Wednesday, August 31, 2011

This Years Must-Have!

No doubt you, like many others, thought it might be one of Apple’s next gen pieces of shiny hardware or even one of the competing pieces of (not-quite-so) shiny gadgets. But, you’re wrong. It’s not even a subscription to SaaSintheUK, believe it or not! In the first of what is likely to be a slew of firsts, industry insights and worldwide exclusives (it’ll be like The News of the World never left us) here at SaaSintheUK, I can reveal that it’s....(X-Factor style pause) payroll that the in-crowd is falling over themselves for! Hey, come on, calm down.

I’m actually referring in a large part to comments and discussion brought about by the news a few weeks back that New Zealand based online accounting vendor, Xero had acquired the Australian online payroll vendor PayCycle or to be more exact, the article Xero acquires Paycycle: lessons for all on Dennis Howlett’s AccMan blog. Incidently, AccMan is one of the few go-to sites to visit for clear, concise, insightful and unbiased commentary on such topics. And I, like many others, keep a close eye on it for this very reason. 

Shortly before this the same author indulged in some crystal ball gazing. What accounting apps might look like in 2015 did include the prediction - 
Integrate seamless PAYE handling. There’s no money in it but it is a differentiator to have it baked into the solution and not an add-on 
- in the list. It's possible this was prompted by insider knowledge of the pending Xero/PayCycle deal. Whatever; that’s beside the point. I almost responded to both posts at the time. But, I had in mind more in-depth articles further down the track for SaaSintheUK that covered much of these points. Anyway, I was busy. I was in that well known stage seen in software development known as the ‘procrastination stage’. Hence, nothing until now. 

This post will likely meander to cover many points, so just to be clear –
  • The acquisition of PayCycle by Xero does not herald a flurry of payroll app acquisitions by the accounting vendors!
  • Nor do I believe this to herald the start of a Xero spending spree.
Why? Two main reasons - 
1. It’s 2011. 
2. Australia is a unique market-place and opportunity - especially for Xero.            

Now suffice to say this topic and those related have played a major role my whole SaaSing one form or another. Consequently - my interest and my urge to share my point of view on the subject. Indeed my pre-occupation with this subject matter from ‘day-one’ at KashFlow is to a large extent, directly responsible for me working with MyPAYE years later and also correlates with the integration strategies of both companies and even the corresponding strategies of others in the same space. 

On that mythical day at KashFlow, I established that no self-respecting, start-up/early-stage accounting vendor is going to throw valuable resources at building, maintaining, supporting, up-grading etc a payroll module, especially when one considers all the amazingly, creative, innovative, game-changing features and functionality that can be incorporated in ‘accounting’. A fraction of which the main players have revealed and plan to reveal and will continue to reveal for years to come; limited only by the imagination and creativity of the respective organisations and the man-hours available to them (this is the really exciting thing about the SaaS accounting market; where it’s going to go, which can/will be anywhere and everywhere - the sky’s the limit and all that). In short, payroll is a massive distraction from ones core competency and should be left to the payroll vendor -the specialist.

Among other things, a viable payroll offering (in the UK) needs full HMRC accreditation...all the time, year after year. And unlike say, the ‘accreditation scheme offered by the ICAEW, this is not achieved by simply handing over a fat cheque. One has to prove compliance by passing rigorous checks and testing. This involves having the HMRC parked on your lawn for a couple of weeks while they check and recheck your elaborate in-app security (as only a public sector org might specify) and test to within an inch of your apps life that it still don’t break, having implemented all the massive annual legislative changes that happen without fail each and every year and that you must have ready and working for each tax year, without fail. And so on. This is very different to what is required with accounting and would be a bit of a culture shock to those vendors I would suggest. Once again, vendors in the main understand this. 

As a footnote, I think it’s worth pointing out that HMRC accreditation should be of a great comfort for customers as all those security & reliability questions are dealt with at a stroke: a far more robust message than ‘partnering with Rackspace’ or ‘secured by...’ whoever. So in short payroll is a massive distraction from ones core competency and... Get the idea? 

There is undoubtedly a demand for payroll that integrates with ones accounting solution (a demand that the incumbents know too well). It just ties up all that back-office stuff neatly; a more compelling proposition as I’m prone to say. At the same time, at this evolutionary stage in SaaS, users will accept unconnected solutions to begin with if they have to, because the net gains are still massive. But the payroll question remains and recurs. 

The plain simple fact is that for everyone who employs someone in any way whatsoever, a cloud-based payroll solution that goes that bit further and programatically drops each pay-run into the accounting solution of choice is a much more compelling proposition. It ain’t rocket-science. The vendors get it (bar one!) cos their customers and would-be customers get-it. So, consequently in a SaaS accounting utopia, all vendors would build their own fully integrated module. 

Much like CRM before it with the ‘front office’, accounting is at the vanguard of putting the back-off processes online. Likewise, other specialised processes are following behind it: payroll, receipt processors, expenses, timesheets etc. And like the CRM scenario, the accounting vendor has far more scope for ‘out of the box’ creativity and innovative solutions, greater breadth and depth and general blank-page, blue sky awesomeness. CRM is now a very broad church covering a multitude of sins and 'accounting' will ultimately cover a very broad range of functionality, in much the  same way. There are already competitors by the bucket-load specialising in all manner of niches and verticals while climbing that Everest of the perfect UX, like 100 metres sprinters chipping away at the world record. 

The more specialised, less sexy, back-office products are not so plentiful - for obvious commercial reasons. While gaining some early adopters to keep things ticking along, they have a much narrower potential user-base, with an almost tool-like feature set. But the challenges to innovation are much the same and when the imagination overcomes the shackles it is still a beautiful thing to behold: offering more than just the text book SaaS benefits. MyPAYE for one, have proven this and over the next few months will astound I’m sure. 

So in common with the prediction on AccMan, the future of online payroll aligns with the future of online accounting. But... 

Day one at KashFlow also led to an understanding of the API and its importance. Incidentally, the API is integral to the usability of any serious online application and a big part of marketing/going-to-market. It means that the accounting solution can do a helluva lot more than listed on the 'features' page; than has been developed so far and is likely to be in the near future. It means that despite limited resources, the solution is always applicable to all manner of circumstance cos the ‘salesman’ can always answer the question “Does it connect with...?”, with the answer “Yes. Just get your guys to do the stitching”! It is no coincidence that the more successful SaaS solutions have an API and an integration strategy built around it. (Much more about this in coming posts). 

Economical, efficient and bespoke. The need to find online payroll partners evolved to a strategy of integration with a range of small business solution partners that worked fantastically for KashFlow and for many of their partners such as MyPAYE (likewise the competition got it pretty quickly too). Among other things, such partners bring other potential partners to the table.  

Such partnerships lead to all manner of places and off in all sorts of amazing and crazy directions. This included to a handful of conversations with potential Australian partners. Similar conversations to those that led to many successful partnerships across Asia and Africa! It became quickly apparent (read - bloody obvious) that partners in Australia were only going to happen if KashFlow had payroll built in i.e. they are one and the same. Read this as, a fundamental requirement for anyone to get traction in Australia is fully integrated payroll. This is a curiosity of the Australian market. 

Like many sectors in many industries in many territories, the culture is determined by the dominant players. Now I’m sure MYOB (like SageintheUK) do the new wave many favours by the way they carry on; their behaviour alone causing customers to go looking elsewhere, pushing them into the waiting arms of the upstarts, but unfortunately this is a case where they don’t. MYOB seem to be directly to blame for this idiosyncrasy in Australia’s small biz software culture. 

Consequently I was always surprised that Xero were investing so much time and money on Australia without the payroll functionality. Had I really been so misinformed by so many informed people? Were they getting away with it? Were Xero proving the local market analysts wrong? From afar it just didn’t add-up. Of course in reality, it highlighted the determination on Xero’s part not to get directly involved in payroll or anything else apart from their core competency, accounting. Consistent with an early declaration in the ‘Xero manifesto’. They simply went as far as they could in Australia without getting their hands dirty with payroll!

It certainly added-up that they should go after Australia which, with the limitations of the New Zealand market place, is virtually their home-market and with a MYOB founder onboard, it also made sense to ‘go after’ MYOB (Australia by default), much like KashFlow has done with Sage in the UK. I assumed they were making some gains and the PayCycle integration did suffice after all! A rather lame attempt from Xero at a universal payroll feature IMHO, that was only ever gonna receive universal condemnation was obviously of no use and I imagine some at Xero Towers might hope it’s forgotten. But ultimately it must have become bloody obvious that the only way to guarantee success in Australia was the payroll acquisition. I think know they would have preferred not to, but like many before they realised acquisition was the only way to avoid a protracted battle over a territory that they could not allow themselves to lose. 

Make no bones about it. Xero had to buy PayCycle or similar, if similar exists. Xero has a war-chest of c. $20millionNZ. War chests have one function. And that isn’t to lose. There would have been a lot of eggs on a lot of faces if the guys talking about taking the USA couldn’t even sort out Australia. I mean...Australia. 

There is no doubt, that the other major markets do not need or require the same level of embedded payroll functionality that Australia requires. Ironically it’s a major Xero shareholder who is almost directly responsible for them having to take this reluctant path. Craig Winkler being a MYOB founder is great validation of course, but I dare say there may well have been some banter over this. 

Xero is the only truly global player of the SaaS accounting start-ups from the last 5 years, purely because of their funding model. Doubtless they’re gonna have a big say in how the market shapes up globally. So when they start acquiring, it’s gonna be news. The only prior similar activity was a minority investment in WorkflowMax, a fellow (excellent) Kiwi, project management solution, to encourage them to work on a Practice Management offering for Xero. Very different. But Xero do not need to, I’m sure have no desire to, nor intend to, buy any more payroll apps in other territories or any other apps for that matter, unless they encounter a similar scenario for a particular territory in the future. 

For the immediate future and beyond they need to swell that war-chest for their aggressive plans to take the USA by storm. And let’s be clear, these plans are very aggressive. Historically the USA is a huge burial ground for companies of all sizes trying similar to Xero. And the US incumbent, Intuit is far more ingrained to the small business culture of the USA than even MYOB in Australia and if with some semblance of a SaaS/cloud strategy or at least a recognition of its existence and importance. And, to be just as clear, the Xero team are well aware of all this. I don’t expect them to be throwing themselves off tall buildings because of what I’ve written here! 

The knowledgeable Ben Kepes over at Diversity suggests that Xero are looking at raising a further $50 to $100 million NZ (?) for this project alone. I’m not surprised. I’m sure they’ll need it. Xero don’t need to be ‘wasting’ their money on acquisitions meantime. The likes of MyPayUSA, the sister online payroll product of MyPAYE for the USA (that sings and dances as required for the USA) means Xero (and others) can hit the American ground running. 

Integration with payroll has worked and is working well for Xero, KashFlow et al. It provides all the required and possible functionality while building the respective brands and customer-bases. Each gets class leading functionality and usability while getting exposure to a warmed-up pool of users. As the market evolves it will see tighter partnerships with the payroll vendors. 

MyPAYE & MyPayUSA is already the embedded payroll engine for Interprise Suite, in both the UK and the USA respectively (and has been for over 3 years). This means that users of this desk-top ERP have payroll functionality built-in to the existing user-interface (UI) and use it happily in ignorance of the supplier. SaaS accounting and ERP vendors have also decided to copy this model using MyPAYE as the payroll engine powering their UI. 

This is the best of all worlds for all. Accounting vendors get a fully functioning payroll engine, a significant chunk of reliable and robust value-add in next to no time, enhancing the brand proposition with no distraction from core competencies. Users get the same user experience (UX) as their preferred accounting/ERP solution. And the payroll vendor gets exclusive access to customers that get it and want it. Expect significant announcements around this from MyPAYE in the very near future. Also don’t expect some because, some want keep the relationship quiet as they proceed to add their brand. 

2015 is a long way off. The scenario above certainly subscribes to the prediction on AccMan. By then the leading accounting vendors may well have accumulated a treasure trove ready to invest and acquire as they cement their positions at the top of the accounting tree. They may well buy their own payroll apps as well as other complimentary functionality. It's certainly more likely than bothering to build their own. If the situation arises, I’m sure said vendors will buy and let it run as a separate department (as Xero intend with PayCycle) for all the reasons described. Of course they may share resources when required, but I can’t emphasise enough, payroll is a very different beast. Meantime, I suggest they can get all the payroll functionality they and their users need without investing any funds or resources. 

Interestingly there are three vendors in the UK that have swum against this tide. Using (wasting) precious resources on what the much better resourced, more successful players simply don’t. Two of the three have had some commentary very recently. I think it’s a safe assumption that they don’t agree with my point of view. Do you agree with them or me? Tell us all and why below! The three vendors in question are what you might call 2nd and 3rd division players - my terminology based (as always) on 'published' paying user numbers. I believe their mixed fortunes are more than a coincidence and validate what I am saying. More about Clearbooks, Liquid Accounts and Liberty Accounts to follow. 

As indeed, there will be much more about much more from here on in. Meanwhile, I’m sure you’ll agree there is plenty here to get your teeth into. Let us all know your thoughts. Do you agree, disagree or not care about what is written here. Have your say below and/or tell everyone else about this post and catch you again very soon ;-) 

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