Thursday, 11 September 2008

Sage's new North America CEO has steep mountain to climb

We went along yesterday to the grand unveiling of Sage's new CEO for its North America (NA) business, Sue Swenson. We have to admit we were a little surprised about Swenson's appointment back in March, with a CV listing a long line of US telecoms roles but seemingly little experience in packaged software. However, to give Swenson due credit, she put on an assured performance in front of a typically critical analyst and investor audience, presenting herself as a 'fixer of broken businesses' no matter what the product or service. While some may remain unconvinced, we think it only fair to give Swenson the chance to prove her credentials.

And she'll have plenty of opportunity to do so. NA is Sage's biggest market, representing 40% of sales but 30% of profits. Although organised into four divisions, Sage's NA operations actually break out into three distinct businesses: core accounting and back office packaged software (c. 60% of NA sales); healthcare products and services (the erstwhile Emdeon Practice Services, some 30% of NA sales); and payment processing services, the balance. It's the two biggest operations that have been causing most grief. Sage took a bit of a beating earlier in the year when a new release of its flagship small business accounting product, Peachtree, failed to excite customers enough to upgrade, dragging down growth. A new version has just been released, so hopefully that gap will be plugged.

But it's Sage's Healthcare division (SHD) that has most analysts' attention. We'll write more on this in future commentary, but suffice it to say for now that we struggled to understand the strategic rationale for Sage's gigantic leap (it's biggest acquisition on record) into the ferociously competitive and unpredictable US healthcare IT market back in August 06. SHD has struggled ever since and is still awaiting the long anticipated announcement of a new CEO to run the business. Sage appointed a COO for SHD just a couple of weeks ago, and meanwhile Swenson is putting in a disproportionate amount of her time covering the role.

In laying out her thoughts after six months in the job, perhaps we were looking for a little more 'flesh on the bones' of Swenson's strategy to knock Sage's NA businesses back into shape. It's pretty clear she understands the breadth, and probably the depth, of the problems. The solutions are not so clear cut. One of Swenson's key focus areas is to boost cross-selling between Sage's NA divisions. Now this rather rang warning bells for us. Not that it isn't a good and noble cause - it's just that we've heard this story from Sage many times before, but in all honesty have yet to really see it bear fruit. Cross-selling was an expected key benefit from Sage's acquisition of CRM vendor Interact back in 2001. But as good as the products are, we doubt Sage has been able to cross-sell CRM to any material extent into its core accounting base (or vice versa). Similarly, Sage was very hopeful that Emdeon would open the doors to significant cross-selling opportunities, but at the moment that division has much bigger problems to sort.

The core issue is that Sage's product and service portfolio has been largely built through acquisition and, until relatively recently, there has been little attempt made to integrate those that make most sense to do so. Of course it's not just a product issue. It's the distribution network, the sales channels (internal and external) and so many other links in the chain that have to be reconfigured to make cross-selling work. This has defeated many other players before, both in software and services, so we shouldn't underestimate the scale of the mountain that Swenson has to climb.

Obviously we want to see Swenson - and Sage - succeed. After all, Sage is the last remaining true UK-based large-scale software vendor, and has generally proven a stalwart stock for long-term investors. But the world has changed for 'purveyors of point solutions' and arguably Sage was a little late to recognise the market shift. We know management are on the case and we will closely follow their progress.

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