Sage really knows its onions
"Nothing was planned ," said Sage managing director and co-founder Graham Wylie. "When we set up in 1981, behind a partition in a printing works, there was no great scheme in someone’s mind, no vision of where we would be in 10 years’ time."
It’s 19 years since the birth of Sage with a 40,000 loan from a Newcastle branch of Lloyds Bank. Now the company is a big suburb of Silicon Valley-on-Tyneside and one of the world’s top 10 computer software firms - up there with 8 US companies, including Microsoft and Oracle, and one German.
When Sage floated in 1989, it had a valuation of 20 million. Its present value is 7 billion - an increase in just over a decade of 34,000 per cent. Profits last year were up 56 per cent to 75 million, and Deutsche Bank forecasts they will almost double next year to 140 million.
If you had invested 10,000 in 1989 and reinvested annual profits, you would today be sitting on shares worth more than 1.8 million, despite their temporary depression as a result of the global technology downturn. Not a bad return from a bunch of Geordie number-crunchers whose home-grown software juggernaut has struck the word "dull" from the profession of accounting.
There are no "suits" at Sage, and no ties either. Executives have homes a few minutes walk from HQ, or arrive on the commuter-friendly Metro, which puts to shame Scottish authorities still light years away from developing anything similar.
The culture is easy-going and distinctly Geordie, but the swish headquarters is nevertheless home to one of the UK’s most dynamic and fast-moving global companies. Its horizons stretch wider almost daily. But given the end of the love affair between investors and technology companies, what is it about Sage that has enabled it to stay ahead of the game?
What it has are revenues, sackloads of them - something which many hugely hyped dotcom companies conspicuously lack.
"Sage is not a technology business, it’s a marketing business," co-founder David Goldman once said. While not exactly true, it encapsulated the company’s central philosophy.
"We’re obsessed with the customer," Zimbabwe-born Paul Stobart, chief operating officer, told The Scotsman as he relaxed in chinos and open-necked shirt in the Sage executive suite. "Selling software is not the end of a deal, but the beginning of a relationship, and this is absolutely vital to our success.
"Most accounting software companies have been founded by technical people. There are very few marketing people in the industry, which is great for us, because we’re chock-a-block with marketing people."
The Sage logic is that if you mollycoddle and love your customer, he or she will keep coming back to spend more and more money on more and more products and services. All evidence attests to the strength of the logic.
"In the UK alone, we have 400,000 customers, from sex shops to bra sellers, motorcycle shops and wine merchants," said Stobart. "They’re all dependent on our support services. And once serviced properly, customers stay loyal."
The vehicles for delivering love and service are some 15,000 or more licensed on-site service agents - whom Sage prefers to call "value-added re-sellers" - in the UK, US, Germany, France, Switzerland, Spain, Portugal, Singapore and United Arab Emirates. "They don’t cost us a bean, but we give them a margin on our software," said Stobart.
The revenue machine works like this. The Newcastle production line churns out CDs of 15 or more software programmes, including the wildly successful Sage Line 50 accounting solution. The resellers, licensed to rebrand themselves as Sage Solutions Centres after training in Newcastle, sell the software, install and implement it on-site, and provide on-site service.
There is further back-up for the Sage Solutions Centres and Sage’s 2.3 million international customers through the 600-person call centre in Newcastle. A small business with a 150 contract can put in as many calls as it likes.
"Microsoft regards after-sales as a cost," said Stobart. "It’s something we make money out of. It’s our highest margin business. Customers are delighted to pay for first-class after-sales service.
"We happen to sell a product, but we’re a service company which seeks to establish a trust, a bond, with our customers so they are receptive to buying new products, upgrades and training courses."
Another secret of the Sage success story is its strategy of expansion by acquisition. It has relentlessly bought leading market share in other countries, beginning in France, where it tucked established companies such as Sarri, Sybel and Ciel and their 420,000 customers into the Sage envelope. Rebranded Sage Sarri, Sage Sybel and Sage Ciel, they are imbued with the company’s service ethic while retaining the local creativity and entrepreneurial flair necessary to adapt Sage products to local needs. "These businesses would be destroyed if we swamped them with Anglo-Saxon culture," said Stobart.
But sometimes the local culture needs reshaping. In 1997, Sage bought KHK, a German company that had a big customer base but none of the other qualities the Newcastle raider desires.
"KHK, I have to admit, was fiercely Teutonic and we took a long time to take the aggression out of it and get the partnership ethic into place," said Stobart. "When we asked its founder, Karl-Heinz Killeit, where his customer service team was located, he had to ask his secretary. In fact, they were in the basement. It was like a dungeon - damp, dark, no windows, desks tight together."
The new Sage KHK moved sales from the top floor into the dungeon and told them they should be out on the road, while customer services left the dungeon for the top floor. "What we find is that customer service is usually very poor, poor or OK," said Stobart. "All new subsidiaries are told they must make customer service the top priority because that way we can sell more goods and more services to them."
From March 1998, Sage began its big entry into the United States, buying outright State of the Art, in southern California, Peachtree of Atlanta and Best Software of Reston, Virginia, all accounting software companies. "We got Peachtree and its million customers for $145 million," said Stobart. "It was a steal, the deal of the century. We don’t think they knew what they were selling." Best Software, bought for $445 million this year, is Sage’s biggest acquisition yet.
The transformation has been massive since David Goldman supped Brown Ale with three fellow dreamers in the Rose and Crown pub on Newcastle’s quayside in 1981 and plucked the name of the fledgling company from a wall chart on herbs. "They were struggling with ghastly computer-like names," said Stobart. "David looked at the herb poster. There was rosemary, thyme, sage. Sage: wise and knowledgeable. And so Sage plc was born."
Initially, Goldman, frustrated to hell and back with doing manual job quotations, asked Paul Muller, a computer science lecturer at Newcastle University and former NASA scientist, to give him an automatic quotation programme for his small printing works. Muller, who had worked on the Apollo programme, asked one of his young students, Graham Wylie, to write the software programme during the summer holidays.
Goldman suggested that Wylie make his programme applicable to all small businesses. Wylie, still aged only 40, is now managing director of Sage’s UK software division.
IN the early years it was hand to mouth for Sage, behind a partition in Goldman’s print shop, desperately trying to make ends meet with the 40,000 start-up bank loan.
The breakthrough came in the mid-1980s when Amstrad produced the first mass market PC and contracted Sage to provide the software. Sage began developing its reseller network and targeting small and medium businesses with the marketing pitch: "One touch of a button is a better way of doing accounting than using a pen."
Goldman, now retired, realised that what Sage was doing in the UK could be replicated overseas. After flotation in 1989, it began gobbling up businesses on three continents.
Continuous expansion is still the strategy. Sage aims to become market leader in Italy and Spain, as it now is in the UK, US, France and Germany.
More purchases of US businesses are on the way and the company is sniffing around in Canada. Poland, Hungary and the Czech Republic are on the radar screen, not least because these former communist countries are technically bypassing the rest of Europe, going straight past analogue technology into digital. And the company’s eyes are also on India, which may be poor but nevertheless has a 100 million-strong middle class.
The latest channel for expansion is the internet and e-commerce. "Ours is a simple mission," said Stobart. "We want to help customers profit from the clear benefits the web has to offer for small businesses. They know they ought to do something, but they don’t know how to go about it. We’re debunking, demystifying and dehyping it."
Clients’ hands are held while they master e-mail and they are offered a variety of web-building programmes costing between 99 and 500.
"We’ve got teams here in Newcastle building websites for customers. We’re recruiting like fury," said Stobart. "Websites are not really our business, but the strategic bit for us is the next stage when you want to put products on the site with a BUY button.
"The button is an order processing module, and when that transaction is recorded and the payment made it’s our accounting software which does the trick. It’s a business in which we will be dominant."
Every now and again, there are rumours that Sage, the first Tyneside company to make the FTSE-100, will be taken over or move to greener pastures. No way, said Stobart.
"We’re very proud of our north-east roots and of the fact that the average age of our Newcastle workforce is 31," he said. "Yes, we’re moving out, but only to a brand new site near Newcastle Airport. We don’t want to sell. We want to be the best, the smartest and the most impactful software company in the world.
"As for me, I used to help Sage with marketing and branding from my own London consultancy. I liked the company so much that I joined it and moved to Newcastle."