Sage chief on Gen Y and tackling the recession
Q&A: Sage CEO, Paul Walker
Sage chief executive Paul Walker talks to silicon.com about the software company's tactics in the recession, its approach to cloud computing and what happens when the Facebook generation turns entrepreneur.
Paul Walker has been chief executive of Newcastle-based business management software company Sage since 1994. He joined as an accountant three years after the company was founded in 1984, rising to finance director in 1987.
With 5.8 million customers, annual revenue of nearly £1.3bn and as a member of the FTSE 100, Sage is, along with Autonomy, one of the success stories of the UK software industry.
In an exclusive interview with silicon.com, Walker discusses how the company is facing the economic downturn, what he thinks of cloud computing and how he hopes Sage can make an impact in developing markets.
silicon.com: How is Sage placed to weather the economic downturn?
Paul Walker: I suppose compared to a lot of consumer-led or heavy manufacturing businesses, one of the great things about our model is that the support revenues - that are well over of our half of our business - continue to be pretty stable in this economic climate. Obviously selling new licences and new systems is more difficult - although probably arguably not as difficult as if you're in the very big corporate end where IT spend has been frozen.
How has the recession impacted the small business sector?
I think the higher up you go, the more you see people saying 'we'll stick with what we've got'. Obviously the number of companies starting off or [buying] software for the first time, that market is very, very small at the moment because a lot people aren't starting businesses - or indeed I should say history tells us from previous recessions that as you start to [come] out of a recession, you see a lot of small business formation which is very important for our small business products. So the trend normally is to see a lot of new businesses formed as you come out of a recession.
New business formations are a big stimulus for Sage as and when you start to come out of a recession. If you look back to the early 1990s you saw a lot of new business formation as we came out of the recession then. And to some extent it's part of the dynamics of any economy that people lose their jobs, people who've been in business start to look for other options, particularly if their businesses have gone bust - a lot of entrepreneurs see this as an opportunity.
What are your short term objectives for Sage?
Clearly maintaining our margin, maintaining our very strong cash flow - we've got a very strong balance sheet - are all part of our objectives. I think making sure we provide outstanding support to SMEs in this type of climate is also a big objective. Back office finance is more critical in a recession in terms of the information it provides. So alongside support, looking to provide new reporting tools, better ways of looking at your business information, analysing data is also part of our objectives over the next year.
Having said that, we're still continuing to invest in the business in putting new functionality, new technology into our products, starting to anticipate when we'll see more businesses wanting to go the cloud computing/software-as-a-service route. So we are still investing in the business.
What impact is cloud computing having on the company?
In the back office accounting area, business solutions, we're seeing very small, slow growth in terms of demand [for cloud computing]. We have a number of products that meet that demand that so far is relatively modest. Our view is that new businesses coming into the market, particularly people who are used to Facebook, used to the web world, as they start businesses they will clearly think more about online solutions and so our job is to make sure we've got products for that set of people who want to go down that route.
And so we think if you look at the dynamics of new businesses coming in…
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...it's going to be a three- to five-year journey as you move up that curve of more and more people demanding cloud computing. It's going to happen - particularly from that group of people who've lived through the online world with Facebook and what the internet can do for them. We don't think it's a revolution, we think it's going to evolve and there'll still be many customers in three years time who still want desktop solutions but we'll have seen a bigger shift to software as a service over that period.
Will this hurt Sage's desktop business?
We have a number of products we're already selling - we will continue to invest in those and expand those over the next 18 months but you will see more from Sage over that period. Having said that, we can't take our eye off the ball - we've still have 5.7 million customers today on desktop solutions so we have to satisfy both of those markets and that's very important for our business.
Now with broadband as it is, a lot of younger people coming into business who are used to software-as-a-service applications and using the web to run their lives, you'll start seeing more traction over the next two to three years. [But] in two or three years time I'd be very surprised if 50 to 60 per cent of our customers were on [cloud-based applications] but it could be more like 15 or 20 per cent which is why we use the word 'evolve'.
Who would you say is your biggest competitor?
Well, given that North America is nearly half our business we have to look to Intuit and their products from the QuickBooks portfolio as I would say our most serious competitor and indeed our biggest competitor in terms of customer size. So I think we look to what Intuit are doing and the way they're running their business and the way they've developed their business. People like to talk about SAP and Microsoft but for me, certainly in North America, Intuit are our biggest competitor.
What are big areas where your customers are asking for more from Sage?
I think we're seeing our customers starting to realise that using the web can start to simplify some of their business processes and allow them to communicate with customers and suppliers in a more efficient way. So we've certainly seen our customers say: "How you deliver - whether it's desktop or cloud computing - is interesting but actually how we can use your products and adjacent products to access information on the web - whether it's suppliers, for our own customers, whether it's for employees - is something we want more of."
For example we recognise that the whole world around legislation has become more complex for SMEs, particularly around employees. Even for small and medium-sized business they're suddenly faced with more HR problems. So we now have simple, easy-to-use, web-designed, online HR products, particularly in the UK, that can help SMEs over the web access solutions and understand what they need to do on certain situations. So I think HR is a good example where we've provided some online solutions to help our customers interface with issues they have with their employees.
It's really just using the web to access information and to have support over the web. And indeed that's another area we think newer customers coming into Sage will always want - to have the opportunity to speak to a support person where they really need to deal with an issue but [companies will] also want to use online support. One of our objectives is to make sure we're providing both of those - we will make sure we've got high-quality online support services for them to use if they don't wish to have direct contact with a support operative.
We think that just as corporates use business intelligence to manage their businesses more effectively, we think dashboards, or whatever you want to call them, accessing that data and presenting it in different ways for non-financial people in an SME is a great part of the market. The manager of the business just wants to look at that data, probably through a web browser, so he can look at what customers are doing, looking at the financial state of the business but without actually getting into the accounting software.
If you map out how SMEs have used technology over the last 20 years where at first it was all around transaction processing, getting the VAT return done electronically, etcetera, etcetera - of course they expect that to happen by default today. I think that [SMEs] want solutions that are more applicable to the industries that they work in. So whereas at one time vanilla solutions [were enough] I think increasingly SMEs, to be competitive in their own marketplace, want business software that is highly relevant to the industry that they work in. If you're an SME in a distribution industry, the software can be tweaked and changed so it's very relevant to the market that you operate in.
What is Sage's strategy around emerging markets?
We're very small in Asia today… but as that SME sector emerges in some of the big Asian markets, particularly India and China, we've got to work out how we participate in that growth area. Today we're selling mainly mid-market products to European and American businesses that are residing in those markets - so one of our big market solutions called X3, we're selling quite successfully in China - but we don't have that entry-level position that we think is very important to build from in those markets.
We're not strong in any of the South American markets today so obviously looking ahead three to five years we would expect our footprint to increase in these emerging markets. And it's partly about technology but it's also about understanding what SMEs require in these marketplaces, which is where we think our domain skill is.
The online solutions in those markets are probably the way we'll try and enter because in a way you can imagine a lot of new businesses starting off in that area are much more likely to want cloud computing than going the traditional desktop route which has been embedded into the European and North American markets because we've been there for such a long time. A lot of new companies starting out in the Asian world you would think would want to go down that software-as-a-service route.