Sage’s CEO fumbles the cloud ball

Sage’s CEO Paul Walker talked to Silicon recently. Despite a number of questions about cloud computing, Mr Walker skirted around many of the issues raised preferring instead to talk up the company’s maintenance revenue stream. From this perch, that’s not a great idea. The opening shot:

…one of the great things about our model is that the support revenues – that are well over of our half of our business – continue to be pretty stable in this economic climate. Obviously selling new licences and new systems is more difficult – although probably arguably not as difficult as if you’re in the very big corporate end where IT spend has been frozen.

Maybe. Reports I see tell me that SMB’s are more than happy to consider alternatives to the incumbent players. Discussions elsewhere tell me that customers are far from happy about the continuing tax that software companies impose on their customers aka maintenance.

Next:

In the back office accounting area, business solutions, we’re seeing very small, slow growth in terms of demand [for cloud computing]. We have a number of products that meet that demand that so far is relatively modest.

Of course Sage sees slow growth. It hasn’t managed to get a credible product to market. And would you blow up your lucrative business model for one that you don’t really understand? Or rather choose not to understand? Sage has had many opportunities to engage with people who do ‘get it’ but so far has presented a ‘tin ear.’ This is a common problem in the software industry where past success is seen as the road for the future, regardless of the surrounding facts. It’s almost as though vendors live in an alternative reality.

…it’s going to be a three- to five-year journey as you move up that curve of more and more people demanding cloud computing. It’s going to happen – particularly from that group of people who’ve lived through the online world with Facebook and what the internet can do for them. We don’t think it’s a revolution, we think it’s going to evolve and there’ll still be many customers in three years time who still want desktop solutions but we’ll have seen a bigger shift to software as a service over that period.

Wrong Paul – that train left the station a couple of years back. Check out what sponsors on this site are doing.  Their marketing resources are a fraction of what Sage blows on petty cash yet they’re all happily feeding at the trough. Better still, check what NetSuite, Salesforce.com and others are doing. Did you notice that Workday just secured $75 million in funding? The market is validating the model faster than Sage can innovate and that’s the problem.

[But] in two or three years time I’d be very surprised if 50 to 60 per cent of our customers were on [cloud-based applications] but it could be more like 15 or 20 per cent which is why we use the word ‘evolve’.

This is a denial of reality. Taking Sage’s own numbers, they’re predicting 500-750,000 of its customers using on-demand offerings. SugarCRM already has north of 500,000 users. Salesforce.com has $1 billion in revenue from 58,000 customers (user count?) Microsoft has gone straight to on-demand for CRM. The CRM market has moved to the internet cloud so unless Sage gets its skates on it will have missed the boat. The accounting market could be different but then Sage’s numerous failed attempts at bringing something credible into this space speaks volumes. One area I will agree: cloud computing isn’t for everyone – or at least on-demand delivered via the public cloud.

Mr Walker then goes on to dilute the argument by saying that customers don’t care about delivery mechanisms but do care about integrating services. While you can technically integrate on-demand with on-premise, it’s a wasted effort because you lose the real time benefits that add value on their own. Sage is not pursuing a viable long term strategy but offers an ample demonstration that Sage is struggling to resolve on-demand to its own business model. This last point gains emphasis in his closing remarks:

The online solutions in those markets are probably the way we’ll try and enter because in a way you can imagine a lot of new businesses starting off in that area are much more likely to want cloud computing than going the traditional desktop route which has been embedded into the European and North American markets

The bottom line is that despite the ‘tin ear’ that Sage exhibits, it knows that in the longer term it is in deep trouble on the cloud/saas/on-demand front. It has made the mistake of failing to understand there are huge markets it cannot reach. It continues to assume that the practitioner will fill the gap or that its continuing with products that were built for another age and constituency will carry the company through. OK – so it has a free online billing service. But that’s not getting the attention a brand like Sage should command.

Worst of all, Mr Walker reveals that Sage’s true masters are not its 5.8 million customers but its financial backers. People are not stupid and when they hear that they naturally think:  “What about me?” The tune needs to change.Brand alone will not suffice once Sage does make a move.

The sadness in all this is that the problems Sage needs to overcome are not that difficult. But…they require a different mindset plus a genuine commitment to investments in the right kinds of technology. The first issue is one that requires a cathartic change in management thinking. The second should naturally follow.

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