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New accounting software heads to the cloud

By Sholto Macpherson

Cloud computing looks likely to trigger a generational shift in practice software.

For a textbook example of technological disruption, look no further than accounting software. In the early 2000s, MYOB and Reckon had comfortably divided the world of business accounting software between them. They had largely done the same for practice software for larger firms, with Reckon APS and MYOB Accountants Enterprise.

These big two have since been upset by players offering cloud-based accounting software that runs servers on the internet, rather than on users’ own computers, such as start-up Xero and US veteran Intuit with its QuickBooks product. Now MYOB’s and Reckon’s last jewels, their practice software packages, are also in danger.

Market turmoil attracts new rivals

Practice management software helps accounting firms manage their business. Typically it can track time and expenses related to various clients; the firm can then accurately invoice, report, store documents, analyse the business and produce the firm’s own accounts, work papers and tax returns.

The new competition in practice management comes from at least five cloud-based software providers:

  • Thomson Reuters is rumoured to be getting ready to sell its cloud-based practice software, Onvio, in Australasia. (Thomson Reuters declined to comment for this story.)
  • GreatSoft, a South African cloud-based software provider, took a stand at the Accounting Business Expo in Darling Harbour in March this year to gauge interest.
  • Sage is working on a cloud practice suite to run on top of the cloud-based customer relationship management service Salesforce.com. It was due to be released earlier this year and may appear in 2019. Some larger firms are interested in using Salesforce.com to create their own platforms, although the ability to customise comes at a high price.
  • Wolters Kluwer, owner of CCH Australia, bought Acclipse’s iFirm in 2012 and has gradually brought the cloud practice software to market.
  • Karbon, a fledgling cloud-based practice application developed by former Xero executives, has gradually expanded its features to compete for the business of medium-sized firms. In June, it announced it had $A7 million in new funding.

Karbon is one of the most promising replacements and a natural fit for cloud-friendly firms that buy into the Xero philosophy – except that Xero has blocked Karbon from accessing any client data, hinting at a less than amicable relationship.

San Francisco-based Karbon doesn’t reveal numbers of customers, citing competitive reasons, but one report says 55% of its revenue comes from US mid-tier firms and about 35% from the Australian market.

“One of the things that holds accountants back is that they don’t have a way of doing standard processes and they don’t have a way of scaling,” says Vacin, Karbon’s vice president of partnerships and education. He believes Karbon can offer both.

The Xero question

Wolters Kluwer also doesn’t share customer numbers, but industry opinion is that iFirm hasn’t taken off as fast as its parent had hoped. It wants to change that through a deepening partnership with industry growth champion Xero.

Wolters Kluwer plans to have its online tax database – iKnow, the digitised version of the Australian Master Tax Guide – integrate directly with Xero Tax, the only other online tax solution. More than that, it says firms will be able to jump straight from iFirm to a client’s file in Xero Tax.

“Compliance is still king, but margins are being squeezed,” says Wolters Kluwer CEO Russell Evans. “Xero has a good footprint in the market and we can’t be all things to all people.” By tying Xero Tax into iFirm, he hopes to create a market winner.

Which raises an obvious question – after smashing the market for small business accounting software, why isn’t Xero offering practice management software for firms larger than, say, 25 seats?

The answer is market size. More than 90% of firms in Australia and globally have fewer than 25 seats, and Xero’s Practice Manager software addresses these firms. Xero estimates that only 350 Australian firms have more than 25 seats. “It’s quite a small market opportunity,” says Trent Innes, CEO of Xero Australia.

The connected solution

In fact, Xero is used by firms with large numbers of employees, with several having more than 100 staff. While the software company intends to support larger firms that use Xero Practice Manager, Xero Workpapers or Xero Tax for their clients using Xero, it expects these firms to use a separate system for non-Xero clients.

Innes sees the market switching from monolithic suites to a mix of applications connected via automatic program interfaces (APIs) that let programs talk to each other. He points to the take-up of Salesforce.com by the largest firms, in combination with separate compliance, work papers and tax software.

Xero is catering to that vision by adding connectors to its practice software in the same way it did with its business accounting software. Xero firms can view alerts within the Xero HQ practice interface from third-party applications such as proposals (with Practice Ignition) or client KPIs and performance reports (from Futrli, Fathom and Spotlight Reporting).

Meanwhile, Intuit is taking a similar approach to Xero by building practice software for small firms only. Intuit plans to focus on serving firms with roughly 20 staff and up to 300 clients for at least the next two years, says Rich Preece, Intuit’s global accountant segment leader.

“If you get into a top firm with 10,000 clients, my experience has been that they’ve already either built a solution or they’re paying good money for a solution that is far better than anything we have currently built. So we don’t intend to go into that space,” Preece says.

Intuit has emulated Xero’s in-software notifications from ecosystem apps and added some neat twists of its own. Users can automatically add comments to jobs through enterprise chat application Slack, with links that take the user directly to the client’s accounting file. This has the potential to slice the number of internal emails.

MYOB’s struggle with Reckon

MYOB is betting there are still rewards to be gained from a suite of accounting software providers whose pieces work together. It spent months in 2017 and 2018 trying to buy Reckon’s Accountants division, including the prized APS software used by several hundred of the largest firms. MYOB’s A$180 million bid was frowned on by the Australian Competition and Consumer Commission (ACCC). But before the commission could actually block the deal, MYOB walked away at the end of May.

MYOB CEO Tim Reed tells Acuity that MYOB is now pursuing its vision of a “connected practice” using MYOB products. Recent releases for accounting firms have seen “phenomenal uptake”, he says, and the “connected practice” vision is one of the top three reasons accountants recommend MYOB products.

The commission’s doubts aside, at least three other factors influenced MYOB’s decision to walk away:

  • Xero told the commission it wasn’t interested in building tools for medium and large practices.
  • Reckon took a big hit to its business, losing H&R Block’s 470 offices to Sage Handisoft.
  • And Reckon announced in November 2017 that it would be unable to make the investment to rebuild its practice software online. “The cost of building out the technology … would require a lot of investment, which quite honestly we didn’t have,” former Reckon CEO Clive Rabie told The Australian Financial Review in November 2017.

MYOB’s Reed says he decided the deal had reached the point where it was better for MYOB’s clients and shareholders for the firm to invest instead in its own sales, relationships and product.

Reckon, meanwhile, has now declared its commitment to its APS practice management product, and to running it over the internet. The company released Practice Manager version 11 three months ago, letting users view – but not edit – the APS database in a browser. “We 100% get that we have to take it to the cloud,” says new Reckon CEO Sam Allert, in stark contrast to Rabie’s November pessimism.

Karbon’s Ian Vacin doubts whether either MYOB or Reckon can build a cloud version of their practice software quickly enough to compete with the new generation. “It’s very hard to move a legacy product into the cloud in a short period,” he says. “Many people have tried.”

Beyond the suite

The new generation software firms say they will win because they lack the burdens of legacy software, and because the best-of-breed approach ultimately will beat a suite of products from the same provider. “The market is really for us to lose,” says Vacin.

It’s likely that the new generation of practice software will look quite different. Alan FitzGerald of Practice Connections, a consultancy on software for accounting firms, largely agrees. “The old way was: ‘you have to have a suite to compete’,” he says. “That’s the old thinking. Now the mantra is to go best-of-breed. So long as you can ensure a good flow of information back and forth (with your tax software) there should be no reason to have a suite.”

Can accounting firms run on software used by other professional services businesses?

Accelo, an Australian-born and San Francisco-based provider of services operations software – “servops” – says it can. Accelo says that more than 100 businesses in Australasia use its program to track the work of high-paid staff. Among them are architectural, engineering, design and programming companies – and accountants.

Troy Ritchie CA runs his nine-employee Wollongong firm on Accelo. Reckon’s Elite small-firm practice management software lets the firm prepare tax returns and store documents, but “there were some shortcomings to keeping notes on clients,” Ritchie says. Accelo displays notes as a Facebook-style feed.

Accelo CEO Geoff McQueen says niche software companies end up charging high prices and struggle to fund new features. “If you only have accountants in Australia and New Zealand as your addressable market, then you end up with really bad product and innovation economics.”

Servops software focuses on capacity management and staff utilisation to improve metrics such as profit per customer and profit per employee. For professional services businesses where 70% of cost is salary and payroll, the operating model is identical, McQueen says.

“If the business keeps those people busy, then the business makes a profit. If they’re not busy, then the business is generally two months away from folding because they don’t have a big balance sheet and their net EBITDA is 15 to 20%.” Accountants work long hours because “they don’t have a tool that runs their damn business,” says McQueen. “That’s what is destroying their gross margins.”

Sholto Macpherson is a technology journalist specialising in accounting software and edits DigitalFirst.com.

This article was originally published in the August 2018 issue of Acuity.