Robert Kugel's Analyst Perspectives

Sage recently announced that it is expanding its Sage Intacct software offering to support discrete manufacturing, with its initial foray into this competitive market centered in France. The move supports the company’s strategy of building out the scope of industries served by its cloud applications to include product-oriented business models and expanding Sage Intacct’s geographic footprint. The company has been extending the functionality it offers customers with human capital management as well as budgeting and planning and extending beyond its sole focus on service organizations to be able to support product-focused businesses. These include wholesale distribution, construction, retail (with the recently completed Bright Pearl acquisition) and now discrete manufacturing, specifically industrial machinery and supplies, electrical equipment and electronic parts.

In 2017, Sage plc, a UK-headquartered company, acquired Intacct Software as a means of speeding Sage’s move to the cloud to accelerate its growth. I assert that by 2025, over 80% of ERP systems acquired by non-product companies will be deployed in the cloud to promote business continuity, improve performance and lower costs. The combination was sensible. Both companies had focused on ERP/financial management software designed for midsize organizations, which we define as those having between 100 and 999 employees. When Intacct was acquired, it was about to pursue an international expansion program. Combining with Sage offered the possibility of achieving this objective with a lower cost of investment, since Sage has a strong presence in Europe, in particular. Sage Intacct initially focused on expanding into English-speaking countries including Australia, South Africa and Canada as part of a broader strategy of offering a global solution that addresses the universal needs of midsize organizations while respecting local business requirements and customs. Sage Intacct’s discrete manufacturing offering in the French market, where Sage has an established presence, is a further step in its global expansion strategy.

Accessing ERP/financial management through the cloud, especially as a subscription, offers midsize companies advantages such as reducing up-front investment costs, avoiding the need to manage the software and hardware, greater flexibility in being able to scale available resources to changing requirements, and potentially lowering the total cost of ownership. These advantages also have made it possible for midsize organizations to migrate from their entry-level accounting systems earlier in their growth cycle, avoiding the adverse impact on their ability to manage and achieve their performance potential when those entry-level systems are inadequate but a more capable system is too costly.

Midsize organizations face distinct challenges because they have almost all the requirements of larger organizations but have fewer administrative resources and smaller budgets for acquiring, operating and maintaining software. For that reason, vendors in this market segment tailor their offerings to address the needs of specific verticals and sub-verticals to reduce implementation costs without compromising the functionality needed by their customers. For Sage Intacct, these are franchise, specific financial services such as family office services (investment management for high-net-worth individuals), non-profits, SaaS businesses including software, hospitality, wholesale distribution and, more recently, retail and discrete manufacturing. Product-oriented business models have been a challenge for cloud ERP vendors because the functionality and features required by customers typically are more complex than for services. However, I assert that by 2025, more than one-half of manufacturing organizations will use a cloud-based core ERP system to promote business continuity, improve performance and lower costs.

The market for ERP/financial management software is mature and highly competitive. There are dozens of established vendors addressing this market segment with fully built-out offerings. Growth in the midsize segment is constrained because the segment is almost fully penetrated and replacement demand is limited by the cost and disruption of changing systems. Our ERP Benchmark Research finds that the average age of an ERP system in midsize organizations is 7 years. Nonetheless, Sage Intacct has several advantages including established partner networks in multiple geographies and highly competitive products in terms of performance, features and functionality. It also offers buyers a set of useful ancillary software, including human capital management and budgeting and planning, which increases the utility of its ERP/financial management offering with a fully integrated set of capabilities.

To achieve its longer-term strategic objectives, Sage Intacct will need to expand geographically and continue to build out targeted verticals and sub-verticals for its cloud software. To remain competitive and give organizations a reason to replace their existing ERP/financial management systems, over the next five years it will need to infuse a steady stream of artificial intelligence (AI) capabilities to increase user efficiency and reduce training requirements as well as streamline accounting and other business processes. Business services such as its payments processing and soon-to-be-released e-invoicing also have significant potential value to customers by reducing administrative overhead, reducing cash flow lags and speeding the accounting close. Sage Intacct’s launch of its discrete manufacturing software in France is an important step in a broader growth agenda to capture a larger share of the ERP/financial management software category, especially as that market shifts to the cloud.

Regards,

Robert Kugel