Battery Power Shakes Up Made2Manage

Event Summary

What seemed as a promising move of a small innovative public but hardly globally visible enterprise software provider in its bid for securing the future amid extensively reported ongoing takeover and makeover feats in the market seems to have unexpectedly turned in quite an opposite direction. To refresh our memory, what seemed as an honorable exit strategy from the public eye happened on June 5, when Made2Manage Systems Inc., a provider of broad enterprise business systems for small and mid-market manufacturers, announced a definitive agreement to be acquired by an affiliate of Battery Ventures VI, L.P. Battery Ventures, one of the leading venture capital firms focused on technology investments, which manages nearly $2 billion in committed capital and has a 20-year history in successfully making investments in software companies. The acquisition of Made2Manage Systems by Battery Ventures was meant to allow the vendor to "better serve the business needs of its well-established customer base, as well as to continue new product development initiatives, optimize sales and marketing efforts, and evaluate complementary acquisition candidates to enhance its position in the space" (see Examples Of How Some Mid-Market Vendors Might Remain Within The Future Three (Dozen)?).

Under the terms of the agreement, an affiliate of Battery Ventures acquired Made2Manage Systems for cash of roughly $30 million, which was at significant premium over the market price at the time of the announcement (i.e., a 36% premium). The company announced it would continue to operate as Made2Manage Systems Inc., with employees and operations remaining headquartered in Indianapolis, IN and lead by its existing management team, who supported the acquisition of Made2Manage Systems as the most effective way to enhance its position as a notable player in the small and midsize enterprise (SME) software market. The privatization of the company would supposedly enable senior management to increase their focus on meeting customer needs and demands — including even more responsive customer service and support, and the ongoing development of the Made2Manage Enterprise Business System (M2M EBS) — without the close scrutiny of skeptical analysts and fastidious shareholders and without fear of any unwanted acquisition. Upon completion of the acquisition, Made2Manage Systems was to be a wholly owned subsidiary of Battery Ventures' affiliate, BV Holding Company, Inc.

However, the first shockwave happened mid August, when Made2Manage announced the departure of several members of the executive team. Jeff Tognoni replaced Dave Wortman as CEO effective immediately, while Tom Millay assumed the role of VP, marketing and sales. Wortman left Made2Manage Systems after 10 years of service. Under his leadership the company grew from $3.9 million to $30 million in revenue, expanded its user base from 244 to 1,700 customers, and developed a single, Microsoft DOS-based product into a fully integrated, Microsoft .NET-based extended enterprise business system. Moreover, Gary Rush, VP of sales; Scott Heil, VP of development; Joe Swern, VP of services and support; and Sam Amore, VP of marketing, also left Made2Manage Systems. Only Traci Dolan, CFO and VP of finance; and Ray Vallillo, VP of support and technical services, remain in their roles.

Tognoni then pledged to conduct, over the next 60 days, an aggressive evaluation of the company and institute organizational change strategies that would "enable Made2Manage Systems to better serve the business needs of its well-established customer base, continue its ongoing development of the Made2Manage Enterprise Business System, and optimize sales and marketing efforts for continued success in the marketplace". Arguably towards that end, in an indisputably aggressive move at the end of August (ironically, right before the Labor Day holiday) about one-third of Made2Manage remaining employees were let go following a wave of upper-management cuts a couple of weeks before. Company officials would not confirm the number of layoffs, but several sources speculated about 65 - 70 employees lost their jobs. At the time of the acquisition, Made2Manage had about 200 employees.

While declining to reveal the number of departures, the company's officials confirmed that a restructuring of the company had been made with three objectives in mind: 1) to align the organizational structure with current characteristics of the market; 2) to improve stability of operations, and 3) to increase the focus on adding value to customers. The company's customer support hotline and other customer service functions were not supposedly affected, nor were the development and maintenance of its current product line. The cuts were reportedly spurred by new management's review of the company's operations, not by any specific events in the software market.

Namely, the company officials point out that the restructuring was initiated in order to improve the long-term prospects and staying power of the business, which is extremely important to existing and prospective customers. In order to align the company with a more established, maturing e-business and enterprise applications market, Made2Manage Systems has made adjustments to achieve a profitable business strategy that thrives on operational excellence and the actual demands of both existing customers and prospects. The company has shifted its focus more toward its customers to provide them with a stable, long-term solution that will meet their enterprise business system needs.

Tognoni comes to Made2Manage Systems with more than 20 years of experience in the software industry. In October 2002, he joined the Battery Ventures investment team as an entrepreneur-in-residence, focusing on exploring new opportunities in the software application business. Prior to his tenure at Battery, Tognoni built and led some of the software industry's fastest-growing technology companies. The new CEO maintains that "the business strategy will remain rooted in the company's dedication to adding value for its customers".

Based on his 20 years of experience in the industry, Jeff Tognoni was asked to lead a Battery Ventures initiative focusing on acquiring established vendors in the software industry. Tognoni brought the concept to Battery and later joined as an entrepreneur in residence. Together Battery Ventures and Tognoni recruited Indianapolis-based Millay, to join Made2Manage Systems, based on his own industry experience. Meanwhile, Ray Vallillo has become VP of support and services, while Jerry Staddon has been promoted to director of product development. Both Vallillo and Staddon are long time employees and have a deep understanding of the vendor's customers and markets.

Further, over the next 30 days, the newly established senior management team plans to continue to evaluate the business and finalize a longer-term strategy for the company leveraging the input from the employee base, its customers and partners. Following the evaluation, Jeff Tognoni, CEO, Tom Millay, VP, sales and marketing, and Chris Lenzo, director of product management also plan to discuss the long-term vision and objectives with the analyst community. Since the evaluation is still in process, as to avoid misleading any audience, from its own employees to the press or analyst community, the company chose to share only what it knows for the fact. The strategy should be defined to the level of detail and care the vendor feels comfortable with by October.

This is a Part One of a two-part note.

Part Two will discuss the Challenges and make User Recommendations.

Market Impact

While layoffs and headcount cuts are nothing new and uncommon in the software market, and particularly after an acquisition and at the general & administrative (G&A) staff level, the extent of the former Made2Manage top management exodus seems quite severe, given the vendor had not been a real money-burning machine prior to the acquisition. The inevitable impression of many observers is that something must have not been planned well (in other words, it has either been overlooked or otherwise not mentioned for whatever reasons) beforehand. One possibility would be that the new owners, Battery Ventures, have simply realized that they "got burned" by a sizeable price tag for Made2Manage, and are now scrambling to recover their investment as quickly as possible. Alternatively, the acquisition rationale was merely for mining the vendor's install base, which, although not huge, is comfortably sizeable, in which case the new management's reasoning might likely be that former Made2Manage executives were not needed any more just to "milk" the install base for recurring service & maintenance revenue and/or for some add-on modules that have recently been delivered and not yet pushed into the client base.

Another possibility is that Battery Ventures still selected Made2Manage Systems as a long-term investment, focusing on enhancing the value added to both customers and prospects by improving the profitability, stability and operations of the company. Prior to the acquisition, Battery Ventures will have indeed conducted a detailed analysis of the company's operations, finances, and all services, support and product initiatives. In addition, Battery will have likely looked at several of the enterprise software companies before choosing to acquire Made2Manage Systems. However, following the acquisition, a major difference in philosophy will have emerged between the former and existing management teams on how to execute strategies for growing the company. As the key strategies to better align the company with the current characteristics of a maturing market could not be agreed upon, it is a no brainer which option will have had the "right of way".

While the ongoing consolidation frenzy is by no means the end of smaller vendors, it has certainly limited the number of survivors to only a selected few dozen, but there always seems to be hope for inventive smaller vendors, who will be focusing on a relatively small, tightly defined market with specific requirements that cannot be met with more generic large' products. Usually, these markets will be too small for the large vendors to want to compete and will also have unique requirements which cannot easily be built into the more generic monolithic products offered by the larger brethren. These boutique vendors will compete by having in-depth product functions and intimate knowledge of their market place or by offering services (in terms of content and/or location) not available from the Tier 1 vendors or independent service providers. Smaller manufacturing enterprises are also often more comfortable to deal with a vendor of a size and corporate culture similar to theirs.

Thus, having forever had a size' (dis)advantage (with mere ~$30 million in 2002 revenues and until recently with only over 200 employees and 1,700 customers primarily in North America), Made2Manage had long compensated by providing a suite of applications with an inherent ease of use and low total cost of ownership (TCO) that small enterprises in its target market desire. From its early days in 1986, the company has put all of its efforts solely into serving discrete manufacturing SMEs in need of enterprise application solutions that are intuitive and, consequently, easy to use and implement. Moreover, during last few years, Made2Manage has further evolved from a vendor of traditional DOS-based MRP (materials requirement planning) software to a provider of nearly one-stop-shop' enterprise business applications on contemporary Microsoft technologies. The company has, gradually, mostly by developing internally, and partly through acquisitions or partnerships, garnered a line of integrated collaborative e-business, CRM, business intelligence (BI), warehousing management system (WMS), shop floor data collection (SFDC) and advanced planning and scheduling (APS) components within its core ERP solution.

While the vendor had not apparently held out on the functionality aspect, the profits have long eluded it notwithstanding. Made2Manage' future seemed to be much more certain following the Battery's buyout. Namely, becoming privately-held should have allowed the inventive vendor to carry on with "strategic initiatives" that it could possibly not carry through if it remained publicly held. It was also better for the company to be outside the scrutiny of public markets, especially with new regulatory requirements, given the costs and risks of being public have escalated, particularly with the Sarbanes-Oxley rules.

Offering low-cost, products with cutting-edge technology to a narrowly defined market segment seemed to have allowed Made2Manage to attract a determined private investor. The generous financial arrangement in these times of venture capital scarcity seemed as the vote of confidence from all involved parties. Should it still continue to execute now with secured financial backing, Made2Manage should have a good opportunity within its target market, which is still without a dominant vendor. Although the larger, Tier 1 vendors have long been moving down-market, Made2Manage's target segment is still largely below their radar screen.

However, that will be a heck of a challenge going forward with only a handful of remaining direct sales people and maybe even fewer technical pre-sales employees, unless the new management espouses quickly another viable strategic blueprint. The direct competitors like Lilly Software, Intuitive Manufacturing Systems, Expandable Software, Epicor Software, Relevant Business Systems, Microsoft Business Solutions, Exact Software and SoftBrands, to name only some that are Microsoft-centric, will meanwhile get lots of fear, uncertainty & doubt (FUD) "mileage" from exploiting the fact that their revered foe has laid off a great part of its research & development (R&D) staff, with some indications that there might be reliance on outsourced development in the future. The marketing department has also been all but wiped out, which will likely mean a void of a clear and aggressive message at the time when it is really needed. One is to wonder whether such sweeping measures were really needed, particularly if the vendor still maintains its not terribly serious departure from its previous strategy. The vendor also maintains that the reduction in force does not imply its inability to serve its customers and the target market, and that in fact, the recent restructuring provides a more accurate reflection of the resources needed to do the job well. Still, the time will only tell how the "improved operational productivity" will be achieved and at what costs for remaining workforce and existing customers.

Made2Manage Strengths

It is very likely the new management will be vigorously analyzing markets in their quest to further pinpoint the sweet spot, and will focus and sell only into this much narrower area in the future. Indeed, in the lower-end of the discrete engineer-to-order (ETO), made-to-order (MTO), assembly-to-order (ATO) and make-to-stock (MTS) manufacturing realm, former Made2Manage had found a market with good opportunities, and it has developed most of the part-and-parcels it needs to defend its turf.

In fact the Made2Manage Enterprise Business System now offers a broadly integrated application solution for automating business processes from selling and product design, finance and human resources (HR), customer service and support, and scheduling and distribution. Basically, it contains most of the functionality that any company would expect even from a top-tier enterprise applications provider. It includes traditional ERP capabilities (i.e., financials, distribution & logistics, procurement, production & shop-floor control, sales, estimating and quoting, quality management and customer service), along with extended enterprise applications such as supply chain management (SCM) (i.e., real-time forecasting, demand planning, infinite and finite capacity planning and scheduling), CRM, and BI/analytics.

M2M SCM 5.01, released in March, offers new planning and scheduling capabilities based on the Theory of Constraints, giving customers the ability to synchronize demand with the capacity to meet that demand, while remaining cost-effective. Also in March, M2M Field Service 5.2, which included more than 40 customer-driven enhancements, was released, while via a partnership with Infoscan Software Systems, Made2Manage announced a new WMS solution in January.

In addition, Made2Manage offers business collaboration tools, all of which are running on the Microsoft .NET platform, including an enterprise portal (M2M VIP) and an integration layer (M2M Link) that enables automated data exchange between disparate systems via eXtensible Markup Language (XML) and Web services technology. Wireless and mobile technology and Web-based training and support have also become Made2Manage's landmark capabilities (see Made2Manage Affirms Its Technological Astuteness). Finally, the ongoing Microsoft .NET transition has resulted with M2M Business Intelligence and M2M Mobile Manager tools (in addition to M2M VIP and M2M Link) all running on the .NET platform, while the M2M ERP backbone remains close behind.

This concludes Part One of a two-part note.

Part Two will discuss the Challenges and make User Recommendations.