One in four New Zealand SME business owners reading this story will be users of Xero accounting software. It’s statistics such as this, and many more just like it, that are useful when it comes to describing the mammoth size of Xero and how it is truly dominating the cloud-based accounting software industry.
Equally impressive is that Xero is the number one accounting provider in New Zealand by a long way, and number one in Australia too – so much so that “the Aussies’ are trying to claim us,” Xero founder, Rod Drury says.
“The growth in these markets is unbelievable and it is looking like we’ll achieve the same result in the UK too.”
Xero has 700,000 subscribers, who are predominantly SME’s, based in 180 countries. In the last financial year its operating revenue grew 67 percent and its subscriber growth was up an impressive 51 percent.
“And what is freakishly exciting is in the last 12 months we saw 450 million transactions pass through Xero totalling a trillion dollars; the numbers were so staggering we had to go back and double check them.” All of these monumental achievements have been accomplished in just ten years of business.
The warm up
Rod has had a knack for computers since he was first introduced to them at Napier Boy’s High School. He saw the great potential in these new machines and became enamoured.
After passing School Certificate and simultaneously becoming the highest qualified member of his family, he followed his passion onto higher education at Victoria University.
Successfully completing his Bachelor of Commerce and Administration (BCA) majoring in Accounting from Victoria University, he took up his first job at Ernst and Young. It was the place he learnt his foundation skills and started thinking about more efficient business systems. Once this apprenticeship was over, he knew he wanted to work in software development. “There were no software development companies to work for – so we just had to start our own. We created the jobs we wanted.”
Creating the job he wanted saw him go on to create the software development and consultancy company Glazier Systems, in partnership with Tony Stewart. The company was sold in 1999 for $7.5m and still runs today throughout the country with more than 300 employees – something he is extremely proud of.
But for Rod his first start-up was merely a warm up – a testing ground for things to come. The follow-up act was AfterMail email software, a well-publicised development that allowed users to capture, archive, retain and preserve as well as search for emails.
It was bought by California-based Quest Software for a multi-million dollar sum. “It was designed to be built up and sold quite quickly. The great thing about it was that it won the best exchange product at Microsoft TechEd, proving it was world class technology, developed in New Zealand.”
“We are years ahead technically than any of the other main players. Our competitors now have the challenge of innovating to keep up with us and I think that will be very, very difficult.”
Now with the funds, skills and a well-known name, he had the tool kit he needed for his pièce de résistance – Xero, an accounting software company which gives small businesses a real-time accounting, invoicing, billing, bank system and more.
In 2006 he and fellow Xero founder, Hamish Watson (who worked as the virtual CFO with him in AfterMail), launched Xero. The company started out small, quite literally, with just five people squashed into a tiny apartment, but progress quickly accelerated and just a year later the company listed on the New Zealand Stock Exchange.
The move was regarded by many as gutsy, but Rod says it was a necessity to execute the long term vision. “We wanted to be a global business from day one. The only way we could do that is if we had some big venture capital.”
Critical infrastructure
Ten years on and Xero has skyrocketed. “It’s crazy now… we have a global team of more than 13,000 employees.” Driving that growth is its subscribers, of which it now has more than 700,000 worldwide. “For me, coming from a small set of rocks in the South Pacific and seeing the momentum we are having overseas is completely humbling, we are so proud.”
Getting accounting software off desktop computers and into the cloud was phase one of the game plan and linked to that aim was growth at all costs. He excitably describes Xero’s position as “near the end of the beginning” and on the verge of a transformation.
Having successfully established the cloud-based platform it is ready to change tack and accelerate the industry. “The speed of change is really going to pick up over the next few years and new technologies are going to gas-up.”
With more than $200m in the bank its focus is now on investing in innovation, managing its cash and growing sustainable margins. Xero is now inextricably tied to its users, and considered ‘critical infrastructure’ for the hundreds of thousands of businesses the world over that rely on its services for the day to day operation of their businesses.
To stay on top of its game Xero is continuously evolving the software with three to four updates a day, tuning the machines, adding new features and making little fixes.
Lengths ahead
Xero didn’t even exist a little over 10 years ago, but already it’s outmanoeuvring the giant incumbent competition in the industry. “It’s not that we’ve snuck up on them,” Rod says, “We’ve had the incumbents throwing the book at us for the past three or four years, but they really haven’t moved the needle.”
He says Xero’s strength is attributed to being an Internet native company. “Being technology savvy just isn’t in the last generation of providers’ DNA,” he says.
Accounting software provider Intuit is Xero’s biggest competition globally, and Xero’s beaten it in every market they both operate in outside of America. “Last year we added more customers globally to our brand than Intuit added to theirs and they spent $1.2b on marketing – so something we’re doing is working.”
Looking at the share of industry revenue among cloud-based accounting software, Xero is miles ahead of the competition. Why? Because “People will pay for value,” he says.
“We are years ahead technically than any of the other main players. Our competitors now have the challenge of innovating to keep up with us and I think that will be very, very difficult.”
Global economy
The services industry is globalising everything, Rod says. Netflix has globalised television, WhatsApp has globalised text messages, Amazon has globalised retail and Xero is at the forefront of globalising accounting software.
“The globalisation of this industry is something that is absolutely taking off and the numbers we are seeing are absolutely nuts.”
Coming from a small, isolated country, exports are of a big importance to New Zealand, but exports don’t need to be a physical product you can ship off. He says SME businesses need to change their way of thinking. “Now, thanks to technology, services can be exported as well.”
It’s time to look beyond the customers you can see in your local area he says. “Your market is no longer who you can see, your market is global and it’s important for businesses to understand these new trends because there are massive opportunities out there.
“Businesses need to think big, learn about technology and then get online and get into the big global markets.”
The future is here
The future has arrived and artificial intelligence will very soon be a part of people’s everyday lives. Xero is harnessing the power of machine learning and artificial intelligence to apply to its products. “Basically every small business now has a super computer working for it.”
Users of Xero can expect a huge amount of innovation in the next five years, with some exciting new products in the line-up and following in Xero’s trademark style, they will be kept beautifully simple for the end-user.
Simple products that work while you sleep is the future of Xero, Rod says. Products that will be seen in action as early as this year include an up-grade that’ll automatically categorise and reconcile bank transactions for the user and a system that will automatically pay the payroll seamlessly in the background.
“Accounting and payroll go hand in hand – small businesses need these things together – so it’s important to us we bring these worlds together.” These improvements represent a massive upgrade as “It’s going to free businesses up to focus on the things that matter.
“We are working on these products today and we’ll start delivering later this year. We are making change happen and it is super exciting.” Having mastered cloud-based accounting the sky is truly the limit for Xero.
By Lydia Truesdale
