Stephen Kelly ousted as Sage CEO after dismal results and faltering transformation

SUMMARY:

Stephen Kelly has made an abrupt exit as CEO of Sage. What’s going on and what happens next. We cast the runes.

Stephen Kelly

In a move that shocked no-one on the ‘inside track’, Stephen Kelly’s reign as CEO of Sage Group came to an abrupt end as the company announced that he is stepping down as CEO and from the board with immediate effect. The company said that Kelly will remain available until until May, 2019 while Sage hunts for a replacement. In the interim Sage Group announced it has:

…appointed Steve Hare, Chief Financial Officer, to the additional post of Chief Operating Officer on an interim basis.  In his position as CFO and interim COO, Steve Hare will have full executive authority to run the business until the appointment of the new CEO. 

The company reaffirmed guidance and said it is trading in line with the most recent forward-looking statement.

The markets reacted badly to the news, sending the shares down 7% although they have since recovered slightly.

What happened?

This appears to have been an overnight decision given that the company and Kelly have agreed he will be on gardening leave for the next nine months. Yesterday, Kelly Tweeted:

and

At the moment, anything that’s said is somewhat speculative but a few facts are worth noting:

Kelly rode into Sage just shy of four years ago with a clear mandate to shake up the company. At the time of his appointment, Sage had become moribund and, in the eyes of many observers, was ticking over as a ‘value’ share rather than a ‘growth’ share. Insurgent entrants into Sage’s core accounting software business like Xero, FreeAgent and Kashflow were garnering all the plaudits and mindshare as representing the next generation of software for SMBs.

At the time, I said:

If Kelly is to be the transformation manager that Sage needs, then he has to convince investors that a sacrificing of margin in the short term will be needed in order for the company to become competitive in the SME space. History does not bode well for him.

When Phill Robinson joined IRIS from Salesforce, I had high hopes that he would find a way to take that beast into the 21st century. After five years, Robinson has made precious little progress other than finally acquiring Kashflow in 2013 and then, by all accounts, promptly screwing it up with a messy UI refresh.

Unlike Eager, I’d encourage a root and branch clear out of the old guard and especially those in middle management. Again, history teaches that it is rarely difficult to get top management on board (sic) but it is the Line 2/3 people that need shaking up.

Years of neglect mean that core products are old and tired. Even forklifting to the cloud isn’t doing it for them. Fear of hearing the truth has kept Sage’s doors locked to all but those prepared to give them good news. Competitors continue to eat away steadily at what should be Sage’s heartland. Midmarket? Forget it. And to cap it all, the company has just imposed an insane price hike on its core, on premises upgrade customers. Oh yes – and the share price is sluggish.

We were hopeful and by July 2016, Derek duPreez spoke with an optimistic Kelly who said:

We will never force migrate customers. Now, in reality we have been very clear with some of the customers on some of the older products that we are not going to build loads of new functionality, do loads of stuff about predictive analytics, but we will keep them compliant.

So if a new set of regulations come out from the government, effectively we will make sure that they’re implemented and 100% compliant 100% of the time. We are shifting the investment from the portfolio point of view to the growth products in the cloud.

At the time, Kelly could bask in the knowledge that under his tenure at the time, the share price had doubled and he had indeed started to shake up the business. Today? The share price is back where it was in July, 2016 having hit a high of 811.40 at the beginning of 2018 and following the group’s acquisition of U.S. accounting software specialist Intacct. At the time I said: 

This is a very good deal for everyone.

Intacct gets close to top market dollar for its IP in the sense the sale price is equivalent to around 8.8x revenue, a price it could not get in today’s IPO environment. Intacct customers get the backing of a much larger brand with R&D resources to match.

For its part, Sage gets a solid infill acquisition that sits between SageLive and X3 and can now legitimately claim to offer ‘the only cloud based financial management solution you will need from startup to enterprise.’

In short, that should have been significantly accretive to the business but the overall results suggest otherwise. In his parting statement, Kelly referred to cloud ARR at £386 million. That’s about $500 million. Assuming modest growth in both the Americas and the U.K., Sage’s largest markets, then Intacct accounts for a good 20-22% of that total.

Sage Group

What’s more, commenters and competitors struggled to understand where some of the numbers come from given what they were seeing in the marketplace. Be that as it may, there were clearly bigger problems.

In June this year, Kelly took the shears to management, firing 30 senior execs. Among those who were shown the door was UK managing director Alan Laing, who left barely a year after taking up the role. He was brought in to lead the UK business after the surprise announcement that Jacqueline de Rojas was leaving in March 2017.

In our experience, such a degree of executive churn is a sure sign that things are not as rosy as the CEO is saying. Indeed, in April, 2018, Kelly acknowledged there were execution issues. That should not have surprised anyone.

Again, in our experience, business model transformation in large organizations is a multi-year journey. Getting everyone aligned to a fundamentally different vision to that of the past management in circumstances that are barely favorable is a really big ask. Few manage it without hitting bumps along the way.

What’s more, Sage had a terrible time getting its cloud act together and it was only after Kelly arrived that the required R&D funds were made available. I recall in 2017 having a good conversation with Stuart Lynn, the target for my ongoing ire at the lack of real progress in Sage’s SaaS product. He said:

When Stephen (Kelly) came in he was very clear – “We’re a technology company.” I can tell you that was music to my team’s ears. It meant we were going to get the R&D commitment we needed. Things are very different today. So what you have is the accounting core which we’ll always develop and hold for ourselves, and then we’re building using microservices principles. So new functionality can plug into any of our solutions as demand dictates. We now work extensively with partners so AWS is there for us, we have an active partnership with Microsoft as some products are on their technology and of course we’re working alongside Salesforce on the Force platform. We now send out teams to get stuff done with the instruction they don’t come back until it’s built. That’s how we did Live in three months. OK – it wasn’t all there at first but it is a product that stands well in the market today.

Lynn left in late 2017 and, I suspect, a good amount of institutional knowledge walked out the door at the same time.

The real problem was that despite R&D’s best efforts, Sage simply couldn’t outgun Xero in particular, which, by that stage had all but won the U.K. market for micro businesses. In the U.S. Intuit continued its juggernaut advances in SaaS, a position that has only improved over time.

That left Kelly with limited options and a big headache. There was no real point in following the past pattern of acquiring other players in other territories to paper over the cracks because who could be acquired (other than Intacct) and add solid value at a price Sage Group could afford to pay? The answer? Almost none. Instead, Kelly talked up partnerships with Microsoft and Salesforce.

For me, the writing was on the wall when Sage tried to talk up X3 as a cloud solution and then attempt to reposition the group with Sage Business Cloud marketing. Scratch the surface and you’d be hard pressed to find something you could truly call new. And even though the company made all the right buzzy noises, the reality was that it wasn’t resonating with the market.

My sense then is that when taken together, the Sage board took the view that while Kelly had done a solid job in getting the transition underway, he wasn’t the right person to execute against that vision or to complete the transformation. And with a dismal outlook coupled with flaccid results, something had to give. It happens and I don’t think anyone should point the finger too easily without accounting (sic) for the massive hurdles Kelly faced or acknowledging the massive amount he achieved.

Where to next?

Putting Steve Hare in charge, for the time being, is sensible. But unless I am very much mistaken, elevating a finance guy into the CEO slot is not something Sage will want to do. They’ve been there before. He is, however, a safe pair of hands who can bring stability at a time when the company has undergone a degree of upheaval.

It will be tough to find a good candidate for the job. If it was my decision I’d attempt to bring over a U.S. person with deep experience in SaaS solutions. I might even try to poach a certain MD who has done rather well in this position the last 9-10 years. But that person would also need a very good operations person skilled in completing the business model transformation.

The other alternative is to do a PE exit and then weigh options. This second route is not one I’d personally like to see although it has been known to work.

Image credit - via Sage

    1. Rick says:

      They need someone new to run products and corporate strategy as well.

    2. Bob says:

      Where’s Blair?

    3. Josh Glass says:

      Not a surprise. Old technology, pseudo-cloud products that could not compete, and horrible management team. This is a Harvard case study waiting to be written.

    4. Jason says:

      My guess would be that a PE firm will sweep up and then sell / spin off individual components.

    5. I’d go further than Den and say Sage needs a visionary CEO with CTO background who can build a nexgen extremely modular SaaS product from a clean slate. Go beyond Xero/Exact-on-Line/Accumatica class meta data-driven architectures are at today. Almost certainly this will be a first-class crypto-commerce blockchain secured product designed to run from any modern browser. To run on-prem, on-mobile or in-cloud in any modern western economy without current in-depth security shields. Alas, this will not happen as a British public company. Leaving only an option for a London or San Francisco based PE firm (we already know who) to swoop in carve out disposals and flog off value. Hopefully leaving a well funded embryo behind with about 5-7 years of runway to develop a genuine killer product for the 2020 to 2050 nextgen EnSW apps era. A product that genuinely scales from micro to small-to-medium run enterprise sized businesses.

    6. Eole says:

      A very good new!!
      Stephen has created not real value, the SaaS activity is less than $100m not the $380 m he claimed
      He spend more than $1B in acquisition with no short term ROI
      He has demotivated > 10 000 employees and resigned several hundred of countries…regional…product …vertical Market experts.
      We need a Keyexpert of the Business Management ( accounting payrol….) with a good knowledge in domain coverage and deep functionalities in dématérialisation , Einvoicing, Epayments, big date …..block chain…..not an hyperoxided unfashionable geek🤣

    7. Juanito Adedze says:

      Reach out To Pascal H.

    8. Lee Margioles says:

      The problem with Sage was Kelley’s inability to acknowledge and replace very poor middle management, directors and program managers. Many have been in positions with little talent, poor attitudes horrible communication. Instead of firing 30 execs he should have cleaned house elsewhere. Moreover Sage has been too tightfisted with budgeting to effectively be able to compete as a techology company.

    9. James says:

      Middle management is a major issue in Sage. Especially in their European HQ in Dublin. By all accounts managers get appointed because of who they know or get along with as opposed to being the right person for the job.

      While there are many talented people working in Sage they are being led by untalented middle managers. When their team under achieves they are simply moved into another managerial role. Sage need to look at outsiders to lead teams.

    10. says:

      Start with the board and work your way down. Nothing can happen without that. There is a lot of wisdom in the adage – a good board will not make a company, but a bad one will inevitably kill it. In addition, the company needs to be taken private. There is a lot to do and it can’t be done as a public company.

    11. Sage Groups BoD is geared to sales execution not digital transformation of product. Apparently not one director has software company design or development experience. Kelly was steering the ship on his own.
      http://www.sage.com/company/investors/company-information/board-of-directors

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