The great attraction of the accounting software market has always been its recurring revenues. Tax changes and, increasingly, compliance regulations, mean businesses are willing to pay vendors a maintenance charge of about 20 per cent of the original licence cost every year. Indeed, the recurring revenues explain why private equity is investing in what is other wise seen as a mature market — the leading packages all offer roughly the same degree of functionality.
The maturity of the market means that vendors are acquiring each other. Resellers too are reducing in number, forming larger groups. The enterprise market is dominated by Oracle and SAP, but is challenged by Infor, the recently formed, private equity-backed group that owns the SunSystems and Pegasus brands.There are about 20 accountancy vendors in the mid tier — dominated by Sage — but some analysts think that number will fall to only five in two or three years’ time.
At the bottom end of the market, there is no clear winner. It is attractive to vendors because it is made up of three million to 4.5 million small businesses. In the UK there are said to be 400,000 start-ups every year, even though one-third will fail in the first three years of trading. Resellers have always avoided this market, thinking it too expensive to sell to, with too little return, but if they develop the skills and find a low-cost way of delivering service, then small business may be an attractive market.
Microsoft hopes it will: in November last year Microsoft UK launched its entry-level Office Accounting product, aiming to unseat Sage 50. In the US, there have been two million downloads of Office Accounting since its launch; in the UK there have been 27,000 downloads of the free version of the product, 1,000 of which have become paying customers, according to product manager Gareth Arnold.
Arnold is delighted with the response, saying Microsoft UK had planned for only 50,000 downloads Office Accounting downloads in its first year. A retail launch is planned for the end of this month, promoting three versions of the product: two professional versions costing £149.99 and £249.99 — the more expensive version including a subscription to a payroll service — and a £349.99, three-user version.
Accountants themselves have been encouraged to join the Microsoft Professional Accountants’ Network (MPAN) by the offer of free software and a free subscription. Arnold says 2,300 accountants have joined the network.
One of them, Mark Cook, a director at accountancy firm Adams Beeny & Co, says he was persuaded to sign up by the free software and free subscription, but to his surprise the site has already brought him a new IT client, who was looking for an accountant.
The market has responded coolly to Microsoft’s entry into the low end software market. Cynthia Alers, director of investor relations at Sage Group, says Microsoft’s Office Accounting has had no effect on Sage 50 sales, and Sage 50 licence and service revenues continue to grow in "double digits".
"Our business development team tried Microsoft’s free software and although the basic package is free, to make the software do anything meaningful, you had to upgrade, which became quite expensive," she says. "Microsoft’s chronic weakness in this market is its inability to understand the SME’s need for strong service support."
Arnold acknowledges that Sage continues to dominate the market in accountancy software and its hold on accountants is extremely strong.
"I think that is absolutely right today, but the MPAN product is in its infancy. We provide a lot of value; we are closely aligned to the Sage 50 product, but we don’t cost between £600 and £800."
Duncan Reid, a partner at Edinburgh-based reseller Icelantic, has used Office Accounting for two years, attracted to the product’s time recording and contact management feature, as well as its accounting functions. It works well, he says, and has allowed the company to charge clients for small units of time — payments that Icelantic’s engineers used to overlook when the business ran on Sage 50 software.
However, he remarks that selling the product is less attractive as there appears to be next to no margin. "People can just download the product from the Microsoft website," he notes.
MYOB, a small business management software vendor in Australia, says its product set offers a 30 per cent margin to resellers, and remains attractive to users. MYOB has recently launched a free payroll offering.
Wayne Schmidt, UK general manager at MYOB, asks: "Where is the margin for resellers if they sell Office Accounting? They can’t afford to take on a product that has zero value."
He says that rather than taking market share from MYOB, the launch of Microsoft Office Accounting has extended the market and MYOB unit sales have increased by 46 per cent since last November.
Like Sage, Schmidt insists that Microsoft does not understand the accounting market. He charges accountants £239 a year for membership of MYOB’s accountants’ network — subscriptions that fund a nationwide account management organisation.
"We have account managers who will walk into accounting firms, sit there, and help them grow their business. With the Microsoft programme there is no relationship, they won’t understand the customer, and I don’t think you will ever have a Microsoft representative walk into your office to help an accountant."
Dave Reynolds, chief executive of the Reading-based International Association of Accountants, reveals that a surprising number of accountants have very little computer knowledge.
"We think that as many as 80 per cent of accountants who are sole traders have no website or email, and even if they do, don’t have a proper email address linked to their business trading name," he says.
His organisation campaigns for a better use of technology by accountants; the Inland Revenue will require all accounts to be filed online by 2011.
Competition from within
Reynolds believes many small businesses need a general small business package, rather than a specific accounts package, and that many of them would be well served by free products from Google Apps and OpenOffice.
Some accountants are, of course, extremely well versed in technology, and are beginning to offer accounting services online, in effect competing with resellers. Baker Tilly, a leading firm of mid-tier accountants, with a fee income of £200m, has been working on its Revas online accounting services and software product for two years. The Revas software is in fact repackaged Access Accounts software.
Mark Holland, managing partner at Baker Tilly OnLine, who was responsible for the development of Revas, says clients who use the firm’s outsourced accounting services save between 15 and 40 per cent of the cost of a traditional back office finance function, because they reduce their need for accounting personnel, office accommodation and no longer need to pay for accounting software licences since they are wrapped up in an overall service charge.
Innovative services from accountants are one of several pressures affecting resellers in the market. NetSuite, with its software as a service offering, is another, according to Jon Ryan, managing director at NetSuite reseller BlueBridgeOne. He says that if a sale is pitched to the strategists within a business, then an innovative service such as NetSuite will command serious attention. If, however, the sale is made to the accountants within an organisation, then they will probably stick with what they know, and that usually means Sage.
"The on-demand platform makes accounting functionality more accessible to users both internal and external to the organisation and also makes the account application easier to maintain," he adds. "Another major advance is in the integration with other applications and technologies like CRM, e-commerce and EDI."
Falling software prices and the need to offer new services are also changing the economics of selling accounting software, and have led to growing consolidation among accountancy software resellers.
However, TSG, backed by Graham Wylie, the co-founder of Sage, has called a temporary halt to its £50m acquisition campaign, according to business development director, Nigel Hudson. TSG has bought only one company since last May, bringing its total to 23. In the previous three years it had made 22 acquisitions.
"The real challenge is in bolting the companies together and it has given us a little bit of grey hair. We have been quite tough on ourselves to make sure that the machinery is working and that any subsequent acquisitions are really plug in and go," he says.
Hudson insists he still has £22m to spend, and will restart the acquisitions trail later this summer "if prices and timings fall into place".
Last year Hudson told MicroScope he hoped TSG’s turnover would be between £37m and £40m, but in fact it has dropped to between £32m and £33m. The decline is in part explained by two company sales, says Hudson, and the fact that the group will now be putting more focus on gross profits, rather than turnover. Staff levels have fallen from 440 in 2007 to 385.
Joe Davey, managing director at Xperience, a Northern Ireland-based reseller that has opened offices in the Midlands, is also trying to grow by acquisition, but at a much slower rate. Xperience turns over £15m and intends to double in size over the next three years. In the past five years it has bought nine companies, financed by profits rather than venture capital or private investment.
"We are trying to bring a degree of professionalism to the reseller that we buy, introducing staff appraisals and management training. It is no longer enough to say to a client that you employ Microsoft certified engineers and that staff have been on Pegasus training courses," he says.
Davey points out that it takes time to consolidate previously independent resellers into one new business: "You need the time to absorb an acquisition properly and make sure the contracts don’t walk out the door."
He insists that buying resellers means Xperience has been able to find efficiencies for the group as a whole, such as software development, something that TSG is still learning how to do.
Kevin McCallum, commercial director at Pegasus, says TSG and Xperience are now the biggest Pegasus resellers in the UK, and that further reseller consolidation is likely. "A lot of reseller have been in business for 20 years, and are nearing a natural breakpoint — do they sell up and retire? I think there will be some very large specialised resellers who will sell just two or three brands."
Like many of the accounting software vendors, Pegasus stresses the integration possibilities of its latest launch. Opera 2, version 6, launched in January, includes sales pipeline management, integrated customer relationship management and document management.
Paul Sparkes, product director for accounting and business solutions at IRIS Group, says sector specialisation is one of the reasons his company is on The Sunday Times Fast Track list of rapidly growing private companies. Profits in 2007 grew 65 per cent, from £8.9m in 2005 to £24m in 2007.
The company says 30 per cent of its revenues are derived from the not-for-profit sector and about 20 per cent from the construction sector, buoyed by the growth in housing and the knock-on effect of the 2012 Olympic Games in London.
Sparkes claims Iris is taking business away from SAP customers, selling Iris into divisional accounts in large organisations that want to install software more quickly and cheaply.
Richard Watts, managing director at reseller ATW, has thrown his resources behind IRIS and its Exchequer product. He sold off his Pegasus customer base last year and made his first acquisition, buying the Exchequer business of a small reseller called Infospeed. He is confident that with a turnover of £1.3m he is big enough to compete in the market, saying that he is able to boost the average ticket price of a £20,000 to £25,000 Exchequer sale to £50,000, by adding web services such as search engine optimisation, and sales order processing.
"In our last three months, the two biggest deals were from customers wanting websites. We sold them the entire package," he says. Other prospects require online scheduling, a quoting system and an e-commerce site, with Exchequer as part of the sale, but not the lead item.
If resellers can learn those wider business applications, then the accounting software market can still bring good returns. And if resellers can play in the large company market, where they must be familiar with the implications of financial regulation, then there is a never-ending source of business.
"What you have to be able to do now is provide an audit showing who changed the security settings to allow executives to change financial figures in company accounts," says Richard Willis, sales director for Infor FMS SunSystems at Infor. In other words, an audit of the financial software alone is not enough — the software must also audit the security system protecting the financial software.
A system that does that needs board approval, and selling to the board usually means the best returns of all.