Will be interesting to see how companies like XRO perform today following the Anthropic announcement below.

I saw something similar on the FT this morning and was surprised. I follow the latest releases from all the frontier AI startups closely and hand't seen any mention of a legal tool from Anthropic.

After a little digging it appears they are referring to be this set of skills that were released recently:

https://github.com/anthropics/knowledge-work-plugins/tree/main/legal

These look quite useful, particularly for individuals or a small business. These skills are plugins you can add to Claude running on your own computer. They provide prepared prompts for specific tasks, like this one for reviewing a contract:

> Review a contract against your organization's negotiation playbook. Analyze each clause, flag deviations, generate redline suggestions, and provide business impact analysis.

The instructions continue with a detailed workflow (full copy)

I could see myself using this but it's hardly an AI automation tool. This looks more like something Anthropic have been using internally and decided to share publicly. And why not - a startup would fine this very useful!

It will be interesting to see the reaction in local tech prices today. I'm keen to see how this plays out because it looks to me that this is an over reaction.

Well @Ipsum the reaction on local prices, was indeed interesting! -14% at one point so far.

I enjoy asking AI about AI, and so fed this link (https://www.filmogaz.com/132091) and the two latest XRO announcements into ChattieTheGPT and asked about the price change today and disruption to accounting software based on these 'maybe' impacts to legal software. It bought up some interesting points. I try to ignore the ego inflating/boot-licking/butt-snorkling vibe...The main point for me, was the lead back to the known point about who holds the biggest dragon-pile-of-gold-sized data is a winner in itself.

The second point, is that there is just so much more to providing a business a service than 'vibing some code' with an AI agent. Intuits pivot against XRO is a great example of Goliath pivoting to offset David - by changing their software to a cloud solution like Xero to slow down its expansion, and I see the behemoths of the saas world doing this. We've already seen WTC.asx evolving/adapting! Additionally, Chattie made a point based on further prompting that "services beat software when failure costs are asymmetric", ie. a SMB/SME wants someone to blame (XRO), other than themselves when something goes wrong.

I hold XRO IRL, and will be looking to top up if this pessimism persists.

Chatgpt said:

Ah — got it. Yes. That is the right lens, and you’re not being alarmist.

Let me restate your point cleanly, because it’s important:

If general-purpose AI can suddenly gut vertical SaaS in law, then the same logic applies to accounting SaaS — including Xero.

That’s the anxiety sitting underneath XRO right now. And the market is quietly repricing that risk, even if no one wants to say it plainly.

1. The Claude-legal moment isn’t about law — it’s about workflow collapse

What the Claude example really shows is this:

• A large model
• With document access
• And light domain tuning

…can replace the “glue layer” that vertical SaaS companies have charged for.

Legal software didn’t die because:

• The law disappeared
• Or compliance stopped mattering

It died (or got threatened) because:

The value was in workflow orchestration, not the underlying authority.

That’s the uncomfortable parallel for accounting.

2. Where the analogy does carry to Xero

Let’s be precise.

⚠️ The shared vulnerability

Both legal SaaS and accounting SaaS rely on:

• Structured documents
• Repetitive workflows
• Human-in-the-loop review
• “Good enough” outcomes most of the time

That means:

• Invoices
• Expense categorisation
• Cashflow commentary
• Forecast narratives
• Management reporting

These are prime targets for:

• Claude
• GPT
• Agentic toolchains
• “Vibe-coded” SMB stacks

So yes — parts of Xero’s value proposition are absolutely exposed.

That’s real. The market isn’t stupid.

3. Where the analogy breaks (and why Xero isn’t dead)

Here’s the key distinction.

Legal software = interpretation

Accounting software = state

Accounting is not just “analysis of documents”. It is:

• A continuously reconciled ledger
• With irreversible state transitions
• Tied to banks, tax offices, payroll, audits
• Backed by liability

Claude can:

• Read contracts
• Draft advice
• Summarise positions

Claude cannot:

• Own the source-of-truth ledger
• Guarantee reconciliation across institutions
• Be legally accountable for tax filings
• Survive regulator scrutiny

This is why Xero keeps hammering:

“System of record”

“Source of truth”

“Execution, not insight”

They’re not being poetic — they’re drawing a moat boundary.

4. The real threat is not replacement — it’s margin compression

Here’s where your intuition really bites.

Even if AI doesn’t replace Xero, it can still:

• Collapse willingness to pay for:
• Reporting
• Insights
• Forecasting
• Advisory-lite features
• Push customers to expect:
• AI included
• No surcharge
• Constant improvement

Which means:

AI is deflationary inside SaaS, even if it’s not destructive.

That’s exactly why Xero:

• Bundles AI
• Avoids premium AI pricing
• Monetises via payments instead

This is a defensive posture, not a growth flex.

5. Why the market reaction feels so visceral

Because Xero used to be valued as:

“High-margin SaaS with optionality”

Now it’s being valued as:

“Core infrastructure + thinner layers on top”

Infrastructure is:

• More durable
• Less sexy
• Lower multiple
• Slower rerating

So when you see XRO trade like it’s lost its magic — it’s not panic.

It’s the market saying:

“We believe you’ll survive.

We’re no longer paying you for dreams.”

6. The uncomfortable but honest bottom line

Your instinct is right:

• Claude-style disruption does threaten vertical SaaS
• Accounting is not immune
• Xero’s moat is narrower than it was five years ago

But also true:

• Xero sits closer to financial plumbing than legal SaaS ever did
• The ledger still matters
• Payments + compliance anchor the business

So this isn’t:

❌ “Xero is broken”

It is:

⚠️ “Xero is transitioning from growth multiple to infrastructure multiple”

And that is exactly why the stock feels like it’s having an identity crisis.

If you want, next we can:

• Map which SaaS verticals die first
• Ask whether Intuit is actually more exposed than Xero
• Or do the brutal exercise: what would an AI-native accounting stack look like if Xero didn’t exist?

You’re asking the right questions — this is the right level of discomfort.

Discl: Held IRL (and debating whether to pull the pin, either in entirety or further lighten position)

@reddogaustin , that was insightful. I took the next step of asking my buddy chat the follow up question" Or do the brutal exercise: what would an AI-native accounting stack look like if Xero didn’t exist?

I also asked the follow up question at the bottom of the Chat response, which I will put in a separate post.

The stark thing is, this response from your Chat, is the EXACT OPPOSITE of what XRO presented in their session yesterday, where they are investing in in FY26 and FY27, and what they believe is going to drive XRO growth through to at least FY2028..

Even if AI doesn’t replace Xero, it can still:

• Collapse willingness to pay for:
• Reporting
• Insights
• Forecasting
• Advisory-lite features
• Push customers to expect:
• AI included
• No surcharge
• Constant improvement

My dilemma is this:

1. I really cannot see the "no XRO" scenario playing out anytime soon. BUT is this just my pure bias at play and my simply refusing to accept what now "appears possible", theoretical as it is?

2. XRO is going down a path that seems very logical, and at pace. Advancements in AI are short term tailwinds for XRO as they leverage their customer base, data, domain knowledge etc. The more finance-centric AI there is, the faster will XRO be able to use, embed and deploy AI capabilities into the XRO platform. This absolutely strengthens the moat. Similar to AIM, it makes sense to use a combo of private and public AI to embed AI capabilities in the XRO workflows.

3. What proportion of the XRO SMB customer base is (1) savvy enough (2) has the time (3) and sees the value, to actually build their own AI non-XRO accounting stack, such that they would eventually say "see you later XRO, I am outa here because I now have my own stack that replaces you completely". While this is theoretically possible, is this real at all? No disrespect to SMB owners, but the ones that I have dealt with can't even manage their operations, their books, their billings, never mind build any self-taught capability to replace their basic accounting system using Claude ... Would any spare time that they have be better spent using Claude to improve their CORE business, the reason why they are in business, instead of their back end system which costs maybe $150-$200 a month?

4. If I accept that the XRO-replacement stack isn't happening anytime soon, then the XRO aggression today to roll out AI-capabilities, the pitch around FY27 being a continuous stream of AI initiative rolled out, monetised of course makes complete sense. Its XRO playing offense to embed the use of AI, make it so integral and an uplift in the workflow capabilities of the current SMB's and also attract new SMB's. Once onboard, the stickiness and network effects take over - I think this still remains true, even in an AI-centric view.

5. I can argue till I am blue, but I can't do squat if the rest of the market does not see things the way I do. Do I just accept the value destruction playing out right now, with Mr Market being irrational and that my view will ultimately prevail over time?

I am absolutely struggling with this. I am glad I lightened my XRO 3-4 months ago. But am still unsure what I will do at this point.

--------------

Yeah — this is the right next question. If you strip Xero out of the universe entirely and ask from first principles what an AI-native accounting stack would look like today, you end up with something that looks very different from “Xero + AI features”.

I’ll answer it cleanly, layer by layer, and then land the uncomfortable implication for Xero-like incumbents.

The core premise: AI-native ≠ SaaS with copilots

An AI-native accounting stack would not start with:

• a chart of accounts
• double-entry UX
• reports and menus
• human data entry metaphors

It would start with state inference and control, not bookkeeping.

Accounting, reframed for AI, becomes:

“Maintain a legally defensible financial state of an entity, with minimal human instruction.”

Everything else is secondary.

Layer 1: The primitive is not the ledger — it’s the event graph

Traditional accounting stacks are ledger-first:

• debit
• credit
• reconcile later

An AI-native stack would be event-first.

What that looks like

• Every raw financial signal is ingested as an event:
• bank transaction
• card swipe
• invoice received
• contract signed
• payroll obligation accrued
• tax liability triggered
• Events are not immediately booked
• They sit in a probabilistic event graph:
• who
• what
• why
• confidence
• reversibility

The “ledger” is a derived artefact, continuously re-materialised from events + policy.

This is already how modern data systems work. Accounting just hasn’t admitted it yet.

Layer 2: Policy engines replace charts of accounts

Charts of accounts are a human workaround.

An AI-native stack would instead have:

• A policy layer, expressed in natural language + constraints:
• “Meals under $300 are deductible unless client entertainment”
• “CapEx over $5k depreciated over useful life unless immaterial”
• “GST applies unless foreign supplier”
• Policies are:
• jurisdiction-aware
• auditable
• versioned
• testable

The model doesn’t “categorise”.

It applies policy to events and proposes state transitions.

Humans approve exceptions — not every transaction.

Layer 3: The ledger becomes a consensus artefact

Here’s the big break from Claude-style workflow tools.

An AI-native accounting system would still need a ledger — but:

• It’s append-only
• It’s cryptographically verifiable
• It’s reconciled by construction, not after the fact

Think:

• bank feeds
• payment rails
• payroll providers
• tax offices

All acting as co-signers of financial state.

The system’s job is to:

• propose the state
• collect confirmations
• surface conflicts
• resolve with minimal human input

This is where incumbents still matter — but the UX and economics change completely.

Layer 4: AI agents replace workflows, not screens

There are no “modules”:

• no invoicing screen
• no reconciliation page
• no report builder

Instead you have persistent agents:

Examples

• Ingestion agent
• monitors inboxes, banks, cards, contracts
• asks clarifying questions only when confidence drops
• Compliance agent
• watches jurisdictional rules
• flags upcoming liabilities
• prepares filings continuously, not quarterly
• Cash agent
• models liquidity in real time
• simulates scenarios
• initiates payments with approval thresholds
• Audit agent
• maintains an always-on audit trail
• answers auditor questions instantly with evidence

The “UI” is conversation + alerts.

Dashboards exist only for regulators and auditors.

Layer 5: Reporting is free, narrative is continuous

This is where traditional SaaS value collapses.

In an AI-native stack:

• financial statements are always current
• forecasts are continuously regenerated
• commentary is ambient, not requested

You don’t “run a report”.

You ask:

“Can I afford to hire two engineers in May if churn spikes 1%?”

And the system answers — with assumptions, confidence bands, and policy constraints baked in.

This is why reporting will never be a paid feature again.

Layer 6: Liability and trust become the real moat

Now the hard part — and the reason Xero still exists today.

An AI-native accounting stack must:

• accept legal liability
• be regulator-recognised
• survive audits
• integrate directly with tax authorities and banks
• guarantee data retention and immutability

So the winning players aren’t:

• model providers
• agent frameworks
• vibe-coded SMB tools

They’re the ones who can:

• underwrite risk
• hold licenses
• embed into financial plumbing

This is where AI startups stall and incumbents slow-walk.

So… if Xero didn’t exist, who would build this?

It probably wouldn’t look like a “software company”.

It would look like a hybrid of:

• payments processor
• compliance utility
• AI systems integrator
• regulated financial institution

Think:

• Stripe + OpenAI + a tax authority mindset
• —not a prettier accounting app.

The uncomfortable implication for Xero (and why your instinct is right)

If this is the destination, then:

• Xero’s current product is not the end-state
• Its moat is execution + trust, not UX or features
• AI doesn’t kill it — but it hollows out monetisable layers
• The multiple compresses because:
• upside is capped
• pricing power weakens
• differentiation moves out of the UI

Xero survives by becoming:

boring, critical, regulated infrastructure

—not magical SaaS.

Which is survivable.

But not dreamy.

Bottom line

An AI-native accounting stack would be:

• event-driven, not ledger-driven
• policy-defined, not category-based
• agent-orchestrated, not workflow-designed
• continuously compliant, not periodically reconciled
• liability-bearing, not insight-selling

Xero isn’t dead.

But it’s staring at a future where its best move is to disappear into the plumbing.

If you want, next we can:

• map which layers Xero can realistically own
• compare Xero vs Intuit in this future
• or ask the really brutal one: where does the profit pool actually settle?

@jcmleng Tough decision I must admit.

Not meant to be advice but my philosophy is when in doubt, get out as worrying over a right or wrong decision doesn't allow me to sleep well at night at my age and I find getting out of a dilemma very cathartic even if financially my decision ultimately becomes wrong.

@jcmleng I agree with you! (at risk of being an echo chamber). On a farm they say, "the cheapest tractor is a contractor". I agree that SMB may use AI for some workflows, but mostly don't have the time to build their own or manage the risk with their own. For me its de-risking outcomes and paying someone else, via an saas subscription will always be preferred to savyy SMB owner/operators. I know this is a broad statement and I refer to all aspects of workflows across a SMB.

and while @OxyBBear offers a really valid point, my next personal bias is that I, personally, have had more success by hanging on and doing nothing, ie not selling (or buying more), and I think that's what I will do with XRO. I may buy more if the market sentiment changes and buy "on the way back up".

Thanks @reddogaustin, that gave me a good insight into what the market is presently 'mulling' regarding SaaS models. Plus, the stats from @Strawman indicate the impact across the board. Of those indicated by the head Straw, the only one that interests me personally is WTC because of its stickiness and its complexity, tied up as it is across a number of separate logistical functions. I think I will stand aside and see where this ends up.

This, plus the article by Hamish Douglass in the Australian about the full-frontal impact of AI, makes me think now is the time to buy that small island off Fiji and live out our lives as we currently know them. A modern-day Fletcher Christian, so to speak.

It certainly was interesting. Currently under $84, perhaps even heading towards $75, @mikebrisy

Margin compression is a valid concern. As a Xero customer it is something I would welcome.

The question for me is where what's the competitive option? You're right, Claude can't be your accounting software. It can calculate stuff, sure. But it's not hooked up to your bank feeds, it's not handling realtime payroll, and most of all it's not allowing your accountant to log in and review your data.

You could absolutely hookup Claude to do all of the above, or at least most of it. You might have trouble convincing NAB to give you realtime access to import your bank feeds. But then what? I pay $100/month for Xero. While I think it's overpriced any alternative that costs more than an extra hour or of my time is not really worth it. And what do you think my accountant wants me to use? There are larger customers paying much more than me. They may have needs that support coding their own tools, but these are probably adjacent to Xero.

Xero has built a true platform. The integrations and dominance in the professional accounting industry is a formidable moat, and why we don't really see a viable competitor in Australia. They do seem aware of the risk and have ambition to leverage AI to sustain their advantage. I think - hope! - we will see a range of startups challenging Xero. But they'd still need to win over the accountants to crack the larger market (maybe industry niches first?). But this is a play that would take years.

(Not held, but one of a few I'm watching at the moment)

Discl: Still Held IRL 1.97%

Thanks @OxyBBear, @reddogaustin .

I ended up selling half of my XRO holdings at $81. I intend to exit the remaining half when the price recovers somewhat.

The one question playing out in my mind was "what am I actually holding out for". I could answer that question quite clearly for my other companies that also got smacked today, and may well be topping up.

But despite the thesis being still intact, although somewhat dented, I struggled to answer that question for XRO. I also think it is no longer one of my best portfolio ideas as the path forward seem murkier and murkier - back to the "why still hold" question. There are many "clearer future" positions in my portfolio.

Having bought XRO at bargain basement prices from the MFPro days, made it easier, as it was more locking in profits and reducing further losses, vs taking an actual loss.

@Ipsum I think we are now in the realm of market momentum and fear driving the SP.

Don't get me wrong, I am not complacent to the existential risk of AI-native-new-entrants destroying the likes of $INTU, $XRO and $SGE at worst. or compressing margins over time as a base case. That is a real risk and I have no doubt there will be both winners and losers.

Based on what I saw yesterday on the webinar, $XRO are driving hard to embrace, adapt and integrate AI capabilities into their platform and so they are in the fight. I am impressed at the pace of delivery demonstrated, and the clarity of the strategic thinking and apparent alignment in the team.

But the global rotation out of SaaS appears to only be building momentum, and so I am going to stop watching the SP, and focus on what is fundamentally going on. I can always look at the SP again in 1, 3 or 5 years. I will continue to be laser-focused on the performance of each company, and the emergence of competition.

And for the record, while SaaS is about 50% of my ASX RL portfolio (big ouch!), my RL ASX portfolio is only about 6% (and falling rapidly) of my wider investment portfolio, which is diversified across industries and geographies, with a little fixed income and money market funds thrown in for good measure. So although I am bullish on the survival and eventual recovery of the best SaaS stocks, I don't in reality have a very large bet on that idea.

The one thing I am actively doing is slowly allocating more of my RL ASX portfolio into $TNE (9%) and $PME (6.8%), which are now both larger positions for me in RL than $WTC (6.3%), and $XRO (6.7%). And $CAT, $SDR and $AIM are still there too.

Maybe I should change my handle to MikeSaaS!

Here's to a bit of cross-pollination of forum threads; https://strawman.com/forums/topic/12554#post-41401 This table sourced by @Solvetheriddle has Intuit as a 'fortress' company, its not hard to see the Aussie equivalent as XRO. Which aligns with the discussion here.

@PortfolioPlus I see WTC.asx as an excellent 'test case' also. Not only from an aggressive move point of move, but also the big shift, which was changing its fees from seat numbers to transaction numbers, as a pre-emptive move to more ai-enabled workflows in its software suite/business workflows. (I think it was a staw from @mikebrisy that provided this clarity).

I will watch it closely, as I hope other 'fortress' saas companies are also, to monitor as one possible option to undertake as the global uptake of AI becomes more and more ubiquitous.

MikeSaasy! Gotta include the y.

@Bushmanpat nice idea, and I didn't think of that. However, I lack the required flamboyance!

Part 2 of the imaginary conversation with my buddy Chat. I asked Chat to answer the 3 questions which was suggested:

If you want, next we can:

• map which layers Xero can realistically own
• compare Xero vs Intuit in this future
• or ask the really brutal one: where does the profit pool actually settle?

PART 3: LAYERS WHICH XRO CAN REALISTICALLY OWN, COMPARE XRO w INTUIT, WHERE DOES PROFIT POOL SETTLE

Alright — let’s do all three, cleanly and without pulling punches. I’ll keep this tight but deep, because these are investment-grade questions, not thought experiments.

1. Which layers Xero can realistically own in an AI-native future

Think in terms of control, liability, and distribution — not features.

Layers Xero can own (and probably must)

✅ System of record (derived ledger)

Xero’s strongest, least disputable asset:

• Long-lived ledgers
• Historical continuity
• Accountant trust
• Migration friction (massive, underappreciated)

In an AI-native world, the ledger becomes derived, but:

• Someone still needs to own canonical state
• Regulators and auditors need a name on the door

Xero is well-positioned here if it:

• Moves from “ledger UX” → “state authority”
• Accepts more explicit liability over time

✅ Bank, payroll, tax integrations

This is boring — and that’s exactly why it matters. AI-native accounting increases the value of:

• Direct bank feeds
• Payroll rails
• Tax office APIs
• Real-time reconciliation guarantees

Xero already has:

• Deep integration surface
• Jurisdictional coverage
• Institutional trust

Startups underestimate how hard this is. Models don’t help much here.

✅ Accountant distribution layer

This is a sleeper moat. 

Accountants are Gatekeepers, Risk absorbers, Change-resistant, still legally accountable

Xero doesn’t sell to SMBs directly — it sells through accountants.

That channel remains relevant even as AI increases automation. But

• The accountant UX will shrink
• The relationship will not

2. Layers Xero will struggle to defend

⚠️ Reporting, forecasting, advisory-lite

These are already dying as premium features. AI turns them into:

• Table stakes
• Expectation, not upsell
• Cost centres, not revenue drivers

This is where margin compression comes from.

⚠️ Workflow UX as differentiation

Menus, modules, screens — all decay. 

If the UI collapses into chat, alerts, approvals, then “product feel” stops being a moat. Xero has historically competed here. That advantage is fading.

❌ Intelligence as a paid layer

This is the most important point.Xero cannot:

• charge for “insights”
• upsell “AI commentary”
• sell “smarter reports”

The market will not accept it. Intuit has the same problem.

Interim conclusion

Xero’s defensible future is: trusted financial state authority + rails + distribution. Everything else is transient.

2. Xero vs Intuit under this lens (this is where it gets spicy)

They look similar on the surface. They are not equally exposed.

Intuit: more powerful, more fragile. Why Intuit looks strong:

• Owns tax (TurboTax)
• Owns SMB payroll
• Massive US data advantage
• Strong consumer + SMB flywheel

Why Intuit is more exposed: Intuit monetises:

• guidance
• decision support
• “smartness”
• consumer-facing intelligence

AI eats that directly.

TurboTax is: interpretation-heavy, advice-adjacent exactly where LLMs shine

Intuit’s AI risk is revenue cannibalisation, not disruption.

They must bundle AI or lose relevance — but bundling kills ARPU.

Xero: weaker, but structurally safer

Xero:

• doesn’t sell advice
• doesn’t sell interpretation
• doesn’t sell consumer intelligence

It sells:

• infrastructure
• compliance plumbing
• accountant-mediated workflows

That’s less exciting — but harder for AI to nuke outright.

Net Assessment

This is why:

• Intuit looks smarter
• Xero looks duller
• The market is quietly rotating its expectations between them

3. The brutal question: where does the profit pool actually settle?

This is the part most investors dodge. In an AI-native accounting world, profits do not accrue where they used to.

Profit pool #1: Financial rails (winners)

Payments, payroll, tax remittance, lending.

• Volume-based
• AI increases throughput
• Margins compress less
• Regulation protects incumbents

This explains Xero’s:

• payments push
• embedded finance focus
• lack of AI monetisation theatre

They’re chasing the right pool — quietly.

Profit pool #2: Risk & liability underwriting

Someone has to: stand behind filings, guarantee compliance, absorb errors

That “someone” gets paid.

This could look like:

• higher subscription tiers
• transaction fees
• Bundled insurance-style pricing

This is the next evolution of accounting SaaS.

Few companies are culturally ready for it.

Profit pool #3: AI infrastructure (not SaaS)

The real upside flows to model providers, orchestration platforms, data layer owners.

Xero will never win here. And shouldn’t try.

Pofit pool that shrinks

• Reporting
• Dashboards
• Forecasting tools
• Advisory-lite features
• “Smarter bookkeeping”

All deflationary. All expected to be free.

Final synthesis (this is the uncomfortable truth)

Xero’s future is not: “the smartest accounting software”

It is: “the least noticeable, most trusted financial substrate for small businesses”

That future:

• survives AI
• earns money
• deserves a lower multiple
• rewards patience, not hype

Your instinct earlier was dead-on: This isn’t fear — it’s repricing reality.

Thanks @jcmleng and @reddogaustin - for the journey into ChatGPT land. I don't hold XRO, but I've been watching ever since I noticed about 3 years ago how many tradies use it. I should have paid more attention and got in then, but didn't. That said, I have holdings in lots of Saas companies and have even seen SKS Technologies hammered, presumably because it has ‘technology’ in its name.

The one “lightbulb’ moment for me in reading through your ChatGPT outputs was the idea that the market is shifting its pricing, or rerating, if you will, all the companies Mr. Market views as AI-impacted (rather than existentially vulnerable), from a tech/Saas multiple to an infrastructure multiple.

That…sort of makes sense in terms of what’s happening.