Xero CEO on Global Expansion and Xero’s Future as a Data Platform (Xerocon 2019)

After a year in the big chair, Xero CEO Steve Vamos showed at Xerocon how he has been busy making his mark.

An introduction – Vamos is a veteran technology executive who has worked with some of the biggest names in tech such as former Microsoft CEO Steve Ballmer and Apple's Steve Jobs, when Vamos was VP for Asia Pacific at Apple in the 90s. His last full time job, as international vice president of the online services group at Microsoft, ended in 2008.

Since 2008 Vamos has taken directorships on high-profile enterprises in telecommunications, retail and health, and mentored senior executives including at Xero. Vamos is known for fomenting leadership, culture and international operations – three areas that fit Xero’s ambitions as it transforms from Australasian success story to a global entity powered by local subsidiaries.

Although he was effectively pulled out of semi-retirement, Vamos has shown he is all in – to the point of relocating from Sydney to New Zealand’s capital, Wellington, where Xero was founded and the location of its largest office.

I sat down with Vamos at Xerocon Brisbane (Australia) to find out how he was setting priorities for a global customer base, how Xero planned to build its data platform, and how it planned to encourage accountants to recommend more technology to clients.

The interview below has been edited for length and clarity.

Digital First: It feels like there's less focus on Australia as Xero becomes a global company. And you see it in the product strategy. You’re going for bang-for-buck decisions in R&D that will affect a whole lot of people at once, like say the Stripe integration, as opposed to more localised releases.

Australian accountants are complaining about payroll, or Xero Practice Manager – there's a bunch of acquisitions that have needed a lot of love for a long time and they haven’t had that. You've got a million options – how do you work out where to assign your R&D budget, country versus global?

Vamos: I would say that Australia and New Zealand still get a big, big chunk of the bandwidth. There was the Single Touch Payroll exercise (an Australian government-mandated initiative). In a period of six months, we turned around a stand-alone payroll solution to meet the market around Single Touch Payroll.

Prioritisation is a challenge. Look, you obviously want to do the stuff that has the most impact on your customers broadly. And then at the next level, you want to do what's going to help you in the markets that have the greatest growth potential and that are ready now. And then you're going to apply the investment in those things that are more newer and more speculative. That's the challenge.

The biggest challenge is really with the bank feeds and the compliance stuff, where markets have different actors involved and different requirements. I wouldn't say that we don't prioritise Australia and New Zealand…

Digital First: Not as much as you used to.

Vamos: No, that's right. If you said to me right now, if you had only one dollar to spend, and you could only pick one place, you go UK. It should be two or three times the size of Australia.

Fortunately, I have two dollars. So where does my second dollar go? It goes to ANZ (Australia and New Zealand). Because you have got to keep growing that business, we've got to invest in the capabilities to drive ARPU (average revenue per user) and drive depth of usage. So, and then, the more emerging markets are the ones there that you challenged to really make sure you're doing enough to keep them moving.

Digital First: How would you rate in order of market readiness to grow other markets such as South Africa, Canada, Singapore, Malaysia?

Vamos: When you go beyond the UK, Australia and New Zealand, you're really looking at North America. We've got a country manager in the US and a country manager in Canada. We had the focus in the US and then we moved out of that into the Canadian business. So they're great opportunities for us. Canada because it's very similar to Australia and New Zealand in size, in government, legislative frameworks and also banking systems. Still it’s early days, around 10% - 12% penetration of cloud accounting. Gotta go there, gotta think about that one.

The US – challenging but the way we're tackling it means that if we're patient we can participate really nicely in that market.

Digital First: Why the need to participate? You're big in the UK, big in South Africa. There's so much there, why spend your capital if you’re going stronger in other markets?

Vamos: It's a good question. Because it's just such a big market. If you said to me, if you said five years from now, picture a Xero that's proven it can build a nice business in the US versus a Xero that never tried, I think that I'd know which one I'd prefer to be.

Digital First: Why?

Vamos: Because I think we can build a great business there. If I didn't think that we wouldn't do it.

Digital First: Why do you think that is, if in the last five years, you don't have much to show for it?

Vamos: Well, because we've got 200,000 subscribers in North America, and I think the business revenue is 40 million bucks.

Digital First: How many of those are in Canada versus the US?

Vamos: There's still a big chunk in the US.

Digital First: Yeah?

Vamos: There's more in the US. If you're thinking that Canada is half that business – no, no way.

Digital First: Oh, OK.

Vamos: It's not. At XeroCon (San Diego, USA) we had 750 accountants and bookkeepers in an audience of 1000. So it was bloody good!

And the partners were like the mob here. You know, very passionate, love Xero, this is what you need to be doing. We just have to persist and we'll build a nice business.

I was involved very directly in talking to one particular prospect who was considering a big decision. A very significant firm, focused on small business, and they chose us over the alternative. The conversation was fascinating because there were things we have to do over the next couple of years that we've agreed we'll do to develop our business together, and I said, "Why don't you go the other way?" And the answer to that question was quite fascinating.

Digital First: What was that?

Vamos: They trust us. They trust us. They want to do business with us. Because we fostered that relationship, cultivated it, and were patient for many moons.

We didn't go in there and say, ‘Give us your money’. We went in there and said, ‘We want to help you on your journey’.

That's not going to happen with every customer. The US is massive - 30 million businesses, and then you take out those that are self-employed and you get down to 20. You take out those that don't have an accountant, you get down to ten. Ten million, right? In three to five years, I'd be happy with a million.

Why not? If you can create a nice business there. We don't have to beat Intuit to have a good business. This is not a winner takes all market. This will be a marketplace that rewards the participants commensurate with the value of their products, and their effectiveness of their go-to market. Those who do a nice job will be rewarded. I don't think it's just going to be one player.

What data do you want next?

Digital First: On the product front, there seems to be so many opportunities for capturing data from different sources. What do you think are the most important data sources to business would be, outside of the ones you already have, that you could add to Xero?

Vamos: Well, you’ve got enterprise connections, payroll, financial services, the bank connection, tax and compliance and the connection into the ATO. And you've got invoicing, so customers.

We're already touching most of those connections. Which is why that Hubdoc technology was so attractive to us. We have to not only further integrate and evolve the accuracy and speed with which we can ingest data, but we also have to commercially bring small business on the journey of using the applications that create those connections.

This structure that we talked about which is going to become more and more like a platform. Beautiful business means beautiful data, beautiful work flows, and more of them. And then using AI (artificial intelligence) and ML (machine learning) around that to create beautiful insights. That's where we're heading.

So the exciting thing is that a lot of what will make us the business we want to be in three to five years we're doing now. It's beyond proof of concept. The concept is proven. It's about scaling it.

Digital First: But what are the gaps? I know that you've hired three people for M&A. Clearly there's an appetite there.

Vamos: Okay, fair enough. So probably the most compelling way to look at M&A, even though what we end up doing may not necessarily 100% line up with this.

We have a strategic view, but then we go out in the market and we find out what's real and what's not. We have a really good view of the functions of a small business and the applications. It's a really nice slide that we have. And in it there's something like 12 columns, and we've highlighted where we play.

And then we've identified those (functions and applications) based on relevance that are the most interesting ones for us to look at potentially expanding into. And then the buy-partner-build question comes up and you deal with that.

But that is the most important page of our whole strategy document because that's the one that says this is the landscape you can operate in now.

The dimensions that are not represented there are geography, obviously, there's language, and there's size of customer. And capability. Maybe there's some phenomenal AI technology that we want to acquire, or it could even be a capability that improves our marketing effectiveness or our sales effectiveness.

There are, literally, so many different ways we can go and we'll be judged based on the quality of those choices. By our board, and obviously by our stakeholders.

The thing I feel really good about is the quality of the process by which we're going through the exercise, and I reckon we'll make good decisions. But we're not going to make rushed decisions.

We're not sitting on our bums doing nothing, we are exploring things.

Accountants as tech recommenders

Digital First: I'm really fascinated with this idea of developing the accountants as a technology channel. I can see you are pushing it with apps.xero.com where accountants can display personalised recommendations to their clients within the marketplace.

Obviously it's going to take a huge cultural shift for accountants to be effective at recommending technology, to be comfortable having those kind of discussions, to understand operational metrics and productivity and efficiency. How are you planning on doing this?

Vamos: There's a few things. So, first of all what Nick Houldsworth is doing to make it easier. To send people to a phone book with 800 names in it isn't particularly helpful. From there, you could get even more specific by saying here are the three recommended bundles for a retailer of this description. And it's like end-to-end, complete solutions that should cover most of what they need.

Then, you say, who are the accounts and bookkeepers that want to have this conversation? We can help set up interviews or conversations with those who are already doing it.

It's happening today. We need to understand the attributes of those partners, how long they've been on Xero, and what their journey is. Because then we can look at the channel more broadly and say, ‘Where are we in terms of maturity, and at what point does that trigger happen (where accountants start recommending apps)?’ Because it does happen.

Then you've got to look at our channel model. Our partner program is largely today focused on volume. How many clients you have determines how you interact with us. I believe that when we do our next thorough strategic review of our partner programme, it'll make a lot of sense to bring in another dimension. It's not just about volume, it's about capability (and the value-add). You've got to find and incentivise to get their attention.

Digital First: What is value-add to you?

Vamos: Value-add is having the conversations about how that small business ought to be doing more on Xero, upgrading their subscription, adding apps. So we ought to have something that says - actually, this is really dangerous, because this is not a real decision we've made. My team might say, "Steve, you're crazy. That's dumb." But – why not give our partners an app-attached target? And say, "If you hit your app-attached target, we'll give you a better margin."

So, that's one thing you need. The other one that's really important is also getting our partner's permission to enable direct engagement with their clients through our digital and direct channel.

This is something we're investing a lot in to make it even more effective. So that means tying demand generation. People finding us, trialling us, on-boarding, using and using more (of Xero), which is customer success.

Getting that funnel really working the way it should for a company of our scale is really important. Then Xero says, "OK accountant and bookkeeper, you guys are busy doing other stuff, but we're going to have that conversation with your client. We're going to send them a webinar on how they could be (using apps) by industry segment.”

Digital First: A recommendation channel is one thing. You then need to implement it. Do you expect accountants and bookkeepers to be the implementation channel as well? Let's leave aside expense management, payroll, and stuff which they do already. What about the hard stuff like inventory or field management?

Vamos: If the app is really easy to set up, a business will just use it. If it's a more complex implementation, then those who have innovated to create that product will have to inevitably provide that support. It may not come just from Xero, it might be from the software company that has provided the solution also does the support.

They would have to do that because the software company is going to benefit from the subscription. They're either getting the full subscription because we referred, or if it's part of a bundle they're still getting the value of the subscription less some of the sales and marketing costs they would have incurred if it wasn't us bringing them the business. A lot of this stuff is happening in the mid-markets and the high-end.

Digital First: So you think the small end of the software industry will mirror what has happened in the mid-size? Software companies will provide the installation?

Vamos: I think it has to eventually. One of the good things about Xero relative to say, NetSuite, and similarly the apps that connect to us relative to the peers in the mid-market, is they are implementing in less complex environments. So I would think that as a software company scales, the support structures within each of those companies will too.

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