Scala and Microsoft Become (Not So) Strange CRM Bedfellows Part Two: Market Impact Continued

Market Impact Continued

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.

Indeed, Microsoft's foray into the CRM arena has not been a bed of roses, despite its indisputably large marketing muscle and R&D investment, its strong channel, traditionally attractive pricing policies, and the aura and experience within the market segment. For one, the experience of penetrating the desktop market can by no means be replicated in the case of the CRM market, given the different nature and complexity of the product groups (i.e., mere technology versus business process enhancement products). While small enterprises desire products and services designed, priced, and delivered from vendors that understand their needs and are focused in that regard, Microsoft would definitely not be the only one that fits the picture. Indeed, the functional, process, and integration requirements of a small-to-medium enterprise (SME) can be just as sophisticated as those of a large enterprise, particularly if it is a multinational entity.

Further, the Microsoft Business Solutions (MBS) division has been swamped with soul-searching issues of handling multiple disparate product lines, some of which already have native CRM capabilities that overlap those of Microsoft CRM. While the Microsoft CRM product's delay was not a train smash matter, and from a product perspective has changed almost nothing for buyers, it does reinforce the concern that the market has voiced about Microsoft's fledgling experience in the enterprise applications market. The question remains how efficiently MBS will continue to provide CRM functionality as part of the single-database integrated Navision, Great Plains, Solomon, and Axapta products, and whether the envisioned and still maintained integrated products' delivery dates at the end of 2003 will also be delayed like in the case of Microsoft CRM's delay.

Further, MBS is not yet exactly a uniformly global company, as its product offerings and channel strategy differ notably within different markets. Not many customers can still integrate or use interchangeably MBS' Great Plains, Solomon, Axapta, and Navision product lines. Thus, while MBS gets distracted by its efforts to provide a clear and concise product roadmap for partners and prospects, as to neutralize significant overlaps in the applications and a hefty cost to maintain and enhance the products, other vendors will have been using that time to perfect their functional differentiations.

Many competitors have already come up with their products' Outlook integration (which is currently Microsoft CRM's strong selling feature) in addition to their compatibility with other e-mail clients and server platforms, and now have time to further establish their expertise in some vertical industries. If nothing else, Microsoft CRM remains both a threat and an opportunity for the most nimble mid-market CRM vendors. Microsoft's entry with CRM evangelism through an array of seminars nationwide has bolstered the market's awareness of the need for CRM applications. Given Microsoft's belated entry and still immature and unproven features without industry-specific versions and limited support for mobile (offline) users, mid-market CRM vendors such as Onyx, Pivotal, Kana, and E.piphany as well as many mid-market Microsoft technology-centric ERP vendors with native CRM capabilities (e.g., Epicor, Sage/Best Software, SYSPRO, ACCPAC, Exact Software, etc) might have acquired another life extension. They now have time to regroup and they have frenetically been redefining their value proposition.

How Scala Fits

Having said all the above, Microsoft might currently need all the help it can muster, particularly from renowned independent software vendors (ISVs). While it boasts over 100 ISV partners that will build advanced applications and solutions atop the Microsoft CRM platform, many of these are fledgling startups, with maybe the most honorable exceptions of Epicor and Scala. Further, Microsoft CRM is not yet available in Europe or almost anywhere else outside North America. Thus, Scala, with its 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, and which delivers software and services that are available in over thirty languages in more than 140 countries, perfectly fits the description of an ideal Microsoft CRM promoter.

To refresh our memory, although the market turbulence during last few years has also taken its toll in the company's restructuring and cost-containment exercise, still, with estimated revenue of ~$74 million in 2002, a 4 percent growth over 2001, Scala remains a prominent mid-market enterprise applications provider. Another factor that may bode well for its future 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 over 600 employees based in offices in over 30 countries and with local distributors increasingly handling the rest. As for the overall picture, the estimate is that more than two thirds of revenue comes from existing customers, with new business accounting for the rest.

The above facts have promoted Scala to a serious mid-market challenger, especially in emerging markets like Central and Eastern Europe, the Middle East, and China (possibly the local market leader therein), given that Scala reported both growth and stable financial performance in 2001 and 2002 while many of its peers have seen a corresponding decline. In addition, the company continues to offer its products and services through the reseller channel/VARs, which has expanded lately, with 54 percent license revenue growth in 2002 and with a 34 percent growth in number of partners now amounting to over 140 partners worldwide.

Although its license revenue declined by 7 percent in 2002, the maintenance revenue increased by 23 percent, given that more than 90 percent of existing customers have been gladly paying for maintenance. This was, in part, due to an aggressive development program, which saw the release of iScala 2.1 mid-2002 (see Scala Shows Far More Than A Bit Of A Backbone) and a new version of iScala 2.2 being slated for the end of the third quarter 2003. From 2001 to the end of 2002, the company doubled its R&D headcount to over 200, plus 50 contractors, and geared up its in-house training center, the Scala University in Budapest, to train and certify its growing ranks of 140 resellers that accounted for 23 percent of its business in 2002. Contrary to many of its rivals, Scala has achieved this growth throughout eight consecutive profitable quarters through 2002. Further, Scala is one of only a few ERP vendors to publicly display its customer satisfaction records, which it claims have seen an average increase of 4.7 percent during 2002.

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, Epicor Software, 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, MBS Great Plains, Sage, ACCPAC, Coda, SunSystems, Agresso, etc.) or in manufacturing and distribution (e.g., Lilly Software, SoftBrands, or QAD).

Scala Product Strategy

Two and a half years ago, the company began redesigning its ERP software and building a new platform specifically for online collaboration. It has meanwhile packaged together the functionality required in one standard software system, which means a business can begin collaborating with its subsidiaries, customers, partners, and suppliers. To that end, iScala 2.1 is the successor product to Scala 5.1, since it contains 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 sale in December 2002, although existing customers will continue to receive support well into the future.

iScala 2.1 comes in two flavors to satisfy needs of both local mid-size businesses and of smaller global corporations (and their subsidiaries, divisions, and suppliers). The iScala Business Server is an entry-level producta 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, rather it targets two somewhat distinct mid-market segments: 1) mid-size units of large corporations, and 2) independent mid-sized enterprises. There are slight variations in the needs of the 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 or sales orders. Since its release, more than 200 customers have reportedly migrated to iScala 2.1. The next iScala 2.2 release is hailed as the biggest release of new functionality for more than ten years, and will have several modular or individual enhancements of interest to manufacturers, including asset management, contract management including support for leasing and rental, advanced service management, iScala Query Designer, several packaged connectivity solutions, graphical resource planning, iScala Business Intelligence Server, to name only some.

Further, Scala has long featured possibly the unique multi-language capabilities of its collaborative ERP software. Scala maintains a single set of application code for all its languagesmore than thirtycompared 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 users worldwide.

To ensure that every new product is multilingual from the start of its lifecycle, 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 in iScala 2.1, allowing the combination of languages with different characters in a single installation. True multi-language 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 an inexpensive product, fast and simple implementations, and reliable service and support. The company has struck the value proposition of balancing business process standardization with the flexibility and autonomy of remote subsidiaries. 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 1 vendors' capabilities. Many of Scala's peer vendors require their customers to operate in a single language at each location because their applications are based on the technology unable hold more than one language in the same system.

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 the foreseeable future. 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 and to manufacture in lower cost geographic locations, the vendor has made attempts to ensure that the iScala capabilities at least match the demands of the medium-to-small manufacturing subsidiary, whether it be for a "to stock" or "to order" manufacturing environment.

Therefore, iScala 2.1 presents an opportunity for third party specialists to create add-on modules providing functionality geared to a targeted market and meet the specific needs of a group of users. Look for Scala to develop ever-deeper and more vertically-oriented functionality via its partner network and based on the latest Microsoft .NET technology framework. Scala should indeed try to more aggressively animate its value added resellers (VARs) to deliver specific functionality to other verticals in the service and manufacturing domains.

With the support for XML and Microsoft BizTalk Server, Scala offers e-commerce applications tightly integrated to the Scala back-office, as well as the interconnectivity to third-party products. The Scala Connectivity solutions architecture (that includes iScala Data Exchange Server and the iScala Manager) provides a way of directly remotely accessing the functionality within the ERP system, and in such a way that does not compromise its business rules and security. Scala has already released support (i.e., exposed through XML web services) for over sixty of the most common business processes and documents (including orders, delivery documents, invoices, etc.) and is regularly releasing more.

Still, Scala would be remiss to build or acquire extended-ERP functionality, especially CRM (currently limited to service management and customer information management, without any SFA capability), supply chain planning and execution (SCP&E) and product life cycle management (PLM), functional enhancements to round out a complete, collaborative, extended-ERP suite, readily available by many of its peers let alone the likes of SAP, Baan, Oracle, Intentia, and IFS. Not to mention the need to bolster strategic supply chain planning and sourcing, manufacturing operational capabilities, and shop-floor execution, well beyond mere order management. Some of its 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 cannot be the only pillar of a holistic supply chain management (SCM) strategy in the long run. Although connectivity solutions, which are already deployed in over 100 sites in over 30 countries, provide interconnectivity to any best-of-breed products (e.g., CRM, SCM, e-commerce site integration, XML-EDI solutions, warehouse management system (WMS), bar codes for distribution, SAP, or PDA solutions) will likely not suffice the target market's one-stop-shop requirements.

Given Scala's install base's loyalty, one should expect these customers to embrace new functionality beyond core ERP. Given Scala's recent faltering within new license revenue, the urgent need for a new product introduction seemed more pressing than ever. Thus, all going well, Scala should fairly quickly add basic CRM features to its ERP offering, which should strengthen its competitive position in the segment. The vendor will continue to target midsize enterprises that require an integrated, enterprise-wide offering at a lower price than those of Oracle, PeopleSoft/J.D. Edwards and SAP. While Tier 1 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 wants to coexist 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 1 product to suit a changing market, even if it could be deployed in a location where often the poor telecommunications infrastructure capabilities would prevent a web-deployed system from being used.

This concludes part two of a three-part note.

Part one detailed the events and began a discussion of the market impact.

Part two continued the market impact.

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