SaaS or SOSaaS? Why does Sage struggle with cloud software?

The lacklustre take-up of Sage One shows that the financial powerhouse is struggling with the cloud

Sage has just announced its full year results and provided some colour on how it has performed.

Rather than go into the detail - which I consider to represent an anaemic performance when compared to its competitors and others with which Sage gets compared - the company provided a sliver of information on its cloud performance.

Earlier in the year, Sage made its umpteenth effort to get a cloud solution into the market with Sage One. It was met with understandable derision from competitors. Duane Jackson, CEO Kashflow said:

As security was the issue that caused them to abandon their last-attempt, they’ve gone overboard this time at the expense of user experience. You HAVE to set 3 security questions when you register for a trial. And if your answer to the question “What is your favourite car” is less than 5 letters, then you have to choose a different answer. Not ideal if you like BMWs or Audis!

I was more balanced, giving Sage credit for getting something out the door that looks usable following an embarrassing series of flubs. At the time I said:

In the short term this will likely be a cash and profit loss. Even if Sage is able to leverage its buying muscle at Rackspace (Sage’s hosting provider) and drop its cost of delivery to less than 5 pecent, it is promising 24×7 telephone support. That’s not cheap to operate and I wonder whether it is necessary for a UK only solution. Then there is the question of marketing. If Blu Sky is a good example of how it is going to market then it will need to do a lot of convincing in the face of far more functionally rich alternatives. Professionals can expect to be the subject of a charm offensive.

So what did they manage in the 10 months it has been available. 1,500 added customers. We don't know what net new are but it will be a fraction of that figure. To describe this as a poor performance from the UK's largest accounting software provider with a claimed 10,000 firms of accountants in its 'club' is an understatement.

But why might this be the case? Sage isn't in the mood to speak with me. I've given them far too hard a time over the years for them to entertain even contacting me on this topic. But I know enough to make some good educated guesses.

  1. In my discussions with the investment community, we are agreed that Sage is a dividend or private equity play. If you look at how it performs and invests in technology, it is following a path that is remarkably similar to what we see with acquiring PE businesses. That translates into a meagre appetite for the commitment required to make a fresh technology play of the kind required to become a credible cloud player. On the plus side, Sage has said that the SageOne development team has been ring fenced. In theory, that provides some protection from incumbent management but that is not translating into marketing results.
  2. Sage is carrying many years technical debt. It is hard to imagine that at least some of this is not carried over into the new solution. Evidence comes in the fact I see almost no innovation in the UI. There is little in the user experience to suggest this is much more than a re-run of accounting software developed in the 1980s. Some of my colleagues describe this as 'saasquerade.' Others would describe it as 'sosaas' (same old software as a service.) Those are unkind words perhaps but representative of the derision with which analyst colleagues hold this kind of offering.
  3. The larger problem is that Sage is compelled to do exactly as it has because to provide something truly innovative would likely mean cannibalising its existing market, which is mostly driven by maintenance and support fees. Sage cannot do this without incurring the wrath of its investment masters. It's only way out of this problem is to go private so that what it does is within its control. That is what the market is anticipating. We shall see of that comes true.
  4. Sage does not own its own data centres but is a Rackspace customer. There's nothing wrong with that at this stage of development but all the evidence points to the need for SaaS businesses planning on large scale to have a significant degree of control over their data centre activities. Outsourcing it to a third party is risky but from where Sage is sitting represents a cost it that fits its business model. That will be an inevitable drag on how it could grow.
  5. If we look further afield into the Australian and New Zealand markets, we get a very good proxy for what happens when something genuinely new comes along. In those territories, Xero is tearing up MYOB, the incumbent which has just been taken into PE. Its growth is spectacular in those territories although less so in the UK, where the Sage brand dominates. Even so, its UK performance is far from shabby. The Antipodes are small, largely self contained markets where there has not been much of a credible alternative. Xero has shown what you can achieve if you are determined to go after the incumbents AND have the financial resources with which to do it. Sage doesn't see this even though my analysis suggests that on a net new basis, Sage is standing still or going backwards in the face of competition from Xero, KashFlow, FreeAgent, e-conomic, Liquid and a slew of other minor players. These competitors have to provide a top class service or they don't survive. Sage will look at SageOne as nothing more than a drain on an existing and successful business model. In other words, it just isn't hungry enough and doesn't see the risks ahead of it.
  6. You would have thought that with an accountants' club others would give their eye teeth to acquire and where the conventional wisdom is that they only recommend Sage that SageOne would have a very good chance of success. My sense is that same accountants club is both suspicious of Sage yet is itself locked into a past time. Too often over the last few years, Sage has released software that failed to address long standing issues, was buggy and which now appears bloated. Why would you think that a new product will be any better? More to the point, if you are comfortable with other Sage products, why would you bother to learn a new one? It is therefore a victim of its own past success.
  7. Sage spends a LOT of money on marketing but how do you market SageOne in tandem with its stable of legacy applications? It is a really hard thing for the company to do without, once again, being pulled towards the abyss of cannibalisation. There are answers to this problem but Sage doesn't see them, and I'm not about to give away THAT IP.
  8. Sage just isn't sexy. Having soggy software is not going to attract the kind of forward thinking talent the company needs to take its solution forward. Sage will tell you it is investing in Ruby and other new technologies but that is not enough to attract the best people and especially not the best designers. This makes it even more difficult for the development team to break out of past cycles. In turn that contributes to what is really a so-so solution.

In its presentation to the investment community, Sage said that SageOne will be the foundation for its future SME development. That is a very scary thought. If this is the best the company has achieved to date then I fear for its long term future.

My assessment is that the new breed of cloud players are hoovering up something around 50-70,000 businesses a year. In years past most of that would have gone to Sage. None of it is going to them today. Unless Sage aggressively tackles the problems I've outlined above then it is going to find itself in exactly the same position as other incumbents. Stuck between a rock and a hard place with 30-year-old code that is no longer cutting it.

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