Sage boss keeps on believing

Three years after acquiring Taxsoft, it transpired the high-end corporation tax product wasn’t up to scratch, so Sage acquired software from Deloitte & Touche and sold it under the Sage brand.

Dave Karlin, Sage’s chief technical officer claims: ‘The new product is much better from a usability standpoint.’

The professional services business – which includes staff from Hartley and CSM, suppliers of software used by professional accountants to manage their client affairs – has had its fair share of problems. Lacklustre customer service forced Jerry Luckett out the door, and now Adrian Grace has the dubious pleasure of turning the unit around. According to Grace: ‘Service standards were not acceptable to us – we had to make changes.’ Wylie admits that part of the problem stems from the fact they ‘didn’t impose service disciplines quickly enough’.

And while it’s true that cultural changes following acquisition frequently cause problems, Wylie seems resigned to managing high staff turnover directly following an acquisition. ‘It’s rare to see the old senior management in place a year after a takeover,’ he admits.

Wylie believes a significant reason for this is that the company is usually acquiring small businesses, where there is a more relaxed atmosphere.

‘As a public company operating in a market that has certain expectations, we have to impose disciplines. That means people turn up between nine and five and make a given number of calls. If they don’t do that, then there has to be change,’ he says.

There were service problems at its Manchester call centre, but Sage now claims the situation has been ‘transformed’, and there is a much higher level of employee and customer satisfaction.

But this strategy is fraught with risk. Sage is well known for making significant management changes at regular intervals – a fact Wylie attributes to the pace of acquisition and that the company sets high expectations within its sales and marketing operations. However, critics wonder whether this is a strategy for success. Professional accountants who have been left dangling on the end of poor customer support represent a key channel to Sage markets, and so it is imperative that Sage resolves this problem once and for all.

Paul Calotychos, business service manager at Baker Tilly’s Basingstoke office, contends that the Accountants’ Club support is ‘a bit of a shambles at the moment. Sometimes I know more than the person on the other end of the phone.’ Calotychos acknowledges that Sage is trying to resolve the problem, but this is another example of a continuing issue the company has yet to fathom.

Frequent management change disturbs business stability, something a number of software companies have found to their cost. Wylie refutes this point, arguing that the core management team in Newcastle is stable and long standing. But one has to question just how effective Sage’s strategy has really been.

Last year, for instance, the company recorded an increase in revenues of 4.8% in the UK, noting that it added 54,000 new customers. The company claims this was entirely organic growth rather than from acquisition and says it expects to maintain that momentum. At the same time, it reported the number of customers under support contracts fell by 59,000, although revenue from this source increased 18%.

The implications are that new license revenue is falling, but when asked to expand on the facts, Wylie is unsure. We speculate this might mean the actual value of new UK business is shrinking, but there is no clear answer to this question. We also note that most of Microsoft Business Solutions’ new business seems to be coming from Sage customers and question whether Sage is providing an adequate upgrade route to higher-end applications.

Sage’s Karlin argues that the company’s 50% market share of the low-end market distorts the apparent number of customers moving to new products.

But he says that suggesting the company is losing share to competitors is not necessarily a reasonable conclusion. Wylie admits: ‘We’ve not been good at communicating our capabilities for larger customers, despite having many well-known brand name customers.’

For example, Sage counts parts of Nestle, Arsenal FC, HM prisons and BAT as customers. Wylie also argues that much depends on how one views the mid-range as a sector, and says that it is not just a function of size but of industry. ‘If you look at manufacturing outside of process industries, Line 500 (the old Tetra CS/3 product) unquestionably has huge market share in the mid-market,’ he says.

This explains why Sage is making such a concentrated effort to focus on manufacturing and construction as key verticals it will concentrate on in the future. Karlin says he has internal and external resources totalling about 1,000 developers that can be deployed into this activity.

He says new functionality will be developed along two lines. First, products are being developed generically to include functions like billing and job costing. Second, Sage is developing specific domain expertise in what Nigel Hudson, business development director, describes as ‘sub-channels’ within vertical markets. Some will be done in-house, and other work will be done by its top-end resellers.

Much of this is a response to problems of getting customers to upgrade.

According to the company, there is a close correlation between customer satisfaction and the number of years they’ve been using the software.

‘Even though some may have a less than ideal solution, they’ll stick with it if they’ve been using it for years,’ says Karlin.

Another view might be that since the ‘feature/function’ war among software vendors is over, new offerings must solve business problems for vertical markets and not be restricted to a single back-office function like accounting.

In this context, Sage has customer management capability from its acquisition of ACT. But in reality, it has to rely on developing the top-end Line 200 and 500 products. This is new territory for Sage, and history shows that software companies that try to move outside their traditional markets experience real difficulties in achieving success. SAP, Oracle and PeopleSoft have all dallied with different market segments with very limited success.

In the meantime, Sage has just released a new version of Line 100. At present, the only modules available are the core financials, but many people buy Line 100 for the ‘commercial’ modules that include SOP and POP.

The commercials are due for release in May or June this year, but Linda Noble, financial controller at Mount West Petroleum Engineering and an existing Line 100 user, says: ‘I’m not going to hold my breath – at least not based on past experience.’ David Rankin, director at Tenon, an accounting software distributor, adds: ‘While the look and feel is very good and will encourage upgrade, I’d expect customers to wait until the other modules come available before making a choice.’

What of the future? Wylie remains confident the company can continue growing its overall market but with more than 100 different products spread around the world and only about 1,000 developers available to keep them up to date, one wonders just how that success will be achieved unless the company continues acquiring other players.

‘IT DOES WHAT IT SAYS ON THE BOX’

Despite the service-related criticisms, Sage enjoys significant market share. Of the 101,000 UK manufacturers that use software, Sage owns 67% of the market. In construction, it supplies 44% of those that use software.

Sage plans to increase its share, in part by providing customers with a ready means to ‘trade’ documents such as invoices and orders over the internet. This would provide a means of locking in industry specific users because there would be no requirement to invest in electronic document ‘translation’ software like EDI or XML. The company believes it can readily persuade up to 30% of its user base to make this change.

And customers keep coming back for more. Wylie believes that up to two-thirds of revenue is derived from existing customers either through services or upgrades. Many of those who use Sage products are flattering.

John Devine, office manager at Marshall Wilson Packaging, says: ‘It does what it says out of the box and we can readily integrate what we have to new telesales software.’ Linda Noble, financial controller at Mount West Petroleum Engineering, has been using Sage products since 1988 and while she has evaluated other accounting products, she continues to sing Line 100’s praises: ‘Its basic accounting works well and that provides me with nine tenths of what I need to do my job.’ BAT uses Line 500 in 49 countries and these have been successfully integrated into SAP hubs.