Virtually challenged

One for the books: MYOB’s Tim Reed takes stock of the competition

Five months after becoming chief executive of household accounting brand MYOB, Tim Reed made a decision to cut the company’s $40 million losses in China and a smattering of other Asian markets and retreat to its home base.

As well as writing off the massive investment, the decision meant turning his back on what everyone believed – and still believes – is the world’s largest emerging economy.

For the 39-year-old, first-time chief executive of a high-profile publicly listed company, the decision was a no-brainer.

For almost 10 years the software developer had lost money hand over fist in China without gaining an inch of ground.

“Analyst briefings were overrun with discussion about this investment which wasn’t contributing a single dollar to revenue and had no hope of doing so any time soon,” Reed says.

That soon changed. In October 2008, in the midst of an internal restructure as the global economy teetered, MYOB became the target of a hostile takeover.

Private equity consortium Manhattan Software Bidco (backed by Archer Capital and HarbourVest Partners) offered $487 million or $1.02 a share.

MYOB was trading at about 92¢ with a market capitalisation of $350 million but the board felt Manhattan’s bid was too low and told shareholders to reject it.

After a bitter battle, the software maker succumbed but not before raising the bid to $1.16 a share. MYOB de-listed in January 2009.

The decision to refocus MYOB’s efforts domestically has paid off. Earnings before interest, tax, depreciation and amortisation jumped 23 per cent to $69 million for the 12 months ending December 31, 2009.

The company simultaneously increased profit margins from
31 per cent to 40 per cent of revenue, while increasing its product development spending by more than 10 per cent to $21 million a year. “Achieving this during a global financial crisis shows more than anything the power of a focused business strategy and focused execution,” Reed says.

However, MYOB’s growth is now totally dependent on extracting more revenue from a market in which it already holds 70 per cent market share. Two in every three businesses use MYOB software to manage their finances and MYOB claims to have more than 70 per cent market share among accountants.

Where will the software developer’s growth come from?

Reed’s greatest challenge might still lie ahead of him, that is, moving MYOB to an online software delivery model.

Google, Skype and Facebook pioneered online software as a concept that convinced people they didn’t need to own computer software to use it securely.

In the world of accounting, it allows an accountant and a business to work off the same set of accounts in real time.

The client pays a monthly rate (about $49) to access and populate the software and gives their accountant permission to view and manipulate the data.

Fledgling brands, such as Xero and Saasu, have stolen the march on this. Two years ago MYOB and its chief rival Reckon announced online versions of their software but accountants are still waiting to see it.

The cost benefits to accountants are so enticing that they’ve started bailing out of traditional accounting products in big numbers. And they are taking their clients along with them.

“It saves us 30 to 40 per cent of the time we’d normally spend on financial statements,” Timothy Munro, director and chief executive of Brisbane accounting firm, Specialised Business Solutions (SBS), says.

“We still charge the same, we’re not reducing our costs to clients but we’re offering more advice to make their businesses more profitable – succession planning, income insurance, depreciation schedules for clients with rental properties.”

Over the past six months, SBS has convinced 30 of its clients to ditch MYOB for Xero. Over the next two years it expects to move several hundred more.

As a result, MYOB will lose not only the $14,000 a year that SBS pays to use its software but also the $600 software package.

Perhaps the greatest endorsement of brands such as Xero is that MYOB founder Craig Winkler bought a sizeable stake in the start-up when he resigned his interest in MYOB.

Reed is confident that MYOB’s online software offering will be technically superior to anything now on the market.

He also wants to extend MYOB’s reach into broader business management tools. In 2008, MYOB bought two web hosting companies – SmartyHost in Melbourne and Ilisys in Perth – to advance this agenda. The idea is that businesses can connect their MYOB accounting software to a website so customers can automatically place orders online.

The concept of becoming a business management hub, although noble, thrusts MYOB onto a new field of competition. It remains to be seen how it performs in this arena while defending its home turf against new entrants.

Small tweaks, big gains

More than one-third of fast-growing businesses surveyed by Business Review Weekly in April said “better business practices” were the main contributors to growth through the 2008-09 financial year.

MYOB chief executive Tim Reed knows something about this. MYOB switched from an accrual accounting model for its product development to a straightforward write-down each year.

It sounds like a small thing but the impact has been immense, both on financial analysts’ perceptions of the company’s fiscal discipline and empowering management to invest more aggressively in product development.

Accrual accounting spreads spending over three years, so two-thirds of what’s reflected on the profit and loss is a result of action taken the year before, or even two years before..

“It’s messy,” says Reed. “Management felt like they weren’t in control. It made people more conservative about product investment.”

MYOB has also re-jigged its system for product development. Now, a single person is responsible for sales, marketing and product development for each customer segment. Under the previous model, the person responsible for small business in Australia would hand a wish-list of product enhancements to a global product management team, which would hand it to a global product development team. Enhancements went through three layers of filtering and the people who were ultimately responsible for product enhancements were not accountable for financial results.

Every year there was a bun fight for funding and the result was a series of trade-offs between managers in Australia, Malaysia, Singapore, et cetera, Reed says. Under the new model, each customer segment manager is responsible for his or her own profit and loss. “It’s increased accountability,” says Reed. “Managers have all the things they need to make things happen, there are no excuses or places to hide. Decision processes are much faster as a result and the product enhancement cycle is shorter.”

BRW

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