Sage is the contrarian of business applications. While the rest of the software sector – Oracle, Microsoft, SAP, Lawson and others in enterprise resource planning (ERP) – strive to deliver global products that can be deployed in most major countries, Sage offers different accounting, different payroll, different HR, different manufacturing packages for each country in which it operates.
While other large applications vendors spend heavily trying to integrate all the technologies they acquire, no matter what their origin, Sage’s integration efforts are almost exclusively restricted to country-specific suites, with even the strongest technologies it develops or acquires rarely making it across another border.
‘Locally-developed business software’ is the company’s name for the model, but in defying the received wisdom of global software, Sage has raised some eyebrows. From its modest roots as a Newcastle-based supplier of small business accounting software in the UK to its acquisition-fuelled global profile, Sage has become an industry powerhouse.
The company has grown to become the world’s third largest business applications software company, after SAP and Oracle, with annual revenues of £776.6 million ($1.35 billion), 4.7 million customers served by 23,000 resellers, 10,000 employees around the world and a fabulously successful acquisitions execution model that is the envy of its rivals.
Not content with its rock-solid franchise in small and mid-sized accounting software, though, during the last three years the company has been carefully orchestrating a radical expansion. Over those years, it has acquired more than a dozen companies across three continents and pumped almost 30% of its software revenues into R&D, with a clear purpose in mind: leadership in mid-market ERP.
But to get anywhere near that point, it needs to expand on the mid-market presence it has built in the UK and US since 1999 and extend its international footprint in mid-market ERP, while continuing to broaden the scope of its applications functionality across all territories – before, as Paul Stobart, CEO of Sage UK puts it, “the guns start blazing”.
That fire is going to come from above and from the side. Oracle, SAP, Lawson, SSA and scores of others are pushing down into the small and mid-sized enterprise applications market, seeking customers with anything between 50 and 2,000 employees. Alongside them are local European vendors such as Agresso, Exact and Systems Union, intent on fighting their mid-market corners. But, as George O’Connor, an analyst at investment firm Shore Capital, highlights, “the really spectre that haunts Sage is Microsoft” with its multi-product assault on the mid-market applications sector, recently lent additional coherence with the launch of the Microsoft Dynamics brand.
What inspires confidence in Sage executives as they face that barrage? The word ‘localness’. Unlike rivals who have been busy internationalising and rationalising the vehicles they have acquired for entering the mid-market, Sage is applying its historical formula – build or acquire locally and then keep it that way.
In Britain, for example, its accounting modules already push into what is confusingly termed as the mid- and upper mid-market with four core products (Line 50, MMS, Line 100 and Line 500). At the same time, there is a long list of other functionally similar products in France, Germany, Spain, the US and in other areas such as Eastern Europe, Australia and South Africa.
But as it addresses the requirements of a more sophisticated customer base, the demand is for more than just accounts; these customers want tight integration between core financials and other business applications (supply chain, manufacturing, customer relationship management and many others) and for the whole suite to be attuned to their particular industry segment. To address that Sage is applying its locally-developed formula to deliver industry-specific software for manufacturing, for logistics, for retail and other verticals. In pursuit of that goal, in the last few months alone, it has bought ERP and logistics software specialists in France and mid-market accounting in Spain.
“We understand the role of software in local markets; that is what we are about,” says Sage’s Stobart. “I insist to our development teams, product management teams, marketing teams that we remain passionate about ‘localness’. And that means localness in terms of how we design products, the way we look after customers and our presence in the field with customers and channel partners. Microsoft, SAP, Oracle don’t have that.”
Few observers doubt the efficacy of that Sage model when it comes to accounting software. Companies – at least those that do not need to have standardised accounting software across multiple countries – tend to trust that local software companies will implement new legal and fiscal requirements of their home country quicker and in greater depth than those providing ‘internationalised’ products. But there are questions about how well that model will work further up the food chain, where a mid-sized business might be more likely to have an international manufacturing or sales operation that needs applications available in multiple languages and integrated with other core ERP applications.
That is territory Sage wants to occupy. With the accounting sector not likely to show much near-term growth, Sage executives know that if the company is to sustain the slope of its revenue curve, delivering an ever broader set of mid-market applications is essential.
“No-one should think we are dabbling; we are deadly serious about the mid-market. We are very strong at the small business end [but in that space] there is not a lot to go for. So if I am looking for growth, I have to get into markets where we are not as present,” says Stobart.
And that seriousness shows in multiple areas: the rapid ramp up in R&D investment; the re-orientation of the organisation to be market facing with closely targeted verticals; the integration of multiple products to form a suite of offerings; the expansion into other ‘horizontals’ such as customer relationship management and business intelligence; and the assurance delivered to the company’s indirect sales channel that Sage is going to support them as it moves up.
At this stage, in the UK, about third of the company’s revenues come from the mid-market, but Stobart recognises that Sage does have a “brand and reputational issue” to overcome, in that it is perhaps too well known for small business accounting.” That may be a blessing in disguise, however.
“The biggest thing we have above everybody else is the customer base. We have 250,000 Line 50 businesses, for instance, and even if only 1% of them grows fast and upgrades to a big system, that’s 2,500 companies looking to upgrade to our MMS or Line 500 products,” says Stobart.
“None of our competitors have that constant stream that our channels partners can focus on,” says Stobart. And that feedline will help stop many of those partners defecting as rival products such as SAP All-in-One or Microsoft Dynamics AX gain momentum.
“The focus on our existing installed base is one of the reasons we think we can win in the mid-market in a way that Microsoft (who are really starting from scratch) and SAP and Oracle (who are pushing down) can’t,” says Andrew Buckley, director of manufacturing solutions at Sage UK. “We have an install base the best part of 500,000, many of whom are constantly growing; we can move with them as they push into the mid-market. We are absolutely leveraging those existing relationships,” says Buckley.
During fiscal 2005 alone, 70,000 customers purchased new mid-market products – either as new customers or by upgrading from small business products, the company reports. And although two-thirds of its business in the UK is still derived from that small business end, on a worldwide scale its acquisitions have ensured that split is reversed.
But Sage is well aware that that will not be enough – meeting the requirements of customers in specific markets will be critical and that is not one of its historical fortés.
Pillars of wisdom?
With that in mind, in October 2004, the company made a conscious effort to move away from a product structure and to reorganise around ‘market-facing pillars’, says David Karlin, MD of Sage’s mid-market division. Those pillars are the mid-market verticals of manufacturing, construction, distribution, retail, non-profit and business services.
“To play effectively in the mid-market we had to a large extent take a verticalised approach,” says Buckley. “We had to engage with existing and prospective customers in terms of their individual businesses.”
That push into vertical markets is again grounded in local software. “We are not trying to apply an international solution on a mid-market customer’s problem,” says Stobart. “We are offering a local solution, built with local fiscal and legal understanding of the customer’s industry. So in construction, we understand if you put a quote together for a construction project in the UK, it is utterly different in style from the way it is put together in America. The way you pay contractors is different; the estimating process is different; the clocking in and union rules are different.”
“So if our stuff is built with all of those local issues mind, then that is a huge step forward for any construction company; it makes sense for them to use something that is attuned to their needs,” he says.
As such, the company makes a virtue out of “not forcing the American way of doing things on you”.
While a large manufacturing enterprise will adopt a set of processes (and the software tied to those) and apply them across its global structure, a less internationally oriented organisation will chose Sage ERP because the company “understands what it is like to be in manufacturing in Britain”, says Stobart.
While most of the building blocks are in place for manufacturing software (at least in the UK), the company is trying to flesh out other areas through development and acquisition (its non-profit offering, for example, still has many gaps).
The question is: Just how efficient is it to fill those product requirements country-by-country, vertical-by-vertical, effectively establishing a matrix of functionally equivalent ERP products?
It will be a few years before the answer to that emerges, but Sage has already earmarked two application areas as suitable for global roll out. Having acquired the CRM products Saleslogix and ACT! in 2001, and brought those together with the eWare online CRM product inherited from its buy-out of ACCPAC, Sage finally launched a separate CRM division in October 2005. With such a vast global base to sell into, that trans-national product line is proving popular, especially for many companies that were interested in CRM but could not stomach the prices being charged by Siebel, Oracle and other high-end players. During the past year CRM revenues in the UK rose 10%, although they still only account for about 7% of revenues.
CRM is also proving to be Sage’s trial area for what is viewed by some as a fundamental shift in the way software is delivered.
In October, Sage launched SageCRM.com which provides subscription access to CRM applications over the web for a flat fee of £50 per month, inclusive of support. But there is a difference between the Sage on-demand service and those of others such as Salesforce.com. Its ‘Rent to Own’ package enables businesses to start by paying a flat fee and then later acquiring the package. “For the first time businesses have a way back from a hosted package to an on-site system,”‘ says Richard Bee, director of CRM at Sage UK.
Despite that move the company is still tentative about software as a hosted service. “There are certain areas of the market where it lends itself easily,” says Stobart. “But in accounting it is going to be a long time before customers are happy to have their data somewhere other than in their own environment.”
A large scale move by customers to the hosted model would be highly disruptive for Sage, but its biggest challenge remains the original one from five years ago.
Given the size of its user base, “the strength of brand is a double-edged sword. It gets us through the door [at mid-sized companies], but then we have to work twice as hard as some of our larger competitors to demonstrate credibility and relevance,” says Buckley.
The fact that it is coming at the mid-market from a different starting point does not concern Sage. As Stobart suggests, the gloves are only just coming off.