Analysis: MYOB and the modern web

Did Bain buy short-term revenues or long-term vision?

Bain Capital has shelled out $1.2 billion to acquire Australia’s MYOB, just as the Australian accounting software company rounds the final turn of a $75 million investment program to propel it into the cloud computing era.

The sizeable price tag paid for MYOB only makes sense if that $75 million has been spent the right way – and some commentators argue Bain will have to spend more yet to future proof MYOB's revenues.

Today MYOB’s cash cow is desktop accounting software sold to professional accountants and small business customers. To keep the barrier high for new market entrants, the company historically required strong integration with the desktop operating system it was tied to (and little else), plus a dominant position in the retail distribution channel.

Luckily for MYOB's private equity investors, the great disruptive force to the retail desktop software model – software-as-a-service – has matured on many fronts but hasn’t seriously dented the revenues of the likes of MYOB, Reckon and Sage. Small businesses haven't flocked to the cloud quite as fast as assumed.

But as more small businesses get used to consuming software-as-a-service, start-ups like Melbourne-based Xero (originally from New Zealand) and Sydney-based Saasu pose attractive alternatives to the traditional suppliers.

MYOB and Reckon have announced initiatives to counter the threat.

Reckon launched Quickbooks Online in Australia in mid-2009, and last year introduced some efforts to include integration options for third-party software. It also recently signed a deal with Melbourne IT for the cross-selling of accounting software and hosting services.

Last year, MYOB introduced ‘LiveAccounts’, a software program hosted by Macquarie Telecom, which offered a basic set of accounting tools for small businesses with one or two staff for $25 a month.

Next year, the aforementioned $75 million R&D investment should result in an update to MYOB’s fully-fledged accounting suite AccountRight.

This new version will be integrated with Microsoft technologies such that data from the local system can be synchronised with the Microsoft Azure Cloud, currently hosted in Singapore, in a similar fashion to the way in which users sync data using Microsoft Outlook or Apple’s planned iCloud.

The beauty of this model is that multiple devices can be synchronised  - but at the same time a user won’t have to be unproductive when not connected to the web.

Is hosted enough?

MYOB expects to continue to generate most of its revenues from the desktop.

“You can’t go with a one-size-fits-all like some of the cloud-only vendors,” says Julian Smith, general manager of corporate affairs at MYOB.

“For those users that spend 15 minutes a day with the software, the cloud is fantastic, they are not so concerned about whether their access is over a browser. But for more complex users, situations where several people spend a lot of time doing data entry processing in the program, the micro-second pauses of a SaaS solution can be frustrating.”

MYOB continues to cite research it commissioned in December 2009 in which 859 SMB customers were asked their preference for cloud-only, desktop-only or hybrid accounting solutions.

MYOB claims that one in five was interested in SaaS solutions, but only four percent said they were willing to pay for it. The pure desktop model was still the most appealing, but the solution SMB customers were most willing to pay for (30 percent) was the hybrid model (versus 26 percent for pure desktop and four percent for SaaS).

But it could equally be argued that many of these customers wouldn’t have yet had the SaaS experience – certainly not what the world has come to expect in mid-2011.

Xero founder Rod Drury argues that MYOB has stuck to the desktop because it can sell differentiated products to the client and the accountant.

“Effectively the vendors have ‘double dipped’ by selling software to a small business to do its books and to the accountant to process the same set of data,” he said in a recent blog on the MYOB sale.

By contrast, Xero and its SaaS peers offer the small business and accountant a “single, shared, version of the data” that he calls the “Single Ledger.”  Xero offers the accountant-side software free to be as disruptive as possible.

“The roadmap the incumbents are delivering to accountants is expensive early-2000s style client server software, with dedicated servers and support,” he said.

Smith agrees that a “single source of the truth” can lead to significant savings, but laughs off the 'single ledger' threat.

“I don’t buy that as a cloud invention,” he said. “We have talked about this in the [accounting software] industry for a long time, only we call it a common ledger – a single source of the truth, in which the data stays in the one place. That is absolutely the cornerstone of our strategy. We’ve been talking about it for a while, so it’s flattering they have adapted that term.”

Smith said accountants can log-in (with client permission) to client systems rather than own their own copy of the software under the MYOB model – but concedes this usually requires the accountant to own and operate MYOB’s Practice Management Systems.

 “The SaaS providers may have neglected to explain that an accountant works in a different way to a business operator,” he explained. “The way they manipulate the data may make such an effort redundant.”

New Zealand-based SaaS commentator Ben Kepes tends to lean to Drury’s viewpoint, but wrote that it is “probably a little belittling of Bain Capital to suggest that they are so shortsighted as to buy a lemon, or that they have no idea of a strategy.”

He believes Bain needs to make two more smaller acquisitions for MYOB’s modernisation to be complete – Xero’s SaaS peers - Acclipse and Saasu, to offer “a consistent cloud offering that gives both client side and practice side functionality.”

Competitor Drury agrees that MYOB's strategy sees it "go online", but he doesn't believe it leverages the power of being online by introducing API's or versions that run natively in the browser.

"The cloud is many things – but one thing is for sure, being online is not enough," Drury says.

What do you think? Is MYOB’s Azure strategy the right play or does Bain need to push for a more radical transformation?