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Sage CFO on capturing value from cloud technology

Jonathan Howell, finance leader of the FTSE-100 software group, reveals how previous CFO roles at London Stock Exchange Group and Close Brothers helped develop resilience

When Jonathan Howell became CFO of Sage at the start of 2018, he was well prepared for the role as he had been on the software giant’s board for several years.

Spending that time as a non-executive director, becoming chair of its audit and risk committee, certainly ensured he was familiar with the group’s leadership team and strategy.

But the task in hand was still a big challenge. Sage, a global provider of software for SMEs, was gravitating from being an on-premise licence business to a SaaS business (software as a service) provider through cloud technology, which meant moving to a cloud-based subscription model.

“It was in effect a triple transformation,” that would add greater long term value, says Howell. “as it meant moving the revenue model from a perpetual licence to a subscription arrangement, with annual or monthly billing, and from being focused on the quarter and licence sales to being with that customer all the time”.

As a result, Howell say he looked to build on the strong foundations of the Sage finance function he inherited from Steve Hare, now the group’s CEO, before pivoting to support the SaaS transformation – by, for example, “ensuring we make the right strategic investments.”

Firstly, Howell says he concentrated on developing consistency in the numbers that finance was producing. “Finance gets a lot easier when you just absolutely focus on the basics- complete and utter confidence in the quality, consistency and relevance of that information you’re producing builds the respect, and the position and the profile of finance within the organisation,” he says.

He then sought to develop the leadership qualities of the finance team. “I want finance team members to be leaders and decision makers, not just advisors and data providers. I want to reinforce that mindset and culture, by giving the senior team space, to get the core finance function running well, and then over time spend more time out in the business,” he says.

With the personnel side of finance reinforced, Howell then set about finessing the technology element of the finance function to improve data and produce better management information, moving from a backward looking to a forward-looking set of processes.

“There is so much more information or data available because of the electronic processes and systems that we have. It was a case of then sorting out what are the critical KPIs as we move to a SaaS business putting in place very good current and forward-looking metrics.

“By that I mean, the extent to which we cross sell and upsell, to what extent we have new customer acquisition, and the value of the customers we lose in any one year i.e. our churn. It’s about getting getting those metrics at a country level, a segment level, and ultimately a product level.”

“We’ve got a lot of forward looking visibility on the numbers through the metric of annualised recurring revenue (ARR), which gives an indication of the level of recurring revenue we can expect to generate in the next 12 months,” says Howell. “Non-financial data has also played a key role in building a strong information base. For example, real-time data from Sage’s net promoter score (NPS) system helps identify opportunities to continuously refine and improve the customer experience – and, by doing so, increasing loyalty and retention,” he says.

Financial background

Sage has grown internationally since it was launched in 1981 in Newcastle, where it is still headquartered. Although the product suite offered to SMEs has continually evolved in that time, the group’s global expansion has ensured it has gradually increased market cap closer to heights of 1999, during the dotcom boom.

Since then, Sage’s market value has gone through a peaks and troughs, with a broadly upward trajectory in recent years, valuing it at £6.5bn by mid-March, ranking it Britain’s second biggest listed tech firm after Aveva.

Howell joined Sage after spending decade-long stints in finance leader roles, first at London Stock Exchange Group (LSE) and then mid-tier bank Close Brothers, both of which were tipped as bid targets.

Following a secondment to the Met Police fraud squad- while at accountants Price Waterhouse- Howell joined LSE to develop its insider dealing investigations capability, running secondary markets in a period of huge change as markets migrated to electronic trading.

Howell was made CFO as the exchange demutualised and within a few months a nil premium merger with Deutsche Borse was announced. After that failed to get support, LSE was bombarded with a series of bid approaches from rivals OM, Euronext, Deutsche Borse, NASDAQ and then Macquarie Bank that were all seen off.

He describes that period of fast growth for the LSE during the bull market of the years leading up to the great financial crisis (GFC) as “very formative,” as “everything was done under a huge spotlight and with scrutiny from shareholders and regulators,” he says.

After 13 years at LSE, Howell took up the role of finance director of Close Brothers, a bank focused on mid-market corporate clients, which was the target of a joint hostile bid from Landsbanki and Cenkos. “I was joining as the firm was in a Takeover Panel offer period, having spent the last three years of my life in them,” he says.

No sooner had the bid been rejected, than the GFC started to impact markets. “I thought, I’ve joined the banking industry at a challenging time. but I needn’t have worried. Close Brothers was really well capitalised, its SME lending was asset-backed secured lending, not really cash flow lending, so there were no liquidity concerns or capital concerns for us.”

Although like its peers, Close Brothers experienced some bad debt issues, Howell says much of the decade he spent at the bank saw organic growth on the back of demand for SME capital lending. “There was no restructuring or reorganisation required. We were able to lend on good terms, with very good security,” he says.

“I think we were the only UK bank that came during that period, that didn’t either cut its dividend or need a capital raise during that period of time,” he says.

In that era Howell, took on non-executive directorships at publisher EMAP and Sage where his time on the board gave him a strong insight into the software firm. “I could see it was a very committed, very passionate workforce. It had a good brand and market position in many of the territories it was operating in,” he says.

Honing finance

On arrival at Sage, Howell set about building the group’s balance sheet. “I’d been at the stock exchange and seen the dotcom boom and crash and then the financial crisis. And one thing I knew as a finance director is you can never predict what the next thing is, but you always know that there is a black swan event or recession or credit crunch, a year or two around the corner,” he says.

When coronavirus first hit, Howell says Sage’s recurring revenue and subscription model ensured it was in a good position financially, with £1.2bn of cash and available liquidity. Sage also benefited from an additional £200m loan facility put in place before the start of pandemic, which was replaced by a £250m 10-year bond a year later.

During the past year, the group’s management team has sought to communicate with the its 12,000 employees through its own TV channel, as well as setting up coronavirus hubs providing guidance across global regions on how to tap support. “Our response has been grounded in our values of doing the right thing for our colleagues, customers and communities. We made our guidance available to customers and non-customers as well. We also were very careful not put through any price rises,” adds Howell.

The result of the careful handling during the initial stages of the pandemic resulted a year to September growth rate of 8.5 percent in Sage’s recurring revenue, says Howell. The results revealed organic operating profit down 3.7 percent year-on-year at £391m while organic revenue rose 3.7 percent over the period to £1.77bn.

Howell says he is confident about the road ahead, despite an uncertain global economic environment, due to the ability to forecast effectively how revenues can likely to be generated in the near future.

“We have an instant snapshot that goes far beyond normal GAAP accounting, based on ARR, that has enabled us to make some brave investment decisions as we move forward.

“Some economies will be going into recession, there will be different speeds in different countries around the world. But we are committed to investment built off a strong and clear understanding that we know about the trajectory of the business,” adds Howell.

He says as well as the more straightforward opportunities, impetus for growth will also come from a combination of the need for flexible Cloud based working and tax authorities seeking digital submissions of tax returns.

That picture is further enhanced by the prospect of an increase in start-ups. “SMEs start up in recessions, its statistically proven,” he adds.

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