Enterprise Application Provider May Deepen Market Impact

Market Impact

The past several years have been tough for SoftBrands, a Minneapolis, Minnesota (US)-based provider of enterprise solutions for the manufacturing and hospitality industries (see SoftBrands' Recovery Softens the AremisSoft Bankruptcy Blow and Fourth Shift's evolution within SoftBrands' DemandStream). However, the worst is certainly past for SoftBrands, and there are some glimmers of hope for a better future.

For a discussion of the Classic Fourth Shift and Fourth Shift Edition for SAP Business One products, see Classic Enterprise Resource Planning Solution Shifts Over. For a discussion of the evolution and DemandStream products, see Extended Enterprise Resource Planning Vendor Shows Its Lean Side. For details on SoftBrands Hospitality, see Vendor Extends the Welcome Mat for Hospitality Industry.

This is Part Five of the five-part SoftBrands' Recovery Softens the AremisSoft Bankruptcy Blow series.

SoftBrands' manufacturing customers are concentrated in the life sciences, machinery, chemical and plastics, automotive, consumer products, and electronics industries. We believe that the life sciences and consumer products sectors represent potential growth markets for SoftBrands in North America. In the Europe, Middle East, and Africa (EMEA) markets, there is growth potential in Eastern Europe, primarily in the Czech Republic, Poland, and Russia.

When it comes to the Asia Pacific market, the manufacturing sector in China is growing rapidly, and the vendor should be well positioned to capitalize on this growth. In particular, SoftBrands should gain an advantage from the facts that the erstwhile Fourth Shift was the first enterprise resource planning (ERP) vendor to be certified by Chinese authorities, and that, for a long time, the Chinese market lacked the strong local competition found everywhere else. There might also be potential for SoftBrands to gain market share with private Chinese enterprises as a result of the Fourth Shift Edition for SAP Business One offering. However, the vendor will likely need to produce local language versions before it can generate substantial sales of Fourth Shift Edition for SAP Business One in the Asia Pacific market. In addition, localization of value proposition, implementation services, and functionality will be required to adapt the product to the cultural differences found in Chinese companies.

In terms of the hospitality sector, SoftBrands has a hospitality customer base of approximately 2,500 worldwide. Organic growth in hospitality might come from replacing legacy systems with new products such as Medallion, and winning new-name accounts.

Regardless of industry, however, all the above forays should be backed up by substantial progress in developing an indirect channel to supplement the company's direct sales force. SoftBrands currently has direct sales offices in several countries, including in Minneapolis, Minnesota (US); Reading, UK; and Tianjin, China.

Manufacturing sales offices employing about forty direct sales personnel are located in Singapore; Shanghai, Beijing, and Guangzhou, China; Johannesburg and Cape Town, South Africa; Dublin, Ireland; and Mexico City, Mexico. The vendor's customer service hubs for the manufacturing business are found in Mexico City, Mexico; Blackburn, UK; Mantua, New Jersey (US); and Johannesburg, South Africa. Despite the fact that SoftBrands distributes its manufacturing software and services through a combination of direct sales and resellers, essentially all its revenue is generated through the direct sales offices. The following table summarizes the principal means of distribution for SoftBrands manufacturing products by geography.

Table 1. Distribution of SoftBrands Manufacturing Products by Geography

Product Distribution
Fourth Shift Direct sales in the US, EMEA, and China Resellers in Europe, Japan, Taiwan, Malaysia, Australia, and Brazil
DemandStream Direct sales in the US, China, and EMEA
Fourth Shift Edition for SAP Business One Direct sales and resellers in the US, EMEA, and Asia Pacific
evolution Direct sales in the US and Asia Pacific.
Direct sales and one primary channel partner in EMEA

SoftBrands has quite a dispersed organization for a relatively small vendor with a number of diverse products. However, we believe that without development of a loyal channel beyond the current contracts with approximately twenty-five resellers and referral partners, the company's growth will be insufficient and SoftBrands will remain only marginally profitable. This is particularly true in light of many tier one vendors' painful learning experiences regarding the importance of resellers in the lower end of the market.

SoftBrands Future Focus

We expect SoftBrands to increase the amount of distribution resources devoted to its newest product offering, Fourth Shift Edition for SAP Business One, within the next few years. In addition, SAP will more than likely help SoftBrands round out its functionality in areas such as distribution requirements planning (DRP), transportation management, plant maintenance, and enterprise asset management (EAM), where SoftBrands would require significant investment to deliver on its own.

However, the markets for some of SoftBrands' more established products are mature, and the vendor may have difficulty generating significant new software license sales in those markets. In North America, for instance, the combination of a decline in the level of manufacturing activity and ERP software package purchases by a substantial portion of mid-sized manufacturing concerns can be expected to limit the potential for new license sales growth of existing ERP packages.

In these markets, SoftBrands may depend for growth on new software products that have a less consistent record of sales and service revenue, such as DemandStream and Fourth Shift Edition for SAP Business One. Demand Stream is a new application for lean manufacturing and a potential gold mine, but SoftBrands needs to form a respectable and knowledgeable team of business consultants that can help customers apply the technology to their lean initiatives.

While the vendor may become increasingly dependent on such products, which are not yet widely accepted (and which no one can be certain will ever be, since they have not sold in substantial quantities so far), SoftBrands will continue to invest in its other manufacturing applications, such as its classic Fourth Shift application and evolution. Given the apparent refocusing and transfer of the sales force to the SAP Business One edition, the vendor will have to tread carefully so as to not disconcert users of the original Fourth Shift. This is especially true in light of the fact that this product's recurring revenue remains a major chunk of the company's revenue. At the very least, SoftBrands should clarify for both existing and prospective users the functional, technological, and pricing differences between Fourth Shift and Fourth Shift Edition for SAP Business One. In other words, if someone was attracted to Fourth Shift in the first place, why should she or he consider (or not) the SAP Business One edition?

SoftBrands currently employs a staff of over eighty developers in its manufacturing software development department, and has contracts with a handful of independent developers. Table 2 shows the geographical spread of the product development departments for the various manufacturing products.

Table 2. Location of SoftBrands Product Development Departments by Product

Product Development locations
Fourth Shift Minneapolis, Minnesota (US) Tianjin, China
Fourth Shift Edition for SAP Business One Minneapolis, Minnesota (US) Tianjin, China
evolution Blackburn, UK Noida, India
DemandStream Minneapolis, Minnesota (US) Golden, Colorado (US) Bangalore, India

The Fourth Shift development staff focuses on developing new functionality that customers have indicated they desire and extending the interoperability of Fourth Shift with other software products and new platforms. Additionally, the vendor is still currently devoting substantial effort to integrating selected portions of the base Fourth Shift code with SAP Business One for Fourth Shift Edition for SAP Business One. On the other hand, SoftBrands' evolution development staff is focused on custom programming using the evolution tools to create individualized ERP systems for evolution customers. The DemandStream development staff has created, and continues to create, new software technology that further enhances this new product.

The idea of gaining economies of scale by building common application components as commodities that can be deployed within the entire product portfolio is tempting and promising in the very long run. However, the flagship back-office product lines will likely remain on separate tracks for some time to come, owing to their quite disparate, and in some instances proprietary, technologies and user bases. The disparity in the technological foundation of the products is also a disadvantage in that it has likely multiplied development expenses and caused difficulties with product integration, which also complicates the tracking of third party partnerships to compensate for the products' different weak areas.


This technological diversity is not SoftBrands' only problem. In addition to the problem of blending many formerly independent organizations together, SoftBrands is still figuring out how best to bring their different technologies and industrial experiences to bear. Even if one puts aside the vendor's tainted parent's past (and the resulting negative market sentiments), the new company is left with multiple products whose brand recognition is quite low due to both the recent re-branding effort and brand confusion caused by the multiplicity of manufacturing products (not to mention the host of hospitality products).

Also, while the products may have their separate niches (i.e., Fourth Shift will be sold to Microsoft-centric smaller enterprises with up to $50 million (USD) in revenues within medical or surgical products, machinery, automotive, rubber and plastics, and furniture and cabinetry segments; evolution will go to larger enterprises with up to $250 million (USD) in revenues that prefer the UNIX and Oracle platform combination within the converters and packaging, apparel, textiles, food, and primary and dimensional metals segments), they may in some instances be similar enough to confuse former Fourth Shift and evolution direct sales representatives and value-added resellers (VARs) when selling the combined portfolio (e.g., to platform-agnostic, mid-market enterprises in the electronics and fabricated products sectors).

The channel partners for the most part will continue to concentrate on one product or the other, at least for now, which will demand little cross-training. Further, only selected members of SoftBrands' direct sales teams in selected geographies will be in the position of representing multiple products, and these individuals will be assisted by pre-sales consultants from one product group or the other who know their products in-depth. Still, the conundrum of how to show a single face to customers certainly remains, especially when it comes to more vigorous enticement and reactivation of over 1,000 dormant accounts. One should also be closely watching the impact of Fourth Shift Edition for SAP Business One on SoftBrands' revenue in the next several quarters as additional geographical releases enter the market.

That being said, SoftBrands faces fierce competition on many fronts. The market for ERP software is intensely competitive worldwide and also price sensitive because the functionality of many of the product offerings in this market have become similar to each other. Moreover, the North American portion of the market has matured and is largely saturated by existing vendors. Competition in this market has become particularly acute, and the market has shown reduced growth since 2000. The EMEA and Asia Pacific markets are less saturated and stronger growth opportunities exist.

Some key competitors for Fourth Shift include Epicor Software, QAD, SYSPRO, Microsoft Business Solutions, Oracle, PeopleSoft, and Infor Global Solutions. Key competitors for DemandStream include QAD, Oracle, Infor (formerly Lilly Software), Pelion Systems, Factory Logic, Exemplary, etc., while the evolution product competes with vendors of financial and enterprise management products from a number of suppliers, including QAD, Oracle, IFS, Infor (formerly MAPICS), Intentia, Glovia, Verticent, and SSA Global. The enterprise software market for the hotel and resort category is also highly competitive and fragmented. SoftBrands' property management systems (PMS) products compete primarily with Micros-Fidelios, HIS, and Springer Miller, while in the leisure management systems (LMS) realm, Springer Miller is the primary competitor. Similar to their manufacturing brethren, SoftBrands' hospitality products compete primarily on the basis of functionality and integration capabilities

User Recommendations

SoftBrands' target market of manufacturing and distribution companies in the $10 million (USD) to $250 million (USD) yearly revenue range, including regional subsidiaries of multinational corporations, should certainly consider the company's latest value proposition. However, such companies should also be aware of other equivalent products.

Midsize manufacturers or existing SAP customers with a need for worldwide supply chain business-to-business (B2B) integration and collaboration and for a divisional or plant-level ERP system should take a look at Fourth Shift Edition for SAP Business One.

For repetitive, batch process, make-to-order (MTO), discrete, and mixed-mode manufacturing enterprises at the lower end of the mid-market, which have limited information technology (IT) budgets and conservative IT strategy, as well as significant manufacturing, customer relationship management (CRM), supply chain, and collaborative B2B e-commerce requirements, we generally recommend including the original Fourth Shift in a long list for an enterprise application selection. Although it addresses the market horizontally, the product has a high proportion of its customers in the automotive, electronics, computers, machinery, fabricated products, consumer products, batch process, and medical devices industries, where traceability and engineering change management (ECM) are key requirements.

Meanwhile, evolution is more suitable for the upper-end of the same market, serving enterprises requiring three-dimensional (3D) or attribute-based bills of materials (BOM), such as textiles, food, paper, mining, and pharmaceuticals companies in MTO, contract-based and configure-to-order (CTO) manufacturing environments.

As DemandStream is targeted at flexible lean manufacturers; can handle mixed-mode operations, electronic kanbans, and just in time (JIT) at the plant level; and can agnostically interface to most ERP systems, non-SoftBrands users may benefit from evaluating it on a stand-alone basis. The product might be of particular interest to enterprises experiencing demand fluctuation, product customization and combination, frequent engineering changes, numerous resource bottlenecks, long lead times, and supply chain complexity, but which are still keen on deploying lean manufacturing principles.

Nonetheless, due to relatively recent restructuring and a fledgling channel, potential clients should conduct thorough research on available resources and reference sites of a regional SoftBrands office or an affiliate service provider. Existing users of earlier product releases that face stabilization (e.g., Micro Data Base Systems [mbds]-based products) should react positively to the company's strategic activities (as outlined above), as they may benefit from querying the company's future product migration path, service and support, or scalability strategy, and as they may be able to negotiate favorable maintenance reinstatement contracts.

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