Systems Group: Small Company With Large Ambition
S. McVey - January 26th, 2000
Descartes Systems Group was founded at Waterloo University in 1981 as a custom
software development company focusing on financial accounting applications for
consumer packaged goods manufacturers. Chairman and CEO Peter Schwartz and Vice
Chairman Mark Lee joined the 5-person company in 1990, which expanded to 25
people over the next six years. By 1997, Descartes had established itself as
a supply chain execution (SCE) software vendor for companies in industries characterized
by short time-to-plan horizons.
1997, the advent of on-line marketplaces hastened the demise of buy-side economics.
In response, Descartes decided to reposition itself to create customer fulfillment
networks to meet the needs of e-businesses. It also began executing its plans
to become an application service provider (ASP) and offer success-based pricing.
Five major acquisitions in 1997 and 1998 gave Descartes the core technology
and expertise necessary to build applications for dynamic planning with short
time horizons and high order volumes. Table 1 shows how these acquired businesses
have contributed to Descartes' flagship product suite, DeliveryNet. The acquisitions
also increased its overseas presence, fortified infrastructure, and broadened
its vertical product market focus. In a move to raise capital to support its
rapidly evolving business, Descartes completed two IPOs: one on Toronto Stock
Exchange in January 1998, the other on the U.S. NASDAQ exchange a year later.
Mead & Associates, Inc.
software for bakery and other food industries
Store Delivery vertical
vehicle routing and scheduling software
Management System. P&D
optimization and scheduling for field personnel and delivery vehicles
partner collaboration, order tracking software
optimization software and consulting
Strategy and Trajectory
the past four years, Descartes revenue composition has changed drastically (see
Figure 1). This change is also evident in results of Decartes's last six quarters.
Until recently, Descartes saw a decrease in license revenues and advancing service
revenues, a combination that resulted from its transition to a success-based
pricing model that yields recurring revenues as its clients grow transactions
and customers. A 27% increase in quarterly license revenues from 2Q00 to 3Q00
may indicate a reversal. Resource investment into integration of acquisitions
in early 1999 and a poor indirect channel also contributed to the drop in license
revenues. Descartes has lacked partnerships with major complementary software
and hardware vendors throughout most of its history. Nevertheless, success over
the last few years has paved the way for industry-specific partnerships with
ERP vendors J. D. Edwards (3/98) and PeopleSoft (8/99). Descartes also maintains
alliances with Oracle, Microsoft, and Sun Microsystems (10/99). (See TEC's News
Analysis article: "Descartes
Evolution Yields Revenue Growth But No Profits" December 1st, 1999)
Perhaps more than any other supply chain software, DeliveryNet targets specific
industry verticals: direct-store-delivery (DSD), field service management (FSM),
logistics (LOG), and home delivery services (HOME). In cases where customers
require specialized functionality, DeliveryNet's common development architecture,
e-Frame, acquired from Calixon, is available as a standalone platform for building
custom solutions. In its revised niche, Descartes faces competitors such as
Roadnet, Bakerstreet, and CAPS Logistics (Baan), although many of its applications
overlap its former SCE area.
functionality: Descartes DeliveryNet is more advanced than competitive
products in the areas of Internet enablement, wireless mobile communications
compatibility, and supply chain visibility. In addition, the flexibility
afforded by e-Frame is a welcome innovation in the mass of more restricted,
off-the-shelf applications in the supply chain management marketplace.
presence in the beverage distribution industry:
Among Descartes customers in the beverage industry are Coors, Miller Brewing
Company, Carlsberg, Pepsi-Cola and Foster's Brewing Group. In addition,
the company is a preferred vendor for Coca-Cola Co. Perhaps most in its
favor, Descartes's customer base is highly referenceable.
Dominant position in home delivery routing and scheduling software:
Quick response is an imperative for these businesses and is achieved through
Descartes's technology that provides dynamic planning in extremely short
time intervals (minutes). One of its more ambitious clients promises same-day
presence in the transportation and third-party logistics market: Private
fleet routing software and supply chain visibility software are particularly
strong, with growing interest in new products like Collaborative Logistics
Uncertain revenues from new pricing model: Acquisitions and transition
to a success-based pricing model have resulted in losses for the last ten
quarters. This trend does not portend disaster in the short term, but continued
losses can erode Descartes's financial foundation. In the short term, success-based
pricing carries greater risk than traditional schemes and failure for its
customers to prosper can be devastating to Descartes's business. If it catches
on, success-based pricing can lower risk as it yields a predictable, recurring
Limited brand awareness:
In spite of Descartes's commitment to e-fulfillment, its products lack visibility
outside a relatively small number of target markets. Competitive offerings
from big name vendors like SAP and i2 Technologies are backed by considerably
greater capital and larger sales channels. Also, few are aware of Descartes's
experience as an application service provider (ASP).
Challenges of ASP:
Descartes has whole-heartedly embraced the ASP business model. Unlike traditional
license fees that are paid up-front, ASP subscription fees rely heavily
on a company's long term ability to manage its client's applications. As
Descartes's business continues to grow, so will the support needs of its
client base, and short term problems are likely to be encountered.
alliance network: Descartes needs to aggressively pursue strategic alliances
with systems integrators, and expand its relatively small circle of complementary
software partners, especially those with e-business capabilities. Descartes
uses a network of small resellers in overseas markets, but relies on direct
sales in North America.
Descartes may attempt a new acquisition during the next 18 months (70% probability),
in spite of its sagging bottom line and lack of operating history as an
e-business enabler. Favorable perception by the investing community has
boosted Decartes's stock price and netted it nearly $45 million (US) in
a bought-deal in January. Wall Street, though, can be a fickle benefactor.
Descartes will begin to embark on more alliances with complementary software
providers, especially e-business enablers, over the next six months. The
recently announced partnership with GERS Retail Systems is a move in this
direction. (60% probability).
Extend DeliveryNet to new include more analytical components: Descartes
should bolster its offering by developing a new module to help clients make
sense of the large volume of transaction data that pass through DeliveryNet.
The offering could be achieved through a partnership with a business intelligence
software company, like Cognos, or an acquisition.
Gain stronger foothold in Asia-Pacific Rim: Although Descartes derives
nearly 10% of its annual revenues from the Asia-Pacific region, this percentage
falls below the industry average of 15%. Descartes should seek alliances
with application hosting companies that have successfully penetrated the
the increasingly competitive supply chain management marketplace, corporations
either advance or are trodden underfoot. Descartes' acquisitions over the last
few years demonstrate that its management is committed to the Internet fulfillment
software market. Descartes offers several attractive options for different types
of companies. Brick-and-mortar businesses wanting to move to e-commerce for
whom efficient customer fulfillment is an imperative, such as those in the perishable
goods delivery or other consumer direct businesses, may want to take a closer
look at Descartes' industry-specific product offerings. Small to mid-range companies
should include Descartes in selections if they are interested in having their
applications hosted. Startup companies should find DeliveryNet particularly
appealing as they can use Descartes software for a lower entry cost and pay
as their business expands.
caveats to consider:
Each DeliveryNet is composed of a collection of modules, some developed
in-house and others obtained through acquisition. Although Descartes maintains
that every acquired product was rewritten and enhanced for integration,
prospective users should question how well the modules work together.