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By Rod Drury, Xero

For decades, big business has been benefiting from global technology investment. The big players like IBM, Microsoft, Oracle and Salesforce.com have focused on building enterprise-scale business technology, finance and business solutions.

By contrast, small business has not seen the same investment historically. Surprisingly, the major players in the small business accounting software market have only between 5 and 10 million small businesses using their desktop accounting packages. This leaves behind millions who still haven’t used any accounting software at all.

The World Bank says the value of small businesses across most economies is immense: they make up around half of all gross value added (GVA), one-third of the labour force, and 97 per cent of all business entities.

Technology shift

The global technology industry has witnessed its first inflection point away from ‘big business tech’, with major cloud platforms digitising consumer technology. For example, there is now Uber for transport, Airbnb for accommodation, Facebook for personal social networking, and Amazon for retail and more recently content. 

This has been made possible by cloud-based and mobile consumption of these services. But also, the companies themselves have invested heavily in public cloud infrastructure, high-powered computing, large data-sets, and smart automation.

In the past 15 years, the cloud has made it possible to take big-business technology and make it relevant for small businesses and their advisers. 

Not having to install software on a small-business desktop has fundamentally changed the distribution costs of providing technology to small business. They now have access to a plethora of new web-based services, in many cases giving them better access to technology than large enterprises have.

In 10 years, cloud accounting solutions have matured, with some providing a more sophisticated set of features to desktop software, but with the benefits of anytime, anywhere access and connected mobile apps. This has driven major productivity gains for small businesses, accountants, and bookkeepers.

In early-adopter markets like New Zealand, more than a third of all businesses now run cloud accounting.

What is exciting is that we are now at the next inflection point, which will finally open up adoption of cloud solutions for the majority of small businesses.

AI-driven accounting

The second inflection point is along the lines of the first, focused on consumer technology. The public cloud, high-powered computing, and smart automation across large datasets will now be applied directly to small businesses. 

This will enable the next big step in productivity and make it easier for small businesses to manage their business and do their books and taxes, and for accountants to deliver high-value advice.

Small business accounting will be one of the early industries to benefit from ‘machine learning’ and artificial intelligence (AI) because there are vast amounts of high-value data to train machine-learning engines.

A simple structure

For example, Xero recorded $1.4 trillion of incoming and outgoing transactions in the past 12 months. Early deployments of AI and machine-learning features are delivering results already.

To provide these services to the small-business segment, just as the big consumer platforms did, business software must cross the chasm and get onto a public cloud platform to be able to deliver innovation and automation with global scale. 

That means a single code base, artificial intelligence and machine learning, and ‘server-less’ architectures that increase the speed of deploying automated experiences to small businesses at scale.

These technologies enable several new models:

•  A connected global platform to assist small business owners to be able to operate globally.

•  Dramatic simplification of accounting for small business.

•  Code-free accounting, where small businesses no longer have to worry how they classify transactions. This is the next major innovation that will unlock the total addressable market. The next generation AI-enabled platforms will do that better than most business owners, removing the major complexity that limited small businesses adopting software. 

Addressing the white space

Small businesses don’t necessarily need to know accounting – that’s not their passion. Their passion is their customers, products and services. 

I believe converting the ‘white space’ of small businesses not currently using any accounting software will occur through providing access to solutions that allow them to focus on their passions – but still help them with their business management and accounting needs, and connect them to their advisers. 

Providing those solutions beautifully, via a single code base on a truly global platform, leveraging automation and AI, is the only way to harness and benefit from businesses and their interactions with customers, banks, advisers, and each other.

The second generation of cloud accounting will drive productivity and success for small businesses, and they won’t necessarily need to even know they are doing accounting. Advantages are:

•  Single code base – build and deploy

•  AI and machine learning – smart automation

•  Billions of transactions and connections – rich data to learn from

•  Public cloud infrastructure – ship code once and globally

•  ‘Server-less’ architecture – infinite scale.

The move from desktop software to first-generation cloud has been slow. While cloud accounting is arguably better and easier to use than traditional methods, small businesses still have to do accounting.

The key to unlocking the opportunity for millions of small businesses will be in the second-generation cloud, where automation and AI will create new experiences like code-free accounting, and will become the de facto standard for small business technology.

Cloud will accelerate

With three million small businesses now on cloud, we can be confident cloud accounting is the future. But there is a new generation of small-business cloud platforms that are AI-ready and delivering their first AI features.  

The industry is poised for massive AI-led innovations that will simplify accounting activities for the small-business owner and encourage accountants to scale their practices. Those missing millions are coming.
Be ready.

In the words of Jeff Bezos, founder of Amazon.com, “artificial intelligence is not just in the first inning of a long baseball game, but at the stage where the very first batter comes up . . .”

There’s never been a more exciting time for business software.