Invictus Games – a sporting challenge metaphor for Sage’s cloud shift?

SUMMARY:

The Invictus Games celebrates sporting excellence against the odds. An appropriate metaphor for some time yet for Sage Group as the shift to the cloud proceeds?

invictus
Prince Harry and Stephen Kelly

Sage’s sponsorship of The Invictus Games in Florida this week has won the accounting software vendor some good PR, which may yet have a commercial, as well as a philanthropic, benefit.

Last month, when Sage announced it would be sponsoring the Games, Cath Everett took a look at the balance between corporate philanthropy and commerical gain, noting that there is – understandably enough – a connection between the two.

Certainly from Sage’s point of view, being associated with the Games and having CEO Stephen Kelly popping up in photo opps with Prince Harry isn’t going to do the firm any harm in terms of brand promotion, particularly in the US. Kelly said as much himself late last week when the firm turned in half-year numbers that disappointed the stock market.

Revenues were £747 million for the six-month period to March, up 6% from £717 million in the same period last year. Profits before tax for the period were down 15.6% to £142 million from the prior year’s £168 million.

Commenting on the results, Kelly was in confessional mode about Sage’s shortcomings and the need for change:

Sage is a fantastic company with all the components required to win in this market. We have a history of pioneering accounting software with the genesis of the PC revolution way back in the 1980s. And we are the only true global player, which means we understand the complex tax and compliance regimes, and environments in all the geographies in which we operate and more than anybody else on the planet.

We are unique and the trusted technology partner to millions of businesses through all stages of their growth from start-up to scale-up to enterprise. Our customers describe Sage personally to me as indispensable.

There’s a big ‘but’ coming here, of course:

Sage was, however, failing to use these competitive advantages. Our historic, federated and fragmented and de-centralized business model meant that we couldn’t fully leverage the scale and the global reach for the benefit of our customers or ourselves. In fact, it was actually hindering our ability to grow.

Our acquisition-led growth strategy compounded the internal fragmentation and complexity. And this fragmentation I’ve shared with some of you before in terms of 270 different products, 73 different code bases, over 150 different sales compensation plans, 139 sites, 105 databases from management accounting, 21 different CRM systems. I could go on and on.

This starts with a culture of innovation within Sage and created candidly, a bit of a complacent attitude to competition, technology change and winning new markets and customers organically. The status quo had to change.

Subscriptions shift

The shift that needs to happen is the shift towards a subscription-based revenue model. Software subscriptions grew 35.3% in the six months to the end of March. The firm says it now has 842,000 subscription customers, up from 561,000 this time last year. In contrast, perpetual licence sales are down 18%.

A pattern is emerging of sales people leading on the X3 Cloud offering, which, said Kelly:

typically therefore would lead on a subscription model. But still a lot of customers, particularly in X3, have IT departments and want to buy on-premise software and that’s fine too. We will see the shift over time. Maybe it’ll take two to three years where the subscription model and the cloud offering on X3 is the preferred option for customers.

But the US is proving more resistant than other regions, which brings us back to the Invictus Games. Kelly said:



We have said repeatedly that in the US, we are not getting the same traction. We are actually now to over 10,000 subscribers, but to be honest we have months where we lose as many customers as we sign up. Particularly, in the first six months in the US it has particularly marked the attrition rate.

So what we are doing in the US is experimenting with different ways of attracting customers. Because we don’t have the same brand recognition, trying to do it digitally, is too expensive to be honest. I mean we do that a bit, but hopefully things like the Invictus Games that we are sponsoring will help with the brand presence in North America. But at the moment, driving a lot of digital marketing dollars to try and attract people across the web in the US is not really working.

As for the competition, in the US it’s about beating Intuit, Kelly reckoned, adding:

The reality is our competitors are incredibly fragmented which is an advantage to Sage, as long as we can coordinate strategy consistently and execute really well in the economies where we serve.

Typically, in every European market, there’s a couple of local sort of competitors and many of those in Europe are owned by private equity firms now.

But there are global competitors such as NetSuite and Xero, he conceded, while still questioning some of their success claims:

I’ll give you some data from the US. We competed with NetSuite on less than 10% of transactions on X3, and we got a win rate of about 50% on X3. So actually, they’re not as visible as what the sort of PR machine that you would kind of believe from a US point of view.

The other folks who get written up about a lot is Xero. I think, in the UK they made a big splash of getting to 100,000 subscribers. The latest data suggests that we’re ahead of them in absolute numbers in the UK and we’re, actually, attracting new customers and new subscribers on a monthly basis ahead of them as well.

My take

The City didn’t take too kindly to the latest numbers from Sage.

Kelly continues to make the case that the firm was overly-complicated, cumbersome and “asleep at the wheel” in some markets, including the domestic UK one. Those are some harsh assessments and have clearly have more than a little truth.

The transformation program that has been put in place can’t be faulted for its ambition. I hear from some sources close to and within the firm that the pace of change internally is relentless and driven strongly from the top. Not everyone’s going to respond well to such disruption, so Kelly’s right to focus on bringing in some good talent from outside.

Kelly also makes the point that this is going to be a long-term journey. One question for him – and for jittery shareholders – is whether Sage can expand its footprint in the US market quick enough at a time when US rivals, such as NetSuite, are upping their game in Europe? The Invictus Games celebrates sporting excellence against the odds. It may be an appropriate metaphor for some time yet.

Image credit - Sage

Disclosure - At time of writing, NetSuite is a premier partner of diginomica.