuite’s own graph is trending upwards – that’s exciting as it builds an impressive base for post-downturn acceleration that could see NetSuite really hit it out of the park on its way to being a major player.

What it Means

Cloud rives agility, drives relative cost savings and drives the efficiency of the businesses that utilize it. The performance of both Intacct and NetSuite in relatively constrained times is testimony that the marketplace buys that vision and is showing so with their checkbooks. That trend will continue, and will only accelerate as these vendors gain even more traction. If you’re a channel partner or implementer living in the old world, while I’d not suggest that your world will end any time soon, it’s safe to say that it’s looking less rosy than a few years ago.