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Xero CEO Rod Drury gives us his thoughts about where the bookkeeping industry is going and how ICB Bookkeepers are best positioned to take advantage of it.

Automation and machine learning are driving a significant transformation in the accounting sector. Today, cloud accounting isn’t just the future, it’s the bedrock modern firms are built on and a key component of their future growth strategies.

Starting with cloud-based accounting nearly ten years ago, we have seen the aggregation of accounting transactions for millions of small businesses into centralized data centers. Cloud accounting applications in those advanced data centers have easy access to adjacent technologies and massive computing resources to deliver big data functionality, like benchmarking and insights, but also artificial intelligence technologies which can start to predict how transactions should be coded.

In our testing, we have learned that accounting has one of the best potentials for automation. The combination of a relatively Rod Drurynarrow subject domain and large sets of data to analyze leads to very impressive results for machine learning and deploying artificial intelligence to the problem of keeping the books.

Our early results put us on a strong path to code-less accounting for small businesses, which means the actual accounting can be hidden from users that don't understand it. However, the accounting is still there in full fidelity where accountants and bookkeepers can make changes easily if required. Those changes further drive the intelligence of the system.

All this automation has bookkeepers and accountants concerned that the machines are coming for their livelihoods - this is so far from the reality of what’s happening in the sector. While the data-entry work will continue to diminish, this is a huge opportunity for bookkeepers and accountants to level-up and become the small business owner’s right hand and trusted advisor.

The Economics of Small Business

While a massive market in aggregate, the small business world is highly fragmented - they’re everywhere and nowhere. Made up of millions of small business customers, each spending a relatively modest amount. Before the cloud the cost of selling and supporting small business was prohibitive with many vendors trying, but either failing or drifting up into the mid to large enterprise market. For this reason, up until the small business cloud, there was minimal investment or innovation in technology for small business.

Accounting is the beachhead application for small business. They all have bank accounts, the smart ones have advisors, and they generally must submit returns with their local and federal tax authorities. Further, accounting and bookkeeping are one of the few small business application categories that have a natural channel - accountants and bookkeepers.

Selling to and supporting each small business is relatively expensive to the point of being uneconomic. In our early testing and reinforced over the years, accountants are the most trusted business advisor for most small businesses. Each accounting partner might have hundreds of small business customers, and we realized they provide a sustainable channel to sell and support small business cloud software.

Bookkeepers usually aren't operating at the scale of accountants, but also form an effective channel to educate and bring on and support small business customers. Increasingly, accountants and bookkeepers are collaborating and as technology capabilities improve bookkeepers are becoming more attractive as an ongoing partner for many small businesses.

In the Xero example, each customer we speak to, while we love them dearly, incurs a small cost - where for an accountant or bookkeeper, every conversation is a consulting opportunity or a time to build a referral relationship.

Simply we don't believe you can build a sustainable small business software business without the channel of accountants and bookkeepers and therefore have worked hard from the beginning to connect our customers with advisors. In fact, of our more than 717,000 subscribers, more than 80% are connected with an advisor. And, in key markets like Australia, that number jumps to more than 95%. A small business on Xero is twice as likely to connect to an advisor compared to some of our incumbent competitors. Connecting small businesses with advisors not only makes them more likely to succeed, but it’s also the only way to cost-effectively tackle the market.

We're here to grow small business

We believe that to solve the big problems of the world, youth employment, social issues, education and health we need to create opportunities and jobs for people. There just aren't enough large businesses to move the needle at scale, and while a lot of money is poured into enterprise and government productivity, it can only really be small business that moves the needle at scale. Before cloud technology, it was very difficult to see what was happening inside the vast small business sector. Our data shows governments have underestimated the size and importance of the small business economy - as the nature of work and employment is changing quickly and most small business market data was inferred by analysis of tax returns and low volume surveys.

Coaching a small business to grow is not something computers are good at. Computers are great for processing data and crunching what-if scenarios, but the psychology of growth requires human interaction to process feelings, fear, motivation and other emotions.

We believe that if we can use computers to do what they do best, and free up time for advisors to think about what the numbers mean and create growth opportunities.

The numbers prove this model is working. Small businesses with advisers simply make more profit and are more likely to survive. Advisors that work in the cloud are earning more money than their desktop-bound counterparts as well as growing faster themselves. The data shows us this clearly.

We're not interested in preserving industries that have had their day. We fundamentally believe the best way to make society better is unlocking a community of advisors to give more businesses better advice - that will drive growth at scale. Creating jobs in service firms that help other firms even more directly creates employment. We're all-in on that.

Software will get smarter, do more and improve automated processing. Accountants and bookkeepers will be able to do their day-to-day tasks far more efficiently, opening up time that can be invested in providing greater certainty and understanding to the business.

Designing our future

As an accounting software company that will service over million subscribers in the next year, with more than 16,000 accounting and bookkeeping partners and over 500 apps in our Marketplace, we know it’s our responsibility, and in our best interest, to be active in designing advisory models for the future. Some of the things we’re doing include:

  1. Working with professional associations such as the Institute of Certified Bookkeepers to ensure we are listening to any concerns, synchronized in creating opportunities in the profession and building trust in bookkeepers by small business.
  2. Having an open dialogue with industry to hear their ideas and concerns.
  3. Designing software that promotes advisors, connects them with small business and creates opportunities.
  4. Designing software that provides enhanced tools for review, checking, fixing, providing certainty and providing insights for greater understanding.
  5. Creating education programs to arm advisors with what they need to know and how to use the enhanced tools.
  6. Developing a set of playbooks and services to assist advisors deliver well-tested growth strategies.
  7. Establishing lead referrals and opportunities for accounting and bookkeeping partners.

Moving from Back Office to Front Office

We have always believed that online accounting is a temporary product category. Larger enterprises often use disparate systems across departments, but for a small business, it’s often the same people using all the systems. The accounting engine, which includes customers, suppliers and employees form the platform for most other software integrations, Business software connected to accounting is exploding.

So bookkeepers, armed with a key understanding of the numbers, are uniquely qualified to work on these next generation of applications that automate more and more of small business. The bookkeeper is becoming a cloud business specialist and choosing a subset of apps that suit the industries they choose to add value too.

The cloud app vendors can also help by developing advisor tools and certification as they are also finding that a network of qualified advisors that understand the concepts of accounting are good for business.

Early discussion with industry associations is showing an alignment with a broadening of certification from pure accounting to broader business applications. Independent associations, with clear codes of conduct, could play a bigger role in the delivery and management of certification. This might provide an additional new revenue stream for associations which application vendors should support.  

Helping you, help yourself

As well as learning technical skills, it's important that those who want to grow their bookkeeping practices treat their business as a business. Learning how to successfully grow and scale their practices. At Xerocon 2014 we publicly declared our commitment to bookkeepers by stating that we wanted to help them double their revenue. As a direct result of this, in 2015 we launched a series for bookkeepers to help them to understand how a cloud business model works and how to grow it. This series consists of four key areas: Planning & Purpose, Revenue & Pricing Models, Automation & Workflow, Branding & Marketing. The series is in its fourth inception now, and we have seen on average a 47% increase in turnover of the business that participated in this course.

We see an opportunity for Xero and ICB Global to work together on taking this program globally so we can help bookkeepers everywhere be further educated and mentored on being successful. What we do affects not only the Bookkeeper but the small business they support.

Lets have a discussion

So this (rather long) paper lays out our initial thoughts in redefining the art of bookkeeping and we hope reassures you all that we are up for working with you to redefine our industry. Like the small businesses we are helping, we want you also to thrive and prosper in this exciting period of innovation.

Please let us know your thoughts.

p.s. Thank you Mel Power, Xero Head Of Bookkeeping and Matthew Addison of ICB Global for helping me with this post.

 

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