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Intuit v Xero (or David v Goliath) – how are they travelling

In Australia today we have two cloud accounting software products competing in the small business space; Xero from our New Zealand neighbour and QuickBooks Online (QBO) from US-based Intuit. Although these aren’t the only two products in the market based on recent product developments, these two look to be outpacing the rest of the field.

QBO has been around globally for close to six years but its introduction into Australia has been relatively recent and also quiet while Intuit was putting key infrastructure in place. Xero has been active in Australia for some three years charming accountants and small businesses alike as it refreshingly engages and communicates with its customers. To date it has had a virtually untrammelled existence, year on year customer growth has been exponential and the many Xero evangelists are a testament to its value.

However the situation is ripe for change. Intuit has launched the new user interface for QBO (code named Harmony), introduced Australian localisations to the product, hired a number of staff and opened offices in Australia, certified partners (Pro Advisors)  and is now geared up for an intensive campaign to gain the hearts and wallets of Australian small businesses. The burning question is – how will Intuit achieve this goal? Something more subtle than using corporate muscle in a Goliath versus David encounter is required.

Although some accountants for a variety of reasons have not leapt on to the Xero bandwagon and are still looking for a suitable cloud product for their clients, Intuit will have an uphill battle to gain traction against the entrenched incumbent that continues to delight and satisfy customers. Intuit can point out that Xero has yet to deliver Purchase Orders, Quotes and Inventory all of which are in QBO, but conversely QBO relies on 3rd party Payroll, has a very weak BAS offering and is still a long way off having the comprehensive bank feed functionality of Xero – putting them roughly at parity from a functionality perspective.

Yet one thing is certain, Intuit is determined to break the stellar growth trend of Xero in Australia (and indeed the world). During my recent visit to the Intuit head office in Mountain View California, I asked the how question of Brad Smith and several of the Senior Vice Presidents and Vice Presidents that I met. The standard response was that Intuit marketed predominantly through accountants – yes but that is exactly what Xero has been doing over the last three years! So although I believe that Intuit will use every weapon it has in its corporate arsenal to unseat Xero in Australia, I am still uncertain how they will do that, how long it will take,  how much it will cost or even what is the measure of success. Intuit is very tight lipped on these specifics. (Interestingly Intuit is not considering taking on Xero in Xero’s home country of New Zealand, I guess the numbers really don’t add up over there.)

Also interestingly, while Intuit is taking on Xero here in Australia at the same time a similar situation in reverse is being played out in the US, where Xero has started to spread its wings. The move started out fairly quietly with an office in San Francisco in late 2011, followed by New York in 2012 and then in 2013, Xero opened offices in Los Angeles and Denver, held its first Xerocon in San Francisco attended by around 400 partners and has now embarked on its first roadshow.  New Zealand gave the US a run for its money in the Americas Cup and this New Zealand company looks like it might do the same with cloud accounting software.

As well as dazzling customers and partners in the US, Xero has also been dazzling investors.  Earlier this month  Xero announced that it had raised NZ $180 million of new capital, some from existing NZ investors but a large portion from a two major  US investors, one of which, Matrix Capital Management, invests in companies it believes can disrupt markets – a strategy of which Xero has long been proud.

A third interesting point in the international Xero v QBO stoush is that it appears that Xero signalled its US intentions before Intuit signalled its Australian intentions. The first US-based Xero office opened in late 2011 but it was around mid-2012 before Intuit went into beta test of its Australian version of QBO and its first executives appeared on our shores around August 2012 – so did Xero rattle the cage of  the American giant into action or was Australia already on its radar screen.

But back to Australia; whilst Xero is still my product of choice from a software perspective there are other factors that work during the decision making process. Businesses migrate to cloud accounting software from one of three main sources:

  • An existing business unhappy with current software
  • A start up business
  • A business not previously using accounting software

Businesses in the first category are likely to be more discerning as far as software functionality is concerned but businesses in the other two categories are much more likely to take a recommendation from their accountant, business colleagues or friends/relatives. Which is why developing relationships with accountants is recognised as the most important tactic to gain customers.

Brad Paterson, Intuit Vice President of Asia Pacific, told me that many Australian QBO clients are migrating to QBO from having not previously used accounting software – i.e. from Excel or shoeboxes, but for sure Intuit will be targeting Australian accounting practices as well as customers on other software (read QuickBooks).

In the US, realistically there is plenty of room for two major players. Xero is unlikely to dent Intuit’s bottom line for quite some time as right now it has about 3.5% of the number of US customers as QBO. It is probably as much an annoyance to the US corporate giant as anything else. In Australia however, with a comparatively smaller market there is much less opportunity for the player coming second and Intuit is not used to being number 2. We can expect to see some interesting developments over the coming months as global giant Intuit steps up its efforts to achieve market share in Australia over the much smaller but popular incumbent, Xero.

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