MYOB’s CEO, Tim Reed, on why he doesn’t need to go global to grow

Since its founding in 1991, Mind Your Own Business, or as it’s more commonly known, MYOB, has become one of Australia’s biggest tech success stories. Today it employs about 860 people, and the 12 months to September generated $212.7 million in revenue.

The custom of small businesses and accounting professionals pushed MYOB founder Craig Winkler onto the Rich List, but the history of the company has had its ups and downs. At one point its stock sold for nearly $8, but in 2009 it sold for a measly $437 million or $1.12 a share.

Today, it’s headed by Tim Reed, who took over from the highly successful Winkler. Despite the big shoes he’s had to fill, Reed seems self-assured. Under his tenure, the value of the company has gone steadily up.

He hasn’t always been so successful. Long before he was CEO of the company, now owned by private equity firm Bain Capital, Reed was vice-president of an American company on the brink.

“If I look back at when I felt the worst about myself, when I most questioned my own performance… it was then,” he tells LeadingCompany.

Until that point, Reed’s resume showed the conventional trappings of success. He graduated from Melbourne University with an honours degree in commerce. He joined strategic consultancy LEK, and after a few years was accepted into Harvard Business School to do an MBA.

From there, a summer job helped him realise his future lay in technology. “I knew I wanted to be a manager,” he says. “An operational, hands-on manager. I didn’t want to go into consulting or banking, which are the big things people go to from an MBA.” While studying, Reed spent his summers working at a vitamin manufacturing facility in southern Los Angeles. He was bored. “I wanted to be in an industry that was rapidly changing, where strategy development really defined the success of the company… an industry that was breaking new boundaries and doing new things. Tech married all that together.”

Reed says he was enamoured by Silicon Valley, and the model underlying start-ups and venture-capital, where 70% of start-ups failed. “That seemed to me to be quite gutsy – to get into business where you knew there was a huge chance of failure. When you knew, if you succeeded, you could change the way people lived, worked and related to each other.”

His initial forays into Silicon Valley proved a roaring success. Reed joined the leadership team of Internet Profiles Corporation. It was the first company to measure traffic on the internet. Its customers were the major advertising-based websites, then search engines such as Yahoo as well as major publishers such as The New York Times. In much the same way as television and radio audiences were verified, it acted as an independent body that could verify impressions to advertisers.

A year and a half after Reed joined, the company was bought out by Engage Technologies. “We were 200 people then,” he says. “Two years later we had 4000 people and were bringing in $500 million in revenue. That was a huge, huge success story.”

The fortunes of the second company Reed joined were quite different, and it was when he suffered his career low. DoveBid was trying to make money as a business-to-business auctioneer. The idea was that businesses with excess capacity or resources could action them off to other business, similar to the way things like Amazon worked for consumer-to-consumer auctions. It overextended itself, and was close to the brink in the early 2000s, during the carnage that followed the dotcom boom and bust.

It was a reality check for the gung-ho entrepreneur. “I was really attracted to that ‘live and die by the sword’ idea: that it works or you go out of business. But it’s very difficult being in a business that is failing. It’s very difficult remaining upbeat, and driving and trying to get to an outcome, when, for example, the company you’re in is losing money and you’re not sure you’re going to raise the next level of funding.

“The company was losing money and customers, and we had 90 days before we wouldn’t be able to make payroll, and we were burning more money than we were taking in … they were probably the worst moments of my career. I learnt a lot from it, which is the other side of that.”

Luckily for Reed, redemption wasn’t far away. He was headhunted to lead accounting software company Solution 6, which was bought by MYOB in 2004. The sale brought him into MYOB’s leadership team.

MYOB was then led by one of its three founders, Craig Winkler, and was expanding globally. By 2008 it had divisions in the United States, China, Hong Kong, Singapore and Malaysia.

That year private equity firm Archer Capital offered to buy MYOB for $736 million, valuing the company at $1.90 a share. Winkler rejected the takeover offer, causing a majority of shareholders to vote against Winkler’s remuneration package at the company’s April AGM. Archer eventually managed to buy MYOB in late 2008 for $437 million, or $1.12 a share. Although MYOB’s board said the price was a “substantial discount to comparable transaction multiples”, the company dropped its opposition to the offer fearing further shareholder dissent.

By the time Archer finally got its hands on MYOB, it had been led for six months by Reed, who took the helm from Winkler after completing a review of the company’s strategy. He believed it was geographically overextended.

“When I came in, our primary growth strategy had been one of expanding into international markets. My belief was that our next wave of business growth would come from our core markets, in Australia and New Zealand. I believed we needed to invest more in the next wave of technologies to be able to deliver what Australian and New Zealand businesses really need from us.

“Fortunately, I was given that opportunity to try those ideas,” he says.

Reed is referring primarily to online connectivity: MYOB’s newer products help its customers save time by automating processes. “Rather than being a little silo on the desktop, where the software could only interact with itself, now we have things like daily bank feeds, so someone no longer needs to enter those transactions manually, so they could flow those in from what had already gone through their bank account. And a whole raft of things around that vision, that our products are far more powerful if they’re connected to other people and other data sources.”

Reed says six in 10 Australian small businesses use accounting software, and of those, 70% use MYOB’s software.

Growing in such a market is a tough ask. But Reed thinks the business could grow to be three or four times its current size in Australian and New Zealand if all goes to plan.

“It’s about rethinking the solutions we bring to bear in the market. By doing that we can grow. For example, your mobile phone is very different to the one you had five years ago because someone rethought that solution, and got a better product to you, which has caused you to increase your spend and re-enter that category.

“There’s a lot for us to do in that vein. Our category is business management solutions – so, we put in a large investment in technology to be able to provide lots of small businesses the benefit of our investment.

“In financial management, which we started in and have strong market share in – there are innovations such as integrating with banking, allowing people to make invoices on mobiles, enabling people to scan invoices to automatically enter in data … We could reduce the time it takes for SMEs to do their books by 80%.

“By driving that productivity, we have an opportunity to win new customers and add value for our existing customers. So I think there are lots of opportunities for us to continue to extend our footprint. Not just in accounting – we’re looking at inventory management, payroll management, and we’re also making websites for a large number of Australian businesses. We keep adding to our solutions.”

Reed says he has no plans to extend overseas again, preferring to focus on current operations.

When Archer capital took over, the company supported Reed’s strategy. In August 2011, Archer sold MYOB to Bain Capital, reportedly for $1.2 billion – nearly three times what Archer paid just four years earlier. This led many analysts to conclude that Australian investors did not sufficiently understand how to measure value in IT companies.

Like Archer, Bain stuck with Reed and his strategy. Reed says he wasn’t overly concerned about whether or not that would be the case.

“We presented our strategy to them, so when they bought the business they bought it knowing the strategies that we wanted to employ, and frankly believing in them. They paid a premium for a business that wasn’t just a fixed asset that was stuck in the water, but one that had momentum, that had a vision, a strategy and a management team excited about growing the business going forward.

“If you’re selling a business that has those attributes, you tend to get a much better price for the business. You’d only buy a business in that case if you agreed with that strategy and had confidence in the leadership team to deliver on it. So no, I didn’t feel scared.

“That said, one of the things about working with private equity is that there is a board of directors who are very involved in your business, who get to know your business very well, who challenge on all aspects of anything from strategy through to operational delivery. I also knew that with a new board, I would be challenged, that they would question the strategy. They might agree on a high level, but when it came to the priorities within, for example, our product development, our product investment priorities and all that, they might want to know why I’ve got something as my first priority and something else as my fourth priority. I knew that that challenging would take place, but I think that’s a very healthy thing.”

In December 2012, the company issued $155 million worth of subordinated notes, which entitled bearers to a 2.5% discount on the company’s shares in an ASX initial public offering.

Despite this, Reed says he doesn’t expect the company will look at listing anytime soon.

“Bain typically holds their businesses for seven years, and they bought us a year ago. We’re years off that.”

Only one left: How Tim Reed built relationships with his new boards

Reed was the only person to remain on the board after the transition from Archer Capital to Bain Capital. When Archer first bought the business, he had some support in the form of CFO Simon Martin, who also sat on the board, but Martin left when Bain bought MYOB.

“When 100% of the board members change overnight, it becomes really important to get to know the new ones,” Reed says.

He says he built relationships with the board in much the same way he builds relationships with everyone he deals with.

“You need to make sure you listen well and that you’re present in all conversations. You need to make sure that you do spend the time – through thinking about the person, putting yourself in their shoes, thinking about what questions they might have, what concerns they might have. You can then be considered in your responses to their questions. You should contribute to the conversation as well, bring something to bear. You should ask questions of them, not just listen to their questions.

“If you do that in life, you form good relationships. You get to know people really well, you get to consider their needs and pre-empt them in most circumstances.

“That’s my strategy for forming relationships, period, and the board is no exception to that.”

Reed adds that boards expect their executives to have an excellent operational knowledge of the business as well as be across what is being presented. Here, a good memory becomes important.

Tech titan: Tim Reed’s do’s and don’ts

What’s the one thing a leader should never say or do?

“I don’t think a leader should ever abdicate responsibility. Part of being a leader is being responsible for things. As soon as a leader abdicates responsibility, blames external circumstances, looks to pass the buck, they’re extremely diminished in being able to lead in the future.”

What elements are critical to achieving change?

“The first thing you need to do is build a case for change. You have to explain to people why things need to be different than what they are today, then you’ve got to paint the picture of the path to change.

“If you fail on the first, just explaining what you want to happen will never, ever work. You’ve got to invest enough time upfront to bring people along with you.

“Once you’ve got that, you need a clear path as to how the change is going to be done, what’ll be different. You need to paint a picture of the end state to help people move together, to make that change effective. But don’t underestimate the importance of making the case for change.”

What makes a workforce productive, or more productive?

“Knowing what needs to be done. It sounds like a really basic thing, but if you can paint a big-picture vision for the company and get them excited about what it’s doing, and then tie their role to the company succeeding, then people don’t feel like they’re just coming in and doing a job. They feel like they’re part of a team that is winning out there in the marketplace – whether that’s getting the best customer-service scores of anyone in the industry, or however you define that. Ensuring that vision is really well-painted and that people understand it, and then tying the link from the big picture to what the individual contributes.”

What qualities do you look for in your direct reports?

“If I’m looking to promote someone to run a large division or to lead a team, the first thing I look for is whether they fit into the culture of the organisation. They’ve got to be people who operate in ways that naturally fit the values of our organisation. That doesn’t mean everyone has to be cut from the same cloth, but they’ve got to be comfortable operating in ways that fit our values.

“I look for people who think, who challenge things, who question things, who are constantly thinking about better ways of doing things, of innovating. At times I look for people with specific skills in the discipline they might be running. So, someone running our software engineering teams needs to have an understanding of the engineering and development process. That’s a skill that’ll make them more successful in their role.

“I also look for people who I fundamentally trust. And it takes me a while to decide upon that.”

What’s your favourite source of leadership inspiration or ideas?

“I love talking to our clients for inspiration. I love getting out and talking to SMEs, hearing about successes that they have, the challenges they have, and thinking about ‘how can we make their lives easier’. That’s the biggest source of inspiration for me – getting about and talking to our clients.

“The other thing that I do is I read a reasonable amount. I like reading business publications. I like reading about the different strategies that people employ. It’s really easy now – there’s so much great content online that I read plenty about business management.”

What was the worst moment of your career, or your career’s biggest challenge?

“I’ve been very fortunate in my career and in the opportunities that have presented themselves. But I think about the time I was in Silicon Valley, and I think about the start-ups that I was in. I was really attracted to that ‘live and die by the sword’ idea, that it works or you go out of business. But it’s very difficult being in a business that is failing.

“It’s very difficult remaining upbeat, and driving and trying to get to an outcome, when, for example, the company you’re in is losing money and you’re not sure you’re going to raise the next level of funding. I think being involved in a start-up that ultimately wasn’t successful was probably the moment where, if I look back at when I felt the worst about myself, when I most questioned my own performance… from the outside it felt like a really attractive model, but from the inside I always felt that I would be in one of the successful companies.

“Academically I could almost separate myself, say ‘this is a great business environment, and this is a great way for an industry to innovate and move forward’. When I actually got inside, and the company was losing money and customers, and we had 90 days then we wouldn’t be able to make payroll, and we were burning more money than we were taking in… the pressure of that environment, and, ultimately, being part of a company that failed, they were probably the worst moments of my career. I learnt a lot from it, which is the other side of that.

“So many of our customers are having hard times now. So I often think back to those moments when I was struggling.”

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