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7 minutes reading time (1486 words)

Xero is innovating its small business cloud accounting software through integration and ecosystem

The vision of Xero, a cloud accounting software firm for small businesses and their advisors, is to be the most trusted and insightful small business platform. Its objective is to improve life for people in small businesses, their advisors, and communities worldwide. The adoration of customers and partners was visible during the two days of Xerocon New Orleans 2022, Xero’s flagship event attended by over 1000 accounting and bookkeeping partners, exhibitors, and speakers. The pace of innovation, increasing dedication to small business success, and promise to promote diversity were evident. In its founding stages, Xero was built to empower collaboration between small businesses and their accountants and bookkeepers. From its inception, the heart of Xero has been to make the complex simple. The ethos continues today as Xero is evolving to be different, dynamic, unique, and memorable. Xero’s long-term plans for North America are centered around augmenting, harnessing partnerships, and tapping into the broader small business ecosystem.

Ecosystem vision progress

Xero has a very sound strategy and is flexible in its approach to small business customer needs. It has created an ecosystem (with over 1000 apps that integrate with Xero) that includes applications that extend how customers digitally transform their organizations with adjacent and complementary solutions to the accounting software. Xero has adopted API standards that facilitate integration across these complementary offerings. In other areas, Xero is establishing alliances that help position integrations as part of a strategy aligned with a digitally transforming small business segment. Xero recognizes that pursuing the ecosystem business approach requires success in other areas, including go-to-market strategy and the ability to integrate around data. So far, Xero has transformed in step with the transformation of its customers and accelerated its integrated offerings to meet rapidly evolving customer expectations/requirements.

Inventory for small businesses

In November 2021, Xero acquired LOCATE Inventory. Xero’s developers are extending its functionality to provide a clear picture of the inventory, which is critical to understanding the actual cost and demand of products, impacting small business revenue and cash flow. The small business inventory management solution is built from the ground up, not an enterprise-first scaled-down version. The solution will allow small businesses to streamline workflows for quoting, printing labels, and fulfilling orders. Xero’s new inventory solution will be available to the US market first, further exhibiting Xero’s commitment to the North American market.

Sales Tax

The pure complexity of sales tax management and compliance is a misery for nearly 70 percent of small businesses. There are over 13,000 tax jurisdictions in the US, each with different reporting requirements and State tax portals. To reduce the complexity, Xero announced a strategic partnership with Avalara that will allow it to build a US sales tax solution in Xero. The solution enables small businesses, accountants, and bookkeepers to simplify sales tax calculations and streamline state reporting, easing their administrative burden and empowering them to focus on business growth and customer retention. The solution will be included in the Xero cloud accounting subscription with no added pricing.

1099 forms

Techaisle’s latest US SMB survey shows that 48% of micro-businesses employ an average of 13.9 contract workers. There are 1.6 contract workers for each full-time employee. Most contract workers are on 1099-Misc (an IRS form required to report payments made to an entity or person other than the employer). The setup of the 1099 requires collecting and manually entering W-9 data for each employee (contract for a full-time). Xero is working towards improving the overall experience making it easier to manage contacts, employees, and e-file in a single workflow.

T2125 forms and Workpaper solution

While Xero’s competitors have been offering their versions of 1099 and T2125 form integrations, Xero plans to make the user experience more straightforward and intuitive by improving tax mapping capabilities and refreshing the UI. T2125 is a form in Canada to report business or professional income and expenses for self-employed persons. Xero has expanded its TaxCycle integration to include support for the T2125 form. Small business owners or their bookkeepers can use automated export of year-end balances to complete the form.

At Xerocon, Xero also launched a new integration with Countable, a working paper automation and management tool for generating read-only working trial balances for accountants and bookkeepers.

Vertical industry applications

Industry-specific solutions that connect digital capabilities to real-world challenges are critical factors in successfully transitioning to a digitally transformed organization. Time to value has increased demand for vertical industry cloud solutions. While Xero’s competitors have had a head start, Xero is moving ahead with measured steps. Recently, Xero announced its partnership with the global construction management platform Procore. The offering will be available in the Xero App Store. The collaboration and integration of the platform with Xero will likely help small businesses to connect their field and back-office teams with real-time financial data in the cloud.

Xero Small Business Insights (XSBI)

XSBI is an initiative to use anonymized and aggregated data from thousands of Xero’s customers to highlight the performance and shed light on the performance of small businesses and give them a voice at the policymakers’ table. Three core metrics are updated quarterly: sales, time to be paid, and late payments. The Xero Small Business Index is a single measure that shows changes in the performance of small businesses from month to month. As with most of Xero’s initiatives, XSBI was launched in Australia, New Zealand, and the United Kingdom. XSBI program was recently expanded to the North American (NA) market and provided valuable insight into the health of the small business economy. Xero’s objective is to inform the government and policymakers to understand what's happening in small businesses and not just have a macro view of the small business economy. For example, OECD has used XSBI to measure productivity in small businesses during the pandemic. The Office of National Statistics in the UK repackages XSBI to provide a broader perspective of the British economy. The Reserve Bank Treasury in Australia regularly uses XSBI. It is considered a unique and valuable small business market resource that many businesses and governments count on. Techaisle feels that there is a unique opportunity for the XSBI data to be prescriptive for small businesses rather than descriptive (in its current form). There is tremendous scope for Xero to develop an analytic platform to deliver more forward-looking predictive or prescriptive perspectives to drive small business growth, reduce costs and achieve digital transformation.

Final Techaisle Take

To successfully execute its vision to be the most trusted and insightful business platform, Xero has been attracting top senior management talent, which is a strong indication of Xero’s future. Most recently, Chris O’Neill, a veteran CEO from Evernote, Board Member at Gap, joined as Chief Growth Officer. Jugdip Bath has joined Xero as Executive Vice President - Product Engineering. He brings his experience from Chegg Inc., Prudential Financial, Citrix, and Intuit. Previously with VMware Tanzu Labs, Hamish Cook has taken over as Vice President of Products US. Faye Pang, a dynamic executive, has been the Country Manager in Canada. She came over from Uber. Matt Moore, who has worked with small businesses, joined Xero as Executive General manager, Product Marketing. During several discussions with each executive, it became apparent to me that they are collectively committed to small business growth.

Digital transformation is the end goal of small businesses. Techaisle asked a sample of 1480 small business decision-makers to identify the current state of digital transformation within their organizations. The findings show that most organizations in the micro business (1-9 and 10-19 employees) segment are at least planning to adopt ‘digital transformation’ in some form and that 17% of all US small businesses have a formal digital transformation strategy and are actively following through” on implementation of that strategy. However, most small businesses are still at the digitization stage (conversion or replacement of physical records or documents and manual tasks with digital alternatives) or the digitalization phase (using digital technology and digitized assets to automate processes).

Xero is quickly pinning down the data entry, record-keeping, and workflow automation to enable digitization and digitalization for small business customers. But frequently, the next step is generating insights to deliver previously unimaginable business outcomes in their journey toward digital transformation, which is challenging to achieve without insights that address small business issues. Techaisle research also shows that small businesses are increasingly interested in the evidence-based decision process. As per Techaisle research, small businesses are moving from being rarely data-driven to somewhat data-driven and ultimately to highly data-driven. Techaisle believes that AI and analytics are altering business patterns. Data has gone from being the exhaust created by applications to being the IP. As a result, Xero must accelerate its initiative to deliver prescriptive analytics using a combination of new technologies of AI and low-code/no-code. Xero must quickly reach a point where ‘systems of insight’ should join the ‘systems of record’ and ‘systems of engagement’ as significant considerations for small businesses.

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