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INTERVIEW: Tim Reed, CEO of MYOB, on building a subscription business and fighting new market entrants

Tim Reed is CEO of MYOB, the cloud accounting software company.

He operates in one of the most intensely competitive market segments in Australia. Everyone wants to play disrupter in the accountancy software field. It’s now all online, off the desktop, in the cloud and the numbers are all about subscriptions.

The fight to gain accountancy software business in the small to medium enterprise space been called the Cloud Wars because of the opportunity to move customers from the desktop to the cloud. The company which can bring a business to the cloud usually keep that customer and gains monthly subscription revenue.

The other players include Xero, Intuit and Sage One. The prize is glittering. They all want a piece of business from the 2.5 million small to medium enterprises in Australia and New Zealand.

About 94% of MYOB’s revenue is now recurring — it’s a monthly a subscription and keeps coming in as long as a customers keep subscribing.

Revenue in the six months to the end of June was up 8% to $161 million. Net profit was $40 million, up 14%. The full year forecast for 2016 is revenue of $336.4 million and net profit of $90.7 million.

Those who purchased a CD of software some years ago are increasingly moving from the desktop to a cloud based solution. This is a rich pool for MYOB. These are users who are used to the way MYOB software works. The company’s paying users are growing 10% year on year and cloud users are growing at 65%. At the end of June, MYOB had 528,000 paying users.

Tim Reed has been CEO since 2008 and MYOB listed on the ASX in May this year. The shares are trading today at $3.29, down from the IPO price of $3.65.

In September, MYOB joined the ASX 200 index. We met over lunch at Steel Bar & Grill in Sydney to talk about his progress in the job.

Tenure of CEOs

Reed: CEO tenure is averaging five or six years in the ASX 300. You’d expect every week that someone’s going.

Pash: They don’t seem to last. They go through a cycle, from being loved to being on the nose with shareholders. But you should be able to get five or so years out of them.

Reed: I’m in my eighth year now as CEO.

Running a listed Vs private company

Pash: Once you become public then the pressure’s on because of the need to report to the market so regularly, something private companies don’t have to do. Do you feel the pressure now you have to report to the ASX?

Reed:I do. But the difference isn’t that great, being owned by private equity was not a low pressure environment either. It is different because private equity owners are very close to the business. Very hands on and frankly, along with management, have high expectations when they buy a business. Bain Capital paid $1.2 billion for MYOB. They didn’t do so that we could all sit back and have long lunches and bottles of wine together.

Pash: They want a result.

Reed: Yes. When I say I do feel the pressure of public markets, I think the main is reason is that one of the really good things about private equity is your owners are very close to the decisions that you make. You walk a journey together — there is a long-term commitment and you both buy into opportunities and risks. In a public market the ability to communicate clearly and succinctly to your shareholders is far more limited. Your shareholders don’t have the chance to pick up the phone and call you every week. And so the thing that I’ve been really trying to do is invest a lot of time in investor relations and being very clear as to what our strategy is, so at the end no one will be surprised. We’ve put our forecasts out there because we were confident we can meet those expectations.

Pash: You can’t get all your shareholders in a room to explain.

Reed. Correct. But you know I’m loving it! Eight years into the role it’s new again. There is a whole new element in the role of being a public company CEO, that brings variety, it brings new challenge.

Watch out for technology

Pash: Technology has changed your business, like it has a lot of others, hasn’t it?

Reed: It’s changed it radically. We used to sell desktop business management, accounting and tax compliance tools. It’s pretty much all online now. And that doesn’t sound like a big change but it’s huge. Our pricing model has changed, our customer support model has changed, our sales channels have changed and our products have changed. For example, we now link into the bank accounts of all our clients so that every night we bring in a secure feed of all of their transactions into their accounting software. We’re uniting the small business ecosystem; this isn’t just accounting software anymore. We now look at end-to-end business process, not just that little part of the journey that we used to manage inside the desktop systems. The great thing for our clients is that means many tasks — like entering data into their accounting software, to sending a copy of their books to their accountant – just disappear. Our technology means it is now all done for them. So the product is different, the value proposition is different, the pricing model is different. A lot of change.

Chart: MYOB

Pash: It’s a subscription business now rather than just buying a CD and loading the software.

Reed: Correct. And customers therefore have an expectation of ongoing service because they’re paying an ongoing subscription. We’ve always offered great phone based customer service, but we now also support clients through online forums and webchat. But beyond this it also means we’ve done things like building a superannuation clearing house into our payroll, taking hours off the process of paying super. We’ve used technology to automate the process of entering data from a supplier’s invoice, we’ve built a secure credit card merchant facility into our mobile app so mobile business owners can take payment when they are on site. All these offerings are ongoing services that we now provide as a part of our online accounting software.

The sales process

Pash: You mentioned sales. How has that changed?

Reed: We used to sell about 80% of new customer acquisition came through retail: Harvey Norman, Office Works, JB HiFi. Now over 90% of our sales are direct. And the channels of influence have changed. It used to be that by far and away the biggest input to making a purchase decision on which brand of accounting software to buy was the recommendation of your accountant followed by friends, followed by someone in the retail store. Today, the accountant is still number one but very close behind is online — online recommendations and social media. So we’ve had to build brand new skills in the organisation in digital marketing, in search engine optimisation and in social media because that’s an incredibly important influencer. The fulfillment channel is online so we’ve had to become an online retailer as well to be able to fulfill that demand that we both generate through accountants and through the online advertising and digital marketing that we do. It’s all changed.

Pash: I looked at your numbers and one of your key drivers is moving those people from the desktop to the cloud if you like. There is a lot of competition but if you’ve already got users, that’s your key conversion.

Reed: That’s the key strength of our business and an asset that we hold. And it’s a really interesting one because what you’re talking about is change management in small businesses, when often their view is nothing is broken. So a small business may say: ‘I’ve been doing my books this way for five years and it’s always worked. You’re sending me this email or your team are calling me up on the phone explaining why there’s something better, but what I have is not really broken — it keeps working fine.’ The opportunity for us is let them know that by moving online we can save them 10 to 20 hours a month – time they can spend building their business or time they can spend with their family.

Motivating staff

Pash: So if you’re spending a lot of time looking after these pesky shareholders, what about the staff? How do you motivate them to get up in the morning?

Reed: We’ve got 1,200 team members at MYOB so a big part of my job is leveraging through them. And I guess we’re very fortunate they’re knowledge workers and so set in the right direction and given the right tools, most people come to work to do a good job and enjoy the challenge of working out how to do some great things for our clients. The big thing for me is making sure everyone knows who we are and where we’re going. I talk a lot about our vision, values and brand, the things that define us as a team. And then about our medium term goals and key initiatives to achieve those goals so each person can see how they contribute to our success. My job is to provide the direction and ensure everyone knows how we define success – they can then work out the optimal path.

Dreaming of the future

Pash: So what are the hardest things about what you do every day?

Reed: I feel very fortunate. I love what we do as a business and I enjoy going to work every day. I feel quite humbled and privileged to be given the opportunity to have the role that I have because I think the work that we do is really important in supporting small and medium businesses, making life easier for them – easier to start a business, easier to stay in business. One of the challenging things when you’re in the tech business is how quickly some things change, and how long it takes to change others. It is often not difficult to identify an end-point, but seeing the path and anticipating the timing is wrought with danger. John Hagel from the Centre for the Edger has written about this. And so I spend a lot of time thinking about those things and if you look back at the last five years in our business, we knew that online accounting was going to be the way it would go … but when? Would it start with micro businesses first or would it start with more established businesses? Would the subscription pricing be attractive to some or to all? Would the product be attractive but the pricing change not attractive?

Pash: You’ve described yourself as a tech company. What is a tech company I wonder?

Reed: That is a good question. Who is not a tech company nowadays? Finance companies are now fintech, medical companies are biotech. There is a good reason for that, software is eating the world.

MYOB CEO Tim Reed.

The competition

Pash: Your competitors position themselves very much as tech digital, such as Xero? It seems to be a very crowded market.

Reed: Yes, Xero, Intuit, Reckon, Sage. The number of competitors in our category is rising. I’m really proud that we’ve continued to build our business and actually increase the rate of growth as the number of competitors has increased. I think it’s effectively an expanding category. There’s movement from desktop to online and more new businesses are entering the category. It is growing the overall market and so there’s more market to be spread around amongst more competitors. I spent 10 years in the US where in every category in the US there are at least four or five competitors. And in Australia we’ve grown up in lots of industries where there are duopolies. I think competition is really healthy, because ultimately the customer wins. I think it’s good for any market but especially for one that’s rapidly changing, innovating and evolving to have more players in it. So I welcome the competitors because I actually think the more competitors, the more we’re expanding the category and the better we serve our clients – it brings out the best in all of us.

Personal passions

Pash: So what about you personally; what makes you get up in the morning? What do you do for fun?

Reed: I’m the father of three — nine, 12 and 15 year old — so that keeps me reasonably busy in the time that I’m not at work. And I’ve got wonderful children but as any parent knows you know you can never find enough time to give each of them, from going out into the backyard and bowling the cricket ball to my son through to working with my 15-year-old daughter on her maths homework.
I’m also quite passionate about the community that we’re a part of and so throughout my life I’ve looked for opportunity for me to give back. I’m currently the chair of Oasis which is the Salvation Army’s inner city youth homelessness service.

I am also a member of the Business Council of Australia and really enjoy contributing not just from an MYOB perspective but thinking more broadly about how we build a productive economy, an economy of the future.

How to get ahead

Pash: Do you have any tips for people who want to get ahead? For getting started in the business world?

Reed: Be clear on why you’re starting a business. Different people do it for different reasons and they’re all valid, but it is critical to be very clear in your own mind. Are you starting a business because you want the freedom and independence? Or are you starting it because you really want to take on the world and you want to list on the Australian Stock Exchange? Or perhaps you’re doing it to pursue a particular passion. They’re all good reasons but it is critical to be really clear what is your goal and why are you there. Write it down and remember it because there are going to be curve balls and there are going to be things that come along that take you off your path. Having a strong sense of your true north is incredibly valuable.

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