The other week I was asked to give my predictions through 2015. I hate those questions because 98% of predictions are flat out wrong. So before anyone asks, this isn’t one of those definitive prediction posts. It is more a way of expressing how I see the market shaking out and where I think it is heading in the near future. I could of course be completely wrong. By the way, you don’t have to agree with this segmentation. It just happens to be my take and it is not meant to be comprehensive but a sampling of solutions I comes across regularly.
One of the easy mistakes to make is assuming that all SaaS/cloud solutions are equal and that they can be bucketed in one lump. That’s not the case. There are numerous twists on the story and the market is turning out to be much more complex and messy than many might imagine. Instead, what is emerging are variations on a theme that create enough difference for me to put different vendors into different categories.
Some runners and riders – a fly by
The easy one to start with is the SME book-keeping cum accounting segment. This is currently dominated by KashFlow, Xero, BrightPearl and FreeAgent (all of which except KashFlow sponsor AccMan – see the sidebar.) They are not full blown accounting solutions and neither do they pretend to be – at least not at this stage. However, they do all offer a solid solution for their target SME markets. There are plenty of others like SageOne and ClearBooks trying to make a name with varying degrees of success. But then I believe buyers should also consider those from further afield like Kashoo. It is after all a global market.
Next we have those that are more like solutions the accountant in business would expect to see. In this group come e-conomic, Liquid and Twinfield. If I was to broaden the market range then I’d also include FinancialForce, Business ByDesign and NetSuite.
Then there is a category of vendor that is more like a firm of practitioners that leverage the cloud to create a different business model. Here we have Crunch although you could conceivably add Brooksons and SJD into the equation.
Next comes the category of business software run in the cloud which includes accounting elements. Here I’d count WinWeb and Zoho.
Finally there is the add-on and productivity market. This is one that has concentrated upon filling in gaps or providing adjunct services, mostly to the SME group. There are plenty of players here. KashFlow has a good directory of these services grouped according to functional type such as payroll, CRM, payment processors etc.
What does it mean?
The SME market is the most interesting for several reasons. First, even though I’ve grouped four larger vendors into one category, they split again into verticals. BrightPearl and FreeAgent are clearly carving out places in the retail and contractor markets respectively. If you look more closely at FreeAgent’s site and especially the blog, you find they are steering heavily towards the geek crowd within the general ‘contractor’ category. At one time it looked like there would be a pricing race to the bottom but that hasn’t turned out to be the case. At an average price hovering around the £17-20 per month mark, they don’t come cheap as in ‘cheap as chips.’
Similarly, I see add on solutions like Freshbooks and ReceiptBank charging in the £10-20/month range. How do they do it and still get people to choose cloud over established on premise solutions? The base accounting solution is a commodity so those vendors have to continue adding features and delighting customers. They’re effectively disrupting themselves. Add-on partners come in the ‘must have’ category like myPAYE, for which there is no premium and then the likes of ReceiptBank, which solves a major headache – expense handling for which customers happily pony up. People are more than willing to pay a premium when they can see immediate value. (I’ll talk more about this in a ReceiptBank specific post.) In between are the payment processors that fullfil a huge need but often work on a per transaction cost basis. All of these add cost but spread their market among a number of the main accounting players.
In the middle area I outlined, there is no reason to suppose that these providers will not flourish. They are tackling larger and more complex issues but there will come a point when those same providers will need to extend their offerings, either through partnering or building out their own capabilities.
At one time I thought SJD would be threatened by the newer class of service provider but so far that hasn’t proven to be the case. It seems that the combination of some cloud like services tied to specialist professionals plus a client group that may never be interested in real time information is enough to ensure their continued success. My lingering doubt is whether that market is sustainable. If what I have seen in the market the last few weeks is anything to go by, the next generation coming through is different to the last. It does want more and it is much more tech savvy. It may take a few years for the market to show signs of real change but I can no longer ignore the likelihood that some parts of the market will expand while others contract. Much depends on the extent to which the current crop market beenfits while showcasing happy customers.
- Over time, it is conceivable that the business solutions providers could dominate the market. But in order to achieve that level of penetration, they will need to woo the professional advisor and likely provide them with portals and dashboards. Whether anyone likes it or not, the professional is still the most important route to market as they have the most influence over the end buyer.
- I would like to see more verticalisation. BrightPearl for instance was finding the going tough until it hit upon the idea of managing many of the moving parts around small retail. Since then, things have gone better. I like the way WinWeb is finely segmenting a group of contractor like markets. Will others follow suit? Only they can know and especially since they have the data which tells them which segments are more attractive.
- Is there room for three (or four) well known players to dominate the market? History says no. It’s usually a case of one dominant player with a clutch of also rans who lag some considerable distance behind the leader. Check how Sage wiped everyone out in the 90′s and early 2000′s as did Intuit in the US. But then this is a different market environment where there are obvious good competitors and where at times, it is a toss up which makes for the better fit. Plus a more tech savvy generation that is as diverse as the old.
- For some markets, the profession will decide. For others, vertical expertise will rule the day. That still leaves plenty for others but they won’t get the mega valuations of the winners. That in turn means that investors will either have to be content with good dividends or cash out to others that can take the model forward in some way.
- Vendors should worry about the rate of switching and whether they are insulating themselves sufficiently against customers who thrive and outgrow the current offering. More on that later.
In the meantime I don’t think customers should be concerned. Competition is good and there’s plenty about. There is an abundance of great solutions wherever they are in the decision chain and wherever they feel most comfortable in adopting solutions.