Scala and Microsoft Become (Not So) Strange CRM Bedfellows Part Three: Challenges and User Recommendations


During these days of frenetic mergers and acquisitions in the enterprise applications arena, there still seems to be a place for some co-opetitive alliances too. Namely, at the end of July, Scala Business Solutions (ASE: SCALA), an Amsterdam, the Netherlands-based provider of collaborative enterprise software for mid-size enterprises and subsidiaries of global corporations, announced it has signed a letter of intent with Microsoft Corporation (NASDAQ: MSFT), the largest software provider in the world, to extend Microsoft Business Solutions CRM (Microsoft CRM) software and integrate it with its iScala Collaborative ERP system. The agreement is expected to be final in September. Part one of this note detailed the agreement, which is a major part of Microsoft's foray into the CRM arena, and began a discussion of the market impact. Part two continued the market impact.

However, by the description of Scala and Microsoft's offering in Part two, it should be more than obvious that the two supposed partners' product portfolios also compete in many other enterprise applications areas within the mid-market, which is likely to affect the true partnership in the long term. Although Microsoft should hereby get a shot in the arm for its launch of an international version of Microsoft CRM by the end of 2003, whether Microsoft will include Scala's envisioned enhancements within its own offering remains dubious. In fact, Microsoft might wish it knew the answer to this tricky question itself at this stage. Microsoft's approach has been to partner with over 100 ISVs by encouraging them to use the Microsoft CRM platform in order to extend its capabilities, hence allowing customers with specific needs to access the plethora of different ISVs to find solutions that would best fit their projects.

There are many Microsoft CRM flavors already available via these ISVs, such as computer telephony integration (CTI), data cleansing, campaign management, partner relationship management (PRM) and so on. Each ISV could then be seen as a new CRM player adding to an already large number of CRM providers. Microsoft CRM is also distributed through a large number of authorized resellers (VARs), more than 1,300 right now. The question that comes to one's mind is to wonder how the customer will navigate through that proliferation of solutions from ISVs and VARs that Microsoft is partnering with. Consequently, Microsoft often ends up competing against its own prior release or an offering from one of its ISVs or VARs. Even worse, upgrading to one version of a product can require cascading upgrades to other products and platforms to synchronize versions that work togetherin other words, a daunting product retrofit.

Another issue is how can the Microsoft traditional volume-based business model be implemented in a more complex and sophisticated field such as CRM, which requires rather high value-adding sales and support models. It is paramount to the end-user to have a one-stop-shopping experience where he/she can find a solution that fits the requirements and a reseller that understands what CRM is all about. If Microsoft fails to create the standard offering, once again we will witness a growing stack of unsatisfied customers and CRM failures in the small-to-medium enterprise (SME) market. Thus, Scala will have to quickly master a number of business issues intrinsic to CRM, such as change management, and identification and automation of best business processes, which go far beyond a mere product functionality delivery.

That could even be an opportunity for Scala to seize since, in addition to the steep learning curves for some traditional accounting MBS VARs to now master CRM sales, support and implementation, some Microsoft VARs might find it difficult to justify selling a Microsoft CRM product at a low price with minimal consulting and integration scope (due to fairly simple initial functionality), when they would prefer to sell more substantial and complex products. Scala, conversely, should be able to offer quite a value-added "dough" incentive for its partners, given a number of vertical industries they could tackle.

Competition From SAP

For that reason, in the immediate future, both vendors will likely join forces to stave off the common fierce competition coming from both the multiplicity of the Tier 2 and 3 peers and the Tier 1 vendors storming down the market. Likely the biggest challenge, however, lies in the concurrency of iScala with the SAP Business One offering for SMEs, the result of SAP's move in 2002 when it acquired TopManage (see SAP Tries Another, Bifurcated Tack At A Small Guy and Software Giants Make Courting A Small Guy Their 'Business One' Priority).

SAP Business One is targeted at companies with less than 250 employees, and includes financials, sales, procurement, banking, inventory management, costing, multi-national, and some basic SFA functionality. It also includes the impressive "drag and relate" functionality available in the SAP Enterprise Portal aimed at alleviating the proverbial SAP R/3 ERP product's complexity and functionality that has become a liability rather than an advantage in targeting (and appalling as well) SMEs. Given the opportunity to offer its own product, SAP is likely to become hostile rather than agreeable to Scala's "symbiotic" (like the Plover bird cleaning a crocodile's teeth) relationship in penetrating and servicing SAP's global customers' remote divisions in the past.

Scala has indeed made a notable dent within SAP's install base, particularly in emerging countries, with its positioning as the "low-end" subsidiary system, providing localized functionality readily integrated with a corporate SAP implementation. The addition of CRM functionality should help it defend against a likely fierce intrusion by SAP's Business One, at least within the sites that prefer a more autonomous approach to a CRM deployment strategy, rather than to wait endlessly for a centralized CRM system rollout, typical to SAP.

Challenges to Scala

Still, as for Scala, room for functional enhancements beyond ERP and product delivery work-in-progress remains, since this alliance only solves its CRM part of the puzzle. Namely, despite the elaborately thought out transition between the products (the upgrade path from Scala 5.1 to iScala 2.1 is reportedly no more complex than that between service releases of Scala 5.1), Scala does not intend to immediately withdraw Scala 5.1, as there are still existing customers who are in the middle of a roll out of the product and as not all languages have been implemented in the initial release of iScala 2.1. Further, the company has to build the hospitality and pharmaceutical functionality into a forthcoming new release of iScala 2.2. Outside of its product's globalization advantage (which is not a small thing though), its "genuine collaboration" message lacks much of the differentiation traits given that many other Microsoft-centric vendors like Ramco Systems, SYSPRO, Intuitive, Epicor, and Made2Manage to name but a few, offer like value proposition of web service-based collaboration and visibility across the entire supply chain.

On the other hand, Scala is becoming a more visible contender in the mid-market, which may result with even the unwanted attention of predatory competitors. At the same time, Scala has to address the remaining gaps within an expanded footprint and vertical focus, which makes it possible to be both an acquirer and prey in the not so distant future. One can never discount the potential that Microsoft might simply acquire the partner-competitor, if necessary to remove a recurring headache.

Despite impressive growth and cash flow in last few years, Scala has been unfortunate to post somewhat disappointing performance in Q1 2003, possibly at an unwanted time, resulting with a restructuring program that, inter alia, included rationalization of the company's R&D base with the closure of some satellite R&D facilities and the transfer of expertise to the company's cost-effective center of technical R&D excellence in Moscow, and headcount reduction of approximately 10 percent from the previous employee level of 650, including consolidation of a number of senior management positions. Possibly more disconcerting could be the fact that long-standing customer interest in the new functionality of iScala 2.2 has resulted in over-commitment to customer-related developments. As a result, the commercial release has been delayed to September 2003 instead of the previously indicated Q2 2003. This delay has had a vicious circle-like adverse impact on new license sales, as customers wait for new functionality. Again, all these events have been taking place at possibly the worst time for the vendor.

Still, one should note that Scala's current offering is also partly the result of tough strategic decisions in the past, which the vendor has managed to resiliently overcome. First of all, in 1998 Scala decided to discontinue support for UNIX, and to focus solely on Microsoft technology. Although regarded by some as a risky and dubious decision at the time, it has proven beneficial and giving Scala the best of both worldsthe expertise to cater to global upper mid-market companies owing to its strong multinational and financial consolidation functional features, and the low total cost of ownership (TCO) attractive to its target market, for focusing increasingly on the proven Microsoft platform.

By leveraging the capabilities of the Microsoft platform only, Scala seems to be also in a better position to be responsive to delivering new functional features that its customers may demand. Additionally, owing to the proverbial dot-com bubble burst, in 2001 the company had to give up on once high-flying prospects of its separate e-commerce application division, called iScala. Nevertheless, the iScala e-business functionality has come in handy, as the iScala platform is an extension of the company's back-office capability, thereby rounding out a next-generation solution set in which there is much tighter integration of collaborative e-commerce applications with ERP functionality.

Thus, one could expect Microsoft or Sage to settle the score with the currently vulnerable opponent or partner Scala, whose global product capabilities they could not beat anytime soon otherwise, possibly through a not necessarily hostile takeover bid. Yet, that might not be likely to happen just now, given these titans' excruciating efforts to streamline their current disparate product lines into a single code offering, or somewhere near it. In any case, the Microsoft CRM agreement at this stage should help Scala maximize the potential for mining its existing customer base, but it could also be an opportunity for Scala to capture the mid-market ahead of Microsoft's launch and the activities of other Microsoft VARs outside North America, were it to offer iScala CRM as a standalone product to Microsoft customers. Thus, whether this is a temporary stint, a true long-term alliance, or just a prelude to nuptials down the track, Microsoft should turn out as a beneficiary in every way.

User Recommendations

Existing Scala users and prospective mid-market user enterprises planning to adopt an extended ERP system should closely follow the touted CRM addition to Scala's footprint. Small and medium size businesses using Scala back office applications and smaller organizations using Microsoft desktop and office applications that have simple CRM product needs (simple sales and marketing activities like opportunity management and forecasting, and basic customer service activities) should evaluate the above iScala CRM functional enhancements as a way to add value to their existing applications although bearing in mind that other vendors currently offer mature products.

Scala customers (particularly in China, Central and Eastern Europe, the Nordic region, and Russia) should watch for basic CRM features with VAT and multinational additions. Scala customers with more advanced CRM needs and an industry-specific focus should not benefit much from this early and likely immature version. Bear in mind that the first release of iScala CRM will not provide tight call-center integration, campaign management, customer portals, offline support for mobile users (customer service and marketing employees), or permit significant application customization, and it should not be short-listed by larger or more complex enterprises, with support for e-mail applications other than Outlook, and with multiple-platform and strong scalability requirements. The product will not be of much use to companies that must manage customer relationships through diverse lines of business (LOBs) with diverse processes at this stage either.

Moreover, the enterprises that have integration needs outside of the Microsoft environment (i.e., database, OS platform, middleware), have complex sales and call-center service business practices, or need advanced CRM functions such as product configuration, content management, personalization, and relationship optimization, will have to look at more sophisticated offerings, some of which will become resellers of Microsoft CRM as well. Bear in mind that Microsoft could end the CRM partnership with Scala after it launches the next generation of possibly unified Microsoft Business Solution suites. Enterprises could then face migration challenges, and should insist on contractual assurances now to prevent or mitigate these.

Outside CRM, Scala's target market, general multi-site and multinational enterprises with up to $1 billion in revenues and their divisions with up to 250 concurrent users per site, should consider the company's value proposition, and we generally recommend including Scala in the long list of vendors considered for an enterprise application selection by the upper-end of mid-market companies that are a mixture of regional business, divisions, and semi-autonomous operations, each with its own autonomous requirements and business processes. These companies generally are rapidly growing and agile, but have a limited regional IT budget and staff, and less intricate discrete or batch process manufacturing, CRM, and B2B e-commerce collaboration requirements.

Technologically, the product may be the most suitable as a solution for global mid-size enterprises, dispersed worldwide (especially within non English speaking regions), with strong requirements on distributed infrastructure, security, and with private trade exchange (PTX) or collaborative role-based portal solutions strategy and delivery. The industries that would most likely benefit from using its products are those from Scala's proven core target sectors—including telecommunications, hospitality, pharmaceutical, and food and beverage.

Scala 5.1 users should position iScala 2.1 central to their collaborative B2B and B2C e-business strategies although being informed about competitive products cannot hurt. They should also question the company's future two-pronged product strategy, the timeline for the products' language and other capabilities convergence, product migration path (upgrade licensing arrangements and ongoing service and support, or ramifications for not opting for iScala). Non-Scala users may as well benefit from evaluating iScala collaborative platform for their collaborative needs.

Large global corporations with a centralized management philosophy looking for strong global corporate financial and HR modules, for a highly scalable cross-platform solution, and for much broader functionality beyond traditional ERP boundaries (e.g., more intricate CRM, PLM, or SCM functionality) from a single vendor may benefit from evaluating other products at this stage. For more on the pro et contra of unified corporate-wide enterprise solution deployment, see Standardizing on One ERP System in a Multi-division Enterprise.

Very detailed information about iScala 2.1 and Microsoft CRM products is contained in the ERP Evaluation Center at and in the CRM Evaluation Center at

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