Market Impact Continued
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.
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
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.
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
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.
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
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.
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,
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.
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.
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.
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.
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.
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
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.
concludes part two of a three-part note.
one detailed the events and began a discussion of the market impact.
two continued the market impact.