Cloud firms grow faster, says Xero

Xero UK Partner Benchmark Report
Xero_Benchmark Report
John Stokdyk
Editor
AccountingWEB.co.uk
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Pacesetting accountancy practices that embrace cloud applications are growing more quickly than technology followers, according to Xero research.

The New Zealand-based cloud accounting developer polled 400 of its users to produce a UK Partner Benchmarking Report that allows practices to compare where they stand with their peers by size, fee income, age and growth patterns.

UK accountants lag behind Xero customers in Australia and the USA in terms of the numbers of clients they support in the cloud, but similar reports compiled in those countries suggest British practitioners are beginning to close the gap, Xero said.

Currently, just under a third of Xero UK accountants (31%) support 80% of their clients online, but 56% plan to reach this mark by December 2018 - no doubt thanks in part to the demands of the Making Tax Digital regime.

“Those that were earlier in that adoption curve were all telling us they expect to be significantly down that cloud journey in the next two years,” Xero UK managing director Gary Turner told AccountingWEB at Accountex (see video below). “Businesses that were maybe at 20% adoption can see themselves getting ahead to 60%-70% adoption in the next 24 months.”

There is obviously a strong agenda in the report to promote wider use of Xero software, but also customer data to support the developer’s claims.

The average growth rate for the profession as a whole was 12% in the past year. In contrast, firms with more than 100 business clients using online accounting experienced 16.3% year-on-year revenue growth. Those firms with fewer than five clients using cloud accounts averaged 9% fee growth.

By mapping growth rates and client profiles over firms’ lifecycles, the study identified other characteristics of the better performers. Among the fastest growing new firms, there appears to be a growth surge during year three from 100 to 200 clients, while average performers can take 5-6 years to reach the 100-client mark. By that point, the leaders will be making the transition from medium size (5-19 employees in Xero’s definition) to the large firm category:

Growth in client numbers over time

Xero UK Partner Benchmark Report
Xero UK

The Xero Benchmarks parallel some of the findings from AccountingWEB’s Practice Excellence Awards data, which confirmed in 2016 that 18% of entrants were supporting all their clients on cloud accounting systems, and that the practices that were more heavily committed to cloud were leading the transition away from compliance work to proactive business advisory services.

Also in common with Practice Excellence trends, Xero’s survey found that firms devote more attention to marketing as they scale up their online client portfolios. “There’s a clear step up in the interest in marketing when firms shift from fewer than 35 online clients to larger portfolios,” the study reported. The other key areas of interest included preparing for Making Tax Digital and finding out more about online apps:

Topics of most interest to firms

Topic % interest
How to prepare for MTD      66%
Which apps should firms use?      59%
Client onboarding & engagement      51%
Marketing in the digital age      43%
Moving clients from spreadsheets      34%

The Xero study also asked practitioners to rate banks, which saw Barclay’s topping the ratings as the best bank to work with for small business clients.

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17th May 2017 11:54

I would be interested to see the same comparisons but with PROFIT growth not revenue growth used as the measure.

Not to mention net cashflow growth.

Sales are vanity, profits reality and cashflow sanity.

Never was that more true than with the cloud, where in my view lack of hard cash is going to bring some high profile punters back down to Earth with a hard crash.

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17th May 2017 14:02

I've not read the whole report, so perhaps I'm missing something here.

The survey was of firms using a cloud accounting package. It comes up with the result that using the cloud is beneficial to them.

With a sample that biased, that isn't a survey worth the name. It's a PR exercise solely intended to get coverage for the people commissioning it. This isn't the first time AWeb has publicised a "survey" like this. Have you considered adding an "advertorial" tag?

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to stepurhan
17th May 2017 17:18

@stephurhan - I have to say that's a pretty cynical perspective, this is in many respects similar to the Practice Excellence series championed by AccountingWeb, but one conducted exclusively with firms that are using a little or a lot of Xero in their practices. 

That it may be of no value to you is perfectly fine, but for firms keen to understand the dynamics of what a shift to cloud software can mean - which we get asked about a lot - it's a perfectly acceptable document that brings together many viewpoints.

The fact it has a Xero logo on it I thought would convey sufficient context for you to apply whatever filter you choose to apply to its contents. But it's been produced in good faith, regardless of how you may receive it.

Gary Turner
Managing Director, Xero
@garyturner

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to garyturner
18th May 2017 11:44

garyturner wrote:

@stephurhan - I have to say that's a pretty cynical perspective, this is in many respects similar to the Practice Excellence series championed by AccountingWeb, but one conducted exclusively with firms that are using a little or a lot of Xero in their practices. 


Therein lies the problem. The entire sample is made up of people who use Xero.

But, as I said, I haven't read the entire report. By all means point me to the page that shows those that are using Xero are growing faster than those that don't use it at all.

Because that's the only way to justify the headline. A firm that uses Xero will, by virtue of using Xero, be a cloud practice. Unless you are comparing them with entirely non-cloud practices then that statement is, at best, unproven. Presenting something unproven as a fact (and this headline does state it as a fact) s not the most honest of practices.

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to garyturner
18th May 2017 17:38

Gary, fully appreciate your point of view but the Cloud falls over when you loose your broadband connection (as did "old" software during a power cut). Our office has top quality connection so the Cloud is great but at home we're severely limited by poor connectivity.

I do hope you point this out to your prospective clients because there are many places in the UK where your product would simply fail to work no matter how good it is in the city.

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17th May 2017 14:24

Come on John, you can do better than this.

Intelligence insulted.

"Cloud firms says cloud is great" ought to be your title.

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17th May 2017 17:16

Indeed.

This report is just another example of Xero (whom I'm starting to seriously dislike) confusing cause and effect.

I'm not sold on the Cloud myself but I can see how it would be a good strategy for firms who are serious about growth. Those firms, however, are the cause and Xero is merely the effect rather than the way around Xero are casting it.

Apparently, according to Xero PR anyway, the mere act of using Xero makes start-up businesses much more likely to stay the course and turns any firm of accountants into a super growth firm.

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to adam.arca
17th May 2017 17:27

@adam.arca - Never mind causality which is nigh on impossible to prove, I'd be delighted with just the vaguest correlation that says firms who are already predisposed to being more prosperous or better run businesses determine that using Xero supports those objectives.

Gary Turner
Managing Director, Xero
@garyturner

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17th May 2017 18:18

@John, @Gary - you always knew it would be the chief naysayers who would comment on this article.

I knew @mrmischief would be one of the first.

I picked up a copy of the benchmark report (I think I completed the survey...)

Whilst it may well be skewed what is does demonstrate and its a point alluded at by @adam.arca.

Xero (and related software) is a means by which new and modern accountancy practices can grow rapidly and stay in touch with their clients far better, provide more services and generate more fees than those practices using traditional desktop software and providing heavily biased compliance based services.

I'm not saying all practices using Xero and QBO and FreeAgent for that matter do - its gives them the opportunity.

Not all the practices using Xero will flourish, some will use it because they think they should and not because they really "buy into it". They will not see any real benefits.

If you're a long in the tooth practitioner (and there are plenty on here) you'll moan and belittle all changes - RTI, Cloud software, advisory services, MTD...

Take the blinkers off its a modern way of working, in 5 years time if you 'haven't bought into it' you'll be left behind.

If I was looking to massively scale my practice I'd rather it was along the lines of the Wow Company or Valued Accountancy and not a big regional practice that is only big because its been around a long time and is fat, bloated and inefficient.

I'll settle for steady growth, increasing profits and a great way of working, being able to provide as much (or as little) support as clients need.

Each to his own.

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By morgani
to Kent accountant
17th May 2017 21:18

Kent accountant wrote:

@John, @Gary - you always knew it would be the chief naysayers who would comment on this article.

I knew @mrmischief would be one of the first.

I picked up a copy of the benchmark report (I think I completed the survey...)

Whilst it may well be skewed what is does demonstrate and its a point alluded at by @adam.arca.

Xero (and related software) is a means by which new and modern accountancy practices can grow rapidly and stay in touch with their clients far better, provide more services and generate more fees than those practices using traditional desktop software and providing heavily biased compliance based services.

I'm not saying all practices using Xero and QBO and FreeAgent for that matter do - its gives them the opportunity.

Not all the practices using Xero will flourish, some will use it because they think they should and not because they really "buy into it". They will not see any real benefits.

If you're a long in the tooth practitioner (and there are plenty on here) you'll moan and belittle all changes - RTI, Cloud software, advisory services, MTD...

Take the blinkers off its a modern way of working, in 5 years time if you 'haven't bought into it' you'll be left behind.

If I was looking to massively scale my practice I'd rather it was along the lines of the Wow Company or Valued Accountancy and not a big regional practice that is only big because its been around a long time and is fat, bloated and inefficient.

I'll settle for steady growth, increasing profits and a great way of working, being able to provide as much (or as little) support as clients need.

Each to his own.

I was going to comment myself but this is pretty much exactly what I was going to say.
We have always been a bit more modern but were becoming a bit of a compliance factory. Since deciding last summer to 'buy into' Xero and adopt it in full for our practice have we moved away from that. We have increased fees and are offering more add-on services moving away from compliance. Not only have the fees increased but in all the time spent on each client is on the decline which can only mean we can manage more clients and become more profitable.

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18th May 2017 09:59

I suspect a lot of this is down to the law of unintended consequences....or something like that.

If you do online banking I suspect you are more likely to do online shopping...

If you open to using online accounting systems you are probably more open to other 'value added' services.

In addition firms who are actively looking to use cloud accounting systems because it frees up time are probably actively looking to grow their firms...

If I were Gary I wouldn't be worried about accountants using the cloud but much more on which product....as sure as night follows day there will be cheaper/better/easier to use products than xero....

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18th May 2017 10:20

Being a relatively new entrant to accountancy practice world, where available, we have always used cloud software.

I do not relate to using cloud software and non-compliance services additional revenues. For me, cloud software is more efficient way of working.

We have been a Xero based practice from the start. Clients take to it, like the apple products, it looks good - "Beautiful accounting software".

Due to Xero costs and Xero marketing support to its partners as compared to QuickBooks, I will be exploring QB as an option for our practice.

We will not stop using Xero. It will be an additional cloud accounting software option. We will start promoting QB to clients as a trial and see how that goes and then decided whether switching allegiance from the current giant is the way to go.

Overall, we are very happy with Xero. It is Xero's marketing support, compared to QB, that is now making me explore QB.

I also think Xero product support is very good. Even though it is all done through emails. This has not affected the good support.

I am still waiting for Gray to meet his promise on Xero final statutory accounts. This was one of the key reasons, at the time, I became a Xero devotee. Just say it Gary, it will NOT happen.

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By keithas
18th May 2017 11:18

Anecdotally, I have noticed that a lot of the younger successful entrepreneurs, especially in the fields of technology and media, have big, bushy beards.
This is obviously the next area worthy of a study such as the above, giving rise to the headline:
Pacesetting media practices that embrace beards are growing more quickly than their clean shaven counterparts.

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18th May 2017 13:07

I don't post here that often these days, but this article and ensuing debate is interesting, lets face it, there is always going to be the divide between those who love 'cloud' and those that don't.

We use both, we prefer for in-house bookkeeping to use on premise software, I personally find on premise better from the accountants’ perspective. We are QBO Pro Advisors as well as others and these work very well for us and clients, with QBO we use the desktop app and a third party software provider, it gets around the shortcomings we find in many cloud products.

Cloud products in some cases certainly seem to be built more for the client than the accountant, which is fine as they will no doubt use them daily/weekly, but let’s be honest cloud is NOT the be all and end all, we are, the accountants, who use their knowledge, skills and experience to help clients navigate the business environment, software is there to assist us support our clients, not the other way around, something many software providers seem to be forgetting... I remember early in my career when Sage hit the market, there were plenty including Sage who predicted the end of accountants and everything will be fully automated, some 29 years later I would say our clients need us accountants more than ever!

Incidentally, we have a few (2 in fact) clients on Xero, we are currently working on one of those, he used excel last year then he decided he wanted to use Xero, sorry to say our time on the job has rocketed, I wish he had stayed on excel, or our recommendations of QBO or VT, you may jump on what training we offered, well we did offer even though we don't use it we would have invested the time, but he said its easy he is fine and everything reconciles, he did not want support through the year although it was offered as Xero was the best thing ever, sadly it is and was not in his case, and from a perspective of the team member dealing with this job we won't be moving forward with Xero for any of our clients we will stick with QBO, AccountsPortal and QuickFile.

Sorry Gary, as you have pointed out many are happy with your product, many are building great businesses on the back of Xero that is very obvious, unfortunately we are just not in that happy little band :-(

Jason

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18th May 2017 13:57

I personally see a lot of parellels between the current explosion of cloud apps and businesses and the dot.com explosion in 1999-2000.

"They came at us in the same old way and we sent them back in the same old way." It was Wellington who said this, but I would happily bet £10k at even money that the next 5 years will see some significant implosions on the cloud.

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19th May 2017 08:46

It's all just a bit of a non-article isn't it? Skewed sample, predictable conclusion, decent software, progress in the profession that we already know about.

The headline to me is clear that it's Xero's promotional push, and the article I don't think disguises that.

What I find continually frustrating, as Mr Mischief points out, is that all we hear about is growth, technology and customer service. That very much includes Practice Excellence awards. It would be nice to hear a bit more focus on profitability and work/life balance, because isn't that what ultimately it boils down to? Growth is of course important to many, but to others it's dangerous and a downward spiral.

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19th May 2017 13:10

Overtrading is something I see with a lot of these high revenue growth clients, some of which are on the cloud and some not. I suspect many in the sample will be overtrading.

The directors are shattered with no real work-life balance, on track for burnout, and there are issues not being dealt with left right and centre. Material accounts issues, staff issues, debt collection issues, job delivery issues.

My own business could have had much more explosive growth if I had wanted it to. I went from start-up one man band to £100k sales in 5 years, I could easily have done it in 3 if I had really wanted to.

But that would have meant compromising on a lot of issues especially client satisfaction, client quality, bad debts, debtors' days and the profitablility of my business.

I am glad I stuck to my plan and did not get excited at the propsect of those extra sales, and my meetings with clients I perceive to be overtrading focus on strategies which can deliver the same profits and improved cash flow for lower sales.

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By morgani
to mr. mischief
22nd May 2017 09:50

I cannot agree more. Whilst we have pushed growth I have never wanted to work crazy hours. I work on average 36 hours a week. Sometimes this hits 40 hours but not that often and I never work weekends, bank holidays, etc.
The growth has to be the right growth. We have not always focused on this so well in the past taking on many clients that in hindsight we should not have done.
For us Xero has helped us focus. It has pointed out the exact type of clients that do fit with us and who we are. We can therefore market to those types of clients and be cautious about those who do not fit.
I could improve profit if I wanted to work those extra hours and push staff to the brink as I could lose a member of staff. We set the current working environment as a nice pace with good working life that is not too stressful.

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By NH
20th May 2017 06:44

totally agree that this article is just an advert for Xero.

We have embraced the cloud and love it, however we have clients on Sage, QBO, Freeagent and Xero, each does something different, and have different prices so there is no one size fits all.

For some clients we can say, for what you need you are going to have to pay £30 a month, for others we can say use Sage Start for £5 a month.

I have never understood why some accountants limit themselves to being "a Xero practice", it might make life easier but are you giving the best service to your clients, I prefer to keep all options open

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By Glennzy
20th May 2017 23:45

I think a lot of people are missing the point here and you need to look beyond the article and actually read the report.

I picked up a copy and found it very interesting reading. Benchmarking is a useful process and although I use it a lot for clients I cannot say I have seen much data for accountants.

As a growing practice myself I am keen to see data for other practices so I can see where I fit in to it all. Things like growth rates, average fee per client earnings per staff is all useful data and saying it is juts a Xero advert is a tad harsh.

What I find interesting is some of the figures for niche practices with low client numbers but high fees per client, this gives you a lot of food for thought when deciding what sort of practice you want to become.

I trained in a good regional firm and although a long standing reputation the growth was minimal each year, inflationary up lift in fees, had to replace 15% of clients each year to cover the ones that moved on only really grew through buying other office or fees out. Thea was a firm that has been around 100 years. You did not have a chance of being a partner if under 45.

The biggest thing I have noticed in last few years is that new start up firms 3 or 4 years back that now are 500 plus client firms. This sort of growth is meteoric and previously unheard of. What I did keep coming to was that these firms all were using Xero as the firms driver which I could not ignore. Granted these firms might shout about it more but I could not find examples of QBO or Sageone etc who were adding client numbers like the Xero practices.

What I would be keen to know is the effect the much talked about advisory offering does to fees, and on average how many client take it up. As a sole trader it is often a lonely place and things are often only found out by trial and error so the more data made available on what is achievable and what others are doing the better.

At that point you can make the decision if it's for you or not.

My own client sign up only really took off once I started offering and marketing Xero based services, so if it works for me there must be something in it.

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to Glennzy
21st May 2017 09:30

All very interesting and fair comments, Glennzy, even for the likes of me who are being increasingly turned off by the apparent hype over substance that is Cloud accounting in general and Xero in particular.

Glennzy wrote:

The biggest thing I have noticed in last few years is that new start up firms 3 or 4 years back that now are 500 plus client firms. This sort of growth is meteoric and previously unheard of. What I did keep coming to was that these firms all were using Xero as the firms driver which I could not ignore. Granted these firms might shout about it more but I could not find examples of QBO or Sageone etc who were adding client numbers like the Xero practices....

...My own client sign up only really took off once I started offering and marketing Xero based services, so if it works for me there must be something in it.

It is these comments which I found particularly interesting. Alright, it is anecdotal evidence but none the worse for that. On the other hand, the analytical side of me finds what you're saying hard to accept. I've used both Xero and Sage One, not expert in either and, if anything, marginally prefer the latter (a big admission for someone who's spent his entire practice career avoiding Sage like the plague).

Bottom line, I don't see anything special in Xero at all, it's just another bookkeeping system that happens to be on the new "wonder" platform that is the Cloud and if anything seems rather clunky to me.

It seems to me, and this is my opinion rather than fact, that Xero is merely benefiting in the Cloud from the same effect that made Sage the lead player in desktops for so long, and that is that "everybody" has heard of it and automatically thinks of it first no matter how weak the underlying program actually is.

I'm not knocking anybody's business decision to use Xero but I can't find it within me to either like the system or believe it's the best program out there for me or my client base.

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21st May 2017 00:54

It does seem Glennzy that the article doesn't do the (far more detailed) report justice, your comments are all very interesting, I often find myself looking for more useful detail, but I guess practices are naturally reluctant to divulge the far more useful but sensitive financial data.

If you have to look beyond an article to understand the real facts, then I would regard that as 'tabloid' reporting, which is why I personally find these non-articles about the same software companies a little tiresome.

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By Glennzy
to Sheepy306
21st May 2017 10:56

Having spoke with firms who have successfully made Xero work for them the general reason behind it is not just Xero software but the eco system around it. It is only when you look at bigger picture do you get why Xero works.

You may remember an article I did comparing the main players in cloud software. At first glance if you stripped back all the branding, then yes they all do the same job. However there are subtle differences for instance Xero has mostly direct bank feeds whereas most use yodlee feeds the difference between the 2 on one client may not be significant but over a portfolio it's a measurable benefit, the same can be said for the "find and repost" function. The 5 versions of Xero also mean there is a product for everyone.

However the light bulb moment for me came when looking at the add ons. Take a restaurant for instance you can get an epos that feeds into Xero, along with bank feeds for card machine and bank account, then you can bolt on AutoEntry to deal with invoice side of things, if multi site then you can add Crunch boards or Spotlight for a decent reporting pack. Once perfected you have got your own end to end restaurant system which you can then sell to other restaurants, you can fix price it as the only variable is really the cost of auto entry. This is when the penny dropped and I could see how these firms were signing up rapid client numbers they were not just pushing a bookkeeping product but an end to end problem fix that clients wanted to buy.

As most of it is automated and with some scale to it you are offering a pretty much gold service for maybe silver money compared to what the restaurant was paying before.
These extra products are not all available in QBO and Sageone. If you present this to a restaurnt operator who is snowed under sorting his 400 invoices he has a month it will be jaw dropping and blow him away. There is nothing to stop you becoming the go to accountant for all restaurants in your town or beyond. You will also have valuable bench marking data to give top end advice.

If you look at the successful Xero practices they are not just selling Xero, they will only sell Xero+ RB + bank feed as an entry level offering, then scaling up from there with further bolt ons.

For me as accountants we could learn a lot from the software lads. Think of your practice and you as the trusted advisor as maybe providing 80% of what your client business needs then build your own eco system of lawyer, IFA, bank manager, insurance broker, finance broker etc and you become a one stop shop offering great service to your clients all the money is kept in a tight circle and all those within the circle cross refer to each other making clients more sticky.

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to Glennzy
21st May 2017 13:28

Many thanks, Glennzy, that's very, very informative.

Given where I am in my practice life cycle, this isn't something I need to rush into. That said, like all the practice gurus tell us, we need to be like a shark and keep moving, so what you (and Marks as well on a different thread) have told me is definitely grist to the mill and very much appreciated. I definitely seem to be missing a trick here but I'm just not sure at the moment it's a trick I really need to know.

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