One of the reasons that I originally purchased shares in Xero was due to a comment in their product improvement update. It said:
“All of these improvements are based on customer feedback. We still have lots of work to do and are planning to release further improvements every few weeks. Your feedback is vital to ensuring that we’re working on the most important things first.”
I think this comment captures a few important points about Xero’s approach to software. First, this set of improvements is just one cycle of delivering improvements every few weeks; this allows them to be very responsive to changes such as changes to the GST Act. Second, we can start using these improvements immediately. That is, they are producing working software that the customers can use straight away; this reduces the feedback loop. Third, they are listening to their customers to determine what the customer feels are the most important requirements, and then prioritising on this basis. As a customer of Xero I have noticed that they are very responsive to suggestions or bugs that I point out.
In my experience, developing software in an agile approach leads to significantly better outcomes, with useful and working software developed at lower cost and in less time. I think this is consistent with Xero’s performance to date, since they have produced a very nice and functionality rich SaaS accounting product with a small team and low budget.
In my structured approach to analysis of Xero I have so far focused on analysing the attractiveness of the industry. This includes and will include questions such as: Is it a disruptive technology? Does it lend itself to network effects? What effect will switching costs have on the industry? Is there a first-mover advantage? Subsequent to analysing the attractiveness of an industry, I think the next step is to analyse each competitor’s strengths. In the case of Xero, I believe that their successful adoption of an agile and design-led development approach is a competitive advantage. In my opinion this advantage is one that larger and more mature firms often struggle to replicate, so this could be a sustainable competitive advantage for Xero.
Disclosure: I am a Xero shareholder and one of many delighted Xero customers!