Geac Gets Its Commonsense Share Of Consolidation, With Revolving Door CEOs No Less Part Two: Market Impact

Market Impact

With continued stable financial performance, Geac Computer Corporation Limited (TSX: GAC) has certainly moved far beyond its 2001 crossroads, although with an inevitable dose of lingering market skepticism. Back from the edge and on a comeback trail under energized management, and with a pruned but also more viable product set, Geac has joined the ranks of the once high-flying and almost deceased mid-market ERP vendors which are again poised for a more promising albeit subdued future compared to the halcyon 1990s (see Resurrection, Vitality And Perseverance Of Former ERP 'Goners').

In Geac's particular case, it appears the company has at least learned some hard lessons so it will not fall again as it did through its former unfocused, rampant acquisition strategy and in the face of the overall weakness of the ERP market during 1999/2000, which subsequently resulted in sharp revenue decline, product development strategy limbo, a disconcerted user base, and disastrous financial results (see Figure 2). Geac's former frugal strategy focused on acquiring, relentlessly cutting administrative expenses and generating service revenue, instead of taking decisive action to breathe fresh air into its arsenal of vantage products also backfired on the company and relegated it as an "also-ran" in the enterprise applications market.

Figure 1.

Figure 2.

Still, Geac's strengths today remain its geographical spread, restored financial health, manageable level of product diversity, and keen understanding of industry business processes in selected vertical sectors. The company seems to have meanwhile become well attuned to the needs of its mid-market install base, with many loyal long-term customers currently enjoying considerable service & support attention. To give the devil its due, Geac has managed, even during its most desperate times, not to painfully tighten the screws on its customers by blatantly increasing licensing, support & maintenance charges. In case of the System 21 Aurora enhancements, which have been a result of many current customers' requirements, one should note that most of the new functionality has been offered to these customers in return for slightly increased maintenance payments, but not for an additional license cost.

Moreover, Geac still ranks among the Top 10 global enterprise applications vendors based solely on revenues and customer base, since its estimated revenues and install base including Comshare would soon be close to US $600 million and more than 6,000 customers, respectively. Prior to the acquisition, the company had more than 5,800 customers in 55 countries, approximately 3,700 staff globally, and R&D expenditure in fiscal 2002 and 2003 totaling more than C$90 and C$70 million, respectively.

Therefore, Geac's ability to shore up the business and return to profitability and positive cash flow, which was achieved back in fiscal 2002 (see Figure 1), should be praiseworthy. With a healthy balance sheet, no debt, and substantial and increasing cash reserves, Geac should be able to face the testing future. Its intent to expand industry expertise and to build, prudently acquire, or license a number of selected products to belatedly extend product functionality and increase revenue opportunities from new and existing customers will prove much more difficult. One should, however, praise Geac's recent appetite for smaller and innovative software companies as acquisition targets (rather than erstwhile antiquated software companies at bargain prices in order to capitalize on their maintenance customer bases), with complementary products that can be sold into its Geac Enterprise Systems (GES) division.

This is Part Two of a three-part note.

Part One covered recent events.

Part Three will discuss Challenges and make User Recommendations.

Geac Reinventing Itself

The few recent acquisitions seem to validate the notion of Geac reinventing itself by offering more digestible point solutions that address specific business problems and thereby augment existing ERP or legacy system investment. Extensity, which was acquired last year and which added travel and expense (T&E) management, time and attendance, and basic procurement applications to Geac's offering, has already been paying off; the Extensity acquisition complements Geac's vision to add new functionality around the ERP fringes and to address issues of importance to CFOs and financial controllers.

Comshare also seems to be a good fit for Geac because the companies both target midsize enterprises in similar sectors, such as financial services, public sector and insurance, and in similar geographies like the US and the UK. Comshare's existing product portfolio of financial planning, budgeting, forecasting, and consolidation software should allow Geac to cross-sell this broad range of BPM products to its existing customers, and to bolster its System21, SmartStream, and possibly even mainframe-based E-Series and M-Series product lines. The fact that both companies have experienced strategic and financial quandaries in recent years, and that they have largely weathered the storm, would be another interesting coincidence.

More on a down note, however, Geac still remains strongly service driven with less than 12% of its revenues coming from license revenues (compared to the 33% industry benchmark, estimated by TEC); close to 80% of Geac's revenue comes from professional services and 10% from maintenance revenue, which the above acquisitions will not remedy any time soon. Still, it is now a financially conservative, stable but acquisitive organization that has remained profitable despite the general IT industry downturn. Geac's future focus on delivering new functionality to its heartland of existing customers and industry verticals, while building out its technology to make its existing products more future-proof, seems prudent. Geac is also targeting new customers through Extensity, Comshare and other front-end applications.

While Geac's past difficulties surely originate in the post Y2K-based slump of the ERP market in 1999/2000 and the current protracted economic slowdown, the primary catalyst was a poorly executed acquisition of once prominent UK-based ERP vendor JBA International in 1999. This acquisition has unfortunately stopped short of producing the great synergy it seemed to have offered initially (see Geac and JBA Join Forces to Form New ERP Giant).

Geac System21 is a suite of integrated backbone systems for middle-market companies operating on the IBM iSeries platform. Since its launch in 1994, it has been used by 1,600 customers worldwide, with 650 in the UK (out of 900 in Europe), 350 in Americas and 250 in Asia-Pacific many in the apparel and footwear, food and beverage and automotive supply markets. As for product scope, System21 covers all the bases of manufacturing, customer service, logistics, financial and service management operations, with several versions geared to specific vertical markets. This product suite offers indisputably deep functionality and advanced business process mapping development, configuration and automation technology in the form of its @ctive business modeling suite, which was an innovative technology that possibly preceded its time a few years ago.

However, merging disparate technologies was challenging, particularly in the case of two companies of similar size, as was the case with Geac and JBA at the time. Furthermore, although well-known for its strength in the attribute-intensive industries (e.g., fashion or drinks), the code behind former JBA's System21 suite had grown unmanageable within different product flavors for different industries. Additionally, the product was tainted with the same negative sentiment about other traditional ERP products, whose former owners had struggled and were acquired during the same period (e.g., Baan, SSA, and ASK).

The fact also remains that Geac had not initially significantly enhanced System21 either, other than Web-enabling it through Universal Commerce Adapter (UCA) based on Jacada technology and embedding the RunTime CRM product (acquired in 2000) for the apparel/fashion industry only. The company further narrowed its market opportunity by reverting to support for only the IBM iSeries (formerly IBM AS/400) and dropping the support for UNIX. Whether the result of the above factors or not, Geac was seemingly unable to successfully market its System21 product during the 1999 2001 period. System21 sales dropped precipitously during 2000/2001 and the product has until very recently all but disappeared from the ERP radar screen. System21 accounts for around 25% of Geac's total revenue, and the failure of this product line would have dealt a severe if not fatal blow to the corporation.

Doing It Possibly Right With System21 Aurora

That grim picture looks set to change in the future, as Geac has over the last 24 months poured more than $12 million into an R&D program dedicated to System21 enhancements. Geac has always had a sound understanding of its target industries and it has stuck with the product, adding new functionality, nurturing and listening to the customer base, and gradually and modestly winning new business. Along the way, the company has restructured a few times, and has taken the opportunity to rationalize the multiple code bases.

Consequently, down but not out, System21 Aurora is on the comeback trail, and likely much leaner since, while delivering the Web-based integration and e-Business functionality add-ons, Geac has also exploited the opportunity to rationalize the multiple code bases that arose from its former zeal to create industry-specific solutions. The outcome thereof should be reduced application costs and development lead times, and a more stable and robust ERP core. Further, the launch of the Aurora release is the first time the parts have been brought together as a cohesive whole, albeit in a loosely coupled manner. As such, existing customers may adopt System21 Aurora as components rather than as the packaged monolithic product. Thus, there seems to be good interest in the product according to Geac's internally conducted surveys, citing that 66% of surveyed existing customer plan to upgrade within the next 6 18 months.

To that end, the news of System 21's reinvigoration and recent new contract wins is quite encouraging. The most significant new version for years includes a number of above-mentioned productivity-boosting improvements and reflects Geac's shift in approach from being a functionality-oriented vendor to a business performance management (BPM) vendor. Geac's developers have apparently re-architected the product to embrace collaborative e-Business features and to improve users' experiences by leveraging the range of @ctive Processes templates, which automate key business and development operations such as demand capture, inventory sourcing and usage, and PLM, to name a few. As an example, order status can be viewed irrespective of how the order has been received, whether manually (by fax or phone) or electronically (by EDI, XML or email).

As for future product development, there are detailed customer surveys underway, and the major development candidates appear to be: further fleshing out the PLM solution, merging the "Drinks" solution with standard core applications (as the only remaining separate vertical solution), extending supply chain execution (SCE) capabilities (e.g., RFID), further fleshing out planning, forecasting and budgeting capabilities, and extending web services connectors.

This concludes Part Two of a three-part note.

Part One covered recent events.

Part Three will discuss Challenges and make User Recommendations.

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