Kelly will take on the role from 5 November 2014, replacing current CEO Guy Berruyer who is retiring. Berruyer will support Kelly as required until March 2015.
Kelly’s salary will be £790,000 plus bonuses and share options.
Kelly previously worked in the private sector before joining government, most recently as CEO of technology company Micro Focus. Kelly joined the Cabinet Office in 2011 and led the Efficiency and Reform Group under Cabinet Office Minister Francis Maude.
Kelly said he deliberated over his decision to leave government, but his passion for supporting SMEs will continue at Sage.
"Sage is perfectly placed to help SMEs fully capture the benefits of cloud, social, and mobile technologies,” he said.
Referring to his work in the Cabinet Office, he added: “The Efficiency and Reform Group Executive team and Civil Service Heads of Profession have never been stronger and I believe that, with the appointment of the new chief executive for the civil service, central government will be further empowered to provide high quality services efficiently and continue the reform agenda.”
In June, the Efficiency and Reform Group announced a further £200m in digital savings. The savings were ascribed to improvements in government’s digital services through moving websites to GOV.UK and introducing online transaction services. The Government Digital Service (GDS) is in the middle of a transformation programme to move 25 of the most used government services online.
Cabinet Office Minister Francis Maude said: “Although we have achieved an enormous amount we are still at the start of our work to transform Whitehall.
"Stephen will be missed greatly but he has developed an exceptionally strong team which will continue our reform work, by further strengthening commercial skills, digitising government and ensuring our major projects run to time and budget.”
There has been no word about Kelly's replacement at the Cabinet Office.