Epicor's Mid-Market Pitch Becomes Higher For (One) Scala Part Three: Market Impact

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).

This is Part Three of a six-part note.

Part One detailed the event.

Part Two discussed how Scala complements Epicor.

Part Four will present merger synergies and challenges.

Part Five will address more challenges and make user recommendations.

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).

This concludes Part Three of a six-part note.

Part One detailed the event.

Part Two discussed how Scala complements Epicor.

Part Four will present merger synergies and challenges.

Part Five will address more challenges and make user recommendations.

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