How will Sage adapt to seismic shift to SaaS?

UK software firm Sage recognises the need to change if it is to continue enjoying the success that made it part of the furniture among UK businesses.

UK business software firm Sage is a company that needs to change if it is to continue enjoying the success that made it part of the furniture among UK businesses.

The name Sage is synonymous with business software. It could be argued that its accounting software has been as much a part of UK offices as Microsoft Office.

But things have changed with the availability of applications on the web, and competition is rife. Suppliers such as Netsuite have targeted Sage customers with their software as a service (Saas) for over half a decade.

Sage's UK CEO, Paul Stobart, says the company has changed, but the perception is that it hasn't. And that is a big concern for Sage.

"The truth is that we are very creative and leading-edge, but people tend to think we are conservative," says Stobart. "We need to get the message across that Sage is a brand not only of today, but tomorrow. [At the moment] I don't think it is seen as such."

The company is aware of the seismic changes occurring in the industry, he says, and has been addressing this shift.

"It is undoubtedly the case that we are in the middle of a massive and potentially disruptive paradigm shift to the cloud. Many people have the perception that Sage is behind the curve, but the reality is different. We've been making substantive investment to migrate our services into the cloud."

Stobart says the next year will be a major challenge. He admits organic growth has been affected by the recession, and with spending forecasts still low, there is no reason to believe it will be easy next year. "Margins will continue to be under pressure."

Acquisition has played a big part in Sage's more recent growth story, although it has had a hiatus over the past few years. Combine this with poor organic growth and it is perhaps not surprising that Stobart is keen to return to this strategy. "We are absolutely looking to get back on the acquisition trail," he says. "It's a part of what we do - it's in our DNA."

Wendy Hart, technology partner at Grant Thornton, says companies will be gearing up in the next quarter to expand their SaaS and cloud computing business streams.

Larger companies such as Sage don't need to acquire for more scale, but may need specialist capabilities. There is also the question of fulfilling shareholder value, Hart says.

Private equity firms are also starting to circle this space. Research from Ernst and Young found that private equity-driven M&A activity in the UK tech sector doubled in the third quarter compared with the previous three months. Stobart says it is unlikely the company will get every deal it goes after.

And the emerging markets are not areas it is looking at. "We've said for a while that, when the time is right, they will represent a great opportunity," he says. "Until the infrastructure is such that it would be protected, it's a difficult game. We need to be secure in the knowledge that we are not going to get pirated to hell."

The SME market in China, Brazil and Russia will be a fantastic opportunity, Stobart adds.

But enterprise IT analyst Dennis Howlett is sceptical about Sage's plans going forward and says its growth strategy remains unclear.

"One of the question marks over an incumbent is can it make the move to SaaS, and I think the answer is yes," he says. "But this is something that Sage hasn't [yet] got its head around.

"The reality is that [business models that rely on up-front payments] have an issue in the current climate. And Sage is [still] suffering from an addiction to maintenance revenue."

But Hart disagrees, saying that Sage still holds a strong position in the market. "If Sage didn't make acquisitions in the next 12 months, it wouldn't die in the water," she says. "I'm sure it's more than capable of adjusting its models to SaaS."

Cloud-based applications currently provide minimal sales for the company, but Stobart is convinced this will soon expand. "If you added up all our offerings, it's still less than 10%," he says. "But over the next five to 10 years, it will absolutely grow and grow.

"We absolutely haven't reached saturation point. We have around 800,000 customers, but not actually that much revenue per customer spend. If you have a base that size and scale, and you can find a new offering, then the opportunity for growth is substantial."

One of Sage's biggest strengths is its brand recognition. But because much of its largely SME customer base continues to tighten its belt in the face of economic uncertainty next year, it will remain crucial to prove it has a value-for-money offering. If Sage manages to get that message across, its market position could remain healthy.

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