Staff and customers of accounting software platform Xero speak of it in awe. Duncan Greive heads to their conference to find out why.
“Xero gives me life,” he said, skin glistening, eyes blazing. Bhaskar Krishna Bitra stood before me in a corner of the Brisbane Convention Centre, clutching a Xero branded basketball and a Xero branded backpack. My colleague and I had approached him with a microphone and a camera, and the passion poured out of him. He spoke fearfully about the days of spreadsheets and manual data entry, then with wonder about automated bank feeds, and cloud-based software. “It means I can work from anywhere,” he said. “I spend more time with my family, holidays. I play cricket.”
He might have been the most extreme example of Xero fandom I met at Xerocon, one of three major events the company has around the world, but he was hardly the only one beaming. Indeed, in its own way, the emotion bookkeepers, partners and staff feel for Xero feels related to the way my eldest daughter used to feel about One Direction. It’s much more restrained, obviously, but there’s a similar sense of a club into which only true believers can gain entry. That only those within its walls really understand.
As one of those outsiders, I found the passion of the Xero believers disconcerting. Because ultimately it’s accounting software. Because as a society we’ve spent generations caricaturing accountants as square, dull, rules-based pencil pushers who exist only to restrain the wild visionaries of business. It’s one of those lame discriminatory clichés we don’t scrutinise because it helps the non-accountant majority feel superior to some class of people. And likely because accountants are, by their nature, unlikely to complain too loudly.
The cliché has played a part in putting something of a wall up around the business as far as mainstream understanding goes. Compared to other big New Zealand entities its work is mostly done overseas, and harder to wrap your head around. Fonterra and A2 sell milk. Spark is a telco. Fletcher Building (mostly) build things. Xero is cloud-based accounting software. Which is what, exactly?
That lack of understanding means that New Zealand’s relationship with Xero is slightly distant: despite it being our biggest tech success, the Lorde of our business community, it’s more nodded at than embedded into our psyche. More importantly, this somewhat prickly relationship has encouraged a polarisation in the business community’s relationship with the company: either you uncritically embrace it or cynically doubt it. The larger, more complex and likely accurate area between those two perspectives feels underpopulated. I was curious to know more, so when they offered to fly me across to Xerocon Brisbane, I felt unable to resist.
The invite came in large part because they seemed to really glom onto our coverage of last year’s event. Our then-business editor (now head of business for Stuff) Rebecca Stevenson attended, and memorably characterised it as ‘Coachella for Accountants’. The phrase stuck, and was repeated back to me in interviews and from the stage multiple times, and I was curious about how that apparent oxymoron was made. More than that, I wanted to know what this New Zealand company, which defied the odds to grow very large, very fast, felt like in this environment. Whether it was hype or reality or, more likely, what ratios of each made it work.
One thing which is relatively poorly understood about Xero’s success is the role open architecture has played in its expansion. Open architecture simply means that outside developers can have access to it as a platform – just as they do with Facebook and Apple’s app store and Google’s Android operating system.
It’s not a coincidence that those are three of the world’s 10 largest businesses. Creating platforms into which other companies can grow and innovate has been one of the signatures of this era, an extraordinary business anti-gravity which often provides income through clipping a percentage of fees charged, new customers through specificity of service and way of locking people into your business by providing even greater entanglement.
Put it this way: if the idea of building a new profile on a social media network or porting all your apps and passwords to a new operating system gives you a headache, imagine trying to do that for a business at any scale. It’s easy to join Xero, but very annoying to leave.
While it’s now ubiquitous – every second startup wants to be a platform – when Xero was founded in 2006 the idea of open architecture wasn’t a natural business archetype. App stores hadn’t launched and Facebook significantly trailed MySpace. Xero didn’t make the decision because they somehow mystically foresaw the future; they made it because there was no other way to achieve their aims from New Zealand.
They were battling capital, scale and geography – so the best way to expand outside of New Zealand was to allow others to build for them. Accounting is by its very nature a deeply complex exercise. Even within New Zealand, famed for its simple, elegant tax system, a gas station in Mt Roskill has to charge a different fuel tax to one in Mt Maunganui. When you get to Europe, it gets much more complicated. In America, with its famously byzantine tax code, multiplied by 50 states – forget it.
Unless you have open architecture, and firms can build out apps to handle all the intricacies of different jurisdictions. Xero’s extraordinary growth, to 1.4m business customers, over 1m outside of New Zealand, would have been unthinkable without this network.
The other innovation was to turn accountants into salespeople. Xero is a classic example of automating away jobs: the process of reconciling accounts was formerly a very labour intensive one, very spreadsheet-based. Xero makes it a matter of a few button clicks. Great as a time and money saver for a small business owner; very worrying if you’re that business’s accountant.
Xero could have faced an insurrection from the trade – it was deeply vulnerable to accusations of taking away jobs which accountants had trained long and hard for. In England in the 80s, guitarists in the musicians’ union campaigned against synthesiser manufacturers, so the futility of a cause doesn’t prevent it being taken up in earnest. Xero turned that on its head by making accountants into salespeople – The Spinoff was onboarded by our accountant, Glenda – who make a small fee every month, and get to avoid the drudgery of line-by-line reconciliation, while retaining the higher value and more stimulating work of producing annual financial statements.
It was these two groups – accountants and partner tech firms – which bought the $1000 tickets (they sold out 3500 of them) and made up the majority of the crowd at Xerocon. The conference was a strange beast. The main hall featured a DJ with dark angel wings playing EDM versions of recent pop songs before 9am, as thousands of somewhat sleepy attendees filed in. From the stage came a mixture of Xero staff talking big picture and small innovation – the major announcement was Xero Learn, a partnership with universities including AUT that will see them training people to work with its systems.
There were outside speakers too. Genevieve Bell is a professor at the Australian National University, who convincingly argued we were moving into the AI age, a revolution as profound as the industrial. She’s set up an institute to try and map it and her talk was extremely good and interesting.
The following day saw Mark Manson in the same slot. Manson’s the author of The Subtle Art of not Giving a F***, the book with a bright orange cover that most contestants on Heartbreak Island were reading. He presented as this genial guy saying things that we all thought but were too afraid to admit, but the subtext was that people’s lives are the way they are for a reason, and there are no victims. Or at least there’s no sense in worrying about whether some people get a bad deal. It’s actively stupid and dangerous, an extraordinary message for a middle-class white guy to be toting around the world in 2018.
So: not all good. But the real action was in the exhibition hall alongside, where various app makers gave away merch and sold their services. Most were independents, but some, like data capture firm Hubdoc, were firms which had been acquired by Xero. This is one of the most powerful advantages the open architecture platform has for its creator: perfect visibility over what is being used, and a sense of what its value might be if rolled out elsewhere, or rolled into the core product.
That kind of power is associated with bad actors: think about Facebook, which acquired Instagram in 2012 and tried to do the same with Snapchat a few years later. When Snapchat’s Evan Spiegel turned down Zuckerberg’s overtures a few years later the Zuck famously copied its signature features into Facebook and Instagram and… well Snapchat’s not doing so well anymore.
Similarly, there is a very rich irony contained in Xero. One of its signature features, one of the things that really helps small business owners, is the way it simplifies paying tax. Small businesses pay a lot of it: GST, PAYE, company tax. After your first year, you get this amazing gift where you get to start paying tax in advance based on what they think you’ll earn! It’s a real treat.
The reality is that our biggest tech company makes tax easy for small businesses, while the very large businesses that operate in big tech famously do anything they can to avoid paying it. A double Irish with a Dutch sandwich sounds delicious – but it is in fact an accounting ploy taking advantage of various tax laws to move intellectual property and income around so as to contribute as little as possible to the public purse.
To her credit, Xero’s Anna Curzon acknowledged the irony, along with other tech horrors like the way it venture funds and treats women and minorities. And while no one is suggesting Xero is engaged in such practises, Curzon was happy to admit the dissonant contrast between what it does for small business and the behaviour of the larger tech sector in which it operates.
There are other things about Xero which give me pause. Peter Thiel, the Trump-backer who destroyed Gawker (which probably deserved it, but still) is a major investor. Not only that, but thanks to a sweetheart deal with the government the investment was largely risk free. Matt Nippert’s reporting on that shitshow remains required reading.
The firm’s relationship with the business press in New Zealand has often been tetchy. “It’s a bubble,” one business journalist told me a few years ago, referring to the then-giddy heights of its stock. He was right, in that it fell from the $40 range back to the teens. But the sentiment that Xero is not a real business has rumbled around for some time.
This is in large part because New Zealand has only had limited exposure to high-growth tech businesses, and even less on its stock market. To those in the traditional business sector the idea that larger and larger losses be correlated with higher and higher valuations is anathema – contrary to everything they’ve been taught. To business journalists steeped in that world it likely had a similarly quixotic quality.
The appropriate response would have been to ignore the critics and stay the course. Yet Drury appeared to hear them, be frustrated by them – and announcing positive operating earnings earlier this year could be viewed as a kind of middle finger to critics who suggested that it was all a kind of sophisticated pyramid scheme.
A brilliant recent analysis by the investor John Hempton suggests that chasing profit over aggressive expansion was one major error. The second, he contends, was moving into the US ahead of Europe. Hempton sees it as a lower priority due to its lack of a value-added tax, and the aggressive US arrival as having convinced Intuit (its leading incumbent competitor) to make a major play into the cloud-based world.
Yet despite these mistakes and contradictions, Xero remains, for the most part, a study in ambitious plans pulled off, and an extraordinary business to witness up close. The crowd was genuinely super-diverse, and all I spoke to (upwards of a dozen people on the conference floor) couldn’t muster a single complaint about Xero between them. Indeed, the overwhelming sense was of gratitude. I’m not an accountant, but I get the feeling that accounting prior to Xero was extremely boring in parts. And that the most boring parts have been automated away thanks to the incorporation of bank feeds into Xero.
The senior staff I spoke to had a similarly beatific vibe, to a near-nauseating extent. They worshipped Rod Drury, they loved the company culture, they had a sense of mission: it’s not just about making the books balance more easily, but nothing less than to “rewire the global economy”.
What form that will take remains to a certain extent unwritten. Perhaps that is in part because businesses like Xero are inherently fast-evolving. But it’s also because the man who said it, Drury, is no longer CEO. He resigned abruptly earlier this year, and while he remains a cult-like figure around the business, and on its board, Xero is adjusting to life with a lot less Rod.
The departure of driven, visionary founders is often a signal that a more mature and boring business will emerge from its wildcatting era. This is Xero’s signature challenge now: continuing to keep its pace of evolution up with a new team involved.
Failure to do doesn’t look too bad: it has dominant market share in New Zealand and Australia, while its growing strongly in the UK. Even if it never cracks the US or Europe, that’s still a great base. At any point it could cool its innovation jets and become a solidly profitable entity, one with a very strong moat thanks to the way it enmeshes itself into the businesses it uses.
Yet it retains major upside. Hempton made one very bold claim in his analysis: “Xero is the only Australian company with the potential to be a $100 billion global tech behemoth.” It’s a scarcely imaginable figure: the total value of every listed company on the NZX is only $140 billion. Putting aside his dubbing it an Australian company (there is a debate; I just find it boring), the case rests on significant growth and expansion in the service and therefore value it can provide to its customers. It remains a very imposing mountain to climb. But no more difficult than the one it is already atop.