Xero CEO Rod Drury and MD of Australia Chris Ridd put down their skateboard and guitar for a couple of minutes during Xerocon to have a chat about some of the newest developments for the online accounting program.
A central theme of the conference was connected services. The first company outside of a bank to connect to Xero is CGU, an insurer which has created a way for Xero users to request insurance quotes by giving CGU direct access to their Xero file. CGU analyses the financial data and uses it to set premiums for worker’s compensation insurance.
Digital First: Do you think people are going to feel comfortable sharing that level of information with an insurance company or a bank?
Ridd: They have full control. We are not going to do anything our customers don’t allow us to do, but if we can reduce the cost of credit, the ability for people to get funding to grow their business that’s a good thing.
Digital First: But we’re not talking about rational fears. It’s the same fear as data sovereignty, a fear of loss of control. Will there be a similar pushback against giving large companies access to your accounting software?
Ridd: The customer is always in control as a subscriber. It’s all about trust. (Xero could talk to) a trusted service provider like a bank, insurance company or a telco, but you’re always putting the subscriber in control of the shared data.
That’s one of the things we’ve talked about to banks and insurers, they have to demonstrate the value.
If a bank can provide a value proposition, such as to pre-approve a loan because you’re approaching that overdraft, provided you have a relationship with the bank already then you would feel comfortable opting in and sharing that data.
Digital First: What are the benefits for business? Is it saving time and money by not calling up on the phone, supplying documents and so on?
Drury: Yes and in terms of lending, it’s the ability to get a loan. It’s binary – you couldn’t get one, now you can.
Ridd: CGU are thinking, where else can we go with this? A really good one is business continuity insurance. They said the biggest issue for business is under-insurance. But by integrating with Xero they can interrogate the financial data.
When I met with CGU they said the standard process is for a business owner to estimate the turnover over the next 12 months.Then the insurer selects the premium, which in reality could be above or below the fluctuating monthly turnover.
Now we can present them with a monthly premium that fluctuates in real time with the turnover in the business so they’re never underinsured. And they’re always optimised in terms of the premium they’re paying.
Drury: And it matches their cash flow.
Ridd: CGU are looking at professional indemnity insurance and all these other things. The value proposition for the small business owner is, ‘Let us opt in and we will always make sure your premiums are optimised and you’re always covered’.
Digital First: Is it permanent access or timed access where the provider can only view the business owner’s financial data for a restricted time?
Ridd: I don’t know whether they have worked that out. I would assume that at certain times they have access and it’s not ongoing access.
This is the first time that anyone has done this. Worker’s compensation insurance is an easy one because it’s a commodity, everyone needs it and they can provision it pretty easily. They can learn from it and start to roll it out through other product offerings.
Digital First: CGU is way ahead of the industry in offering these services through Xero, as are New Zealand banks. When will we see these integrations become commonplace in Australia or elsewhere?
Drury: All the banks and large companies are thinking about digital disruption in their strategies. We’re going to see so much innovation in the next two to three years, so much more than we have in the last 10.
Ridd: Now that we’re getting close to completion phase on the accounting platform we’re putting resources to working with some of these companies. A good example is Warehouse Stationery. You can order stationery online and two hours later you go into Xero and it’s there as an accounts payable invoice.
So there all these relationships we can integrate into Xero to get this whole seamless exchange of data. We’re just at the start of it now but we’re putting much more effort into those discussions now.
Drury: Everything you would do in desktop you should be able to do in cloud and we’re finally getting there.
Over the last year or so we have built all these parallel teams and now we’re starting to do the next thing which is to change the product category. It’s just logical, right?
We’ve never thought of ourselves as an accounting software business, that’s just what you have to do at the beginning.
Keeping ahead of the competition
Digital First: Why criticise Intuit for buying up the ecosystem if you’re building it out anyway? What’s the difference?
Drury: They are completely different approaches. Ours is open APIs around everything, we try to nurture our ecosystem. We bought Workflow Max which was a time and cost system and we wanted to provide that software for our accountants vertical but we kept it on its own.
We don’t do any cross selling, we haven’t discounted it, we let it compete out there. We see those applications will absolutely verticalise over the next couple of years. Like what we have done for the accounting side of the equation.
The reason that Intuit is buying up apps, I don’t believe they are delivering on their core application so they’re using their balance sheet to go out and buy these things. So you end up being a bit of a bride of Frankenstein and I’ve had a lot of feedback from accountants saying they don’t want to go into a bunch of different apps.
can understand why they do it in the short term but in the long term I don’t think it’s the right strategy. We know that open wins and you can see the response we’re getting.
Digital First: What do you think about independent app marketplaces. Do you think they have a future?
Drury: No I don’t actually, to be honest. There’s no margin in this business and it’s very expensive cost of sales to pass long term ongoing margin, and you just have to do the work to build the channel and the customer base.
We love it when guys do stuff like that but you see what we’re doing with dashboarding, that’s just features and we’re building that into the product. And we’re building the channel. So they don’t add any value to us and we have this mass and the customers the other third parties are working alongside us. I’ve never seen an example where those marketplaces have worked.
Digital First: Don’t you think that the other cloud programs are catching up in features?
Drury: There’s this assumption that all accounting software is the same. and up until this point we’ve had to all build the same features – reconciliation, general ledger, reporting, debtors, creditors, expense management.
And people have got there through different journeys, whether it’s syncing your desktop to the cloud or start with an old code base and hack stuff onto it, we started with a clean platform and now we’re getting the benefit.
Now we’re just turning on business intelligence and doing that for all our customers and their data. We’re entering this interesting phase where you can now see the results of the investments in the platforms we’ve made. So the difference of what we’ve done compared to everyone else is starting to show.
Xero and the Missing Mobile Platform
Digital First: The mobile payments place is exploding and Xero doesn’t have a strong solution for its users. Xero integrates with Square but that is US only and has had negative press recently. Other accounting software providers have bank-backed solutions. What are your plans for mobile payments?
Ridd: We just announced one yesterday – Ingogo are now an add-on partner. They have been disrupting the taxi industry which is arguably the hardest mobile payments market because cab drivers aren’t necessarily tech savvy and it’s a pretty tough environment.
They are now looking into other industry verticals that are mobile, so we’ve done some really clever integration and they have a really broad platform that they can take forward.
Drury: We’re not really excited about the B2C (business to consumer) space. Yes, our customers can pick any one of a number of gadgets to fit onto their phone and take B2C payments, and that’s a brutally competitive market.
Eventually the big guys will probably win, probably it becomes bank native. What we’re much more interested in is the B2B space, or how do you a do a $5,000 or $50,000 bill and how do you do that without putting a tax across all small businesses?
We’re much more interested in what’s happening in real-time bank clearing and inter-bank work, that’s where we’re spending time with the banks and that’s where the money is.
Digital First: What’s the latest on that?
Drury: Really good. We’ve rolled out what we call a banking 2.0 model. Ee have pathfinder banks rolling that out now. It’s absolutely being noticed in Australia, we have another big bank going through that model. It’s just a matter of them lining up projects with their core banking systems. The best way to get the industry to move is to get your first bank, and we’re making good progress with all of those.
If you’re on the same bank there’s no reason you can’t get paid by the bank within the hour.
Digital First: You mean triggering the payment from within Xero, right?
Drury: Yeah. And then get it securely to your bank, and having the accountant or the bookkeeper do the heavy lifting, and then the business owner does an “Approve” on their mobile app using all their banking security and get that paid really quickly to the other party.
Ridd: And that’s the key workflow. It’s directing it from internet banking and you have the mobile workflow on the phone so that the business on the road can make those payments.
Digital First: Is that live in New Zealand?
Ridd: Yes, with ASB. And in Australia banks are working on it too.
The new breed of add-on programs
Digital First: What is the ideal profile of a Xero add-on partner?
Drury: We’re into the next phase of SaaS applications. So the first phase, crazy valuations, everyone got funded, lots of startups. There’s been a fundamental re-rate of SaaS companies, not forever but for a period of time.
Also what’s happened is that the two big platform players, Intuit and Xero, are now getting to scale and Intuit is taking an approach of buying up the ecosystem and because we have our teams firing we can pull some of that in (the horizontal features).
So I think the end of the horizontal features, there’s maybe a year or two left for those because they will get pulled into the main platforms. So we’re saying to add-on partners that they need to start thinking about at higher-value verticals, that’s looking for franchise opportunities where there’s lower cost of sales to get to those customers where you can provide some real value.
It’s not just providing just a bit of code that you write but how do you get the data. If you’re doing a trade management app go and get the plumbing catalogues, and those applications. That’s the sustainable place that the ecosystem needs to go now.
Digital First: What advice would you give a young Rod Drury who is a 24 year-old programmer and wants to build his own app? How much capital does he need, and what people does he need on his team?
Drury: If he’s 24 he should come and work for us and have five or six years of experience and doing the internship. If you’re going to go out on your own you can’t just build little horizontal features anymore. There’s plenty of time recording software. That’s done.
So it’s now finding the really good niches where you can understand that niche especially where there’s a bit of data that can move around, a reengineering of that industry. That’s exciting.
So we’ve invested $250 million in our accounting platform so they can focus on that business vertical. I think finding partners that they can work with who really understand an industry and understand the disruption that comes from moving into the cloud, those are exciting opportunities.
Digital First: How much money would you require? What types of roles?
Drury: You just plot it on a curve. If you’re going to build a business with 10 people, say $100,000 fully loaded, that’s $1 million a year. Then you have to work out that if I could get $1 million a year, say I fund that for two or three years, are you going to go for a high number of low value sales or a low number of high value sales?
If you go for a large number of sales you need marketing, network effects and all those things. I think now we’ve gone through that raw exuberance in business SaaS and actually money won’t be as easy to get.
They need to think about where they place themselves on the curve. Personally I would be looking as high a value mid to large size business opportunities where the heroics of the founder can sell those first 10 to 20 deals and you get that lumpy revenue.
Digital First: Who makes the sales? Selling to enterprise takes long sales cycles, skilled sales execs.
Drury: The founder, right? It’s the passion of the founder that gets those first couple of deals. That’s what I did with AfterMama me and the senior dudes were doing the selling and other guys were writing the code. And in those enterprise deals you can get $30k deals and you just need to go out and do the selling.
If you do something at $50 a month you need to attach to ecosystems like ours where you have 330,000 customers to sell to. I’m just worried that little horizontal features are being pulled into the platform. We want to see people move into these higher value verticals where you’re getting $10k-$20k per customer a year.