CEO Interview: Nov 5th sees Stephen Kelly in the job of Sage CEO for exactly one year. He talks about year one and what’s next.
Stephen Kelly was announced as CEO of Sage on November 5th 2014.
He has set out a plan to awaken a sleeping giant, change its diet, shed some weight, get some new clothes, keep its friends, make new friends (some younger) and hang out in cooler places.
To park the metaphor, Sage is slashing operating costs, has announced strategic partnerships with Salesforce and Microsoft, promised not to force its customers onto the cloud, promised investors it will maintain its margins and all the while embarked on an ambitious plan to entice the millennial generation of SMB entrepreneurs to manage their company finances on Sage via its mobile first approach.
Sage was formed in 1981. It is the UK’s largest software company. It sells financial software, mostly accountancy and payroll to mostly SMB customers. It is multinational. Its main operations are in the UK, US and Australia and has offices in Brazil.
The Sage of old was very fragmented, Mr Kelly says, with independent islands operating below even country level.
"We had product groups operating independently within countries. And we have 270 different products. Too much was operating as different independent islands. And we had different independent systems. So one of things we’re changing is the 21 different CRM systems we have in house. In three years there will be one: Salesforce," he says. Sage moving to the Salesforce Customer Success platform was first announced in February.
It is time to use technology ‘to smash the walls, between the front and back office.’
Sage has huge operational legacy
"The good news for us in some respects is that because of the fragmentation of the past we never integrated our acquisitions. There’s huge efficiencies for us to drive within our own business," he says.
The plan is to slash general and accounting costs.
He says: "We spend about 22% of revenues on G+A. Most companies would spend low teens, or even 10-12%. We can take a number of margin points out of inefficiencies and invest them in growth and sales. And that’s the plan. Don’t tamper with the model from an investor point of view for operating margin. But we can make efficiencies in IT, in HR, in finance and all back office back office areas. This year we’ve shifted $30m within the budget from cost to growth driven investment."
And in terms of the customer base Mr Kelly recognises that the shift is to cloud and SAAS and what that will mean.
"We care about sustainable accelerated growth, driven by customer success to build shareholder value. But you put the customers first. In terms of the operating model, what I’ve committed to the investors is making that 28% operating margin," he says.
Mr Kelly says that Sage will not radically change its approach to the capital markets, it will continue to pay a ‘progressive dividend.’
"Look at the FTse companies and you’ll see we’re top decile in terms of revenue growth, operating margin and free cash flow. Only a handful of FTse companies have paid a progressive dividend every year since 2000 and we’re one of them and we’ll see that continuing," he says.
Moving Sage to SAAS
"We’re becoming a SAAS business. I did a capital markets day for analysts in London and said in two to three years we’ll transition to deploying significant growth products through the SAAS model."
"Even now our growth in subscriptions is 30% plus, so we’ll continue to see momentum and healthy growth and that portion of our business will grow faster. And what we’ve said on perpetual licences business from quarter to quarter is going to go up and down.
And some quarters it might go down."
"Generally the trend is good on licences and the really accelerated growth is on the subscription business. So we do this right and challenge ourselves pretty hard to say within that we want to maintain 28% margin. We are very profitable, create great free cash flow and progressive dividends compared to our competitors. The 28% operating margin underpins the business"
Sage, he says is not expecting a pinch.
The real economy – customers
His eye is on the prize. The prize is the size of the market. The opportunity is to grow rapidly.
When we meet at Salesforce Dreamforce in San Francisco it is clear that scale of conference and the rate at which Salesforce has grown to get there sets a benchmark and maybe even a target.
Sage and Salesforce announced their strategic partnership in May 2015.
What does it give him?
"There are a number of strands. The first strand to cover is technology. So through the Salesforce 1 platform comes Sage Live. A project that wasn’t even imagined a year ago."
It was announced with Salesforce CEO in May with Salesforce CEO Marc Benioff.
"And then what we’ve seen is early adopter customers posting transactions, the product is live. That speed couldn’t have been established without Salesforce."
With Sage Live the concept is of a mobile first application and that will use the Salesforce Lightning architecture and new user interface. "We’re a mobile first application. And through Salesforce Lightning we’re probably the most advanced app partner out there deploying the Lightning technology."
The tech relationship with Salesforce accelerates speed to market for products and also grants Sage insight to the Salesforce product roadmap and co-development rights. "Some of their best developers are working with us," says Mr Kelly. The partnership means access to and development of expertise around cloud platforms.
Another thing Sage gets from Salesforce is scale.
At Dreamforce there were 150,000 people described by Mr Kelly as ‘like a movement, a volunteer army.’
He also points to the immense marketing power of Salesforce.
"We’re co-marketing with Sage Live and the Salesforce products. You’ve heard Marc Benioff say Sage is the most strategic relationship Salesforce had in 16 years. Keith Block, Salesforce President said the same thing at the Sage summit."
What Mr Kelly wants to emulate from is how the Salesforce brand was built and the effectiveness of its marketing machine.
"It is an area we can learn from them as a company to get really scientific around marketing, especially digital marketing."
The Second Year
Sage Live integrated with Salesforce1 will appeal to millennials and to ’10 million businesses out there within our footprint which are likely employ half a billion people.’
What are the cultural parallels between the organisations?
"We are disruptive. We start with the customer, the entrepreneur, the millennial. The scale of growth in tech and services is exponential. The speed at which you can grow companies and do it sustainability is so much greater than you could 20 years ago. And the speed at which you can go international, go global because of the digital economy is tremendous."
This new language of digital disruption is new to Sage’s traditional customer base and Mr Kelly recognises his bi-model approach.
"Because many of the existing Sage customers are in their 40s, 50s, we’re looking at this relationship with Salesforce as customer acquisition for a completely new space."
But he points out that no-one is being abandoned or forced to move.
"I signalled that at Sage we don’t end of life our products. So we won’t do forced migrations. We’ll offer incentives and choices for customers to move to cloud and mobility."
Targeting the millennials and brand building
"The brand needs to be built. You don’t build a brand overnight. It has to be a relentless drumbeat of rolling thunder. We’re positioning ourselves as champions of entrepreneurs."
The way the digital economy works it won’t take 30 years to grow from start up to global business.
Salesforce is again seen as setting an example. It was the fastest company to $5 billion and will probably be the fastest company to $10bn.
He says: "I think all those kids in Tech City should be looking up at us as a poster child and saying I want to be the next Sage."