The Market Impact of Two Powerhouses
Written By: Predrag Jakovljevic
Published On: August 25 2005
This is an analysis of the equivalent moves of the two superpowers at the (perhaps even more promising) lower-end of the market, also known as the small-to-medium enterprise (SME) market segment. One player is Microsoft Business Solutions (MBS), who underwent two major, well-publicized acquisitions in the early 2000s (see Microsoft Keeps on Rounding up Its Business Solutions). The other player is the UK-based the Sage Group plc (LSE: SGE.L), who has been rounding out, also by annexation, its currently largest (SME) geographic coverage (see Will Sage Group Cement Its SME Leadership with ACCPAC and Softline Acquisitions?).
The lengthy discussion of recent events points out the fact that even the biggest and best in the market have serious issues to solve, and that no one can rest on their laurels. Also, the two SME leaders seem to have somewhat different strategies going forward, and time will tell who will ultimately win. Certainly, no one should hereby dismiss the importance and clout of the likes of Epicor Software or Exact Software in the market segment, each with own innovative twists on the value proposition (see Epicor's Mid-Market Pitch Becomes Higher For (One) Scala and Exact Software—Working Diligently Towards the "One Exact" Synergy), but both market observers and Sage and Microsoft themselves will respectfully agree that they tend to be each other's most "love to hate" opponent.
While many eyes are on MBS due to its indisputable mind share, the parent company's technological prowess, and pervasiveness/familiarity—at least on the desktop level—Sage/Best will remain the SME applications market leader for some time in terms of inexorable numbers that determine the market share-based leader. Namely, its slew of relatively recent acquisitions have created a company with well over $1.2 billion (USD) in revenues, nearly 4.5 million users and more than 20,000 reselling and software development partners. If one is to juxtapose these against the MBS' $800 million (USD) or so in revenues, over "only" 300,000 customers, and over 8,000 partners, any debate about who the current SME leader is, should cease for now.
Sage still has the largest channel and market share in almost all SME categories (e.g., entry level accounting products, small business solutions, contact management/customer relationship management (CRM), non-profit businesses, etc.), which it obtained via its well-crafted strategy to both develop and acquire a very complementary group of best-of-breed products and to develop interoperability and a reasonably smooth upward migration path within its portfolio. These "to suck the air out of the room", "customer for life", and "to lose' customers to ourselves" (i.e., to another Sage/Best product) mantras seem to have resulted in a rare persistent organic growth these years of depleted new account opportunities.
The enterprise application software industry has historically been characterized by the quest for new accounts. As market penetration has increased, the opportunity for new accounts has logically lessened, and many vendors are therefore betting on "the replacement market" to serve as their new account vehicle. But do companies want to replace their existing application software?
Some recent announcements from IBM and other powerhouses tell us that these vendors think companies want to keep the software they have and improve these systems through enhancement and integration efforts. For some time now, and somewhat ironically, the likes of Microsoft and IBM have been telling customers it should soon, if not already, be possible to build many of the integrated, cross-functional applications they need without investing in major new packaged systems. By plugging together existing and new Web services and components, and using some technology and services from these vendors, they should supposedly be able to get much of the flexibility they need (for a detailed discussion of how vendors are approaching growth opportunities, see Achieving Growth: New Accounts versus Up-selling to Existing Accounts).
To that end, on its North American side, Best Software too has long been posting profits and organic growth, and a great reason for this would be its prudent strategy of acquiring complementary products that lend themselves to cross-selling (e.g., FAS and ACT! to Peachtree customers, or Abra, FAS and SalesLogix to MAS customers) and upward migration (e.g., from Peachtree to MAS 90 to MAS 500). Also, while Best is benefiting royally from cultivating its large installed base, MBS' and SAP BusinessOne's emphasis on hunting new licenses in the recently stalled economy has had limited success so far. Hence, one should not be surprised by MBS' recent upbeat results (i.e., in terms of license growth, not necessarily in terms of profit margins) in great part from up selling so-called "surrounding" applications like Microsoft Demand Planner, or Microsoft Business Portal to its existing enterprise resource planning (ERP) users.
Another extension which is soon to be available to all MBS' product lines is the nearly ubiquitous FRx' applications for financial reporting, consolidation, and forecasting (see FRx Poised to Permeate Many More General Ledgers). The other vendors have not been sitting still either, and other object cases of ERP extensions over disparate ERP products portfolio are Exact e-Synergy and Exact Event Manager.
In fact, Best is counting on its future growth coming primarily from the migration of its smaller customers to its mid-market solutions, as over 70 percent of its revenue currently comes from installed base activities (i.e., support contracts and maintenance, upgrades, payroll services, training, etc.). Moreover, nearly 500,000 customers maintain support contracts, providing a stable recurring revenue stream to the vendor in these days of reduced activity in the market. Best's strongest points will have indeed long been its cross-selling and upward migration aptitude. It has already mastered the Peachtree to MAS 90 path, while ACCPAC has fitted well with its Simply Accounting to ACCPAC Advantage Series route.
This is Part Four of the Is "Sage" Wiser and Better than "Best"? series.
Sage/Best Market Analysis
SME customers continue to increasingly realize the importance of seamless integration between front-office and back-office applications, and to consequently look for one strategic vendor (i.e., one throat to choke') to fulfill and be solely accountable for the vast majority of their business application needs, particularly in the lower end of the segment. Also, many of them have long outgrown their entry-level accounting solutions la QuickBooks, DacEasy, Peachtree, or Simply Accounting, and are pointing at its original provider for functional expansion opportunities in contact management/sales force automation (SFA), CRM, human resources (HR)/payroll management, electronic data interchange (EDI), and warehouse management systems (WMS), all of which Best and ACCPAC have tackled.
On its hand, former ACCPAC had possibly raised the bar by offering its customers a multidimensional choice:
- to start with accounting and add other tightly integrated business applications as needs arise;
- start with a simple set of enterprise applications and grow to more advanced level applications;
- run applications in-house or on a hosted/subscription base;
- run on a wide range of platforms—Windows or Linux OS, or on Oracle, IBM DB2, Microsoft SQL Server, or Pervasive databases; and
- run on a local area network (LAN) or provide access via the Web. Not many peers, if any, are able to offer a product that is designed to accommodate new technologies easily, and that caters to a potential long term growth with an abundance of flexibility (for more information, see ACCPAC—Being Much More than Meets the Eye).
In addition to product offering, Sage/Best has long invested heavily in recruiting, motivating, and supporting the resellers that service the segment by providing them with product interfaces, relatively uncomplicated functionality, and attractive price points. The company has also made application programming interfaces (API) available to external developers to help integrate their primarily accounting-based products with vertical market extensions provided by their partners.
Sage/Best and former ACCPAC have for decades been cultivating awareness and relationships within a community of influencers, such as certified public accountants (CPA) or chartered accountants (CA) and small and medium accounting companies that make recommendations to their clients regarding which packages to deploy, and this can be neither easily nor quickly toppled. Conversely, MBS, while well established in the general accounting market, does not offer applications used by professional accounting firms, such as time and billing, tax preparation and write-up, and it remains to be seen how the vendor will animate CPAs to resell the upcoming small business accounting (SBA) product.
Sage also offers "no-frills" on-line or retail—via over 5,000 retail outlets, in addition to telesales, direct e-mail and Web ordering—entry-level or "feeder" business-application packages that attract small businesses early on, such as BusinessWorks Gold, Peachtree, or ACCPAC Simply Accounting. Then, the vendor provides more advanced functions and more scalable software as these businesses grow. Further, some smaller Sage/Best resellers grant customers the rights to their applications source code, which is unheard of by the larger vendors. The publicity coming from many failed implementations by the larger vendors makes smaller businesses skeptical and reticent to deal with the upper-end tier two, let alone tier one enterprise application providers.
Therefore, Sage/Best Software has almost all the ingredients of the recipe for success in the SME market—the functional footprint, several strong individual product brands, deep and ever-improving channel relationships, large installed base (many of which are small-offices/home-offices (SOHO), referred to as a "feeder channel"), and financial stability. Still, even if the ingredients and a good recipe are only a good start, it takes time and immaculate execution to produce a succulent dish'.
For one, the Sage/Best Software brand has yet to have a universal ring, like those of Microsoft, IBM, SAP, or even Intuit, for that matter. Given Sage's revenue level is quite higher than those of mid-market who is whos—Geac Computers, MBS, SSA Global, Infor Global Solutions, and Lawson Software—, making it an ultimate juggernaut within the SME market per se, the time has long come for its mind share to become commensurate with its size (for more information on the importance of branding and positioning, and on subtle differences between the two, see Branding and Positioning: What's the Difference? And Can You Afford It?).
Thus, despite a seemingly well crafted marketing campaign, the Best Software brand remains much less-known than those of its individual products, for example, ACT!, SalesLogix, or Peachtree, and especially ACCPAC. The company has long suffered from either the "Best who?" syndrome or the confusion with the former Abra, Carpe Diem, or FAS provider only. Additionally, the wealth of corporate names and a likely unwieldy slew of products within each of Sage's divisions and groups, presents sales and marketing confusion for the company, both internally and externally across the globe.
Sage is far from being a uniformly global company, as its product offerings differ for different markets, particularly on both sides of the Atlantic. For instance, while the unified Best brand will be increasingly applicable for the North American market, Sage offers for the other international markets a disparate line of products for small businesses comparable to the above-mentioned Best's lines (e.g., Instant Accounting for a single user, Line 50 for up to 5 users, Line 200 for 5 to 25 users, and Line 500 for up to 1,000 users).
While Best Software's MAS 500 manufacturing modules come from the company's purchase of ERP vendor Haitek Solutions in 2002, Line 500 comes from the Sage Group's acquisition of Tetra, a UK-based mid-market ERP vendor, in 1999. These deals have consequently resulted in different ERP products offered by different units of the Sage Group. After the Tetra acquisition, The Sage Group formed Sage Enterprise Solutions, based in the UK, which offered an ERP suite initially called Sage Enterprise (renamed recently Line 500). Therefore, the one face to customers' motto might only be applicable within certain markets per se, such as North America, the UK, or France, and very unlikely across the globe.
Yet, international business is a major reason the company has to be able to use the name Sage in all markets. North America is obviously a very large contributor to the global business and several Sage and Best brands, especially in the CRM realm (i.e., SalesLogix) and its entry-level element in contact management (i.e., ACT!), have truly a global application. One of the great strengths that the vendor brings to the market is the breadth of the product selection it offers. The ability to promote true breadth under the Sage brand is important for both existing and prospective customers. Another real issue is the increasingly international scope of business, especially since Best has had some recognition in the US but virtually none internationally.
MBS Also Faces Competition
By the same token, similar facts will eventually render MBS Great Plains and Solomon, still highly successful product lines in North America (and some regional pockets elsewhere), secondary to Navision and Axapta, which are better known across the globe. For example, Axapta is the youngest of the MBS products, which despite the disadvantage of a nascent install base and brand recognition, comes with the benefits of more modern technology, while the software supports 20 languages and 32 preloaded currencies, and also adheres to local accounting standards and filing requirements (e.g., taxation and disclaimers), where applicable (for more info, see Microsoft Axapta: Design Factors Shape System Usage).
These capabilities, and MBS' belief that the sweet spot for the Industry Builder integrated stacks would be high-end enterprises (although we might have some reservations when it comes to truly multinational and large corporations), have been the rationale for picking Axapta as the first test bed for the initiative. Also, as Navision's or Great Plains' partner base is heavily fragmented (as opposed to Axapta's smaller and more intimate partner community), a similar initiative would cause turmoil, and the segregation of those partners, which would make it into the Industry Builder list, and those less advantaged ones, whose solution would now compete against the first ones.
This concludes Part Four of the Is "Sage" Wiser and Better than "Best"? series.