Will Sage Group Cement Its SME Leadership with ACCPAC and Softline Acquisitions? Part Four: Market Impact

Market Impact

In March, Best Software, Inc., one of the leading current providers of integrated accounting, business management, human resources (HR)/payroll, and fixed asset solutions for small and medium enterprises (SME) in North America, announced that its parent company, the UK-based The Sage Group plc (LSE: SGE.L), had completed the acquisition of ACCPAC International, Inc. (www.accpac.com). The Sage Group plc is a leading provider of business management software for mid-sized companies worldwide, with annual sales of nearly $900 million (USD) and 3.6 million customers, and ACCPAC was, until recently, an independent subsidiary of the software powerhouse Computer Associates International, Inc. (NYSE: CA).

While many eyes are on Microsoft Business Solutions (MBS) due to its indisputable mind share, the parent company's technological prowess, and its pervasiveness, 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, the above-mentioned latest acquisitions have created a company with over $1 billion (USD) in expected revenues, over 4 million users, and nearly 20,000 reselling and software development partners. If one is to juxtapose these against the MBS' $0.6 billion (USD) in revenues, over "only" 0.27 million customers, and over 6,000 partners, any debate about who the current SME leader is should cease for now.

For the Sage Group, Best Software, the consolidation of ACCPAC and Softline is neither a recent nor a startling event, given their separate slew of acquisitions in the not so distant past. As a result, the combined conglomerate still has the largest channel and market share in almost all SME categories (e.g., entry level accounting products, small business solutions, contact management/CRM, non-profit businesses, etc.) 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 "customer for life" and "to lose' customer to ourselves" (i.e., to another Sage/Best product) mantras seem to have resulted in a rare persistent organic growth these days, and one should expect a similar rationale with ACCPAC and Softline's offerings.

However, the Sage/Best Software brand has yet to have a universal ring, like those Microsoft, IBM, SAP, or even Intuit for that matter have. Given Sage's revenue level is quite higher than those of Geac, MBS, SSA Global, 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.

The above merging vendors all understand their market well and have thus gained market and mind share as well as loyal customers. In addition to product offering, they have long heavily invested in recruiting, motivating, and supporting the resellers that service the segment. There are also influencers like certified public accountants (CPA)/chartered accountants (CA), and small and medium accounting companies that make recommendations to their clients on which packages to deploy, and Sage/Best and ACCPAC have been cultivating awareness and relationships within this community for decades, which can be neither easily nor quickly toppled. The knowledge these vendors have of their customers' business is also reflected in product interfaces, a relatively uncomplicated functionality, attractive price points, and in making application programming interfaces (API) available to external developers to help integrate their primarily accounting-based products with vertical market extensions provided by their partners.

They also offer "no-frills" online or retail sold -- via over 5,000 retail outlets, in addition to telesales, direct email 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, these vendors provide more advanced functions and more scalable software as the small businesses grow. Further, some smaller resellers of these vendors grant customers the rights to their applications' source code, which is unheard of by the larger vendors, despite many failed implementations' publicity coming exactly from these providers, which additionally may make smaller business skeptical and reticent to deal with the upper-end Tier 2, let alone Tier 1 enterprise applications providers.

This is Part Four of an eight-part note.

Parts One, Two, and Three presented the Event Summary.

Parts Five and Six will continue the discussion of the Market Impact.

Part Seven will cover Challenges and Part Eight will make User Recommendations.

*Note: Parts Five to Eight will be published on June 9 to 12.

Best Software Strategy

Best Software 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). To be fair, MBS has the PWA Group, FRx, and Forestar products somewhere in its fold through the former Great Plains' acquisition of these respective HR, financial reporting/consolidation, and fixed asset functionalities, but it still has the four largely competing flagship ERP/accounting product lines. Also, while Best is benefiting royally from cultivating its large installed base, MBS' and SAP BusinessOne's emphasis on hunting new licenses in a stalled economy has had limited success so far. Hence, one should not be surprised by MBS' recent upbeat results in a great part from up selling so-called "surrounding" applications like Microsoft Business Network (MBN), Microsoft Demand Planner, or Microsoft Business Portal to its existing ERP users.

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, in addition to the fiscal year 2003 migration statistics (i.e., nearly 30 percent of all new MAS 90 customers have migrated from Peachtree and, even surprisingly, over 10 percent of all new MAS 500 customers have leaped' from Peachtree, while 10 percent of all SalesLogix customers have formerly used ACT! and nearly 20 percent of new MIP Fund Accounting Pro customers have migrated from Peachtree), nearly 300,000 customers maintain support contracts, providing a stable recurring revenue stream to the vendor in these days of reduced activity in the market.

To bolster this, Best Software's migration center opened in Atlanta in early 2003, and is comprised of employees focused only on helping customers migrate from one Best platform to another. Formerly handled out of multiple different organizations within Best Software (e.g., the Small Business Division then featuring the Peachtree, DacEasy, and Timeslips products, and the Specialty Products Division then featuring FAS, Abra, Carpe Diem, and TimeSheet Professional products, in addition to the other four) this centrally-located group will support Best customers as they consider new/different platforms for their business (see Best Software Delivers More Insights To its Partners (As Well As the Market)).

Best's strongest points would indeed have long been its cross-selling and upward migration aptitudes. It has already mastered the Peachtree to MAS 90 path, while ACCPAC will fit well with its Simply Accounting to ACCPAC Advantage route. As for cross selling, the so-called "application erosion" phenomenon also comes into help for Best Software. That has particularly been proven time and again with the fixed asset modules that many ERP vendors attempt to deliver as an intrinsic part-and-parcel' of their suites. However, the customers often quickly realize that these modules have merely a basic functionality, thus they leave the module to languish unused (eroded) throughout multiple product upgrades. However, when an acute need for fixed asset accounting and reporting across multiple sites nationwide strikes, these enterprises then have to helter-skelter resort to a best-of-breed add-on like Best's FAS product that features all intricacies of different depreciation laws in all fifty US states. In other words, new add-on applications and software enhancements should continue to surface for the foreseeable future, and to provide compelling enough payback to justify purchases, even in this tough selling environment.

The same would also hold for Best's stalwart core HR/payroll product, Abra Suite for smaller organizations, which has a large user base of approximately 15,000 customers in different vertical markets. The system supports more than 4,000 tax jurisdictions and all standard government reports that can be filed electronically, while industry-specific reports are also available.

As a testimony about what kind of leverage Best has with these specialty products, one should try to account for the droves of MBS' VARs that are peddling these products as well. This slew of products comes as a result of multiple years of the parent Sage Group's effort to rake up a pile of software products through a bevy of acquisitions, although many with a common thread. Companies such as former specialty products provider Best Software (acquired in 2000), CRM provider Interact Commerce (acquired in 2001), entry-level accounting provider DacEasy (acquired in 1991), not-for-profit accounting provider Micro Information Products (MIP) (acquired in 2001), and another entry-level accounting provider Peachtree Software (acquired in 1999), all had strong brand recognition in their respective target niches and a market presence in the SME market in which Sage had long specialized as well.

Therefore, Sage/Best Software has almost all the ingredients of the recipe for success in the SME market, i.e., 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. While most vendors targeting mid-market customers should be intimidated by the fact that a number of the large enterprise application vendors are trying to sway into their space (see Software Giants Make Courting a Small Guy Their "Business One" Priority), the above facts give credence to Best's management claim that the company continues to "take the oxygen out of the room" for growth in the lower-end of mid-market for intruding vendors. Still, the ingredients and a good recipe are only a good start, while it takes time and immaculate execution to produce a succulent dish'.

ACCPAC Strategy

ACCPAC is definitely not a stranger to the business applications market. Quite the contrary, given its long incumbent status (since 1979) and proverbial focus on small and medium businesses, its broad and well-attuned product portfolio developed mainly internally and through a limited number of sensibly acquired solutions that address the needs of the market segment, its large customer base (over 0.5 million users in over 130 countries worldwide), and a far-reaching distribution channel of over 7,000 Business Partner relations including value added resellers (VAR), ISVs and consultants, and many retail outlets in the near future, in addition to telesales, direct email and web ordering. One should indeed notice many semblances between ACCPAC and its new parent.

Headquartered in Pleasanton, California, with offices in Australia, Canada, India, Mexico, the Middle East, South Africa, Southeast Asia, and the UK, ACCPAC was acquired by Computer Associates (CA) in 1985. In 1996, it was established as an independent business unit of CA, and it has had its own executives managing its business ever since. The fact that it has been divested only recently by CA and that it has not lost its brand recognition amid CA's naming convention might speak favorably about the vendor's viable independent value proposition. On the other hand, the ability to leverage its former giant parent's numerous (and sometimes advanced or emerging) technologies, sales channel, and partnerships, has certainly helped so far. However, the timing of switching parents seems perfect, given any discussion about ACCPAC's viability should hereby be allayed, and not to mention that Sage and Best have always been attuned to the needs of smaller enterprises, which could not be farther from the truth in CA's case.

Still, to be fair towards CA, after more than two decades of prominence mainly within core financial/accounting solutions for the lower-end of the market, ACCPAC has lately, under CA's patronage, been making big strides to extend its reach and turn into a full-fledged comprehensive e-business software provider for small and medium enterprises. To that end, as outlined earlier on, during the past few years, the vendor has added many new solutions in areas like CRM, warehouse management, e-commerce, point of sale (POS), and human capital management (HCM).

Further, through its ACCPAC Online hosting service, launched in 2000 and based on CA's Unicenter TNG infrastructure, the company also offers applications using an application service provider (ASP) model, giving its solution providers more options as they look to tailor solutions that best fit customers' needs. The ACCPAC Online Preferred Accountant Subscription Services (PASS) program was thus designed to enable its accounting VARs to become virtual ASPs (VASP), with ACCPAC being the ASP in the shadow'. In addition to possibly unique deployment flexibility (i.e., there is a possibility of selecting which individual applications will be run on premises or hosted), ACCPAC is likely the only vendor amongst its peers that is an ASP as well. While the other vendors also provide a hosting alternative, they have to do it through third ASP parties, which often may mean some additional licensing and implementation, as well as service and support intricacies to the end user. This could make an order winning difference to some customers who prefer to deal solely with one vendor.

On the other hand, the difficult economy has created a situation where the customers, particularly those with multiple locations dispersed worldwide, also seem to prefer the subscription model, as capital budgets have been slashed, and everyone would prefer to avoid one up-front lump payment and stretch it over a prolonged period of time. Although the move from software as a standalone, or pre-packaged, solution to software as a service will not happen overnight, given the unsustainable financial model of many early ASPs and due to many hosting snafus of the recent past (see Hosting Horrors!), in a few year's time, gigantic IT providers such as IBM, EDS, Microsoft, Oracle, Accenture, and the likes will likely be competing in the ASPs market, giving thereby hosting another breath of fresh air. Thus, ACCPAC's plan is to expand on the foundation it built during the past few years and help partners move into this more predictable revenue generating area of hosted services. The hosting option is one of the few new dimensions that Sage and Best have always lacked in their portfolio.

This concludes Part Four of an eight-part note.

Parts One, Two, and Three presented the Event Summary.

Parts Five and Six will continue the discussion of the Market Impact.

Part Seven will cover Challenges and Part Eight will make User Recommendations.

*Note: Parts Five to Eight will be published on June 9 to 12.

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