Sage can survive and thrive if…

by admin on July 17, 2012

in Cloud Computing/SaaS

There’s an interesting Twitter exchange going on right now as Sage gets its analyst day underway in Newcastle.

The gist of it goes like this: Sage is now being outgunned by the SaaS/cloud players (which I have said the last two plus years) and has little wiggle room to grow in the face of reported EU market weakness. Elsewhere, I know that investment advisers are viewing Sage as either a straight dividend play or a potential private equity target. Both alternatives would send a strong signal that their days of leading the market are over. There is another alternative which few are considering.

Just as Sage is in the doldrums, vendors like Salesforce.com are in the ascendency. Sage makes plenty of money but is seen as having a limited future. Salesforce.com is barely profitable but is on a high growth trajectory. Salesforce.com has an $17.7 billion market cap while Sage is around $5.5 billion. Salesforce.com revenues are tracking $3 billion. Sage revenue is tracking around $2 billion. Doesn’t make sense does it except in the context of the future revenue and profit streams that analysts are expecting.

So how might Sage turn its fortunes around?

Most people I know believe the toughest thing to do is turn the culture around from one where acquiring IP is the business model to one where servicing the customer using cloud technologies rules the day. That’s a commonly agreed thought stream. It’s also agreed that making culture changes is difficult.

I dont think this is as difficult in Sage’s case as many believe. It’s not as though there is an army of high earning sales people to worry about. There is a large channel of resellers who have become disillusioned in recent times. But so what? Where are they going to go if Sage turns around and says ‘game over?’ This is a problem for all software vendors that have a reseller model. Sage just happens to be the big dog in many markets.

The real problem lies in the boardroom. When Paul Walker stepped down as CEO, the company had a golden opportunity to usher in a fresh set of eyes. Instead, it opted for a more refined version of what went before. How that decision was reached remains a mystery but you can bet that institutional investors didn’t have faith in the management team to make radical changes. You can also bet that the existing management didn’t have the stomach or vision to make change.

Now it is becoming apparent that its core European markets are vulnerable, Sage is once again trying to buy its way out of trouble. This time in Brazil with a £125 majority stake in that SME market. It is at best a stop gap.

If the powerful institutional investors were prepared to step back and see how Sage could once again find sustainable growth – and that has to come via a change in the business model – then it is conceivable that Sage could once again become relevant. Acquisition will not do it now or in the long term.

But Sage has one asset it is easy to overlook – its support centres. These might not be the best in the world but they are experienced. It would not take a huge ask to mould these into the kind of service agents needed for a cloud play. Sage also has SagePay – one of the truly bright stars in its constellation of acquired softwares. That could be massively leveraged beyond where it is today.

There is enough maintenance and service revenue for Sage to make the kinds of change I believe are needed without killing the share price. It would require root and branch management surgery but it is do-able. There are precendents. Ariba springs to mind. The question now comes – will investors insist on change or sit back waiting to cash out? The longer they wait, the less they’ll achieve. But which is preferable – a slow, lingering death or life saving yet painful surgery?

Comments on this entry are closed.

Susan Barnes (@Netfira) July 17, 2012 at 10:03 am

Sage can survive and thrive if… http://t.co/dK3ZgAqp

Greytrix (@greytrix) July 17, 2012 at 11:02 am

Sage can survive and thrive if… AccMan http://t.co/KjHvQDSl

Wayne Schulz July 17, 2012 at 11:44 am

Dennis I think you’re right on with your assessment of resellers (of which I am one). Sage does not owe them a continued business model of high margin sales. In my personal view Sage should once and for all tell us collectively that the new model is that publisher makes license revenue and reseller makes consulting revenue.

The primary pushback from resellers is that if the publisher took away margin on license sales that resellers could no longer afford to offer free (time wasting) demos…. which to me is quite odd because I view free demos as the beginning of the ills of most poor implementations…

ReallySimpleSystems July 17, 2012 at 5:39 pm

Sage’s main problem is not in the boardroom. Sage’s problem is that they haven’t figured out how to sell SaaS applications through the channel. As nobody else has either, and IMHO it isn’t possible, Sage, like Microsoft, don’t have a route to market for cloud products.

To compete with SaaS products, Sage would need to change its business model to that of an SaaS vendor: direct/automated sales. The channel would be furious and start dropping Sage products, so somehow Sage would need to distance traditional products and brand from the new SaaS line.

As Hewlett-Packard famously said “Eat Your Own Lunch Before Someone Else Does”

But do that they have too, or die.

John Paterson
http://www.reallysimplesystems.com

clive boulton July 19, 2012 at 9:15 am

Sage already architected a Web 2.0 backfitting of its 6.2 million customers via an opt-in update of on-premise product installer. For an early sign of adoption, the doors already fell off the SQL Server hosting the web 2.0 data, necessitating a shift to a scalable NoSQL database . Sage does need a little more runway for this strategy to bed in. Research via Stephen Smith’s – Sage CSA’s blog – http://smist08.wordpress.com/

Whats is thee alternative for business operation at scale. Hold onto your customer base like Exact Software while building a new On-line customer base, isn’t it better with highly conservative accountants to transition a huge customer base to a new technology platform.

Both Sage and Exact seem to be winning, waiting to do Web 2.0 is certain death as Kewill discovered. http://cliveboulton.com/post/22715195453/backfitting-kewill-for-web-2-0-growth-kewill

admin July 19, 2012 at 9:40 am

The bulk of Sage’s customer base is NOT accountants. I don’t see how Sage is winning when its last few years performance has depended on price hikes, not organic growth.

Anonymous July 20, 2012 at 12:09 am

http://world.einnews.com/pr_news/106115908/sage-north-america-appoints-himanshu-palsule-as-chief-technology-officer-and-head-of-product-strategy

Sage North America Appoints Himanshu Palsule as Chief Technology Officer and Head of Product Strategy

More of the same. yet another example of moving weather beaten chairs around on the deck as the ship goes down. One would imagine new people who have had success and know how to deliver would be inducted onto the team, but that is not the case so far. The very same people who have overseen the dramatic decline of this once strong company, seem to be the ones who survive and pop up in new and bigger roles. Dennis is right. The problem starts and ends at the top.

Sibby July 20, 2012 at 9:54 am

I’m staggered this conversation is still happening. Back in 2005 Sage was a little upset for companies trying to turn their system into ‘SaaS-lite’ type offerings by using Citrix. This was affecting their revenues. Sage then should have seen and adopted to the future. Sounds like they like to live with the legacy past. Workday seem to have figured out living with partners/resellers. Sage can become a visionary like Workday has in the enterprize space, or many of the upstarts that are knocking on its doors. Or they can quietly slip into the past – another great company that failed to change. They have lost 7-8 years already by the sounds of it.

admin July 25, 2012 at 11:58 am

Not possible with current leadership trajectory IMO

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