Can Xero win the entire practice?

Xero today announced the acquisition of WorkflowMax, a cloud software provider they had previously taken a near 16% stake in.

WorkflowMax is the developer of online job, time and invoice management software that has latterly been extended in scope to become a practice management solution for accountants (and other similar trades).

Xero have long stated their commitment to a "one ledger" strategy: integrated client and accountant side accounting tools around one dataset. This acquisition is a bold move towards implementing this vision.

Traditionally, client businesses have used accounting software such as Sage and QuickBooks to maintain their accounting records. Their accountants have then taken the numbers from this "front-end" software and transferred them into their own "back-end" practice software, to produce properly formatted, compliant final accounts and tax reports for filing with the authorities.

Xero, together with other new new entrants, have disrupted the established "front-end" software market with their online model and innovative features. With the WorkflowMax purchase it seems Xero are now hoping to muscle-in on the "back-end" software business too.

In their Market Release on the acquisition, Xero state:

Not only does it help us win the entire practice, it places us in a very strong position against incumbent providers.

So how far will this bold strategy go?

There are various elements that make up the back-end software used by accountants. Of these, the practice management bit is, I would argue, the easiest. Far, far more complex, and therefore expensive to develop, are the tax requirements. Professional corporation tax and income tax software for the UK is complicated and expensive. Similarly, company secretarial software is not simple stuff.

Xero have produced tax filing software for the New Zealand market (in partnership with WorkflowMax) but I can't see that they would want to tackle tax compliance for lots of other jurisdictions, like the UK and Australia. And the US?

Since the back-end software accountants use is usually integrated around a central database, I would have to question how Xero could disrupt the practice management market without covering tax. Even nailing the final accounts element without the others would mean loss of shared data and the need for re-keying accounts numbers into tax software.

Then again, there are plenty of firms who use "best of breed" software, from different suppliers. In this scenario the shared, central database is not a hurdle for Xero to overcome.

Interesting times ahead.