Kirsten Barrie:    That’s a very good philosophy.  Juxtaposed, that leads me into asking what you think of Intuit’s acquisitions?

Rod Drury:    We have a view that you don’t really want one vendor for all of your business tools. We want to provide a seamless experience for your core, to commoditize that and make it really cheap.  We love seeing all the innovations that’s happening with all these add-on applications because normally accounting is tied up with a vertical. It might be a restaurant system, retail, church subscription management, or golf course - there are heaps of different bits of accounting software. What we’re trying to do is to take the common parts and make that a commodity that provides great value. Then we want to see a lot of smaller companies invest and build specific industry solutions. In the early part of the industry, before us and QuickBooks and whoever else had finished all of the horizontal pieces, there had been an opportunity for people to come in and build quotes or time recording for example, which is great.
Now that we’re up to speed with our development teams, it's natural to add those kinds of features.  We can do them ourselves because the marginal cost of doing them is relatively small. With Intuit, our reading is they’re struggling with QBO because there’s just a lot of work to do and they've probably gone a little bit earlier than they would have liked to move from the desktop to the online platform - they’ve still got a few years of work to do there.
What they’ve been doing is quite logical: using their strong balance sheet to acquire products that sit around its side. I think there are a couple of problems with that.  One is you end up with a kind of Frankenstein of different components, which is the opposite of beautifully integrated accounting software. I think you have to have the patience to actually build the features. Having a bunch of add-ons together as a full solution in your core application doesn’t really make sense to me.
The second thing is we have to be very careful and respectful of that ecosystem. If you’re coming in and picking winners early, what does that mean? Why would you invest in the ecosystem? If they're going to pick one winner, then either you win the lottery - or you don’t. Then you're competing against that ecosystem provider.
I can understand why they’ve done it but I don’t think they’ve really thought about the damage they’ll do to their ecosystem by picking a favorite and then buying one in each category.
At the moment it seems that the best way to be acquired by Intuit is be really a good Xero partner. If that’s the case then I don’t see why anyone would be investing in their community. They’re probably doing it because they can associate with them, that there's a big headline, and also then a number of potential customers there. But at the end of the day, if they’re going to go and buy one, why would you invest?
Compare that to our WorkFlowMax acquisition where we bought them because we wanted to provide the practice management software for accountants. Rather than us bundling WorkflowMax and going cheap and dominating time and cost systems, we have a separate team with WorkFlowMax.  We don’t bundle with them. Those guys are out on their own because we want to see four or five other specialty time and cost systems that work out there as well. We think we’re taking a much better long-term view for a healthy ecosystem, where I think the DNA of Intuit is they want to own everything. We think having an open approach absolutely wins long term.

Kirsten Barrie:    Do you think that’s because they are reacting to the competition of Xero, or they have a “Silicon Valley” mindset possibly ?

Rod Drury:    They’re absolutely reacting, because they have to use their balance sheet to grab each category. The problem is there are so many providers in each category that it’s just a finger in the dam.
For every one they acquire, there's another four. You can’t buy all of them because you only need one. So that doesn’t make sense. I think also culturally, Intuit’s thing is, “we want to own all of it”, where culturally we’re not.
We want to provide an awesome commodity service for the core part but we want to see a bunch of other smaller companies that don’t need a couple hundred million dollars to build. Instead let’s see ones that can do it with $1M of funding, or self-funded, then we’ll see a bunch of innovation happening.
We got 300 other CEOs charging around selling us at the same time they are selling their vertical solution. Our feedback to the add-on providers is they need to stop thinking about building horizontal features because in the end, Intuit’s going to buy just one, and we will probably build most of the rest of it ourselves over time. They need to now be building the vertical industry solutions that go over the top, that become a sustainable businesses where they can get a few thousand, if not $10K a year from their customers. We want to make sure there’s plenty of room on the table for this rich line of business vertical apps.
People that are building applications for wineries, or for retail systems, or the best golf course management system where you have a few thousand, if not 10,000 customers. You can do it with a team of ten to a few hundred. Those are the really interesting high-value sweet spots where you don’t need massive amounts of capital and you don’t have to build a huge business but you can deliver fantastic service to your community.
I hope that we see the horizontal providers sort of take the pragmatic opportunity to do some good stuff while we’re still building up the platform. As a partner, you have to ask yourself, “Have you got a feature or an entire actual business?” Some of them will be taken out, but not that many, so better for them now start thinking about what the verticals are that really suit what we’ve built and how they can go deeper.
In the same way, we’re looking at what other data can we grab. There’s a lot of vertical data that’s really interesting. Say you’re building a plumber’s job costing system, part of that will be going and finding all of the plumbing suppliers that are having a great plumbing product catalog that might be curated. To me, that’s the next generation, it’s very interesting. Other examples are medical management or dentist software, also linked to those sorts of catalogs.

Kirsten Barrie:    Sometimes I think it’s more appropriate and prefer to have my clients’ employees use the add-ons for their job tasks.  They make a really nice front-facing portal.

Rod Drury:    Yeah, I think so too. But if they’re just going to do basic quotes, we’re going to do that soon, so they have to do really enhanced tasks or be for a particular vertical. We want to do the old 80/20 rule where we’ll do the basics - because that’s what small businesses expect - and then the add-ons have to do something which is much deeper. I suspect you have to start getting under the verticals more than just a good horizontal.
Over time, our quoting and invoicing team will be bigger, it will be three times the size of a little five-person company just doing a particular feature.  In the end people won’t pay for just a feature. They do now because there’s a gap but over time the expectation is that’s just part of core.
We’re really trying to educate our add-on partners that the industry is changing quite quickly. Intuit coming in and doing these acquisitions has probably accelerated that change from horizontal to verticals much quicker. We would have thought they still had another couple of years. It’s a bit like an injured elephant swaying around the forest knocking trees over, and it's actually doing quite a bit of damage in the ecosystem.

Kirsten Barrie:    Your view on creating a functioning ecosystem with global benefits is very impressive and farsighted.

Rod Drury:    I think that comes from having been successful before, this is my fourth business. After you’ve done the first few, you’ll have hit some of the basic goals. By the time you do something you really want to do for the rest of your life, you want to do it on really good terms. It has to be purposeful, it’s not about you, it has to build a team, it’s about the people inside the team, and it has to be better for society.
That’s why we’re so hard on the small business sector. If we make them more productive at scale, which is about getting accountants and bookkeepers working alongside them, then that directly translates to growth and to more schools and hospitals.
I think that’s the luxury of being a bit older, and having done a number of businesses before, you can take a long-term view. For us, we are fiercely protective of our ecosystem but also we’ll give them a hard message that Intuit is changing the ecosystem market, and that they need to be thinking now about moving because otherwise the tide’s going to go out in the next two years. We have already been messaging this hard because they need to understand this if they’re going to build sustainable businesses moving forward.
There was a fantastic quote from Satya Nadella,  Our industry does not respect tradition — it only respects innovation.”
For the first time, Intuit, who is like a big battleship, has a nimble, well-funded, highly capable competitor. A new type of product comes in that’s much more nimble and potentially has even more capable people, who is not scared of going for it. Think about ten years ago, the top people in tech weren’t at Intuit, they were at Microsoft or Oracle, more latterly they were at Google or Facebook. The really good talent has flipped out into businesses like ours because they’re on such high growth curves, they’re selfishly going to want to jump onto those growth curves.
A lot of people in New Zealand would say, “Oh, Intuit, that’s a big company. It’s going to turn around and crush you guys.” But we say, “Well, no, they’re not.” There’s so much legacy, we can get equal or better management talent because we can offer a much higher growth curve. We’re funded enough to do what we need to do.
If you take a look at the Super Bowl commercial they did which was a fantastic piece of social media, really ingenious because it was about their customers.  But it hasn’t moved the needle for them. You can't spend your way to selling to small business. You have to be really clever. We were terrified when we saw this brilliant Super Bowl campaign thinking, “Oh, it’s game over,” but then what happened? Nothing happened. It just shows you how hard this industry is.
Even with all of the branding that Intuit has, many US businesses have chosen not to use them so far. It’s game on and it’s really exciting.  I don’t think we need for us to win and Intuit to lose, and I’ve had this discussion with Brad. I think we’re going to really grow this exciting market; competition is a wonderful thing for it.  I believe we should be inter-operating between invoices from Xero and QuickBooks, which could actually flow together very nicely. It’s a great opportunity to share leadership.

Kirsten Barrie:    How is Xero going to make sure that it doesn’t become like the current state of Intuit?

Rod Drury:    Because that would be against our values and I won’t let that happen. It’s as simple as that. We have a way that we want to do this business, we have a strong set of values, and our senior team comes on with those values. It’s institutionalized. We believe we’re doing this for all the right reasons.

We do too.  Much appreciation to Rod for taking the time to answer my questions and looking forward to what lies ahead.

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