Creative destruction. Sounds pretty menacing doesn’t it?
But don’t fear – rejoice! Innovation should be celebrated as it makes the world a better place.
In 1942, the Austrian economist Joseph Schumpeter described a process of ‘industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one’.
In simpler terms, imagine Darwin in a suit talking business.
Creative destruction is when new ideas and technologies redefine an industry by doing something much better than the status quo. In doing so, the old order is challenged and forced to either improve or perish.
Convertd is all about digital education and so we’re delighted to launch our blog series, Creative Disruptors, showcasing the hottest, most disruptive internet businesses. We’re kicking things off by talking with Gary Turner, UK Managing Director of Xero.
We’ve got several interviews lined up but decided to debut with Xero as we love their cloud-based accounting solution. Not only are we customers but we reference them in our digital marketing workshops as an example of an online business that uses the internet to transform an industry. They’ve just received investment from Peter Thiel, founder of Paypal and early investor in Facebook, and are expanding like crazy.
Without giving it all away in the first few paragraphs, we’ll let Gary do the talking. You’ll learn:
- His ideas on innovation
- Why the smartphone isn’t really a phone
- How software is creating new categories
- Why accounting is not like root canal treatment (anymore)
- The importance of design-led decision making
- Why Xero has banned ‘customer service’
As a bonus, you will also find out why it’s not the big that eat the small!
Frederic: So how would you describe Xero?
Gary: This is something I’ve been thinking about quite a lot about recently. I think five years ago if someone has asked me that question, I’d would have initially referenced an established or well known brand in our category – and in this case it would be Sage – and I’d have then said ‘We’re like Sage but we’re in a browser’, and back then being in a browser was probably our primary differentiator; our anchor point. But actually today, I think that’s the least of what identifies us as a business. It’s just a kind of elementary definition of what Xero does.
I’ve been reading some great commentary recently about where Apple are going as a brand. Insights from really smart people like Marc Andreessen and Horace Dediu who are two of the most insightful commentators on innovation and market disruption – Horace Dediu said something about the smartphone market the other day that really resonated. He commented that, although we call them smartphones, most people rarely use the phone part anymore. It’s a residual piece of functionality.
We have this tendency to define new innovations on the basis of what came previously. So, you’re defining the new innovation by what makes it different from what came before rather than what it stands for on its own merit. So while in the most simplistic sense we used to be ‘like Sage but in a browser’, much like the first automobiles were called ‘horseless carriages’, it’s becoming clear that Xero is actually much more than that.
If the ubiquity of the mobile phone was the necessary context required to give birth to the smartphone, and the habit of strapping a timepiece to your wrist was the equivalent context for the smartwatch to exist, then the habit of doing your compliance bookkeeping and accounting using a PC application for the last thirty years is Xero’s prevalent context, and by logical extension Xero is therefore the ‘smart’ accounting app – but this doesn’t really work as a label. Yes, we do your accounts. And yes, there’s that common DNA to the previous category. But we’re actually not an accounting software package in the same sense that a smartphone is not really a mobile phone, at least defined by core purpose or use. And I think that realisation is now just beginning to dawn on people for online accounting software.
Frederic: Is there a good way of summarising this process of innovation?
Gary: Marc Andreessen has a great way of describing this, which is to think about how software is being injected into existing hardware categories or even a business model, whether that’s mobile phones, wristwatches or the taxi business Uber, and in doing so creating entirely new categories or markets. The mobile phone was a great container for innovation. We all had them, we’d quickly become habituated to walking around with these devices in our pocket. That device context then became the necessary host for Apple and Google to then inject software into it and transform it into something quite different. And so the smartphone couldn’t exist without the mobile phone but very quickly smartphones became about GPS, email, cameras, social and apps, and all these other things that you look to these smart devices for. And so as Apple was to Nokia in the mobile phone market, Apple are now to Casio and other watch manufacturers.
So in that sense Xero is modern software injected into a the prevalent PC software container and in doing so is creating an entirely new category. It will take us longer to replicate all the functionality of PC based accounting software because accounting is much more complex than making phone calls or telling the time, but once cloud accounting attains some kind of effective parity with desktop accounting, then we get to really innovate around it. We’ve already got some stuff in Xero that doesn’t have any pre-existing behaviour or capability in a desktop product. There are a couple of bits we’ve still got to finish in core, but we’re pretty much there now and so were beginning to introduce functionality that’s completely new to the world of small business accounting.
Frederic: Are you a platform business and was that the ambition from the start?
Gary: Absolutely – we’re a platform business. I don’t think we necessarily began with the same, clear platform vision we have today in the same sense that I suspect Apple didn’t really know what they were building with the iPhone in 2006. You know what I mean? I think there was enough of an educated hunch and an instinctive belief that ‘there’s some goodness in here’ and there’s a massive opportunity and scope for innovation and disruption. But I’m sure Apple couldn’t articulate what that was for the iPhone the way they would today. And I think we were in that same category when we started out. But it’s much clearer today.
The economic and usability benefits of software in a browser meant you didn’t have to worry about patches, updates, downloads and antivirus, so that in itself was actually enough to get us going. And the convenience of logging into your accounts in an airport departure lounge are rudimentary justifications that were probably good enough to get going with. And it’s only when we got into it that we thought, actually, this is really quite interesting and we are actually building a platform, plus we had the good fortune to support that possibility by deciding early on to do things like build an open web API that makes building a platform much easier.
Frederic: People love how beautiful Xero looks. Are you making accounting beautiful?
Gary: Yes – Xero have always been completely focussed on the whole user experience. People used to say that doing your accounting was like root canal treatment. It’s not the kind of thing where you walked into the office in the morning and thought ‘Awesome! I’ve got to do my bank reconciliation today!’. Taking design and user experience seriously was a big part of challenging the assumption that accounting is painful and boring. We wanted to flip that expectation and then use it to our advantage.
I think one of the best things about Xero is that it’s fundamentally improved the relationship between a business owner and their accountant or bookkeeper. So, it’s not only a relationship between the business owner and their accounting, it’s almost like you’ve got this beautiful triangular relationship that didn’t really work very well before.
Frederic: I bet accountants up and down the country bless Xero every morning because it makes their lives so much easier. Because they’re automating a lot of the things that used to be manual.
Gary: Absolutely. Sometimes accountants can be initially nervous because they’re like “Whoa, wait a minute. I don’t have to do that anymore? How do I get paid?” And so we have to reassure them and educate them that the reason that they’re having to do all of this really inefficient compliance work for their clients is because their clients aren’t being helped by software. I mean, most small businesses don’t use accounting software at all. Most small businesses use notebooks and spreadsheets.
Frederic: Is that still the case?
Gary: Absolutely. And actually, the alarming thing – and this is what gets us really energised – is that firstly, around half of the UK’s total economic output comes from small businesses. The UK’s total annual GDP is something like 1.4 trillion pounds per year. I suspect most people would be very surprised to learn that half of that is generated by small businesses. Then, second, more than 50% of those small businesses are still using spreadsheets and paper to manage their accounting. It’s crazy that possibly as much as quarter of the UK’s GDP could be managed on a spreadsheet or pen and paper – it’s not a straight linear correlation like that, but it’s got to be in that ballpark.
Frederic: And that’s why Microsoft are not anyway going to go bust.
Gary: Exactly. And that’s incredibly motivating for us because for the first time ever, small businesses have an opportunity to run their affairs effectively and much more efficiently. And if we can effect even just a modest five percent improvement in the productivity of small businesses by getting them off spreadsheets and paper, and on to proper systems of record and real-time connections with their accountants, not thinking of accounting being like root canal treatment – even a five percent improvement on a just quarter of the UK’s GDP is something approaching £20 billion – and if you then think about how useful £20 billion would be for tackling chronic problems like youth unemployment where 750,000 young people are unemployed today. So this is a big thing we’re trying to fix.
Frederic: Obviously you’re UK MD and from reading the press, you’re also trying to make inroads into the US with Peter Thiel’s investment. Do you have European ambitions as well?
Gary: We do but it’s all about the right timing for us. If you look at the total addressable market and business universe of just the territories that we’re directly invested in which is the US, UK, Australia and New Zealand – New Zealand’s tiny but even just those three big ones, we have a combined addressable market of more than thirty million businesses. And then we have reach beyond that into other English speaking territories like South Africa, Canada, Singapore and so on. So I think our focus for the next couple of years is to just really set ourselves up to win the game in those initial English speaking markets.
Frederic: And is that a language thing or is it also to do with financial regulation and common law?
Gary: It’s probably more the latter. Language localisation is actually mostly an engineering challenge, and relative to accounting localisation that’s the easy part. The bit that’s more onerous is localising to comply with GAAP (Generally Accepted Accounting Principles) in different jurisdictions, all the reporting and localised accounting rules and regulations. If you just look at Europe, you’ve got not just language but you’ve got all this different custom and practice, the culture of doing business in Italy’s quite different from doing business in Germany. And it wouldn’t be efficient given we’ve got thirty million small businesses already in an addressable market, plus it would also result in a trade-off between some of the deeper innovation work we would want to prioritise ahead of localising a thinner product in more territories.
Frederic: I’m fascinated by Xero’s business strategy. New Zealand is a small economy yet I believe it’s served Xero very well by acting very much as a laboratory. You can really nail the product before scaling and I think that’s what the top team at Xero have done.
Gary: Yes, being much smaller the technology community is also much tighter. Everybody knows everybody! The degrees of separation are much smaller over there.
Frederic: You could almost say it followed the same business strategy as Facebook and Harvard. It used an institution as a network where there are existing relationships and just piggy-backed on those.
Gary: Absolutely. So smaller geography, a relatively small corporate infrastructure, tight networks have really helped. We’re also a quite big company there now with annualised revenues that have now passed a hundred million US dollars. There aren’t very many businesses in New Zealand that large. And now it’s probably a bit easier for my CEO Rod Drury to pick up the phone to a government minister and talk about an trade initiative that will carry some weight. Originating from New Zealand is great – we think of it as a test lab and so new ideas can get road-tested there quite easily, and if they fly then we’ll generally roll them out globally.
Frederic: A lot has been made about the importance of data-driven decision making. Do you use data to improve the product and operations?
Gary: We are design led but I’d say we’re are also quite data-driven. Not as much as Google is in an algorithmic sense. But we combine data insights with a lot of design thinking in terms of how we build product.
Frederic: One thing that I think is very interesting in the B2B space is how marketing has changed. Because standards for web design have improved with the ubiquitous use of Facebook, Google and Twitter, B2B businesses need to build B2C-like brands. An alien would probably say that Xero was a consumer, not a business brand.
Gary: We’re selling to small business and small businesses are the second largest market after consumers globally. So we’re kind of selling in B2B but in a B2C way because if I’m self-employed and run a plumbing business and perhaps I’ve got a couple of guys that work for me, I actually look more like a consumer in my behaviour. I don’t have a procurement manager or a CTO defining my IT strategy. My decision making around what I’m spending my money on in my business is approached more in the way a consumer would approach it. And so that resonates for us because we’re kind of selling to consumers who also run businesses, rather than the notional archetype of a ‘business person’ that doesn’t really exist anymore.
Frederic: And that must inform your marketing strategy as well?
Gary: Totally. We’re selling to consumer business owners who tend to make more impulsive decisions. They’ll say: “I’ve had enough of this, I need to get my accounts in order” and they’ll go online to find a solution and inside of half an hour they can be trialling or even using it. They won’t go and contract a consultant to write them an IT strategy paper.
Frederic: One thing Convertd does is to teach digital through analogies. So we’ve got one blog that compares Search Engine Marketing with digital imperialism. In our next blog, we are arguing that web businesses can learn a lot from well-run restaurants in providing a fantastic experience from end to finish. Xero seems to really value the customer experience in perfecting all the touchpoints with the customer?
Gary: In the traditional context you can easily imagine a customer service dept. or a customer support team and even just the language that’s used implies dysfunction ‘You’re through to the customer service department’ or ‘You’re through to the support department’ immediately creates this implied context that their customers encounter problems so often, they’ve created a dedicated team for it.
Instead, we call it Customer Experience. And that’s because we believe that you don’t buy Xero the way you’d traditionally buy software, we want you to have an integrated experience where the software is just one element. Every time you engage with Xero, we want you to have the best possible experience, whether that’s in the software or not. So for example, we deliberately don’t force customers to phone us as the first step whenever they need help because telephone based support systems tend to be inflexible and inefficient, neither of which create a great customer experience. They usually force the customer to self-diagnose (“press 1 for this problem, press 2 for that problem…”) and maybe after three minutes you get triaged through this automated experience and then, you get to explain the problem all over again to the person or multiple persons you finally reach!
It’s not that we don’t speak with customers by telephone at Xero, if your hair’s on fire with a real emergency then we’ll absolutely use to the phone because in those contexts the telephone is hard to beat. But the first port of call for every issue really shouldn’t be by telephone because that’s such an old world experience.
It’s also funny sometimes, that in creating this integrated customer experience we even have things like banned words, for example we try not to use the word ‘endeavour’ because endeavour belongs to a specific half-hearted category of customer service language.
There’s this British thing of saying to a customer “We’ll endeavour to resolve this for you…” which means we’ll use big, respect-conveying words to make it sound like I’m treating you seriously, but we’re not really”.
“I’m very sorry that you were dissatisfied with our service. We’ll endeavour to learn from the situation” basically means “Go away”.
And then if we’re at a public event, if we’re at an exhibition – not even one of our own exhibitions – all of our staff wear the same t-shirts. Not like some kind of weird cult. But there’s a kind of design led uniformity in terms of the great interpersonal experience that we would like you to get when you meet people from Xero. So, whether you are using our software, whether you’re looking something up in our online help, whether you’ve got a problem and you need it resolved or whether you bump into a Xero employee in the street wearing a t-shirt, we’re always thinking about that optimising and giving you a the best experience as a customer.
Frederic: Do you think that focus on Customer Experience is unique in software?
Gary: One of the coolest things about being here – and I’ve been in software for twenty years – is that in my previous career if I happened to meet a customer in a social situation instinctively you’d brace for impact because you know they’re about to launch into you about all the things they don’t like and present you with this verbal laundry list of things that they want you to address.
But at Xero where we all wear our t-shirts proudly in public and we’ll be in places like coffee shops or hotel lobbies where random people come over and ask we’re the guys that do accounting software, and then instead of complaining about what they don’t like, in my personal experience they just want to say how happy they with Xero. So, instead of getting complaints we get gratitude. It’s incredibly energising and humbling to be on the receiving end of that.
Frederic: The best software businesses out there today are more like partnerships with their customers. They don’t serve someone, they’re partners and you’ve a feeling that “you’re in this together”. Would you agree?
Gary: If you talk to me or if you spoke to my CEO, Rod, we genuinely get excited about what we’re doing for our customers. On the simplest dimension it just so happens to be accounting software that we’re in and we’re kind of making money and doing okay. But we’re completely energised about this huge, once in a lifetime opportunity to materially help millions of businesses.
Rod references this in the contrarian way Peter Thiel sees the world when he asks ‘What global business is nobody building?’.
Somebody has to build Facebook for business. And we think that we have a crack at applying for that job. Very different dynamics and marketing and monetisation models, but it is a huge opportunity in that big scale category.
Frederic: I want to talk about banks. Obviously they’ve had a lot of challenges recently – with the PPI miss-selling and the rise of peer-to-peer lending. Given the importance of banks to our lives, it’s surprising to me that they don’t act more like partners. Surely Xero is uniquely positioned to start offering additional services on top of just bookkeeping. For instance, with all that data you’ve got about a company, you could actively source them better deals for their utilities?
Gary: The last set of summary statistics I saw reported that in the twelve months to June this year, our UK customers processed around twenty billion pounds worth of transactions using Xero which in scale terms is about the same size as BT Group annually. And that’s doubling every twelve months, so a year ago it was about eight million which was about the size of a big national retailer like Marks and Spencer, and next year we’ll be well into in the thirty plus billion space. So, in that number must be many millions of pounds worth of spend with utility companies and insurance companies and so on. So this idea of utility group buying is kind of interesting, that one day we could be some kind of broker for that. But that’s still really just a hypothesis today and there’s a huge amount of complexity in getting to that, should we chose to in the future.
But I guess the other, possibly more interesting part is making it easier for businesses to get capital for investment because a) their accounts are good order and b) we enable those businesses present their financial fundamentals together in a way that the banks can more easily make lending decisions upon. So certainly from a lending risk perspective, we could build a capability in Xero so that a bank can press a button when somebody applies for a loan to assess risk more effectively than for example an Experian credit because they’re probably working on small fragments of mostly non-current financial information to inform something like creditworthiness or a lending risk profile. There are obviously data privacy and consent issues in that, but if we can find a way to turn this into something that was of great value to our customers and they opted in to it, then there is possibly nobody better placed help.
Frederic: This data driven approach could revolutionise the role of accountants too I guess?
The interesting thing in this data conversation is that accountants and already have a position of professional trust with the small business customers. So we think we can actually empower the accountant to not just offer a better basic compliance services, but actually become a valuable adviser to that small business by providing them with key performance indicators like monthly net profit on sales, reporting on and then helping to to reduce things like average debtor days performance, or giving them actionable advice like telling the small business owner that they’re now at the stage where they should be thinking about hiring more people.
Frederic: I’m a big one for quotes and was wondering if there’s any quotes, not necessarily business related, that use to motivate your teams?
Gary: Wow – tough question to answer on the spot!
I think this is one of Rod Drury’s ‘It’s not the big that eat the small, it’s the fast that eat the slow’ and speed is something that we really focus on. Go really fast and don’t procrastinate. And that can sometimes mean we misfire, we go down certain avenues and then realise “That’s a bit of a cul-de-sac, let’s not do that” but we’d rather keep the business moving forward. I guess part of that is because we’re paranoid that another Xero might come along. We want to get as far down the track as possible before that happens. But equally, I think we scare a lot of big established businesses and organisations whether they are competitors or banks or whatever, they’re very slow and ponderous in the way they go about things. And therein lies opportunity.
Another one I really like is more of a philosophy than a quote from the Marc Andreessen – “Software is eating the world” – where today I hope that Xero belongs to that generation of new software which bears little resemblance to old software, or how we used to think of software. Contemporary technology with the deep network effects and integration that creates a whole new opportunity for software businesses to use it to better effect.
Frederic: Well thanks very much Gary. It’s been a real pleasure. We could chat for hours but I’ve got lots of really interesting stuff that I’m sure my readers will love.
Gary: Cool, I enjoyed it too. Glad it was useful.
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