Counting on accountancy software

Accountancy software market is growing

Accountancy software is often overlooked by businesses, but it is something they all need to function succesfully. The last few years have been dominated by Sage – but the market is huge and offers potential for everyone, reports Ken Young.

Businesses have a ‘take it or leave it’ approach to many software applications, but there is little doubt that most could not operate without up-to-date accounting software. Not surprisingly, it is a market with considerable potential.

For SMEs, the essence of accounting software represents the ability to automate accounts payable, accounts receivable, payroll and reporting. Most often they select offerings from Sage, Pegasus, Exchequer, Access Accounting, IRIS, MYOB, Microsoft Business Solutions, and Intuit (although its flagship Quicken product has recently been removed from the market).

The last 10 years have been dominated by the rise of Sage, the UK’s largest software company. Half of Sage’s revenues are now generated in the US. However, there are increasing signs that Microsoft is threatening at the high end, through the acquisition of Navision and Great Plains, with growing intentions in the SME sector.

Sage’s key products for the SME sector in order of size are Instant, Line 50, Line 100 and TAS Books. Sage has huge distribution advantages over its competitors by virtue of its three-pronged attack: selling online, through resellers and via accountants.

The ‘accountants club’ consists of about 1,000 firms that receive incentives for selling or recommending Sage software to clients. Meanwhile, Sage has over 2,000 accredited business partners, some of whom operate online sales services, something Sage also does itself.

Not surprisingly, there are tensions between these channels. Typically, this means that resellers are concerned that margins are disappearing as a result of online sales, or that the accountants club gets preferential incentives.

Sage has the difficult job of balancing the needs of these different partners. But there is little doubt that whatever the route to market, Sage likes its partners to emphasise a re-branding of the company. Sage wants its resellers talking more about it being a business management software supplier rather than simply an accounting software maker.

While some analysts say that this is because the accountancy software market suffers from saturation, Sage is upbeat, stating that with three million SMEs and about 400,000 new businesses starting each year, there is always scope for growth.

In recent years, Sage has made a point of diversifying to allow it to upsell a range of applications to customers of core accounting software. This is notable in CRM through the acquisitions of ACT, SalesLogix and AccPac International.

With around 600,000 customers, Sage could be excused if it were over-exuberant. Its market dominance is the envy of the rest of the industry. In a recent survey, its Line 50 product was found to be used by 28 per cent of firms questioned, with no other vendor scoring higher than six per cent. Meanwhile, its 2005 half-year profits of £100m showed an increase of 16 per cent when compared with the same period in 2004.

Nick Brown, head of channel sales at Sage, claimed the key for resellers is to understand how to exploit the market. “They have to look at offering applications support. The dilemma is that they might not have the skills to do that and that there are possibly longer sales cycles,” he said.

By way of example he pointed to firms that are getting more involved with integrating Sage products to back-office and front-office systems.

“There are better margins if you can get involved in that way. Margins are better at the start and on an ongoing basis,” he added.

But there is a dark cloud on Sage’s horizon in the shape of Microsoft. Despite talk of the launch of Microsoft Small Business Accounting by year end, Sage is keeping its gunpowder dry with only a few specific comments. Brown said: “Microsoft is selling off its technical stack. But firms have to ask themselves whether that will reduce auditing or implementation costs. And how will they handle setup, training and support?”

But in Denmark, home of Navision, Sage recently approached the Monopolies Commission hoping for a block on the firm’s acquisition by Microsoft, showing that it is keen to protect its business in the courts if necessary.

Perhaps it is also hoping that the imminent launch of Line 50 version 12 will distract buyers away from Microsoft’s growing visibility in the sector. Key enhancements relate to increased sophistication of business analytics with the package.

Vin Janhal, managing director of WEM Computer Solutions, a reseller based in west London, said: “I have noticed Microsoft concentrating more on small businesses, notably for CRM. Accounting software is only a tiny percentage of our business now because we find the market saturated. Five years ago it was 20 to 25 per cent, so it is a big change. I think that Sage is broadening its pitch by offering consultancy. Eventually I think it will offer accounts online.”

Janhal, like many, is most concerned about online sales. “You find too many customers now seek advice, but then they go away and buy online. Or they find the prices online and they tell you to match them,” he said.

Microsoft’s new package is aimed at firms with below 25 staff and promises tight links with Microsoft Office applications. For example, easy exporting of invoices into Word for editing or the export of profit-and-loss data into Excel for manipulation. Nevertheless, such functions are already available in Intuit’s QuickBooks Pro Software.

Susan Lazareff, UK country manager at Intuit is not flustered by the news. She said: “Microsoft has entered the market before. With over four million SME’s, it is a big market for all the players.”

Intuit QuickBooks version 05 was launched in February this year and the firm’s channel remains very similar to Sage with online, retail and accountants.

But resellers could be forgiven for losing interest in the ‘S’ part of SME. Although firms turning over less than £1m account for 85 per cent of the UK market, it is the hardest community to reach, and by definition has the smallest IT budgets.

Pegasus (part of Systems Union), with its Opera 2 software, is arguably the market leader in the medium sized business space, which it defines as businesses with turnover of £1m to £20m and 50 to 100 staff.

Pegasus competes directly with the higher-end Sage products and, to some extent, with Microsoft’s Navision and Great Plains. It has 120 VARs in the UK serving 25,000 customers in a sector that it estimates at 40,000 to 50,000 firms (giving it at least a 50 per cent share). 6,000 sites are now using Opera 2, which was launched over three years ago to replace Opera.

Gary Turner, managing director of Pegasus, claimed that the biggest advantage the firm offers to resellers is zero channel conflict.

“We are dedicated to the channel and, unlike Sage, we do not allow sales of the product online. It is easy for a Sage reseller to switch to Pegasus, as they can get a fast track into accreditation or even just train to sell specific products, such as our business intelligence tool or our construction accounts package,” he said.

Despite Sage’s dominance, Turner believes resellers need to get the firm in the right perspective.

“They are a ‘pile them high, sell them cheap’ operation. We are more about service delivery: we have 500 channel technicians supporting our sales,” he said.

Turner also said that resellers need to appreciate that accountants support products such as Opera where they see it can help them support and give consultancy to their clients.

“They love it when they see the kind of analytics and business reporting that we can offer. They know that their role is changing and they are very keen to see packages that make this kind of analysis possible,” he said.

Pegasus was one of the first firms to provide business intelligence, which it has now extended into a stand-alone tool that can be integrated into some Sage products.

But resellers need to be aware that businesses are tired of software that over-promises and often creates as many problems as it solves.

Last year, a survey of 1,000 firms by the Institute of Chartered Accountants England and Wales (ICAEW) focused the minds of the industry. It reported that one in eight companies had experienced a business critical failure of their business software over the past two years.

But Paul Booth, technical manager of the ICAEW IT faculty, said that recent research conducted in conjunction with Microsoft revealed that return on investment (ROI) is not the main driver.

“They are more concerned about ‘soft’ issues, notably ease of integration and faster communication that it can deliver. These feed through to ROI but its not necessarily measurable factors,” Booth said .

As far as stimulating sales, there is evidence that fear can be a factor. Last year ICAEW found that the industry’s promotion of International Financial Reporting Standards (IFRS) had been the single most important reason for upgrading, suggesting that concerns over compliance are still useful drivers for up-selling.

David Turner, marketing director at Coda, said: “Compliance is one of three drivers that are stimulating business in the SME sector. The others are the need for greater efficiency and automation, and finally the need for better reporting.”

Turner said that Coda’s acquisition of the Dream product has brought it strongly into the medium-sized market, rubbing shoulders with Microsoft’s Navision, as well as Sage and Pegasus.

But Turner’s belief that his company wants to take on resellers with a vertical focus is the key to its current strategy.

“We have been involved in tenders where it is a shortlist of ourselves, Systems Union (Pegasus), and five Navision resellers. Inevitably that is bad for the resellers as they are having to find the margin in the value-added sale,” he said

But London-based Microsoft reseller Tectura disagreed. Managing director Adam Edmondson conceded that there are a growing number of Navision resellers but said that: “It’s a sign of the strength of the Navision offering. It also means that we are interested in developing vertical niches that give us a stronger position in some sectors.”

For example, Tectura has expertise in life sciences and fresh produce distribution.

“We are very much about developing markets because that is the trend today. Five years ago it was possible to sell IT just because firms knew they needed it,” Edmondson said.

“Now you can’t sell anything without showing clear measurable benefits, so it is key to show that you can deliver benefits in a specific sector. The other benefit is that if you are selling vertically the time to sale can often be shorter. It is just not worthwhile selling horizontally as that is a crowded market with very narrow margin.”

Coda’s Turner agreed: “We are very specific about our channel. We are looking for value-added resellers in specific areas such as insurance and those with skills of developing web services. That is what the SME market needs and we believe it is fairer to the channel because there is far less scope for conflict.”

Sage may be a very dominant force in the market, but there are up to 40 solutions that customers may be considering. The ICAEW’s Paul Booth summed it up: “There is no such thing as a standard accounting package and that is increasingly so in the medium and enterprise sector with links into CRM and ERP.”

Such a range and complexity should give resellers plenty of reasons to stay in the sector for some time to come.