Skip to content

Changing of the guard

Regular readers will know that we’re fascinated with business strategy, especially how technology changes business models. As one of very few early stage SaaS companies that’s public, our numbers are out there for all to see.

Right now there’s an intriguing business scenario playing out in Australasia. The combination of MYOB and BankLink has been the powerhouse of accounting small business software in this part of the world for more than a decade. Now it’s been reported that BOTH are up for sale. This has huge implications for the tens of thousands of small business owners and accountants in this part of the world.

Australian accounting software provider MYOB needs no introduction, but BankLink is not well known outside of the accounting industry. It’s a real New Zealand success story. BankLink provides banking feeds to accountants and business owners that allow accountants to process books on a cash basis, managing hundreds of thousands of bank accounts.

Last week the AFR reported that MYOB had failed in its bid to buy BankLink and that MYOB was looking to be acquired (again) having not found institutional support for a relisting on the ASX.

It’s understood Archer has terminated discussions with BankLink New Zealand about buying the business and folding it in with MYOB, Australia’s biggest accounting software provider.
As the story goes, PwC-advised BankLink, which is a supplier of live bank feeds, was seeking a higher price than the $NZ100 million ($80 million) tabled by Archer.

Now the deal has bitten the dust, it’s believed Archer Capital will start seriously considering strategic options for an exit of MYOB

And Merger Market followed up the story with comments from BankLink founders:

“After 25 years, BankLink’s owners are looking to pass on to another generation outside of the family.”

This morning the AFR reported:

Bain Capital and Kohlberg Kravis Roberts & Co. are among the potential buyers for Australian software maker MYOB, Reuters reported. A sale of the company could fetch around A$1 billion. MYOB is owned by Archer Capital and HarbourVest Partners, private equity investors that picked up the company in 2008 for roughly 450 million Australian dollars.

And then this from Merger Market today:

An Australian accounting software and services company, could be interested in Archer-owned MYOB, depending on price, said Reckon CEO Clive Rabie. After MYOB failed to acquire New Zealand-based accounting services provider BankLink during the week of 1 August 2011, Archer Capital and HarbourVest Partners LLC hired UBS to advise on the sale of MYOB, as reported.

You can deduce from this that thousands of Australasian small business customers are going to be sold to a new business owner. It also potentially marks the end of the old Windows desktop software model in Australasia.

Some background

The last generation of small business accounting software – the Windows generation – was won by three companies around the world. Intuit in the USA, Sage in the UK and MYOB in Australia. They cracked the model of retail distribution for installed software. They shared a large chunk of the upfront box price to the retailer and grew their revenue by gaining support contracts for maintenance, and improved their profitability by pushing that support to low cost fulfillment centers.

As public companies they acquired the surrounding companies in their space. Now 15 years on they are an aggregation of quite dated products. Traditionally if a new entrant gained market share or innovated, the incumbents acquired them and everyone was happy – except perhaps the end customers who became accustomed to not having innovation.

When setting up Xero we believed that the internet changes everything for small business accounting, and that a well funded new entrant had a chance of gaining market share by going for a pure online model. It takes a while to build such a big application as accounting and so far our strategy appears to be working.

Public company as a SaaS strategy

As part of our business strategy we decided to skip the venture capital stage and go public early. We did this for several reasons.

  • We needed 50 people from day one, therefore we believed we needed at least $15m to fund the business.
  • We could possibly have raised that from venture capital in Silicon Valley, but for an early stage company to do that we would have had a valuation not much more than $15m and the business would have been quickly sold so the VCs could make their money.
  • We wanted to build a long term business, rather than just build up a technology asset and sell to a larger company. We’d sold businesses before as individuals, so with Xero, our senior team wanted to experience building a true global business of scale.
  • We love small business. We feel a responsibility to make business more fun and make small business owners more productive. We get a huge kick hearing how much easier we’ve made the admin chores and that we’re getting normal people excited about technology.
  • We also believe that for the SaaS industry, where your customers bet their business on you, being a public company gives a lot more transparency. Private companies are likely to be sold once they show their potential – which we think, makes it hard for end customers to trust that you’ll be around for the long term.
  • As an entrepreneur I like that being public allows us to have more chess pieces for strategy. We can also be on the buy side, bringing more smart people into our team such as our recent acquisition of PayCycle.

So it felt right to become a public company. It gives us the resources to do things properly and build a great team. The results are coming through.

The cloud disruption

We’ve also seen a fundamental change in the industry which has been traditionally split in two. Client side accounting and accountant side accounting. The large providers sell products to both sides of the industry. These products have often come from different acquisitions, so are different codebases and file formats. Effectively the vendors have ‘double dipped’ by selling software to a small business to do its books and to the accountant to process the same set of data.

Over the last few years we’ve got the small business and the accountant on a single, shared, version of the data – we call it the Single Ledger.  And over the last year we’ve been rolling out accountant side functionality. This is incredibly disruptive to the industry. The roadmap the incumbents are delivering to accountants is expensive early 2000s style client server software, with dedicated servers and support. Cloud software is taking the cost away for the accountants.

At Xero we provide the accountant side software for free – why should the end customer pay twice? This is just a logical benefit of the cloud but a fundamental change to the industry. $10,000, $40,000 or even a $1,000,000 in annual licensing and support is what the accounting firm would expect to pay – this is now free. The Cloud wins.

Impact on incumbents

MYOB

While we’ve been on our journey, the incumbents have been going down a very different road. As stated above MYOB has been owned by private equity firm Archer Capital for the last two and half years. The private equity business model is to raise the economic value to the asset and sell it quickly. So MYOB acted logically under a PE model and cut costs to the bone, reduced investment and raised prices. The risk of this strategy is alienating customers. If you don’t have competition that strategy may even work, but I don’t think they understood how quickly the SaaS competitors would mature and grab market share.

The incumbents have also taken a compromised technology strategy. With their sunken investments in client side technology they have moved to a synchronization between desktop and online rather than the Single Ledger strategy. This is difficult and expensive to pull off and we believe will accelerate the adoption of pure cloud solutions.

If MYOB is sold to another private equity firm then it’s hard to imagine how it could create further value without a massive technology investment. It will be interesting to see if the new owners go for investment for more of the same grinding of the asset. How will they exit? IPO, split out the assets or will a bigger global player acquire?

BankLink

Last year BankLink received a grant from the New Zealand Government for NZ$2.1m to do Research and Development. However, BankLink does not appear yet to have responded to the shift to the cloud. Its products, though much loved and familiar to many, are now largely superseded by platforms such as Xero. While BankLink provides a good sunset revenue stream it does not provide technology innovation for an acquirer.

Reckon

Australian listed company Reckon is in an interesting position as well. They have traditionally had the leading accounts production (accountant side) technology, especially for large companies with their APS acquisition and have been the exclusive distributor for Intuit’s QuickBooks (client side). Intuit has not yet delivered the true online version of QuickBooks for Australia and Reckon doesn’t appear to have secured the rights for it at this stage, even if it does arrive over the next couple of years.

You’d also have to ask why Intuit would need a distributor anyway as online does not require boxes to be moved and in this new competitive market there is unlikely to be the margin to support a distribution tier.

So Reckon has been diversifying and appears to be following the strategy of MYOB in buying stakes in ISPs. The problem with that strategy is that it’s competing with your future online channel and ISPs haven’t yet been able to step up to offering high value services.

If Reckon buys MYOB, it still hasn’t resolved its issue of not having a world class online solution for the Australian market .

The impact

This is the most significant vendor flip the small business accounting space has seen in a generation. In Australia and New Zealand hundreds of billions of GDP are managed through these platforms – and now there is uncertainty on who will own those businesses. Two big customer bases are about to be sold out. Who will be the trusted custodian of these transactions?

I’m not sure the investors in the business have seen the impact the cloud is already having on the industry. They are buying sunset businesses that need to spend up big to catch up with technology – and the world is constrained by access to good developers who understand business web applications.

So the guard is most definitely changing. It’ll be very interesting to see what shakes out.

 

Read more about Business, Australia

 

45 comments

Doug Hanna
10 August 2011 #

Having distributed Solution 6 products to the New Zealand market prior to 200 when I escaped to create an internet services business, I understand the role of the accountant and the ideal technology solutions. I’ve found it hard to believe, with the writing so firmly on the wall, that these companies did not choose to completely re-engineer their products to work in the cloud. Years ago I had discussions with my friends at Banklink about this but I think they’re still distributing desktop software that communicates with their servers. It was a while ago and things may have changed since.
In my opinion, Xero’s approach recognises how people want to purchase and use their accounting system. Small monthly fees, access anywhere, no hassle installing upgrades and backing up data, and the accountant gan go in and fix up mistakes, post journals or suck the transactions down into their more powerful client accounting systems for final tax accounting.

You guys are on the right track. Something needs to happen, a sunset or a rebirth.

Philip Bridgen
10 August 2011 #

Thanks Rod, for a clear and insightful discussion of the Changing of the Guard and related issues – interesting times, and probably some tricky decisions soon to be facing MYOB and Banklink users. BTW, Xero got several very favourable mentions at the Bright Ideas seminar in Wellington last night, including from guest entrepreneur Jenny McInteer of Wishbone Design!

Jerry Zhao
10 August 2011 #

going to buy Xero’s share now!

Richard Francis
10 August 2011 #

Fascinating post Rod. I started as a CA in 1993, not long after which both Banklink and MYOB were dominant players in SME land. When I started my own firm, they still held that spot despite not having innovated at all. It was with great frustration that I had to offer these products to clients (until 2007 anyway).

15 years of incumbency will mean that these players will grind on for some time yet, like faded aristocracy swimming against the tide of history. But every year there are thousands of new entrepreneurs entering the game – all weaned on Google, Apple and Facebook – and they will only be looking online for their business needs. This is a generational change – and market opportunity – that accountants must grasp and react to.

Ben Kepes
10 August 2011 #

While I’d be the first to sing the praises of one of the many SaaS accounting products for businesses that need to integrate with other application, that do business online or that need to work remotely, I think it’s a bit disingenuous to say that BankLink et al are purely “sunset products” for the general masses.

My brother is a builder and is as 1.0 as they come, handing his accountant a box of invoices every year to wade through. For him, moving to a product like BankLink would be a complete revelation – his accountant would have visibility over his transactions and coding and eventual return filing would be a doddle. For my brother though, despite being a hand waving cloud evangelist, I really can’t see any advantage to be gained in moving beyond that level of automation.

I’m an electrician by trade and I can absolutely see the benefit that jobbing tradespeople would get from, for example, a SaaS service management solution like Connect2Field integrated with SaaS accounting, but my point is that if we look at the million or so customers that “legacy” players like BankLink or MYOB purport to have (and lets not argue about the legitimacy of that number for now) it’s hard to deny that there are a significant number who are served perfectly well with the products they’re using – with a product like BankLink that is already working on a subscription revenue model, that’s enough to keep them ticking along nicely for the foreseeable future.

With that said, I’m a firm believer that cloud/SaaS has incredible value for businesses – but let’s not lump all businesses in the same bucket…

Rob Benson
10 August 2011 #

Well put Rod. Game over I reckon. Would low to discuss recent experience on the PSA space sometime. Happy (very) Xero customer and would never go back to quickbooks, myob etc

Rod Drury
10 August 2011 #

Ben I agree that tools like Banklink are good enough for many people. Xero’s accountants only Cashbook product does most of what Banklink does and we see lots of accountants using that with their customers so you are correct.

As Xero Cashbook is the same code base as the full Xero the customer can easily upgrade to add invoicing as they get comfortable with their numbers. That allows accountants to grow their relationship with their clients.

But you may have missed the bigger point.

The pipeline of doing the books means that small businesses may pay for products like Banklink, but then the accountant still has to do the final accounts production in a separate tool like MYOB AO/AE or APS.

When the client and accountant side comes together and the accountant discards the traditional final accounts software for a single ledger solution then the accountant simply flips everyone over to the single ledger solution.

So I agree that small businesses may not have any reason to flip from Banklink but the accountant absolutely does, and that is what we’re seeing playing out now in the market as we deliver our accountant side features.

We believe that stand alone client side accounting and stand alone accountant side products don’t make sense in the long term as it’s double dipping. In the cloud the client and advisor is on the same database so it made sense for us to build accountant side features as well.

That’s what makes these trade sales fascinating. If the cloud changes the business model as we hypothesise – the revenue for the accountants divisions must reduce substantially if not completely go away over the next few years. With now over 45,000 customers I’m sure we’ve significantly stalled accountant side revenue for MYOB and Reckon. We certainly hear they discounting heavily to maintain business.

As MYOB is not public we can’t see the numbers but the Reckon half year report from earlier this week is interesting.

http://www.reckonlimited.com.au/LinkClick.aspx?fileticket=aucF8NPcbQo%3d&tabid=58&mid=433

“The Professional Division has grown EBITDA by 16%. The performance in Australia was particularly strong. The result was however negatively impacted in both the United Kingdom and New Zealand by tough economic conditions and weaker currencies.”

Which would tend to indicate that New Zealand accountant side revenues are down.

Of course this dynamic is just our opinion but we’re betting on it.

I hope that make sense?

Rod

Ben Kepes
10 August 2011 #

Yes it makes sense – but that would have been a significantly different conversation had MYOB been able to acquire (and integrate into AO) BankLink. But they didn’t, and haven’t, so it’s something of a moot point.

The interesting thing for me is that after doing the returns for all of my businesses over the last 15 or so years, a couple of years ago laziness got the better of me and I engaged a CA to do return preparation. The firm in particular is a fairly young, dynamic sort of a crew, not the dinosaurs of old, and yet even they said it was simply easier to export a trial ledger form both Xero and MYOB (the two accounting products my businesses were using at the time) and import it into their practice management software. Yes that sounds completely backwards and absolutely there are practices that realise the benefit to be gained by a single ledger… but it’s just interesting hearing that (admittedly very small sample) opinion coming out.

Luckily there are enough forward looking practices for all of the SaaS accounting providers to keep happy with, and enough left over for the traditional players to do well from.

Thanks for the well reasoned response, and thanks for the original post, it’d be good to have other CEOs think more broadly about the industry as well (Ed, Duane, Heather, Jennifer et al, I’m looking at you guys!)

Snoraa
10 August 2011 #

Interesting post thanks. Afraid we are one of the dinosaurs still stuck on myob software that we hate for its horrible interface but still there because we paid for it a number of years ago and there is nil ongoing cost. Will probably only change to xero when this version stops working on mac hardware or OS (haven’t checked Lion).

Steph Hinds
11 August 2011 #

Brilliant post Rod. And great comment Richard. Accountants with the new breed of products can now start to keep up with the pace of change in other Industries. We have the opportunity to make our Industry appealing to the younger generations (our future) and to really be able to help our clients with real time information.

Rod Drury
11 August 2011 #

Another interesting industry development today. Netsuite has moved away from the small business market.

http://www.readwriteweb.com/enterprise/2011/08/netsuite-stops-selling-to-smal.php

This was expected as the small to mid market ERP space still requires a complex sales process for relatively small revenue, so you would expect vendors to drift up-market and chase fewer, larger, deals.

It shows that your sales and support environment needs to line up, and you need to build the support channels and ecosystem.

Very interesting times.

Rod

Richard Francis
11 August 2011 #

Sorry Snoraa, but saying you’ll stick with MYOB because you paid them some money years ago is like saying you’ll stick with a horse and cart rather than a car until the horse dies.

What value do you put on your own time, your user experience, your ability to interact with other online tools that help you improve your business?

James Frogley
11 August 2011 #

MYOB + VC+ Time = Feltex

Ben Kepes
11 August 2011 #

Richard – I absolutely understand where you’re coming from but I have to say that without a parctical understanding of Snoraa’s business, you can’t really know whether UX and interaction with other online tools would be a productivity boost.

Time in terms of bank feeds however I’ll accept is a valid differentiator between the two products…

Darren McMahon
11 August 2011 #

Interesting times ahead. It is about time the accounting software market got into the 21st century and it has taken Xero to do it. I am so glad I jumped on board when I did.

On the Netsuite front, JCurve is the product that is filling the space filling the void left by Netsuite’s departure. JCurve is essentially a scaled down version of Netsuite and is specifically targeted at the < 20 user market.

Andrew Haynes
12 August 2011 #

Snoraa, you’re participating in the sunk cost fallacy!

http://en.wikipedia.org/wiki/Sunk_costs

Marc Zabern
12 August 2011 #

Finally a blog I may be able to contribute too. Xero has been the first cloud solution in the NZ market space that made small business start thinking about how they can utilise this tool as a business strategy to manage their business better. As most business owners finding running accounts the most dull thing ever, Xero is and will continue to make small business move away from running their business on spreadsheets and single source data entry points that will allow them to be more effective in the way they operate. Not thinking about how your business is effected by your accounting software will result in businesses who do to act and react faster than you can keep up and they taking business away from you.
NetSuite is a tier two ERP and as a reseller it fits with organisations that have 10 or more employees or with companies that do operate with complex business models or want to operate on an international level. However NetSuite is pushing very hard in the NZ market through their reseller channel to provide a cost effective solution and are adjusting their pricing model to fit to the NZ market. We are also resellers of JCurve’s NetSuite model which provides a out of the box business solution that allows a company to put in a sophisticated tool into their business at a very rapid rate providing businesses a wide range of functionality including e-commerce out of the box. My smallest client is a two user site.
Your business in today’s market needs to be nimble and responsive to the challenges and changes that occur. Investing in the proper tools to run your business will help drive your business forward.

Rod Drury
14 August 2011 #

Traveling in the US this week and two pretty big announcements from Intuit show much this industry is in flux.

Firstly Intuits platform play, IPP is being turned off and flipped to Microsoft Azure.

http://ippblog.intuit.com/blog/2011/08/partnerships-ipp-windows-azure.html

we will no longer offer our “native development” stack for developers to build on. We are going to focus our resources on the top of the stack and make data and services for our developers the top priority.

So what should our developers who are looking for a PaaS offering do?

While we have always been and will always be an open platform, and we will always embrace applications built on any platform, we think it’s important to help guide our developers who are looking for a PaaS option to what we believe is the best option on the market. So I’m pleased to announce that we will continue the journey we started with Microsoft last year and double down on our investment to tightly integrate the Windows Azure platform with IPP.

This was a big surprise to the Intuit developer community.

The next was an email from Intuit which shows how different their strategy is to the one we’ve discussed above.

Dear Accounting Professional,

At Intuit we do our best to inform you about upcoming changes in advance which may affect you or your clients.

You are receiving this letter because your business is listed as an accounting or bookkeeping service, and you may be providing this service to other QuickBooks Online users. We would like to inform you of changes that will impact your clients with new subscriptions to QuickBooks Online starting August 11, 2011. Starting that date, new subscriptions to QuickBooks Online (Simple Start, Essentials, or Plus), will no longer include a free accountant user.

This change will only impact clients new to QuickBooks Online or creating a new company file after August 11th. There will be no change to the accountant user included with QuickBooks Online subscriptions for your current QuickBooks Online clients (activated prior to August 11th).

For new QuickBooks Online clients to share data with accounting professionals, there are two options:
- Clients can simply add the accounting professional as a regular user in their QuickBooks Online file
- Intuit is also considering a new offering called QuickBooks Online Accountant, which will be designed to allow accounting professionals to access client data and use tools designed specifically for accounting professionals to work more efficiently with their clients.

This offering is scheduled to enter a “Pilot” program in August with a planned commercial launch later this year. You as an accounting professional may be able to join the Pilot program where your client can then invite you to access their data through this program
If you have any questions about this upcoming change, or would like more information about our planned offering, QuickBooks Online Accountant or the Pilot program, please call: 1-888-333-3451.

Sincerely,

The QuickBooks Online Accountant Team

Nuts!

[...] comments on the Xero blog last week from Xero CEO Rod Drury regarding the failed discussions between MYOB owners Archer [...]

Rex
15 August 2011 #

“It also potentially marks the end of the old Windows desktop software model in Australasia” Not sure I agree you can come to a conclusion like this. Given the sale of MYOB is by a private equity firm they probably had their own reasons for wanting to sell eg they have lifted revenues and cut expenditure, this increasing the market value. I suggest a business like MYOB has very high cash flow so they have probably paid for the initial investment and are wanting to re-invest the 1billion in something else. I dont see this as having anything to do with box vs cloud. Personally I see a place for both and it really depends on SME’s wants and needs… Could xero just be looking for a chance to get some negative PR on a larger more profitable competitor?

Jim
15 August 2011 #

@Andrew, I think Snoora is utilising their investment until such time as they are required to upgrade/change due to lack of effectiveness. There is a big difference.

[...] Anyway, MYON was acquired by private equity firms around three years ago which indicates that the timing is right for a divestiture, a fact that Xero CEO Rod Drury pointed out in a recent post. [...]

Craig
18 August 2011 #

Interesting points all round. Absolutely agree that it’s taken a couple of the big players time to respond to SaaS model. Small is nimble so they say – so good on you Xero. But, given the investment MYOB are making in developing their SaaS capability (financed from cash flow, not share issues) ….It’d be a brave man indeed to suggest that MYOB is a sunset company. Lets see where players such as Xero and MYOB are in 24 months.
My prediction is this:
Xero will have grown market share exponentially up to 2013.
MYOB will have made significant ground in moving relevant product to SaaS.
Xero’s customer acquisition will level off at significantly below the market share of MYOB.
Xero’s poor revenue to development and support ratios will be hampering growth.
MYOB will continue to dominate the market.

Rod Drury
18 August 2011 #

Been on the road but happy to follow up on a few comments.

First the big news. It looks like it’s Sage …

http://www.businessspectator.com.au/bs.nsf/Article/UPDATE-2-Sage-in-exclusive-talks-for-Australias-MY-KTKB5?OpenDocument

I was a bit surprised by this as I thought under the new CEO and leadership team that Sage has moved on from it’s model of buying the incumbent provider in each market. This would be a classic Sage acquisition and I had thought they had changed their strategy.

This would be a dream for us as it’s two old world companies. Neither is shipping start of the art online software nor brings to the table an online strategy that that would give us any concern. None have demonstrated innovation recently. After 3 years under private equity ownership another ownership change would be very distractive and distracting for a long time.

MYOB continues to talk about R&D but we haven’t seen anything out of the pipeline for sometime. It’s not about spending money, it’s about shipping and we’ve shipped over 60 major releases in our short life. Has any other software company done that?

@Craig, that seems like a bunch of emotional opinion rather than anything that is worth debating. If you read our presentations our model was a big investment and that has paid off with revenue tripling again this year. We added 25% of customers in the 3 months before our meeting. All the feedback we get from people in the know is that is outstanding. We have raised plenty of money so are happy to keep investing in our team and platform to grow long term. We could choose to drive to profitability but we communicated with our shareholders and explained why it is in their interests to let us go a bit harder as the opportunities is so big.

Of course that will receive criticism from some quarters and it’s not common in NZ but it is very common in the private internet companies that are growing like weeds in the USA. As we raised the money this gives us the opportunity to have a prolonged growth phase. And I think we delivering very well – or we wouldn’t be doing it.

I know we come across as more aggressive than some would like but these transitions are huge opportunities and it’s my job to make sure that potential customers are very aware that they are being sold. We unashamedly want as many MYOB customers as we can get, and we will give them a much better service.

Obviously publications like the NBR will call for a choice quote because it drives traffic to their site and some will have a go but doesn’t matter to us, we just execute our plan and we’ll let the results speak for themselves over time.

If you read what I’ve written above about the disruptions we’re seeing in the market there are a number of big factors going on that no one has commented or challenged us on.

We believe our approach of building both the accountant side features and the client side features in the same Single Ledger platform fundamentally changes the industry model for accounting software. Sage and MYOB will in the long term have trouble selling expensive software to accountants. We think the Cloud forces that change. I don’t think they’ve worked that out yet.

Anyway those are just our opinions and I’d welcome constructive thoughts. It’s a very interesting business case study playing out.

Yetti
18 August 2011 #

I think SaaS is a natural software delivery winner … of course. However i dont believe it will come in the form that Xero is today. How can i work on my books with disconnected for example? You cant. How can i work on my books while my internet provider goes down? You cant. What happens when obscure browser XYZ comes along and Xero doesnt work in it?

SaaS will mature and Native Software + a cloud service will dominate. Microsoft have been touting this for years, Apple are betting on it 100% and Steve Jobs knows browsers cant deliver the experiences he wants/needs & Xero even is now starting to dip its toes with iOS software (albeit very limited right now) and “planned” software for other mobile platforms.

With all the momentum of the iOS devices i would have thought any startup with purely browser based software would be smartly walked out of the investors board rooms.

Why not have the best of both worlds and have powerful desktop/mobile software with the a connected service?

Doug Hanna
18 August 2011 #

Criticizing SaaS as being unavailable while disconnected or when my ISP goes down, while having some validity, doesn’t value the significant benefits of the cloud. Our world is on-line and in future we will never go off line even in the air. The Internet increases in reliability year after year. Browsers are rapidly adopting HTML5, rapid automatic fixes and improvements and their quirkiness is reducing each year. New browsers will continue to support existing code or be rejected by the market. We also believe that browser based apps like Xero will continue to develop along with browsers to offer richer and richer user experiences across an infinate number of web browser enabled devices.

Xero’s strategy is in my opinion sound and for the big boys to migrate to SaaS while they go through acquisitions and restructures may be frought with problems. I’ve been there before.

These are indeed interesting times.

Michael Porter
18 August 2011 #

Without repeating everything Rod has said, I’d concur. I believe the potential acquisition by Sage plays into Xero’s hands. It’s one super oil tanker ploughing into another one and neither can turn around their existing business model. The acquisition will create a great tangle of integration as they sort out the merged entities ongoing software, management and business direction…. in the mean time Xero continues on its singular mission. To be the best global SASS SME accounting software and to throughly embed itself through (in main) the accounting practice channel (with initiatives like the single ledger). Xero’s customers are ‘sticky’ (which has great long term implications) and while difficult to wrestle off competitors – it’s not often there’s such a product performance gap between a new product and the product of the major market share of the incumbent – this has enabled Xero to continue to start snow balling it’s customer growth profile through it’s accounting channel expansion. I would assume that to replicate a product for SAGE or MYOB that is ahead of Xero would be no mean feat and that’s why it’s worth owning a piece of Xero. The head start is clear.

If a private equity firm had looked to acquire MYOB for the customer channel with a view to a further significant R&D injection to meet the potential SASS evolution and utilise the existing MYOB customer base… maybe a threatening story; even in that scenario trying to force existing clients onto a new cloud based platform would be difficult in the extreme. There’s a time factor that’s playing against them + MYOB’s software doesn’t seem to lend itself to conversion of existing data to the cloud, therefore clients given the hassle of changing one’s accounting system can adopt whichever software is recommended / product leading. Neither company seems to have fully accepted the cloud based ideology in the first place to date, nor are they committing the resources. Other SASS acquisitions will be the only option and as long as Xero isn’t for sale they’ll still have inferior products. So onwards and upwards for Xero.

It is VERY interesting and the next few years look to be an incredibly exciting global opportunity. (once in a generation) I believe Rod + the Xero team of talent are staring down the barrel of something very exciting, they’re in pole position, we’ll see how far they go – please don’t sell out ! let’s see NZ produce a truly global technology company to be proud of.
Fanfare over.
But opportunity sure knocks !

Rod Drury
19 August 2011 #

@Yetti I agree. But the MYOB model seems to be more sync to the cloud model which is a logical strategy for them to consider to preserve their sync investment in client.

That gets some benefits of the cloud but not the real long term benefit.

If they get to a muiti-tennanted, multi-sharded, API based accounting engine at the back end then they will be in a good place. I haven’t seen any of this.

The first phase of the accounting cloud migration was getting the GL moved over. We’re almost done with that. The next stage is where it gets interesting.

For example our Reporting Packs. That is cross practice reporting that requires the model we’ve implemented and it revolutionizes accountants productivity.

Once you have the back end store sorted then you can add other client scenario’s. Like iOS.

But the issue then is the cost of developing multiple clients which is why we like HTML5.

Good discussion. Would love someone from MYOB to engage and talk about their cloud architecture. I think we’re all interested to have the discussion.

Chris H
19 August 2011 #

Rod
I think it wishful thinking to expect MYOB to enter this lions den…:-)
My cursory observation on the much promised but very delayed delivery of MYOB’s successor to their current version is that they are finding it a whole lot more complex than expected. Accounting process doesn’t lend itself to the synchronisation model readily. Keeping track of multiple active databases synchronising, file locking, recovery planning, upgrade and schema changes, the whole scenario introduces a nightmare of complexities that are not traditional accounting developers expertise. On top of that it just doen’t scale well. I can understand their business driver in wanting to satisfy their loyal and traditional desktop users but I think they may be technically challenged to produce a robust ‘desktop plus cloud’ solution.
However don’t right of Sage, should they be the new owners. They do have a whole lot of hard earned experience on how synchronisation solutions should work through their broad CRM experience. The lines are soon to be drawn, interesting times ahead.

Yetti
19 August 2011 #

@Doug, you are dreaming if you think these issues will be ironed out in the next 5-10 years. they are the same things people have been saying since the browser was invented :) “never go offline” ? really, how can you say that with a straight face?? Browser compat issues wont go away anytime soon so long as each vendor is pushing to build new capabilities for app builders to use. HTML5 isnt a holy grail and is already not providing many things native app developers can take advantage of.

Dont get me wrong, i think Xero being built from the ground up for the cloud is the right thing to do.

I just think Xero is missing out on some incredible user experiences not fronting the service with native applications.

Craig
20 August 2011 #

@Rod D: Rod, exactly which part of my observation/opinion was ‘emotional’? I stated a view. If you read my piece properly, with some thought you’d have observed that I was supporting competition.

Rod Drury
20 August 2011 #

Update: Bain Capital outbidding Sage … http://www.ft.com/cms/s/2/6ade016c-ca65-11e0-a0dc-00144feabdc0.html#axzz1VWt4jSGf

What are they going to have to do get a return on that?

And we don’t think their compromised Cloud sync strategy makes sense.

http://blog.xero.com/2011/08/when-cloud-is-not-the-same-as-cloud/

Fascinating.

Excellent!

Ben Kepes
20 August 2011 #

I’m confused here, I would have thought that having multiple parties in a bidding was to acquire MYOB would be a validation that they’re doing something right – be it from a business or a technology perspective. I would have though that MYOB trying to sell itself with no bidders would have been a real indication of a changing of the guard…

We’ve all seen Sage do stupid things before, but KKR and Bain are two well regarded PE firms, I’m not an M&A guy but it seems that they’d be unlikely to bid for MYOB if it wasn’t a viable investment opportunity…

Ben Kepes
20 August 2011 #

“bidding war” not “bidding was” sorry…

Craig
20 August 2011 #

@ben: Tend to agree Ben. MYOB generates a solid ROI. disappointing that they’re not publicly listed then at least others could benefit in the dividend and multiplier. At the risk of being accused of making ‘emotional’ statements…. Seems like some are on some form of religious crusaid when from all accounts they should be focusing on quietly making their business great.

Ben Kepes
20 August 2011 #

Craig – just to clarify, my comments were around the attractiveness of MYOB to the bidders and what we can infer from that viz its current position and future potential.

I’m not going to enter into a discussion on the merits or otherwise of this post – partly because that’s unseemly and any comments of that nature are best made directly, but also because this is Xero’s blog and they have the right to use it for their own purposes, they’re a commercial entity and flying the flag is what they’re entitled to do…

Rod Drury
21 August 2011 #

Looks like Bain Capital, a Private Equity firm have brought MYOB from the other Private Equity firm.

http://www.reuters.com/article/2011/08/21/us-bain-myob-idUSTRE77K0BD20110821

Congrats to Archer Capital, Tim and team. That’s a great deal.

Here’s a couple of useful links

http://www.xero.com/about/careers/
http://help.xero.com/#Q_QuickConvert

Ben Kepes
21 August 2011 #

Nice riposte Rod…. and yeah, I’m sure you’ll be getting some MYOB refugees…

Rod Drury
22 August 2011 #

Some great quotes in the articles this morning that lay bare the PE model

http://www.smh.com.au/business/bain-snatches-myob-from-weakened-sage-20110821-1j4ov.html

But it remains a hugely profitable deal for Archer. The acquisitive private equity fund bought MYOB in February 2009 for about $500 million, and then boosted earnings by stripping costs, raising prices and aggressively going after customers.

”We doubled the profitability, we basically achieved the three or four things we set ourselves before we acquired it … and we had a lot of inquiry from potential buyers,” Archer partner Peter Wiggs said.

The deal is believed to have been valued at 11.3 times earnings before interest, tax, depreciation and amortization.

MYOB is used by more than a million small-to-medium enterprises in Australia and New Zealand.

Bain said MYOB had been the leader in the financial software space for a long time, and it would continue to grow through cloud-based computing offerings.

Did MYOB actually ship any software while owned by Archer? Live Accounts was the old Business Basics product from years ago and seems to have flopped and everything else like AccountRight and the AO replacement seems to have been delayed?

I don’t how Bain can take costs down much more or put prices up further as the market is much more competitive now.

Under the PE model they’ll need to sell MYOB again in a few years so how do they drive it to a $2B company?

I think Bain not being in this part of the world just hasn’t read the market.

Oh well. We’ll make the most of the opportunity.

Craig
28 August 2011 #

Awesome article in MYOB. totally support Mr Smith. Archer ROI speaks volumes. Correct Rod, excellent deal, and lessons to be learned. Suspect the only refugees will be the ones that don’t deliver value.

Craig
28 August 2011 #

Awesome article in NBR on Friday. Totally support Mr Smith. Archer ROI speaks volumes. Correct Rod, excellent deal, and lessons to be learned. Suspect the only refugees will be the ones that don’t deliver value.

[...] our story on the AGM here, or go here to read Drury’s full [...]

[…]  but unfortunately they suck.  With precedents like Trade & Exchange vs Trade Me, Xero vs MYOB and digital vs physical music stores it’s amazing that our on-demand providers still exist […]

Add your comment





We welcome all feedback but prefer a real name and email address.