Disruptor v incumbent: a cloud combat playbook

The battle for for the hearts and minds of bookkeepers is intensifying for providers of accounting software MYOB and Xero. With US giant Intuit joining the mix, the cloud based accounting market is getting crowded.

In this era of digital disruption it is easy to picture web-born businesses sweeping away old-world competitors. But every so often an incumbent learns how to fight back early enough to make a difference.

This is the story that MYOB chief executive officer Tim Reed hopes to tell in years to come. MYOB once dominated Australian small business accounting software, but recent years have seen it challenged by eight-year-old New Zealand-based Xero.

MYOB is a 30-year-old company that counts desktop software as its key strength. Xero’s software is purely cloud based, and has amassed approximately $250 million in private equity. This year it reached $100 million in annual turnover with 147,000 Australian business customers – almost double that of 12 months ago.

Not surprisingly, MYOB has been pilloried for allowing an upstart to gain so much market share, and for its perceived slow response to cloud computing.

Reed insists that his company has not been sitting still. MYOB launched a fully online product, MYOB Essentials, three years ago, and has web-enabled many other products. MYOB has also made a number of acquisitions, including the bank account reconciliation service BankLink in 2013, and human resources software maker PayGlobal this year.

Reed says MYOB has changed its sales channels, processes, technology platform and overall economic model, and adopted the agile software development methodology to more rapidly release updates.

“We used to get our clients through OfficeWorks and Harvey Norman, but the vast majority today come through our website,” Reed says. “They used to buy a perpetual licence and a minority would opt in to a maintenance program. They are now choosing a subscription model.”

That means less upfront revenue, but more revenue over time. Despite this, the company reported 13 per cent revenue growth for its 2013 financial year to reach $247m, with EBITDA of $121m.

UPDATE: The company's financial data for the first half of 2014, released today, shows a continuation of that growth. Revenue has grown to $140 m for the first six months, up 21 per cent over the same period a year ago, and EBITDA increasing 29 per cent to $70 m.

Reed estimates that MYOB still has between 60 to 70 per cent of the small business market, with more than 30 per cent using its cloud software.

UPDATE: The company's latest sales figures show that uptake of its cloud software has been strong, with 63 per cent of new small business product registrations being cloud subscriptions, up from 36 per cent a year ago.

The question now is whether the changes will be sufficient for MYOB to retain its market share in the face of the Xero juggernaut.

According to Tony Hoffman, director at Brisbane-based chartered accounting firm Hoffman Kelly, his clients are split roughly 50-50 between Xero and MYOB.

“MYOB did have the lion’s share when it had its simple desktop version,” Hoffman says. “There has been a big movement to the cloud and Xero has come out as a newbie and taken market share while MYOB took their eyes off the ball a little bit.

“But they are pretty well bumping heads together now. Certainly MYOB has come back, and their pricing strategy is a hell of a lot more aggressive than Xero.”

While MYOB has a broader feature set, Hoffman says Xero has recruited web-based partners to develop complementary software to fill the gaps.

Xero’s managing director for Australia Chris Ridd says his company’s cloud-born origins means it does not have MYOB’s legacy of older software products, so it can be more focused in its research and development spending.

He says being cloud-born also appeals to younger clients.

“The new businesses starting up these days are reasonably tech savvy,” Ridd says. “We are obviously taking market share from the incumbents, despite some denials from some players. But about 40 per cent of the customers signing up with Xero are actually coming from no incumbent accounting software.”

Despite Xero’s rapid growth and MYOB’s own efforts, Reed estimates that less than 10 per cent of Australian small businesses are using cloud accounting software now.

“We think we’re there in plenty of time in response to when our clients want,” Reed says. ”That said, there is no doubt that competitors that entered the market forced us to look at our plans and respond accordingly.

“We didn’t want to be the company that was too slow to move.”

But by waiting for market acceptance, MYOB undoubtedly lost potential business, particularly from younger accounting firms such as five-year-old Newcastle firm Growthwise.

Co-founder Steph Hinds says her fledgling firm initially paid out $24,000 for four MYOB licences, before finding Xero a month later. It was Xero’s ability to automatically integrate bank feeds that led her to propose it to some early clients.

“And our clients were so impressed they told all the rest of our clients, so we didn’t have a choice but to transfer everyone at once,” Hinds says.

Now Growthwise has 11 staff and services 360 clients.

While MYOB and Xero battle for dominance, numerous other players area also issuing their challenge.

Sydney-based Saasu launched its small business cloud accounting package back in 2002, but founder Marc Lehmann says he has deliberately not chased aggressive growth.

“We’re trying to craft something that is a great feeling for a business owner to use, and that is not about size and marketshare,” Lehmann says.

Another player has also quietly made its way back into Australia. US-based Intuit dominates its home market for small business accounting software, with 60 million customers and 90 percent of retail sales.

For 20 years Intuit’s QuickBooks desktop software was localised and distributed in Australia by Reckon, but the two companies split in 2012 when Reckon chose to pursue its own web-based product development strategy.

Intuit subsequently launched a cloud-based Australian version of its QuickBooks software at the start of 2014, and has been gaining attention thanks to aggressive pricing.

Lehmann believes Intuit’s target is more likely to be Xero rather than MYOB, as Xero’s global ambitions make it a greater threat to Intuit’s US customer base.

“It feels like they are going to try and kill that off before it becomes a problem for them,” Lehmann says.

Reckon has also reasserted itself in Australia with the launch of its Reckon One online accounting software earlier this year.

While it is likely that some of the growth reported by MYOB and Xero has comes from the Reckon/Intuit split, Reckon’s chief executive officer Clive Rabie says his company has achieved small but steady revenue and profit growth.

“In the small business market we are switching a lot of our traditional desktop users to using online products, and we are also earning new online customers,” Rabie says. “We have come into that (cloud) market a lot later as a result of the termination of our agreement with Intuit, and we are most probably growing that a little bit slower.

“But within the next couple of years we expect to be growing that as fast, if not faster, than our competitors.”