Epicor's Mid-Market Pitch Becomes Higher For (One) Scala
Part One: Event Summary
P.J. Jakovljevic - December 13, 2004

Event Summary

While the market has for some time been buzzing about the (for many still miraculous) predatory comeback of SSA Global, another true mid-market incumbent vendor, Epicor Software Corporation (NASDAQ: EPIC), should be lauded too for its recent revival. Like SSA Global, and intriguingly in the same time frame, Epicor did not have much upbeat news for several years following on its progenitors’ (i.e., erstwhile Platinum Corporation and Dataworks) merger in 1998 and subsequent name change from Platinum to Epicor in 1999. Nevertheless, in the past two years, Epicor has seemingly achieved a turnaround both in terms of its financial performance and of its strategy clarity. It has also for over two years reverted to its, this time possibly more selective, acquisition streak starting with the Clarus e-procurement acquisition at the end of 2002, and former ROI Systems and TDC Solutions acquisitions mid-2003 (for more information, see Epicor Picks Clarus' Bargain At The Software Flea Market and Epicor Conducts Its Own ROI Acquisition Rationale).

As highlighted in the above articles, it appears this time though that Epicor has learned some hard lessons from its cumbersome inception through mergers that had initially resulted in unrelated, diverse products, and all in the face of the overall weakness of the enterprise resource planning (ERP) market during 1999 and 2000. Thus, the Scala merger too seems to have much of a strategic merit as opposed to a knee-jerk, ‘me too’ impulse owing to the ongoing consolidation craze in the market. While customers want their enterprise applications providers to oblige them with new products and technologies, vendors in turn feel compelled to increase revenues and market share as to be able to justify funding of new product development.

To that end, Epicor pledges to continue to invest in its products and to grow both organically and through acquisitions, in order to assemble the right mix of back-office, front-office, and collaborative e-business functions, delivered under a single-point accountability (i.e., “one-stop shop” and “one throat to choke”) approach that is overwhelmingly desired by its target market. While in the past Epicor would integrate with partner products for best-of-breed solutions to accommodate these requirements, it has lately been expanding the boundaries of traditional ERP by building fully integrated applications that are based on the same technology and toolsets, and possibly delivered all from a single vendor.

Epicor Acquires Scala

Accordingly, back at the end of 2003, Epicor and Scala Business Solutions (Euronext: A.SCALA), an Amsterdam, the Netherlands-based provider of collaborative enterprise software for mid-size enterprises and subsidiaries of global corporations, jointly announced that the expectation was justified that they would reach agreement on a merger. The proposed merger was effected by a public offer by Epicor for all the outstanding ordinary shares in the capital of Scala at an anticipated aggregate transaction value of approximately $87 million (USD)—the equivalent of Euro3.27 per ordinary share—, as of the closing price on November 13, 2003, consisting of a cash price of $ 41.7 million (USD) subject to adjustment, plus 4.1 million shares of Epicor’s common stock. The offer was made up of a cash price of $1.823 (USD) per Scala share plus 0.1795 shares of Epicor’s common stock.

The public offer only commenced following the completion of Epicor’s due diligence investigation of Scala, the receipt of a fairness opinion by Scala, regulatory approvals, the filing of an S-4 registration with the Security and Exchange Commission (SEC) by Epicor, and other customary conditions including, among others, material adverse changes to Scala and management retention agreements. Initially, Epicor anticipated that it would begin the public offer for all outstanding ordinary shares of Scala and publish an offer memorandum in December 2003, and close the transaction in the first quarter of 2004. The combination was then also expected to be accretive to Epicor’s Generally Accepted Accounting Practice (GAAP) earnings in the second quarter of 2004 and for the fiscal year 2004.

One of the requirements for delisting Scala’s stock on the Dutch exchange was that at least 95 percent of the ordinary shares of Scala are offered. As said earlier, the anticipated transaction value of approximately $87 million (USD) was to be paid partly in cash and partly in Epicor common stock, with a 20 percent downwards protection for the shareholders of Scala. Any decrease in the value of the common stock of Epicor below a floor of $10.21 (USD) per share was to be compensated in cash by an adjustment in the offer price. The anticipated transaction price of approximately $87 million (USD) represented a premium of approximately 40 percent as of the closing price of Scala’s shares on November 13, 2003, and a 59 percent premium on the basis of the 30-day share price average. The closing of the transaction, which was expected to occur in early 2004, was subject to certain conditions including, but not limited to, regulatory clearance and acceptance by Scala shareholders, whereas the Dutch regulator of the financial markets (Netherlands Authority for the Financial Markets) and Euronext had been informed of the intended bid. SG Cowen Securities Corporation was adviser to Epicor and Fortis Bank Corporate & Investment Banking was adviser to Scala, with respect to the transaction.

However, the acquisition closing process was delayed for one major reason, which was the ensued restatement of Scala’s US GAAP financial figures by its auditor KPMG, so that it was not until mid-June that Epicor was able to declare its public offer to acquire all issued and outstanding ordinary shares in Scala unconditional. As of the tender closing date, approximately 21.7 million Scala shares have been tendered into the offer, and upon the delivery of these Scala shares, Epicor was to hold approximately 93.2 percent of the issued share capital of Scala. Epicor then conducted a subsequent tender period for holders of Scala shares who had not yet tendered their shares, which expired effective July 5. Following the completion of that subsequent tender period and the tendering of 1,096,048 shares in the period, corresponding with approximately 4.54 percent of all outstanding Scala shares, Epicor now holds a total of approximately 97.98 percent of all outstanding Scala shares. Consequently, Euronext Amsterdam N.V. then confirmed that the listing of the Scala shares on the official market of Euronext Amsterdam N.V. would terminate as of July 13, 2004, whereby July 12, 2004 was the last trading day of the Scala shares on the Euronext exchange.

What the Merger Creates

The merger by all accounts creates the largest independent global mid-market provider of collaborative ERP, customer relationship management (CRM), and supply chain management (SCM) applications based on Microsoft’s .NET platform and Web services, with approximately $250 million (USD) annual revenue run rate, nearly 1,500 employees, and with over 20,000 customers. The combined company hopes to expand its global presence with worldwide coverage of sales, consulting, and support for mid-market and large multinationals as well as local enterprises, offering a broad suite of integrated solutions.

Both Epicor and Scala customers should now be served by a global entity with the reach and scale to more effectively support their operations, and will be well positioned for growth with local support in emerging markets, and in key markets where Scala traditionally performs well, such as Scandinavia, Russia, Central and Eastern Europe, and China. Scala’s customer base is predominantly European , while Epicor’s largest customer base predominantly in North America, Australia, and the UK. The resulting company’s revenues will therefore be diversified across regions with approximately 52 percent of its revenue base in North America and 48 percent outside this region.

The combined company plans to further support and develop iScala products, while Scala’s management was offered one board seat out of six on Epicor’s board of directors. In the long term, the combined company’s product offering would be developed using the functional synergies of all products, and the integration advantages of the .NET framework and Web services. Enlarged Epicor pledges to continue the unwavering commitment to developing and bringing to market software and services based on Microsoft technology, given its strong Microsoft partnership—as a globally managed independent software vendor (ISV) and Microsoft Global ERP Ecosystem partners—and has actively participated for many years in numerous Microsoft joint development programs and early adopter technology initiatives.

The merger may also bode well for Epicor’s expanded presence in key growing verticals including financial services, consumer packaged goods (CPG), professional services, automotive, industrial machinery, light engineering, electronics, hospitality, pharmaceuticals, and nonprofit. Also, this might increase the vendor’s scale and reach to support global multinational corporations with a worldwide infrastructure for sales, consulting, and support, and a strong partner channel—combining over 400 partners worldwide, with possible operating and infrastructure synergies in general and administrative (G&A), research and development (R&D), facilities, and technical support with a solid platform and infrastructure for future strategic and tactical acquisitions in a consolidating market.

Prior to the merger, Epicor had delivered its solutions to over 15,000 customers worldwide, whereby its manufacturing customer community includes over 6,500 customers, implemented in more than thirty-five countries. Epicor's broadening suite of integrated software solutions features CRM, financials, manufacturing, SCM, professional services automation (PSA), and collaborative commerce applications.

On the other hand, Scala’s main trump is unrivaled localization capabilities for companies doing business in established or emerging markets, or even in some of the world’s most difficult-to-get-to places. Scala has garnered the local know-how and expertise to deliver results for businesses almost anywhere in the world, from over twenty-five years working with international companies and their subsidiaries and divisions in many types of industries. Scala delivers software and services that support local currencies, accounting regulations, and legal requirements in more than thirty languages in over 140 countries.

Epicor Financials

Since the transaction closing, Epicor has reported two quarters of earnings, most recently the October 20 upbeat announcement of financial results for the third quarter ended September 30, 2004. For a protractedly languishing company until not that long ago (see figure 1), reporting facts like that the Q3 2004 revenues grew over 54 percent, year-over-year, whereby Q3 2004 license revenues grew over 64 percent, year-over-year, second quarter GAAP earning per share (EPS) grew over whopping 175 percent, year-over year, while the vendor added over 165 new customers to its base and it released over 50 product upgrades to market across its suite of solutions, and so on, should bear a great importance and vindication to the long-embattled but persistent management.

Figure 1

Total revenues for the quarter were $62.2 million (USD), up over 54 percent compared to $40.3 million (USD) for Q3 2003, whereby it included $17.5 million (USD) in total revenues from Epicor’s recently acquired subsidiary Scala Business Solutions N.V., whose revenues have fully contributed for the first time to this quarterly report. Excluding the contribution from Scala, Epicor’s total revenues grew 11 percent year-over-year. Software license revenue totaled $15.3 million (USD), a 64 percent increase compared to $9.4 million (USD) a year ago and including $4.7 million (USD) for the contribution from Scala (see figure 2). Excluding the contribution from Scala, Epicor’s license revenues grew approximately 13 percent year-over-year.

Figure 2

Consulting and maintenance revenues for the third quarter were $45.9 million (USD) compared with $30.4 million (USD) in the third quarter of 2003, up over 50 percent. Included in consulting and maintenance revenues was $12.6 million (USD) from Scala’s contribution. Excluding the contribution from Scala, Epicor’s consulting and maintenance revenues grew approximately 10 percent year-over-year. GAAP net income for the third quarter was $6.3 million (USD), which compares with net income of $1.8 million (USD) in the prior year’s period. For the quarter, adjusted earnings were $9.6 million (USD) compared with adjusted earnings of $4.7 million (USD) in the same period last year. Adjusted earnings exclude amortization of capitalized software development costs and acquired intangible assets, stock-based compensation expense and restructuring charges, and other.

Further, Epicor ended the quarter with cash and cash equivalents of $46.6 million (USD), up approximately 2 percent from the prior quarter, including significant cash expenditure for transaction costs, Sarbanes-Oxley costs, and severance costs following the reduction in force completed during the quarter as a result of consolidating the Epicor and Scala organizations.

For the fourth quarter 2004, the company raised its previously issued total revenues expectations from the range of $66 to $67 million to $67 million (USD) in total revenues, while for fiscal year 2004, the company raised its previously issued total revenue guidance of $220 million to $221 million (USD). Additionally, the company provided an initial outlook for fiscal year 2005, where it anticipates the revenues to be approximately $273 million (USD) The company has also completed extensive operational reviews of its Scala acquisition and put in place plans toward achieving its cost synergies and accretion goals, which was demonstrated in the last quarter.

How Scala Complements Epicor

Epicor Software Corporation (NASDAQ: EPIC) and Scala Business Solutions (formerly Euronext: A.SCALA, delisted in July 2004), an Amsterdam, the Netherlands-based provider of collaborative enterprise software for mid-size enterprises and subsidiaries of global corporations have completed a merger that began in late 2003. The merger creates the largest independent global mid-market provider of collaborative ERP, customer relationship management (CRM), and supply chain management (SCM) applications based on Microsoft’s .NET platform and Web services, with approximately $250 million (USD) annual revenues, nearly 1,500 employees and with over 20,000 customers. The combined company has an expanded global presence with operations and customers in 143 countries, including worldwide coverage of sales, consulting and support for mid-market and large multinationals as well as local enterprises, offering a broad suite of integrated solutions.

Given Epicor’s ordeal of the past and the fact that divesting two lateral products in 2001 greatly helped it achieve some much needed stability nowadays (see Latest Development on Epicor's Trying The Divestiture Tack), one could wonder about the wisdom of the renewed Epicor’s appetite for acquisitions. After all, the acquisition of former Dataworks had left Platinum (subsequently Epicor) with multiple unrelated ERP products and the inherited daunting task of rationalizing its product development strategy, and, who on earth with a sound mind would like to revisit that experience? Well, concurrently with achieving a turnaround both in terms of its financial performance and of its strategy clarity, Epicor has also for over two years reverted to its, this time possibly more selective, and thus successful acquisition streak starting with the Clarus e-procurement acquisition at the end of 2002, and former ROI Systems and TDC Solutions acquisitions mid-2003 (for more information, see Epicor Picks Clarus' Bargain At The Software Flea Market and Epicor Conducts Its Own ROI Acquisition Rationale).

Moreover, one should note that Epicor has since its progenitor’s inception twenty years ago been competing primarily in the true mid-market, which it defines as enterprises with revenues between $50 million and up to $1 billion (USD), and to that end, the vendor has competed mainly with the Vantage (for new business opportunities), Manage 2000, and Avanté products in the manufacturing arena, and with the Epicor Enterprise suite (formerly e by Epicor) and the Clientele standalone CRM product for certain service industries. Increasingly, since customers in this mid-market segment are looking for Microsoft SQL Server-based solutions, the Vantage manufacturing product (and its “smaller sibling” Vista, as an introductory-level product) have turned out as better positioned to address this requirement, although both major manufacturing product lines include the broad range of modules for the upper echelon of midsize manufacturing enterprises.

Scala Products

Therefore, Scala should complement and further bolster Epicor’s offering in many regards, but possibly the royal one would be its ability to firmly position Epicor as a standardized tier 2 or divisional solution for Global 1000 companies. This is owing to Scala’s unrivaled global product capabilities amongst peer vendors, which will be explained in more detail later in the text. Otherwise, at first glance the merger looks like a positive move for both companies and their customers, since Epicor obtains a foothold in some complementary geographic regions, and in certain discrete manufacturing and service industries where it has not really penetrated in the past (e.g., industrial machining, pharmaceuticals, light engineering, hospitality, retail, not-for-profit [NFP] organizations, etc.) by acquiring a reasonably run vendor without much excessive baggage.

It is interesting to note that during Epicor’s trying years at the turn of the century Scala had performed much better. For example, although the market turbulence during these few years had also taken its toll in Scala’s restructuring and cost-containment exercise, still, with revenue of approximately EUR 74 million in 2002, which was a slight 4 percent growth over 2001, Scala then remained a prominent mid-market enterprise applications provider. Although its license revenue declined by 7 percent in 2002, the maintenance revenue increased by 23 percent, given that more than 90 percent of existing customers continued to pay for maintenance. This was, in part, due to an aggressive development program, which saw the release of iScala 2.1 in mid-2002 (see Scala Shows Far More Than a Bit of a Backbone) and a newer version iScala 2.2 in 2003. From 2001 to the end of 2002, the company also doubled its research and development (R&D) headcount to over 200 (out of a 700 total employee headcount at the time), plus 50 development contractors, and geared up its in-house training center, the Scala University in Budapest, Hungary to train and certify its growing ranks of 140 resellers that accounted for 23 percent of its business in 2002.

But, despite impressive growth and cash flow during these years, Scala unfortunately posted a quite disappointing performance in early 2003, possibly at an unwanted time, resulting with a restructuring program that included rationalization of the company’s bloated R&D base with the closure of some satellite R&D facilities and the transfer of expertise to the company’s cost-effective center of technical R&D excellence in Moscow, Russia, and headcount reduction of approximately 30 percent from the previous employee level, including consolidation of a number of senior management positions.

Possibly more disconcerting was the fact that long-standing customer interest in the new functionality of Web services-enabled iScala 2.2 release then resulted in overcommitment to customer-related developments (whereas the iScala 2.1 release was mainly focused on improvements in the underlying technology platform). As a result, the commercial release had to be delayed to September 2003 instead of previously indicated mid-2003. This delay created a vicious circle-like adverse impact on new license sales, as customers had to wait for new functionality. Even as all these events took place at possibly the worst time for Scala,,Epicor, who struggled at the turn of the century, had ironically meanwhile quite straightened its ship to even appear attractive as a savior to former Scala board in 2003.

Also, these rationalization measures and the eventual release of the product have reverted to increased revenues and a positive operating income afterwards. Namely, by the end of 2003, Scala’s results were again exceeding expectations owing to a new product released in September, iScala 2.2 Collaborative ERP, which was hailed as the biggest release of new functionality in more than 10 years, and which has several modular or individual enhancements of interest to manufacturers, including service management, CRM, SCM, asset management, contract management, resource management, business intelligence (BI), workflow management, user interface (UI) customization, and connectivity.

The company has since reportedly seen strong customer demand for the new iScala version, reflected in its healthy sales pipeline, especially in markets where Scala traditionally performs well, including Scandinavia, Eastern Europe, Russia, and China. Nearly 60 percent of Scala’s top customers, including both global and local enterprises, have supposedly been actively involved as early adopters since 2002, with many of them already running the new version live. As an example, Tetra Pak is one of Scala’s longest-standing customers, with Scala solutions implemented in nearly fifty countries, against SAP at the corporate level.

iScala 2.2

The iScala 2.2 Collaborative ERP system includes

• iScala Core Business Processes, which is a set of business processes that includes multicurrency and multi-legislative financial functionality, asset management, and a set of packaged integration solutions (eXtensible markup language [XML]-electronic data interchange [EDI], financials, and master data integration) which helps customers to improve the business efficiency of their core processes.
  
  
• iScala CRM, which is powered by Microsoft CRM (for more information, see Scala and Microsoft Become (Not So) Strange CRM Bedfellows), accessible from both Microsoft Outlook and the Web, and integrates with iScala ERP and other business systems.
  
  
• iScala SCM, which is packaged to address typical business needs, starting with logistics (purchase and inventory management), warehouse management (including quality control), manufacturing (planning, configuration, shop floor control), tools (such as lead time management, available to promise [ATP] and drop shipment), and integration solutions.
  
  
• iScala Contract Management, Project Management, Service Management, which is a set of business processes that has been significantly improved and extended in the new version of iScala to help customers automate their pertinent business processes.
  
  
• iScala Human Resource Management, which includes the global version of the iScala Payroll module that customers can use to improve their personnel management in almost any country, regardless of how complex the legislation requirements.
  
  
• iScala Business Intelligence (BI) Server, which provides a broad set of BI and analytics tools to give users access to information they need when they need it to make the right decisions quickly. Designed to make operational and management reporting easier, the product enables users to relatively quickly perform drill-down enquiries and comparative analysis to find out exactly how the business is doing and where improvements are needed.
  
  
• iScala Developer, which is an entire development solution for creating vertical and unique company-specific processes inside and outside the iScala system.

Thereafter, in May, Scala announced that the first service release (SR1) of the latest version of the iScala Collaborative ERP system is now available for all existing and potential customers worldwide. iScala 2.2 SR1 includes a wide range of new and enhanced business functionality, such as better connectivity with other best-of-breed warehouse and manufacturing systems, improved features in the supply chain and service management processes as well as availability in two additional languages—Korean and traditional Chinese.

The company has also enhanced its iScala CRM offering to give customers better visibility into the sales pipeline and across sales activities, to improve the quality of leads and closure rates and be able to fully integrate with Microsoft Outlook and other Microsoft Office programs. iScala CRM now comes with standard reports that are reasonably fast and easy to run and with a familiar interface, similar to Outlook, which will possibly help a company extend its applications to more users. For example, a user can create a sales proposal from a Microsoft Word template, use pricing data from their iScala ERP system, and save all versions of that proposal within iScala CRM, keeping track of all the changes in the sales cycle until the sale is closed.

Last but not least, the addition of a brand new iScala Manager Software Developer Kit should interest Scala’s indirect channel, who will now be able to add further value by designing new business processes that can easily be added to the standard iScala workflow, to support customer- or industry-specific needs.

Market Impact

Epicor Software Corporation (NASDAQ: EPIC) and Scala Business Solutions (formerly Euronext: A.SCALA), an Amsterdam, the Netherlands-based provider of collaborative enterprise software for mid-size enterprises and subsidiaries of global corporations, have completed a merger that began in late 2003. The merger creates the largest independent global mid-market provider of collaborative ERP, customer relationship management (CRM) and supply chain management (SCM) applications based on Microsoft’s .NET platform and Web services, with approximately $250 million (USD) annual revenues, nearly 1,500 employees, and with over 20,000 customers. The combined company hopes to expand its global presence with worldwide coverage of sales, consulting, and support for mid-market and large multinationals as well as local enterprises, offering a broad suite of integrated solutions.

Thus, Scala, with main direct office coverage in Europe and the Far East, and through its network of partners and dealers in most remote, esoteric, and still low-penetrated markets, perfectly fits the description of an ideal Epicor supplement. Another factor that may bode well for its future as Epicor’s subsidiary is its vast international coverage, and a broad geographic revenue mix (over 4,500 customers with over 7,500 sites worldwide), which not many (if any) peer vendors can tout. Scala has offices in over thirty countries, with local distributors increasingly helping out the direct sales force, whereas the vendor has continued to offer its products and services through the reseller channel and value added resellers (VAR), which has also expanded lately, with 54 percent license revenue growth in 2002 and with a 34 percent growth in number of partners amounting to over 140 partners worldwide.

The above facts have long promoted Scala into a serious challenger in the mid-market, especially in emerging markets like Central and Eastern Europe, Middle East, and China (possibly the local market leader therein following up on the early entry in the 1980s). The former flagship Scala 5.1, a mature but less technically apt ERP product suite, has traditionally covered the full spread of core ERP modules, including logistics, manufacturing, financials, project management, and service management, with the indication of high levels of customer satisfaction. Like SYSPRO, its parent-to-be Epicor, Intuitive Manufacturing Systems, and Exact Software, Scala’s functionality is equitably solid in accounting, manufacturing, and material management areas. This is an advantage compared to competitive products that are either mainly strong in accounting (e.g., Microsoft Business Solutions [MBS], Sage/Best/ACCPAC, Coda, Systems Union/SunSystems, Unit 4 Agresso, etc.) or in manufacturing or distribution (e.g., Lilly Software, SoftBrands, Made2Manage, or QAD).

Scala Market Strategy

At the beginning of 2000, Scala began redesigning its ERP software and building a new platform specifically for on-line collaboration. It has meanwhile packaged together the functionality required in one standard software system, which means a business can begin collaboration with its subsidiaries, customers, partners, and suppliers. To that end, iScala 2.1 was the successor product to Scala 5.1, since it contained all of the basic ERP functionality that was available in Scala 5.1 in addition to the collaborative capabilities inherent to the new XML Web services-based design. Scala 5.1 was withdrawn from new business sales in December 2002, although existing customers will continue to receive support well into the future.

Like its predecessor, iScala 2.2 also comes in two flavors to satisfy needs of both local medium business and of smaller global corporations (and their subsidiaries, divisions, and suppliers). The iScala Business Server is an entry-level product—a collaborative ERP package for the medium-size stand-alone business needing core ERP functionality without a need for high scalability and advanced security, and as a first step towards automating business processes across applications and with customers or suppliers systems. iScala Enterprise Server, on the other hand, is designed as a more complete collaborative ERP package for medium-size multinational companies or for the subsidiaries and divisions of larger enterprises. It has all the functionality of the iScala Business Server but adds scalability, business centralization capabilities, and support for working across and supporting multiple sites and subsidiaries.

Thus, Scala prefers not to be simply perceived as a mid-market vendor per se, as it rather targets two somewhat distinct mid-market segments:

1) mid-size units,divisions, or subsidiaries of large corporations, and

2) independent mid-sized enterprises, where Epicor’s sweet spot has also primarily been so far. There are slight variations in the needs of these two mid-market types, since the corporate divisions typically have urgent connectivity needs such as processing multinational invoices, using integrated warehouse systems, or triggering automatic purchase and sales orders.

Unique Multilingual Capabilities

Accordingly, Scala has long featured possibly the unique multilingual capabilities of its Collaborative ERP software. Scala maintains a single set of application code for all its languages—more than thirty—compared to other vendors who commonly support different software versions for different languages. Scala’s product architecture, which enables a single version of the software to support multiple languages, means global companies can keep their maintenance costs down by, for example, running a single service center to support several countries. It also gives them flexibility to manage their global business more easily in a multilingual and multicultural environment, since Scala also provides telephone support in over fifteen different languages to support local users worldwide.

To ensure that every new product is multilingual from the start of its life cycle, translation into different languages is done in the software development process on a phrase-by-phrase basis to give accurate meaning in multiple languages. The multilingual capabilities are enhanced by the new Unicode technology that is used starting with iScala 2.1, allowing the combination of any languages with different characters in a single installation. True multilingual technology like Unicode also allows a wide range of languages such as Chinese, Russian, or Arabic, to be stored, displayed, and printed on the same page or even in the same field. The technology also gives Scala a significant technical advantage in that new developments and maintenance updates to Scala software only have to be developed in a single version, whereas Scala’s competitors typically have to maintain multiple versions, one for each language.

Consequently, having long focused on the upper end of the ERP mid-market, Scala has apparently demonstrated an understanding of this market’s dynamics and its pragmatic requirements of robust multinational corporate functionality and intra-enterprise visibility within a fairly inexpensive product, fast and simple implementations, and reliable service and support. The company has struck the value proposition of balancing business processes standardization with flexibility and autonomy of remote subsidiaries, which should come in handy for Epicor’s like forays.

Global companies should appreciate iScala’s features such as simultaneous support for multiple accounting standards, enhanced security and usability features, and remote administration tools to manage distributed or local installation, which can often match or exceed the tier one vendors’ capabilities. Many other peer vendors conversely require their customers to operate in a single language at each location because their applications are based on the technology unable to hold more than one language in the same system.

With recently increased business functionality, comprehensive integration, and connectivity capabilities coupled with a brand new flashy UI, iScala 2.2 might be an attractive choice for companies who are considering upgrading or buying a new ERP system. There might be no similar product that provides companies with consistent information, a global view of the business, one view of customers or suppliers, and reasonably rapid system deployment at the same time.

While tier one enterprise systems can cope with the complex needs of centralized functions and a large number of users, they are often not well-suited to handling the less complex needs or localization requirements of a branch or sales office in remote countries. Hence, Scala (and now Epicor too) wants to cohabit with these global players by providing systems for subsidiaries and regional offices of global enterprises. Scala’s argument would be that it is simply too expensive and time consuming to keep changing a rigid tier one product to suit a changing market, even if it could be deployed in a location where often the poor telecommunications infrastructure capability would prevent a web-deployed system from being used.

Vertical Specialization

Scala’s endeavor at some vertical specialization, operating with a wide range of specialist channel partners around the world, many of whom target specific application areas, such as the pharmaceuticals business (over 500 sites) and the hospitality industry (over 300 customers), is also commendable, although these are perceived and marketed as stand-alone solutions, separate from iScala. Thus, these solutions will have to inevitably migrate to the new iScala platform in a foreseeable future. Also, a number of Scala customers work in discrete engineer-to-order (ETO) and make-to-order (MTO) manufacturing, and require full project based accounting capabilities. Because one of the main businesses of these global companies is to manufacture in lower cost geographic locations, the vendor has made attempts to ensure that iScala's capabilities at least match the demands of the medium to small manufacturing subsidiary, whether it be for ‘to stock’ or ‘to order’ manufacturing environment.

Still, independent Scala had yet to build or acquire many aspects of the extended-ERP functionality, especially supply chain planning and execution (SCP&E) and product lifecycle management (PLM) functional enhancements to round out a complete collaborative extended-ERP suite, readily available by many of its peers let alone the tier one likes of SAP, SSA Global, PeopleSoft, Oracle, Intentia, and IFS. Not to mention the need to bolster strategic supplier relationship management (SRM) and sourcing, manufacturing operational capabilities, and shop floor execution, well beyond a mere order management. Some of iScala’s clever features, like Global ID (a unique identifier to be assigned in all of client’s enterprises worldwide) and available-to-promise inventory (ATPI) order line check, still could not have been sufficient to comprise a holistic SCM strategy.

Scala Connectivity Solutions, which are already deployed in over 100 sites in over thirty countries, provide interconnectivity to any best-of-breed products (e.g., CRM, SCM, e-commerce site integration, warehouse management system [WMS], bar code for distribution, SAP, or personal digital assistant [PDA]-based module solutions) would likely not have sufficed for the target market’s one-stop-shop requirements. Therefore, iScala presents an opportunity for third party specialists or VARs to create add-on modules providing functionality geared to a targeted market and meet the specific needs of a group of users. Not to mention that many ready-made solutions from the Epicor’s arsenal (e.g., SRM, PLM, WMS, storefront commerce, etc.) could come in handy for potential up-sell and cross-sell purposes.

Hence, in addition to a number of potential functional extensions, Scala finds a more visible ‘big brother’ with a global infrastructure (i.e., Epicor generated nearly $150 million (USD) in revenue in fiscal 2003, which should still rank it amongst the dozen or so largest enterprise applications vendors in the world) and a solid management team, more certain R&D budgets, while both companies should jointly garner increased visibility and clout. Both user communities should benefit from Epicor’s enlarged size (a substantial installed base of over 20,000 customers), and recently restored financial stability and likely mutual products’ enhancements (e.g., Epicor could leverage Scala’s HR and payroll modules or localization capabilities, rather than typically licensing them in an original equipment manufacturer [OEM] fashion).

Epicor Contribution

On the other hand, Epicor has embraced .NET even more zealously than its creator Microsoft, often leaving Microsoft staffers in their development labs with their dropped jaws. As a good example, over two years ago, the vendor released Clientele CRM .NET as a pure .NET-based product (see Epicor Claims the Forefront of CRM.NET-ification). Further, at the company level, Epicor’s standardized technology direction currently embraces the Microsoft .NET Platform for XML-based Web services. Through .NET, which is the next generation of Microsoft's Distributed interNet Applications Architecture (DNA) and Component Object Model (COM), the vendor hopes to be able to provide comprehensive support for Web services deployment and enterprise application integration (EAI).

This technology strategy should enable Epicor's still diverse development teams to leverage Microsoft technology, while allowing each product group to continue using the individual databases and development tools appropriate to the requirements of each product's target market. For example, with the release 6.0 of both the Vantage and Vista manufacturing products early in 2003, Epicor executed on a critical milestone of its manufacturing product roadmap—incorporating a single application framework across the two solutions through the alliance with Progress Software Corporation, as well as with Sonic Software Corporation for its enterprise service bus for transactions services and security.

Furthermore, in late 2004, Epicor will introduce its .NET-based Vantage 8.0 manufacturing solution (formerly code named Project Sonoma), which features an n-tier architecture that has been architected from the ground up to support the .NET platform and Web services. Rather than wrapping existing applications with Web service-like interfaces, the new Vantage and Vista presentation layer has completely been rewritten in C# and Visual Studio.NET, while the extensive business logic has been preserved and wrapped around with stateless Web services (i.e., which are connected or invoked only when the information is needed).

The platform will supposedly deliver unrivalled flexibility and performance for both developers and customers, and allow for the development of applications based on Web services that have either a smart client or browser-based UI. Version 8.0 will include frameworks for exposing all applications interfaces as Web services, plus an orchestration engine for constructing composite applications using both Microsoft BizTalk Server and Sonic. The solution aims at enabling all (both existing and future) Epicor manufacturing customers to adopt Web services piecemeal, on their own time frame, while protecting the existing technology investment, since software reuse and integration have been on Epicor’s mind during the software revamp.

Also at the corporate level, the vendor has incorporated numerous features into its UIs to simplify the operation of and access to all its products, which incorporate the popular Microsoft Windows graphical user interface (GUI). Epicor’s GUI tools include industry-standard field controls, pull-down menus, tool bars, and tab menus that facilitate the use of the software, while the products incorporate the latest and most advanced GUI features such as process wizards, cue cards, advanced on-line help, and on-line documentation, based upon today’s single document interface (SDI) standards. As the model for distributed computing continues to evolve through the advent of Internet technologies, Epicor also offers additional client deployment models, including thin-client, browser-based, and mobile client access.

Therefore, Epicor has lately created three diverse and yet streamlined product lines (i.e., Epicor Vantage, Epicor iScala, and Epicor Enterprise) that cover different industries (i.e., distribution, industrial, manufacturing, services, non profit, and hospitality verticals) with a minimal overlap, which should mean more opportunities without much clash amongst different sales forces. Epicor is striving to become a cross-trained, functional organization, given some cross-selling opportunities in hospitality, as well as localization of manufacturing with Scala accounting and payroll solutions. However, the other side of the coin is that because of these seemingly unrelated product lines, Epicor may mean different things to different people, which does not really help mind share creation in particular segments of interest.

Epicor, as well as its product groups, have had a share of tough history that they now must get far beyond to gain traction in the market. For example, first DCD, then DataWorks, and then Epicor’s Manufacturing Solutions Group, the reborn manufacturing group must remind its customers and the marketplace of its historic success and forget about so many years of financial pressures which nearly sunk it into oblivion. There would be an analogy with the Epicor Enterprise Solutions group, that started as Platinum, and has meanwhile been awkwardly and confusingly till recently referred to as the “e by Epicor” umbrella brand. Consequently, since the late 90’s Epicor’s business has been less visible to the market, and customers and the marketplace may have forgotten who Epicor Manufacturing or Epicor Enterprise are and what they represent. The positive industry coverage for the last two years for its plausible strategy, modern products, and record performance are certainly a great step in the right direction.

Challenges

Despite notable functional and technological initiatives, the challenge for Epicor/Scala and its affiliate channel also remains the management of still multiple ERP product lines, given iScala fits somewhere between the manufacturing and service industries. Also, while these three major product lines may have their separate niches, they will in many instances be similar enough to confuse former separate Epicor and Scala’s direct sales reps and VARs in selling the combined portfolio, although Epicor has defined specific “rules of engagement” around functionality and multinational requirements. Again coming back to the brand management conundrum, while there is the intention to drop the Scala name in favor of Epicor globally, in many markets, however, the Scala name has much greater specific weight than Epicor, which has led the vendor to keep the Epicor Scala brand in these regions..

The management team will further have to determine a narrow range of key go-to-markets for each product, clarify the positioning, and segment and target the sales channels. Although it is likely that the product lines will continue on their separate tracks for some time to come, the newly combined company should unequivocally articulate any plans on future product development and possible cross-integrations. To that end, while there have been many knee-jerk temptations to, for example, leverage iScala’s HR/Payroll and localization capabilities (tailored for local language, tax, and legislative requirements) for Epicor Vantage or to integrate the Epicor for Service Enterprises product to iScala (and thereby create more global opportunities in both instances), there have not been many firm decisions yet. Till then, it is still likely that the sales channel will face some conflict in terms of market overlaps (e.g., the hospitality vertical), as well as traditional association with a certain product line regardless whether it is the best fit for a certain opportunity (i.e., iScala for global hotel companies and where the property management is critical versus Epicor Enterprise for Hospitality where the food and beverage services capability is of more importance).

Moreover, limited financial resources to adequately fund multiple key strategic initiatives including multiple products’ assimilation, brand marketing, undeveloped global channel and brand recognition, and formidable competition within the market of Epicor are the challenges the company has yet to overcome. Although Epicor has a demonstrated two-year track record that shows it has been able to achieve profitability, while continuing to support all of its products with new releases, and while delivering new technology-based products to the market, if one wants to be nit-picking, the envisioned annual revenues of $250 million (USD) for the merged entity is still less than the revenues of Epicor alone back in 1999, when it recorded total revenues of $258 million (USD).

One can also be nit-picking when it comes to the technical foundation of the three product lines. Namely, despite the Microsoft-centric nature of the products, with many common denominators, these products are still not on the same architectures. To be more precise, Epicor for Service Enterprises is built with the Epicor Internet Component Environment (ICE), a new toolset (created using Microsoft Visual Studio.NET and the .NET Framework) for the swift development of enterprise-class Web services applications and the foundation for the new breed of industry-specific ERP solutions from Epicor.

Within the same product breed, the Clientele CRM.NET suite, which was the first CRM application built completely on Microsoft’s .NET Platform, also uses Microsoft Visual Studio .NET as its standard customization tool and can support changes using any of the NET-compatible programming languages, but it uses rich or smart client versus Epicor for Service Enterprises’ Web-based UI. There are some thoughts about coalescing these products’ architectures into one in the future (given only nuances in their architectural differences), but the greater problem might lie in the fact that earlier Clientele versions and other Epicor Enterprise industry-specific products are quite behind when it comes to their migration from client/server (i.e., Microsoft Visual basic for Applications [VBA]-based) architectures to Web service-based one of, for example, Epicor for Service Enterprises.

More Challenges

Epicor Software Corporation (NASDAQ: EPIC) and Scala Business Solutions (formerly Euronext: A.SCALA), an Amsterdam, the Netherlands-based provider of collaborative enterprise software for mid-size enterprises and subsidiaries of global corporations, have completed a merger that began in late 2003. The merger creates the largest independent global mid-market provider of collaborative ERP, customer relationship management (CRM), and supply chain management (SCM) applications based on Microsoft’s .NET platform and Web services, with approximately $250 million (USD) annual revenues, nearly 1,500 employees, and with over 20,000 customers. The combined company hopes to expand its global presence with worldwide coverage of sales, consulting, and support for mid-market and large multinationals as well as local enterprises, offering a broad suite of integrated solutions.

The situation may become even more complex in Epicor’s Manufacturing Solutions Group, which contains 6,500 of Epicor’s 20,000 customer base, and which, as mentioned earlier on, features Vantage (for new business opportunities), Manage 2000, and Avanté as its major mid-market ERP products and Vista for smaller discrete manufacturers. As for specialization, Vantage remains the preferred system for MTO, job shop enterprises, while Avanté, which has not been actively marketed in the U.S. since 1999, leans towards complex manufacturing and project work environments as well as towards repetitive manufacturing with one of its product variants; Vista, on its hand, is the low-end product for much smaller discrete manufacturing enterprises.

However, even with this simplified product set, Epicor still has a substantial rationalization and abridging job to do. For example, the vendor has to utilize open database technology to provide flexible, yet integrated enterprise business applications. Namely, Vantage and Vista, developed on a single framework, are designed for Progress Software Corporation's Progress RDBMS, but they are also available on the Microsoft SQL Server .NET Enterprise Server platform, while the Avanté product leverages UniData (a.k.a. U2) open database technology from IBM Corporation.

Thus, the above-described product roadmap strategy within Vantage 8.0 calls for a common platform that has a single layer of business logic and multiple UIs that sit on top, letting manufacturers migrate from their current installations at their comfortable pace. Epicor first delivered on the new roadmap with the early 2003 announcements that its Vista 6.0 and Vantage 6.0 enterprise systems now share that common platform, with UIs and workflows tailored to the markets they serve (see Epicor Reaches Better Vista From This Vantage Point). At the same time, Epicor rolled out the product strategy and roadmap to all of its manufacturing customers, thereby sharing the vision of how all products (Avanté, DataFlo, Manage 2000, and ManFact) would fit into the future constellation, including plans to continue development on those solutions releasing new upgrades every 12 to 18 months based on customer feedback. Logically, Vantage and Vista have taken the front seat as the solutions for new business, owing to their sexier technological foundation.

While the long awaited porting of Epicor’s flagship products onto Microsoft SQL Server and Progress as well as continued focus on .NET framework should significantly relieve the company's R&D burden (the vendor spends 12 percent of its revenues on R&D, and has over a quarter of its total headcount in R&D), create incremental revenues opportunity in coming years and improve its general competitiveness, the remaining work of delivering single .NET compliant application framework remains major. At best, 80 percent of current install base will be covered by the first release of Vantage 8.0—namely, the earlier users of Vantage and Vista, whose migration (or mere “cherry picking” of new Web service-based enhancement) should be reasonably painless.

Eventual Migration

Still, the remaining 20 percent of 6,500 manufacturing customers, might sooner or later want to migrate from current non-.NET applications, although Epicor is committed to supporting these customers indefinitely (these customers are currently provided with new upgrades every 12 to 18 months based on the input the vendor gets from customers with regard to the enhancements they would like to see), which will in turn draw on its multiplied R&D and support resources. One should imagine the magnitude of the effort when the Avanté and Manage 2000 (Epicor acquired ROI Systems in mid-2003, bringing this midsize discrete manufacturer and hybrid manufacturing and distribution environment enterprise solution to the fold) instances, some with extensive customer bases on non-Microsoft technologies, should follow the path. Epicor indicates that these customers will be offered a migration to Progress or IBM DB2 database from U2 (only in the second generation of Vantage/Sonoma), but acknowledges that the migration will virtually be another full-fledged implementation, which might mean some customers’ defections.

As for Scala, room for functional enhancements beyond ERP and product delivery work in progress remains too. Namely, despite the elaborately thought out transition between the products (the upgrade path from Scala 5.1 to iScala 2.2 is reportedly no more complex than that between service releases of Scala 5.1), Scala does not intend to immediately withdraw Scala 5.1, as there are still existing customers who are in the middle of a roll out of the product and as not all languages have been implemented in the initial releases of iScala.

Further, the company has to build the hospitality and pharmaceutical functionality into a forthcoming new release of iScala 2.2. The partnership with Microsoft for CRM might also be dubious in the long run, given the temptation to utilize the ‘home’ product Clientele, particularly for some larger enterprises where Microsoft CRM scalability is yet to be tried and true.

Competition

Incidentally, the competition is also flying from many directions since the parent company now competes in many diverse markets, and it now has a number of competitors that vary in size, target markets, and overall product scope. The primary competition comes from ISVs in three distinct groups, including

1) The above-mentioned large, multinational tier one ERP vendors that are increasingly targeting midsize businesses as their traditional market becomes saturated (see PeopleSoft Revamps World for Its Mid-Market "Express" Conquest and SoftBrands to Institute Fourth Shift for SAP Business One Manufacturing Work-Plan).

2) Midrange ERP vendors, including Lawson Software, SSA Global, IFS, Intentia, and MBS.

3) Established best-of-breed or point solution providers that compete with only one portion of Epicor’s overall ERP suite, including Sage/Best Software, Systems Union, Unit 4 Agresso, or Geac for financial accounting; HighJump Software, Prophet21, RedPrairie, or Manhattan Associates for distribution and WMS; QAD, MAPICS, SYSPRO, Lilly Software, Encompix, Adonix, or Made2Manage for manufacturing; and Onyx, Siebel Systems, Pivotal, FrontRange, Salesforce.com, or SalesLogix (owned by Best Software) for sales force automation (SFA), customer service, and support. The list of the competitors in the above markets is by no means exhaustive.

Also, a leaner company with a large customer base and a palatable market capitalization remains an attractive acquisition target in this seismically consolidating market, with possibly unwanted attention of predatory competitors. At least, the Scala acquisition with its organizational and products’ merger might also deter the acquisition-spotting vultures for the time being, in addition to an existing rights plan for a heftily higher price per share than the current one.

User Recommendations

Epicor’s financial stability and its ability to enhance its products (both in-house and via acquisitions) and its determination on executing product and technology strategies deserve commendation. Current users are advised to follow Epicor's new product introductions and keep an eye on its future product strategy. The positive sign is the company’s more manageable and narrower focus, as demonstrated by its most recent results. Mid-market companies with up to $1 billion (USD) in revenues that are within the parent Epicor’s industries of focus (i.e., Epicor Vantage for capital equipment, fabricated metals, electronics, instruments and controls, and consumer packaged goods [CPG], and Epicor Enterprise for enterprise services, financial services, non-profit, hospitality, and entertainment) and companies with a need for a single-source functionality beyond core ERP scope, should benefit from including Epicor in the short list of potential candidates for the enterprise applications selection.

Enterprises should nevertheless monitor the consistency between the announced strategy and the company’s actions in continuing to support all of the former products strategically. While Epicor has continued to support all products from Dataworks since 1998, and pledges to continue to support all its products, existing users of Epicor products that face stabilizatio or discontinuation may benefit from querying the company’s future product migration path, service and support, and scalability strategy. As for the newly added or anticipated functionality, users are advised to ask for firm assurances on the availability and future upgrades timeframes, and more detailed scope of enhanced product functionality. They should also inquire about any possible impact (or benefits) of migrating towards more advanced offering. Taking stock of current resources’ Progress, VBA, and C++ skill sets and assessing the effort to train these into VB.NET and C# is highly recommended at this stage.

Although the path to Vantage 8.0 (Sonoma) is an evolutionary path, the first release will offer functionality that is equivalent to, or a superset of, the functionality in the current releases of the Vista and Vantage products. This first release also meets the requirements of most Manage 2000 and DataFlo customers. By the second release and higher, ‘Sonoma’ will be equal to, or a superset of, anything customers have in place, including Avanté and ManFact, which would be only some time after 2005.

Scala's target market, general multisite and multinational enterprises with up to $1 billion (USD) in revenues and their divisions with up to 200 concurrent users per site, should consider the company's value proposition, and we generally recommend including Epicor Scala in the long list of vendors considered for an enterprise application selection by the upper-end of mid-market companies that are a mixture of regional business, divisions and semi-autonomous operations, each with its own autonomous requirements and business processes. These companies generally are rapidly growing and agile, but have a limited regional IT budget or staff, and less intricate discrete or batch process manufacturing, CRM, and e-commerce collaboration requirements.

The product is also the system of choice for many lower midrange companies where the primary language requirement is not English, and where there might be a need for integration to SAP in the corporate office. Technologically, the product may be the most suitable as a solution for global midsize enterprises, worldwide dispersed, with strong requirements on distributed infrastructure, security and with private trade exchange (PTX) or collaborative role-based portal solutions strategy and delivery. The industries that would most likely benefit from using its products are those from Scala’s proven core target sectors—including telecommunications, hospitality, pharmaceutical, and food and beverage.

Large global corporations with a centralized management philosophy looking for strong global corporate financial and HR modules, for a highly scalable cross-platforms solution, and for much broader functionality beyond traditional ERP boundaries (e.g., more intricate CRM, PLM, or complex project and ETO functionality) from a single vendor may benefit from evaluating other products at this stage, bearing in mind what might come from Epicor’s side in the future. For more on the pros and cons of unified corporate-wide enterprise solution deployment, see Standardizing on One ERP System in a Multi-division Enterprise.

Scala users should meet the new owners and talk with the new management to make certain they know existing customers’ expectations and plans. Measure the vendor’s commitment to support your technology for a specified time. Keep a close eye on its actions, given that product enhancement and service and support strategy can sometimes change after an acquisition, although Epicor seems committed to actively selling and enhancing the product at this stage. Also try to understand the product strategy and look for opportunities in the new prospective product portfolio.

On a more general note, existing and prospective enterprise software users need to understand every vendor’s strategy toward them. While you should talk to sales people and vendor executives, also look for more than mere words. Ask about why certain items you think you need are not available as standard offering. Ask about headcount changes, product release schedules, release contents, partnership programs, the future of exiting OEM third-party products, etc.

Finally, very detailed information about Epicor Scala, Epicor Vantage and Epicor Enterprise products is contained in the ERP Evaluation Center www.erpevaluation.com.