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KashFlow the bogeyman for Sage

12th May 2010
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A remarkable exchange of views has been taking place since soon-to-retire Sage CEO Paul Walker took his final bow by sniping at Cloud accounting providers during Sage’s half-year results briefing.

According to KashFlow founder Duane Jackson, the Cloud accounting start-up has become the bogeyman for Sage, whose executives appear to be losing their composure over software as a service, which refuses to go away.

In Sage’s half year results presentation, Walker acknowledged the ongoing debate and set out the company’s stance. According to Walker, “The technology world is divided over where data and applications should reside”  – on the desktop, the web or a hybrid approach such as Sage’s, which it proclaimed as “connected business solutions”.

After breezing through the 1990s with double-digit growth, Sage’s growth has been slowing for the past few years. In a masterclass of how to accentuate the positive, Walker presented the 2% drop in organic revenues for the six months to 30 September 2009 as an improvement on the previous year, when income fell 6%. Thanks to its brutal cost cutting, Sage told analysts that its profit margin had increased from 24% to 25%. In the UK, meanwhile, the company’s revenues were flat. Again, Walker switched the focus of his presentation to a 5% increases in subscription. While organic software revenue contracted by 11%, the company pointed out that Sage 50 revenue was comparable to H1 2009.

While Walker might be entitled to whisper to his colleagues, “I think I got away with it this time,” it is not a performance that the next Sage CEO will be able to repeat many times and contrasts with the growth figures being reported by Cloud accounting providers such as Xero and KashFlow – who admittedly are starting from lower base points.

But some of Walker’s comments as he headed for the executive Exit door surprised some of his smaller rivals: “Many of the people who've launched SaaS products in the last four/five years and that industry analysts get very excited about, even though most of them have got less than 5,000 customers, is that what those solutions are is actually desktop solutions online. Very few of them, if any, have taken advantage of being a pure SaaS play. And what we've done is wait. We've listened to our customers, and we've looked at what the advantages of SaaS can bring to them.”

According to Jackson, KashFlow was mentioned several times by name at Sage’s results briefing. Leaving aside the fact that KashFlow, Xero, FreeAgent, Pearl Office, Liberty and numerous other applications in the market are gaining new users with “pure play” Cloud accounting applications, Jackson says market analysts have been asking him why and how his firm is generating growth with Cloud accounting, when Sage cannot. “I think it’s because we have no legacy issues in terms of software or revenue streams that we need to protect,” he told blogger Dennis Howlett.

In a separate conversation, Jackson told AccountingWEB, “We don’t log the number of Sage conversions, but it’s probably not as many as Sage think it is. The much bigger threat for them is that we’re taking away potential new business. With new users coming on board at a rate of around 300 a month, KashFlow has to be cutting into Sage’s share of the entry-level accounting market.”

One by one  on-premise suppliers have been retreating from the UK market. MYOB and Microsoft made their exits, while Intuit has found it hard to retain its market share after retiring Quicken. “We’ve become the default alternative,” claimed Jackson.

KashFlow has been recruiting its customer from three sources: those who use “Excel or nothing”; refugees from Sage and the other desktop suppliers. “We got a big increase from MYOB,” he said.

While taking a close interest in KashFlow’s success, AccountingWEB has continued to reflect the real hurdles to the adoption of Cloud accounting – many of which were amplified in responses to Jackson’s recent post on Walker’s comments in our online discussion group.

Data entry and software response times speeds, availability and occasional lack of control over upgrades and report formats were highlighted by discussion group members. While the technology momentum for Cloud accounting is building, accountants need to make a huge cultural leap to throw aside lessons learned during their initial training and the behavioural patterning that has taken place during their working lives.

Ironically for the Cloud community, old guard desktop developers like Sage and Intuit will have to jump on the bandwagon before their existing users will move to the Cloud. Online<>50 has shown that if you offer accountants an online version of Sage, they’ll leap aboard.

Jackson is aware of this, and takes an almost masochistic interest in tracking the Cloud initiatives of his larger rivals. His market intelligence indicates that “Son of SageLive” is imminent, possibly based around a Pastel Cloud system developed in South Africa. And with QuickBooks Online already up and running in north American, a European version cannot be far behind.

The Sage versus KashFlow spat is just one more episode reflecting the wider cultural shift. And though one might expect KashFlow to fear direct competition from Sage, you get the sense that Jackson will enjoy a fight where he has the guerrilla fighter’s advantage of fighting on his home turf.

Replies (9)

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By david_terrar
13th May 2010 17:35

How can Sage and Paul Walker misunderstand the SaaS market in su

I'm confused as to why you don't take Paul Walker to task.  You quote him when he says:

"Very few of them, if any, have taken advantage of being a pure SaaS play"

It's the "if any" that I worry about. Paul Walker (CEO of the largest player in the UK accounting market)  is seriously suggesting that most, and maybe all of the current UK SaaS accounting players are actually desktop applications hosted over the Internet rather than pure SaaS applications designed for the Internet.  This is simply not correct, and a massive misunderstanding of the UK online accounting market.  You do go on to say " Leaving aside the fact that KashFlow, Xero, FreeAgent, Pearl Office, Liberty and numerous other applications in the market are gaining new users with “pure play” Cloud accounting applications", which is correct, but I would expect you to say more.  There have been "pure SaaS play" accounting applications on the UK market like Liberty or Twinfield since at least 2005, and arguably some applications before that too.  Some suppliers, like Sage themselves with their own Online50, have tried the "desktop application but hosted" route, but the successful ones have architected their applications properly.   Go look at Dennis Howlett's database - few of those, if any, aren't pure play SaaS.

It's clear that Paul Walker and Sage have been poorly advised on this topic.  It seems quite comical that they should finally, in 2010, be talking about SaaS pure play when the SaaS and online market have moved on to talk about the value proposition of working a different way rather than the technical stuff.  For me, this does not bode well for whatever SaaS product Sage eventually come out with later this year. and

David Terrar

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By Richard Messik
13th May 2010 19:37

Sticking their head in the sand
As I have said in my blog Sage are sticking their head in the sand because they can't equate the SAAS model to their exorbitant fees profile. In the end they will see that as the demand grows they will have to adopt a can't beat them join them approach.

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Gary Turner
By garyturner
13th May 2010 23:55

Big difference

Review Sage's numbers and you'll see that software and software related services revenue accounted for barely a third of their total UK revenue last FY. If you strip out the related services revenue which I can only guess at being things like stationery, training and payment processing, web hosting services etc. then you're likely left with actual software license revenues closer to £50 or £60M or a quarter of the all up UK number. Comparing apples with apples, the distance between Sage and its SaaS competitors is much narrower in raw license revenue terms than the all up Sage UK revenue number of circa £250M might suggest.

In that context it's not surprising therefore that issues like SaaS get either mis-understood or deliberately diluted. Sage's software license revenue is simply a foothold to a 3-4x attached revenue multiplier. An important foothold and one that's so large and granular that it won't erode overnight, but eventually they'll need to blend or flip more to web based apps as the world around them does and user expectations shift.

The other challenge, though, is flipping legacy product code to SaaS code isn't easy or quick, very expensive (which is more painful in the context of a public company with at best flat or sliding revenues and under-fire profits) and would only serve to secure (but actually cannibalize) existing revenue streams without any real incremental revenue - therefore being a considerable net loss making exercise in the short term whose only redeeming function would be to the secure long term business. And public companies don't like having to pitch short term profit hits to protect the long term to an impatient investment community.

On top of that, any new cloud products would require considerable marketing support (read profits) to message and convince customers to move and could likely also risk compromising revenues for existing Sage sales channels; accountants, retail etc.

All in, it could seriously dent a year or two of profits. Which they won't get past the city. 

Thus, until those attached revenue streams come under real and significant strain by competitors displacing significant numbers of deployed licenses, Sage can safely play the waiting game.

With what I'd estimate as a collective market share of less than 20k online/SaaS accounting users in the UK market, there's still a lot of breathing space for Sage. Far be it for me to peg back Duane's optimistic outlook on the topic, but we all could do a much better job of really challenging Sage for share. A few hundred or even a collective 1,000 or so a month isn't a very big chip off an installed user base of around 300,000 Sage accounts app users. Let's have some more war war and less jaw jaw.

And so Paul Walker has rightly got a lot to be proud of and the enemies are not at the gate. Yet.

But roll on a couple of years and 40-50k cloud users (and therefore 40-50k cancelled Sage maintenance contracts and related revenues) and I doubt his replacement would choose to remain quite so boorish.

Gary Turner
UK Managing Director, Xero.

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By User deleted
14th May 2010 09:34

And the way forward for them ....

Let us not forget that Sage themselves tried to introduce a SaaS solution thatwent horribly wrong and as a consequence they have now conveniently adopted collective amnesia (try looking for - you won't find it anymore)

With this in mind the statement '.. And what we've done is wait ..' is clearly incorrect. Once bitten ... would seem more appropriate, but of course the City would not have been impressed with such a statement


Surely any CEO worth his salt really should know his market place and not need to be briefed on the state of play.

Therefore the question has to be - how can a CEO become so removed from his core business market that he utters such blatently incorrect statements. This is either ignorance (incompetence) or a deliberate ploy to mislead (city/shareholders etc) and whichever one chooses it hardly demonstrates credibility or shows him in a good light; especially as he is now job hunting!


Whilst the pure software revenue is in £10's of millions (rather than £100's), surely the whole point of the Sage add-on revenues is that they are spin-off's from the software side and the two are inextricably linked - ergo. no software sales results in no lucrative spinoff revenue

Anyway the revenue model of selling boxes rather than a drip-feed SaaS approach is the real stumbling block with Sage and as you say it is all about revenue

After all one only has to look at the general SaaS packages - monthly subscription, high level of free support included, simple update/release model etc.

Now compare that with just the Sage annual support cost (ignoring the software cost) and one has to question value for money 

At the moment the best route for Sage in this whole saga is to do what they are good at - go back on the acquisition trail and buy a SaaS product; don't bother to develop one because it is too time consuming and costly. Once they wake up to this approach they could run the two products (desktop/cloud) in parallel and concentrate on gradually migrating their desktop population. To write the relevant migration API/Web Services would not be a problem and they could offer free trial migrations etc. so that users could run things in parallel until they gained confidence

The only caveat for Sage is to purchase a product that is technically good and a close fit and not simply based on revenue stream as they have done in the past - i.e. buy the product and not the customer base


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By david_terrar
14th May 2010 10:34

Sage's lack of credibiity, and still missing the boat with SaaS

Like you I'm not sure whether Paul's comments on the SaaS market are incompetence or misrepresentation.  Either way it reflects very badly on Sage's credibility and "expertise" as the accounting software market leader. 

I'm glad you've brought us down to earth with some real numbers and highlighted the problem Sage has in considering whether to sacrifice short term profit for long term survival. The call to arms for us to get on and attack the Sage customer base is well timed.  I'm very intrigued by how they will be pricing and positioning whatever this new product will be.   However, your argument highlights the fact that they've wasted over 5 years to address the SaaS/online question with a series of failed attempts - they've missed the boat.

I'm glad Richard, Gary and JC have chimed in (plus Duane and Dennis in their blog posts), but It shouldn't be up to your "readership" to point out how wrong Paul's statement was.  As a leading accounting publication surely that should be down to your analysis and thought leadership on this subject? and
David Terrar

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John Stokdyk, AccountingWEB head of insight
By John Stokdyk
14th May 2010 17:57

It's a cultural story, not a technical one

David, I think you're misinterpreting my role and that of AccountingWEB here. I haven't done the exams and don't work as an accountant, nor do I develop, support or market accounting software. AccountingWEB members on both side of the software industry fence probably have more experience than me of those areas, so I have never put myself as a "thought leader" on those subjects.

But I do keep a very close watch on what's happening in the market and when I see things our members might find interesting and signficant, I write stories about them.

To be absolutely frank, I think only around 0.05% of AccountingWEB members (yourself and representatives of the developers concerned) care about the semantics of Walker's speech and whether the applications being discussed are "pureplay SaaS" or not. Duane is certainly able to take care of himself and he and Dennis Howlett have taken Walker to the mat on that score already.

Walker's statement is laughably innaccurate, but as has already been noted, they were the words of someone who already has his hand on the Exit handle and is palpably unprepared for the fight ahead.

For me the growth of Cloud accounting is not really about the technology (though there have been and will continue to be many stories about that angle), it's about the prevailing business culture. For accounting software, Sage is the dominant UK brand and as I've pointed out in our Cloud accounting discussion group, it is very firmly rooted within the profession.

That new users of accounting software are turning to systems such as SaaS, Xero, Liberty, Twinfield etc rather than Sage Instant is significant - as the story points out - and the fact that KashFlow has so demonstrably succeeded in getting under the skin of Sage executives provides a dramatic illustration of that point (and fits into a good, old-fashioned David v Goliath scenario). That was the essence of this story I decided to write.

Thanks all the same for your additional commentary - bringing together the different viewpoints on a subject like this provides everyone with more evidence on which to make their own judgements, which remains one of the main objectives of the team.

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By david_terrar
14th May 2010 21:22



Thanks for the additional comment and explanation.  Much appreciated.

David Terrar

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Nigel Harris
By Nigel Harris
19th May 2010 13:33

I think it's our profession

Sage seem to be caught up in the age-old time warp that many in our profession inhabit. When new technology appears the early adopters stir up the market and the old guard struggles to change its business model. A couple of examples:

Tax publishers really struggled when CD publishing and then online became the norm. Butterworths lagged behind CCH for ages with their pricing model - some might say they still haven't caught up. Online training and webinars have started to supplement/replace live CPD courses, but providers don't seem to be able to get their heads round the pricing model. I have just received details of some webinars which are being priced "per person", and "if you want to book more that 20 delegates please phone for pricing". But we're all sat round the same computer - why would I pay for more than one user?

Sage has sufficient clout that if it ever gets a useable SaaS product out there it will no doubt quickly dominate the market. The challenge now is for all the other SaaS providers to stake their claim before Sage arrives.


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By onesys
22nd Jun 2010 16:55

The Way Forward for Sage and SaaS

Either Sage suffers from the 'IBM syndrome', or it is playing games.

As trust and confidence in any Cloud / SaaS applications and its suppliers will play a big part in the forward planning and purchase decisions of UK-based businesses, many may go for offerings from more established brands.

It would make good commercial sense for established brands such as Sage and new Cloud application developers to join forces, as this could benefit all.

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