Interview - Sage CEO Stephen Kelly on transitioning to a ‘pure’ cloud business

Profile picture for user ddpreez By Derek du Preez July 26, 2016
Summary:
Kelly is undertaking a huge challenge in shifting Sage from somewhat of a dying brand, to a company that is a market leader in cloud financials.

stephen kelly sage
Stephen Kelly, CEO, Sage

When Stephen Kelly took on the role of Sage chief executive almost two years ago, it’s fair to say that he had a bit of an uphill battle on his hands. The company’s brand, whilst still sitting at the heart of the SMB market, particularly in the UK, was failing to catch up with some of the more innovative cloud-based vendors.

However, two years since joining, it seems that progress is being made. Since 2013 the company’s share price has more than doubled. And in a trading update today, Sage said that its group organic revenue had increased by 6% and that it was delivering growth of 6.1% for the first nine months of the year. Software subscription revenue (cloud) grew by 33.2% in the first half of the year.

Business is good. In my opinion that is largely down to Kelly and the company’s dogged commitment to transforming Sage into a ‘pure’ cloud company. Compared to the dabbling that happened prior to Kelly’s joining, Sage is now pursuing cloud aggressively - both by partnering with the likes of Salesforce, Amazon and Microsoft, but by also investing heavily in its core product line.

Kelly wants to simplify, both internally and in terms of Sage’s go-to-market strategy. The partner programme is being consolidated. And so is the product line. Whilst he is committed to not forcing customers to migrate to the cloud, there is going to be an awful lot of ‘carrot’ put in front of them to make it very tempting to do so.

We saw evidence of this yesterday when Kelly took to the stage to rally partners around the cloud message and urge them to work with Sage to figure out how they can make money from a subscription model.

I got the chance to sit down with Kelly briefly at Sage’s annual user event in Chicago this week, where explained that he doesn’t want the company to be playing catch up with the other cloud players in the market. Instead he wants to innovate and stay ahead of the curve, so that customers view Sage as a market leader. He said:

We genuinely have to have the best cloud accounting solution on the planet. I think we’re good, but we are going to really focus more and more energy on R&D, to get miles ahead of everybody else.

R&D

sage
Sage has invested £139 million in R&D in 2015 alone and it shows no signs of letting up. The results of this vary, but include the Sage Cloud (an integration and data layer for apps), the Sage marketplace (a third party platform for the development of vertical applications that connect via open APIs) and even the release of bots to carry out financial tasks within messaging apps, such as Facebook Messenger and Slack.

Kelly said he will measure his success based on getting these features in the hands of small businesses, globally.

The marketplace - it would be easy for any business to use whatever the common device is by that time and then in real-time use Sage as the digital heartbeat and populate their business with lots of third party apps. That’s a vision we have got. These apps will integrate together, through open APIs.

The other thing, I do think the user interface will be natural language, machine learning. That’s a massive shift. That could be huge disruption and unleash amazing productivity for the small and medium business.

Sage has also invested in distribution centres that replicate the most customer friendly of service centres in the market - one in Dublin and one in Atlanta.

And whilst Kelly is sticking to his ‘no forced migration’ rule. He does hope that customers will be tempted to move over to the cloud products when they see these feature and service benefits. Part of the plan is to also scale back investment in some of the older on-premise products and plough this into the cloud portfolio. He explained:

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.

If I were a customer using one of the older products, that would certainly serve as somewhat of a wake-up call - or a kick up the backside - depending on how you look at it. Kelly also wants to make it very easy for customers to get to the cloud. He said:

And the other one is commercial incentives - so why would it be in the customer interests? And then once it is, how can we do it over a weekend?

And Sage’s sales team have been given a very clear message too.

There is an approval process, where if they want to sell on premise software they have to get approval.

As a result, the aim is that net new on-premise customers will naturally subside and cloud growth will perpetuate. So how is this going for Sage? Kelly says it is “going pretty well”, but there are some geographic variations - particularly in countries where privacy is a big concern, such as France and Germany.

But what are the numbers? Unfortunately Kelly couldn’t say, as the company doesn’t publish these. It seems though that this could change soon, which would be useful, as we can then get a clearer picture on how the revenue base for Sage is shifting. Kelly said:

We should [publish the numbers], but we don’t. We should. Many other companies do. And the other thing that’s worth noting, we are very pure [when we talk about] cloud. If you look at some of the other companies, they claim that every customer is a cloud customer. Particularly the big guys. Whereas, if we do it I think it should be a lot more pure.

Challenges

Kelly isn’t shy about the fact that this is a big change for Sage, which was very much perceived to be a company that was stuck in its ways and falling behind the innovation curve. And this has been challenging internally for the company too. He said:

I make no apology for it, it’s a massive transformation. It’s a root and branch transformation. It’s taking us not into this decade, but the next decade. If we get this right we could be the rightful category leader for all these entrepreneurs around the world. We used to consolidate our earnings internally off 105 different databases. We had 21 different internal CRM systems. We had 139 properties. We had 159 different sales comp plans. All of this is madness.

In the modern world we need one way with a sales compensation plan, induction, training, there’s a way of doing this well. What we had before was very fragmented. What we are moving towards is greater consistency.

And this plays to what keeps Kelly up at night. His main challenge, or worry, is getting Sage to do

Sage CEO Stephen Kelly

the job at hand. That’s where the main blocker to the transformation will lie. He finished by saying:

[The biggest challenge] is always ourselves. Sad to say, it’s always ourselves. Reality is that we are very fortunate that we don’t have a global competitor. We have individual country competitors. It’s very fragmented, the competition. What that gives us is opportunity. If we get our act together on the transformation, it means we can move at greater speed and velocity.

I think that the reality is that our future is bright. The only thing is stopping us is us - our own belief. And although I said the transformation is massive, what it really is is picking up the phone to the customer, finding out what the customer needs, selling them the most appropriate product, working with partners, building great products. It’s basic stuff.

My take

A few years ago I never thought I’d attend a Sage conference and actually find the content interesting. That’s changed over the past couple of years. Kelly’s commitment to the turnaround is great to observe - particularly as history tells us that a reverse of fortunes in this market is somewhat rare.

It’s not a done deal for Sage, however. Whilst the trajectory looks good, there’s no getting away from the fact that it has a huge on-premise install base that may very well be stubborn about shifting to the cloud at the will of Kelly - and feel a bit isolated in this new cloudy world.

I mean, Kelly is right in what he’s doing. And he’s changing Sage from being an isolated dinosaur to a collaborative cloud friendly company. Will it lead in the cloud market? I’m not sure yet. It has a big challenge, particularly here in North America. But in the meantime its fun to watch Sage give it a go.