Is Xero about to abandon the accountant model?

The last ten years have taught me that running a business is like driving a car. If you’re looking ahead you’ll go far. Looking back does very little to help unless you can innovate as a result.

That said, you need to keep an eye on the rear and side view mirrors. And just recently Xero has come into the frame. It operates a different market to us, but it’s still interesting to observe its moves and I can say with some certainty that...

Xero is up to something.

A big something.

Something that will pull the rug from under the feet of accountants.

What I am talking about? Automation that’s what. 

Xero has won an almighty marketing battle with Sage and displaced the incumbent by using accountants to distribute its software. It’s a clever move by Xero and one I admire.

Xero is nothing more than smart bookkeeping software. There’s a little Artificial Intelligence (AI) built in but it’s cursory - the tax features are very limited to the extent that you still need an accountant to help you out at year end.

And that’s why it appeals to accountants. Xero stands shoulder to shoulder with them keeping their place in the food chain secure. Xero sells bookkeeping software, accountants sell accountancy services. Happy clients. Happy accountants. A virtuous circle.

However, Xero is clever. It knows it can’t compete like this forever and it also understands the value of new machine learning technology even if it’s not implementing it just yet. If a computer can drive a car, then why can’t accounting software file your tax returns or accounts?

It’s a question we have already started to answer for contractors here at inniAccounts because it’s clear that for around 95% of small businesses with simple needs a computer could very easily do your year end accounts.

Technologists get it. Accountants don’t. And there is the rub. Xero has become hugely successful by using accountants as a sales and marketing channel, especially those who deny that technology will eat their lunch.

Of course, there’s another success story in this for Xero. SMEs are now loyal to Xero and not the accountants they buy it from.

Just last week I saw this in action, numerous people at a networking event saying they need a new accountant who can support Xero. People want to switch accountant not software. Xero owns the customer. Accountants don’t. This is a market-shifting dynamic.

If we combine this opportunity with the pressure Xero are under to return value to shareholders, they have no choice but to steal ￡m's of revenue away from smaller accountancy firms. In particular those who aren’t providing complex advisory services. And they'll do this via automation & AI.

That's because Xero has got to do something. It is still a loss making company and it needs to think about making a profit soon. And what easier way than mobilising its loyal following to give their cash to them, rather than accountants?

And of course, QuickBooks is breathing down its neck. It’s gone straight to the end game, automated processes and missed out the accountants altogether. All of which piles on the pressure for Xero to accelerate automation before it misses out completely.

In the next five years we’ll see a new battle play out and I suspect the tables will turn. Xero will fully automate accountancy - including filing accounts and tax returns for the majority of the UK's small businesses.

It’s a harsh reality for small accountancy practices, but they need to either figure out how to add value, cling on to the literally dying tail end of business that haven't embraced technology, or go out of business. Not much to choose from, but I know what I’d do.

Read about inniAccounts’s approach to innovation and why we’ve won a Queen’s Award for our real-time tax calculator and adoption of artificial intelligence here.