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Who Will Be the First $10B Bookkeeping Automation Company?

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    There are about 5.5 million U.S. businesses with more than one employee, most of them using some combination of software and outsourcing to manage activities like payroll and bookkeeping. Which means there are at least 5.5 million dreams of software systems that automatically do all of the work needed to keep the general ledger up to date.

    I’ve heard the joke “Nobody loves their bookkeeper” so many times that the use of machine learning and other AI technologies to automate repetitive, low-value bookkeeping tasks seems like a foregone conclusion. But how will that market develop in the years ahead?

    We may be able to predict where the bookkeeping automation market is headed by looking at the history and dynamics of the payroll services market. Dominated by ADP and Paychex, yet supporting 2,000 niche players, payroll services overlaps with traditional bookkeeping in several ways:

    • Both are “must do” activities for a business. That means the market is large.
    • Both are non-core business activities. That means business owners want to minimize time spent doing them.
    • Both involve sensitive financial information and the movement of money. That means owners must be cautious about who does them.
    • Both have been partially but not fully automated by software. That leaves room for a software plus service model.

    Let’s look closer at the payroll services market and then loop back to the nascent bookkeeping automation space.

    Overview of the Payroll Services Market

    The 800-lb gorilla of payroll is of course ADP, the company founded 70 years ago that today generates $14 billion in revenue and boasts a $70 billion market cap. The next three payroll providers combined (Paychex, Paycom, and Paylocity) represent just $5 billion in combined sales. Despite that concentration, the payroll services market also supports 2,000 niche players targeting specific industries or segments, or supporting a specific accounting software suite.

    Given the diverse needs of millions of SMBs, it makes sense that the payroll market encompasses both one-size-fits-all providers and narrowly targeted niche providers. Digging deeper, the market dynamics are driven in large part by high customer turnover. An SMB might be a happy Paychex customer…until they hire a new accountant who prefers ADP. It’s not uncommon for payroll companies to see 15 to 20% annual churn.

    The churn problem has two important implications. First, reputation is everything. From ADP to the smallest niche player, maintaining and promoting a high NPS score is key to attracting customers to replace those that churn. Second, it’s critical to keep a tight rein on customer acquisition costs (CAC). CAC scalability ensures new customers provide not just growth, but sustainable growth.

    Battle Intuit…or the Bookkeeper Down the Street?

    Millions of SMBs use a combination of accounting software and third-party bookkeepers to manage their finances. Intuit’s QuickBooks dominates the market for small business finance software, claiming 5.6 million small business customers. According to BLS data, there are 1.7 million bookkeepers and accounting clerks maintaining those books.

    A small business might pay $500 annually for QuickBooks but $5,000 to the bookkeeper who keeps it running. Right off the bat, one thing is clear: the smart play for a startup isn’t going after Quickbooks but the 10x pool of spending going to bookkeepers trained to make Quickbooks work. Especially when a lot of that work involves repetitive, low-value tasks perfectly suited to machine learning applications.

    That’s a dynamic we see in other markets like CRM and HR, where a new generation of companies are building automation layers that sit on top of the established system of record (Salesforce, QuickBooks, Workday) aimed at eliminating the manual work required to maintain those systems. Scale wrote about the economics of this strategy in a recent article on the future of the cloud.

    After all, would you rather attempt to outspend Intuit to dislodge 5.6 million QuickBooks customers? Or go after the much larger pool of spending being directed to bookkeepers? All it takes is “software-izing” the bookkeeping services component.

    People + Tech Will Be Key for the First $10B Bookkeeping Automation Startup

    A market defined by more than 5 million businesses spending $5,000 annually can clearly support several large companies. Like payroll services, we expect to see multiple $10B bookkeeping automation businesses emerge alongside hundreds or thousands of niche players focused on specific verticals or software platforms.

    While “automation” is central to this market, we don’t expect AI-only providers to have much success. The simpler AI tasks may be integrated into horizontal applications like QuickBooks and Bill.com, while the more complex tasks may require human involvement for years to come.

    The better play is to leverage AI but supplement your technology offering with people. A software and services offering gives customers an easier transition from their traditional reliance on a bookkeeper. There’s also the reality that fully automated bookkeeping isn’t yet technically possible. Managing the books still requires a lot of contextualizing paper records and categorization judgement calls.

    At Scale, we’re watching for the first truly great bookkeeping automation company, one that provides a differentiated product that completes work automatically. We refer to that level of automation as “Do It For Me” automation. It’s a design approach that builds on SaaS and cloud to enable autonomous software agents that do work for us.

    When no one says “I love my bookkeeper”, there are millions of businesses waiting to write a check to the first next-generation software plus service company offering a better way to keep the books.

    Scale’s Executive in Residence Sanjeev Kriplani contributed to this article.

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