Epicor Conducts Its Own ROI Acquisition Rationale Part Two: Market Impact

Market Impact

On July 9, Epicor Software Corporation (NASDAQ: EPIC), announced that it has completed the acquisition of ROI Systems, a privately held competing ERP provider of manufacturing software solutions for approximately $20.7 million in an all cash transaction. And, on July 15, in a fashion similar to its fierce competitors, Microsoft Business Solutions and Best Software, Epicor announced the acquisition of a strategic suite of warehouse management solutions (WMS) from TDC Solutions, a long-time, successful independent software vendor (ISV) partner of Epicor focused on the wholesale distribution industry

Given Epicor's ordeal of the past and the fact that divesting several lateral products in 2001 will have greatly helped it achieve some much needed stability nowadays, one could wonder about the wisdom of the renewed Epicor's appetite for acquisitions. After all, the acquisition of Dataworks had left Epicor with multiple 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?

However, one should note that Epicor competes primarily in the true mid-market, which it defines as growing enterprises with revenues between $10 million and $500 million, and to that end, the vendor has competed mainly with the Avant and Vantage products in the manufacturing arena. Also, the software purchases in this market have primarily been influenced by functionality, performance, availability of a Windows-based solution, price, quality and customer service. Increasingly, since customers in this market segment are looking for Microsoft SQL Server-based solutions, the Vantage product (and its "smaller sibling" Vista, as an introductory-level product) have turned out as better positioned to address this requirement, although both major product lines include the broad range of modules.

Further, Epicor's 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 to utilize the individual databases and development tools appropriate to the requirements of each product's target market.

This is Part Two of a three-part note.

Part One detailed the events.

Part Three will cover the Challenges and make User Recommendations.

Manufacturing Solutions

As mentioned earlier, Epicor's Manufacturing Solutions Group, which contains approximately half of the entire Epicor's customer base, features Vantage and Avant as its major mid-market ERP products and Vista for smaller discrete manufacturers. As for specialization, Vantage remains the preferred system for make-to-order (MTO), job shop enterprises, while Avant 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. The rationale of Epicor focusing on Avant as well as on the Vista and Vantage products immediately after the merger with Dataworks was that all run on the Windows operating system, which has long become one of the key requirements for success in the ERP mid-market. Also, the businesses have been similarly structured, since they sell to their distinct markets.

However, even with this simplified product set, Epicor still has some rationalization and abridging job to do. For example, the vendor has to utilize open database technology to provide flexible, yet integrated enterprise business applications. 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 Avant product leverages UniData (a.k.a. U2) open database technology from IBM Corporation.

Thus, the new product roadmap strategy, called Sonoma, calls for a common platform that has a single layer of business logic and multiple user interfaces that sit on top, letting manufacturers migrate from their current installations at their comfortable pace. Epicor first delivered on the new roadmap with the recent 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), without much vocal reference to Avant product line. Nevertheless, internally and tacitly to the market, Epicor has developed a product strategy for Avant that describes how the product fits into the Sonoma strategy as well as the plans to continue development on that solution. The product has in fact still been actively marketed in many markets outside North America, albeit in North America, Vantage and Vista have taken the front seat owing to its sexier technological foundation.

The Avant product's capabilities are geared toward midrange manufacturers of discrete, highly engineered products with complex manufacturing requirements in eight principal industries: industrial equipment, computer/office equipment, consumer electronics, instrumentation and controls, medical/dental products, transportation/aerospace products, capital equipment and contract manufacturers. The product is modular in nature and can be scaled from small to large configurations on a variety of platforms supporting the Microsoft NT and UNIX operating systems, and can be implemented in a variety of multi-currency, multi-company and multi-plant environments networked through client and host-based configurations. Avant also includes front office applications through its integration with Clientele, Epicor's CRM product.

Still, the Avant product suite comes with a caveat of addressing many discrete manufacturing styles, including engineer-to-order (ETO), assemble-to-order (ATO), make-to-stock (MTS) and Repetitive, through its disparate variants with different names -- ManFact (formerly sometimes referred to as Avant for ETO), Avant (formerly Interactive Group's InfoFlo product), suitable for mid-market ATO and MTS "mixed mode" manufacturers, and DataFlo (formerly sometimes referred to as Avant for Repetitive). Each offers primary functions for their respective manufacturing styles (such as project management, flow manufacturing and rate-based scheduling). Also, distribution functions such as plant load management, transportation management and demand deployment are not yet available. As mentioned above, Epicor has quietly developed strategies for each of these products to continue enhancements on them and to provide a migration plan for moving to Sonoma only when the customer chooses. There is no a strategy to unify the products into one, given the Sonoma strategy will elegantly offer a migration path for each. Avant will continue to be sold opportunistically or actively to new customers depending on the regional market's idiosyncrasies, while ManFact and DataFlo will not be actively marketed, although they will be enhanced based on existing customers' requirements and will also be deployed at new sites of existing user enterprises.

ROI System's MANAGE 2000

This is where ROI Systems' MANAGE 2000 product comes into picture. While its less than 400 customers with at least predictable service and maintenance revenue, as well as the ROI's impeccable financial situation and knowledgeable staff in mainly complementary vertical industries to Epicor's would be valid acquisition justifying points, the major one, to our belief, is that with MANAGE 2000, Epicor should have enough install base and common technology platform (i.e., the critical mass) to energize and justify the future strategy for Avant and MANAGE 2000 development under the same roof, with its own VP-level executives.

MANAGE 2000 provides many horizontal applications for production, planning, engineering, finance, sales order management, supply chain management (SCM), CRM, field service, and business intelligence (BI), which are similar to Avant's roster of modules and what most of midsize manufacturers need now and in a foreseeable future. As a possible differentiator, MANAGE 2000 features a very solid product configurator that enables prompt communication and decision making between front-office and back-office, and which is quite abreast of the exacting needs of leading product configurator solutions in the market. It also handles repetitive manufacturing requirements well through backflushing the ability to automatically reconcile inventory and make paperless transactions right after the products have been built, albeit this might result with an overlap with the DataFlo product. The advanced planning & scheduling (APS) capability with support for both infinite and finite capacity planning, as well as hard allocation in a lot-controlled regulated environment that requires strict product genealogy are also cited as strong features by many customers.

Further, ROI Systems was one of the first mid-market vendors to have an integrated external service management capability in a market that has increasingly been focused on customer management, and well before the term CRM was coined per se. On the other hand, the product has long lacked native sales force automation (SFA) part of CRM, which should be supplemented by Clientele in a fashion similar to Avant. Also, its strong native distribution requirements planning (DRP) functionality should cover the gaps its future siblings will have long exhibited.

Further, like Avant, MANAGE 2000 also runs on Microsoft Windows 2000 and UNIX platforms. ROI's approach has always been to offer proven but not necessarily leading-edge product technology, which has allowed the vendor to provide its customers with easy migration paths to updated technology. Another technological advantage for ROI was its early ability to run MANAGE 2000 on Microsoft Windows platform, which has been the major choice of its customers (over 90% of install base). Also, for its target market, the product scales very effectively as it may be required over time.

Possibly the best example that ROI would not adopt new technology until it is confident that its customers can migrate relatively painlessly to a new technological platform could be its use of the IBM UniData nested relational database management system (RDBMS), and Unibasic development tool - which, although not leading edge, have not been major drawbacks in ROI's target market, where the database and tool are still not the order winners. However, it is a much easier database to administer, albeit not as functionally robust as popular relational databases like Microsoft SQL Server. Again, the customers' convenience has taken precedence over the opportunity that a trendier database could bring. Another blessing in disguise is Avant's reliance on the same less-popular platform, which should be music to IBM's ears, given its recent foray into mid-market (see IBM Express-es Its Candid Desire For SMEs).

Additionally, like all remaining Epicor's products, the ROI's product architecture is being transformed to be compliant with the Microsoft .NET strategy, uses XML, HTML, Microsoft's Visual Studio .NET IDE (Integrated Development Environment), Internet Information Server (IIS) and active server pages (ASP) technologies and is ODBC (Open Database Connectivity) compliant, which provides for integration with applications such as Microsoft Office, computer aided design (CAD), import/export, and MES (Manufacturing Execution Systems) software products. Access to most parts of the system is actually now through the portals, while ROI has lately been working on a major .NET expansion to the CRM portion of its suite. Additional effort is going into adding greater depth to the portals, and converting all internal communication within the system to XML, including all programming interfaces and exits to the outside for import and export of data.

Thus, on its hand, ROI Systems has been approaching the point of making some tough decisions in order to remain competitive in a long run. Namely, much room for improvement has long lingered, since, owing to its sort of a stealth operation and past modest but steady growth and with only a handful of direct sales offices and nascent business partners primarily in the US, and a few in Canada, and Australia, ROI Systems has achieved only a small market presence in general and has all but been relegated to an obscure vendor. This, together with its size of slightly over $20 million in revenues, is reflected in quite limited brand awareness and an undeveloped worldwide channel. This is further aggravated by the fact that while its product exhibits basic multi-currency capabilities and it supports only the English language, making new sales quite a difficult feat as many companies may be seeking global providers for its entire collaborative supply chain management requirements. Thus, the vendor reported the best sales ever in 2002 even though it was be able to cite only a dozen or two of new customers in the year.

Consequently, something would have to give in sooner rather than later -- either the product capabilities and/or customer service would start seriously lagging, or the vendor would have to depart from its sacred business' modus operandi to be profitable, debt-free, and without any restructuring and disruptions. An illustration would be that the current version 7.0 of MANAGE 2000 software suite, which integrates traditional ERP features with CRM, SCM, or e-business collaboration capabilities, was launched nearly three years ago. Release 7.0, which is based on XML for easier access, navigation, and global interfacing, was indeed a significant evolution for the suite, adding functions such as field service, Internet real-time sales order processing (eSOP) and status reporting, purchase consignments, work order splitting, Internet service request management, vendor-managed inventory (VMI), and expanded advanced planning and scheduling (APS). The long-awaited version 7.1, which was scheduled only for the beginning of 2004 should migrate UI to .NET, but the product would keep its dependence on the IBM U2 database. The functional enhancements would be quite modest, featuring integrated business intelligence to provide better access to information, enhanced capabilities for managing prospect/client relationships, and a beefed-up Web portal that simplifies system access for casual users; in other words, something seen long ago by many peer products.

Key to ROI's customer satisfaction success should likely lie in the fact that it has hardly ever launched any product enhancement and support directions that would eventually leave any of its customers in the dead-end street or feeling blackmailed. However, the cynics may always point out that, with such lengthy new product release cycles and without earth-shattering new functionality, it might not have been that difficult to keep customers on the current release. Thus, this was likely the right time for the company's four co-owning executives, who have never sought venture capital nor have they ever borrowed money, to make an honorable exit, as seen in the fair price tag for ROI. Given its privately-held nature, ROI Systems could not have been acquired without its owners' consent, which leads us to believe in the need for a white knight embodied in Epicor.

Merger Strengths

As a summary, the merger looks initially like a positive move for both companies and their customers, since Epicor obtains a foothold in some complementary discrete manufacturing industries by acquiring a leanly run vendor without any excessive baggage, ROI Systems finds a more visible big brother' with a global infrastructure (i.e., Epicor generated $143.5 million in revenue in fiscal 2002, which should still rank it amongst the 20 largest enterprise applications vendors in the world - the vendor currently has over 15,000 customers, and approximately 25% of its total revenue is derived outside of the US market) and a solid management team, more certain R&D budgets, and some CRM, e-sourcing and supply chain execution (SCE) capabilities from the Epicor side, while both companies needed increased visibility and clout. Users should benefit from Epicor's larger size and recently restored financial stability and a likely products' streamlining between ROI Systems and Epicor.

If for nothing else, the acquisition could result with minor functional overlap or possible adversarial competition between the respective products and target industries. Possibly the most apparent benefit is Epicor's pledge to even move forward the release 7.1 of MANAGE 2000 to Q4 2003, while the release 7.2 that will likely be even more Sonoma-compliant, is now slated for the end of 2004. The likely reason for that would be that, although the staff reduction and cost cutbacks have already taken place, it has affected only the areas of general & administrative (G&A) and of sales & marketing (S&M) staff, but not the ROI Systems' development and support organization.

Given apparent cultural similarities between ROI Systems and Epicor Manufacturing group (i.e., the former competitors' offices have even been in the same office complex) such as the Midwestern approach to not oversell to the customers, it is likely that Epicor will leverage ROI's highly integrated sales and implementation process, called KnowledgePath, aimed at providing customers with a continuous flow through the process by having the implementation organization involved from the start. The methodology offers an implementation map and a set of tools to set the course that is fully documented, time-tested, delineated by steps, expectations, roles, and responsibilities for the client and ROI team (i.e., there is no over the wall' handover of the project from the sales person who would promise pies in the sky' to the customer to the implementation team that would subsequently scratch their heads), and designed with a measurable outcome for success.

The Knowledge Path approach thus begins by helping customers define business and system requirements. It then builds on information about the customer's organization and its goals, business practices, business issues, and expected tangible benefits from MANAGE 2000. ROI implementation personnel then work with the manufacturer's implementation team to identify training and tailoring requirements, as well as policies and practices. Next, they develop an implementation schedule, and, once the implementation is complete, they offer support, monitor success, and listen and respond to suggestions.

Another key to keeping its target mid-market customers pleased has been ROI's focus on delivering discrete manufacturing functionality with many good manufacturing practices in mind. ROI Systems has to that end long attempted to provide the holistic, enterprise wide lead-time reduction approach, it refers to as the quick response manufacturing (QRM) concept and which lends itself well to almost any manufacturing environment, and will certainly not sound Greek to current Epicor's staffers.

This concludes Part Two of a three-part note.

Part One detailed the events.

Part Three will cover the Challenges and make User Recommendations.

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