Catalyst International Ties Fate to SAP

Vendor Genesis

Catalyst International was founded in 1979 in Milwaukee, Wisconsin, as a custom development firm specializing in building warehouse management systems. In the past two decades, the company has deviated little from its original charter. Catalyst fits comfortably into its niche as a WMS (Warehouse Management System) provider, focusing on high volume, complex industries in the top enterprise tier (companies over $1 billion in revenue). All of its revenues derive from sales of its core WMS, customization work (modifications), support, and hardware.

Catalyst has enjoyed positive compound annual revenue growth of 20% since the executive management changes in early 1997, placing it slightly ahead of the industry average of 17%. The second and third quarters of calendar 1999 produced disappointing results, but Catalyst regained some footing in the last quarter. Overall, its capital position is good, although license revenues fell to 20% for 1999, which is below the industry average mix of 30% licenses, 60% services, and 10% hardware. Approximately 15% of its revenues were derived from hardware in 1999.

Catalyst WMS supports a wide range of interfaces to third-party peripherals, such as radio frequency-based scanning devices, bar coding devices, and material handling equipment (such as conveyors, sorters, and carousels) and resells these to some of its customers. Its WMS product offers extremely deep functionality in warehouse management, inventory management, yard management, shipping/receiving, order fulfillment, and warehouse optimization.

Catalyst products interface with several third-party software applications, such as manufacturing resources planning systems; enterprise resource planning systems (ERP), such as SAP, Baan, and Oracle; and supply chain planning systems, such as Manugistics and i2. Catalyst WMS runs on UNIX servers from Sun, Hewlett-Packard, IBM; with Oracle RDBMS; and communicates with a Microsoft Windows NT operating system. Catalyst relies predominantly on direct sales in North America and a network of VARs in South America and EMEA regions.

Vendor Strategy and Trajectory

From a macro perspective, Catalyst falls into the supply chain execution (SCE) category, providing applications that manage all aspects of inventory movement within a warehouse and across supplier and customer boundaries. Within SCE, Catalyst's management intends to remain focused squarely on WMS to the exclusion of complementary functionality such as TMS (Transportation Management Systems) and MES (Manufacturing Execution Systems). In this narrow latitude, it has had great success. Though Catalyst falls behind larger supply chain execution vendors like EXE Technologies, IMI, and Manhattan Associates in terms of total revenues, it ranks among the top three domestic WMS vendors.

Limiting itself to WMS, Catalyst has explored growth opportunities afforded by porting its WMS to other platforms, though without success. In the late 90s, the company made two attempts to port its Unix-based software to Windows NT, but eventually conceded that technologies acquired for the port lacked feasibility.

Catalyst has also tried selling its scalable WMS product to mid market wholesalers and distributors, however, the 1998 launch of CatPack, a scaled down version of its WMS for the mid market failed to generate significant new sales. CatPack will be phased out over the next few quarters, but Catalyst is still determined to penetrate small to mid enterprises and will market Catalyst WMS to companies of all sizes.

Probably the most significant event since Catalyst's founding is its new alliance with ERP giant SAP. Signed in September 1999, the deal names Catalyst WMS as the preferred provider of warehouse management systems for SAP's LES (Logistics Execution System). SAP LES provides some core WMS functionality but has been criticized for its inadequate depth of offering for certain high volume industries. Catalyst WMS will have preferential status to fill this void and provide support for WMS installations in SAP's customer base. The alliance offers Catalyst the potential for tremendous growth over the next four years provided it receives due support from SAP sales representatives who will need to screen leads so as not to overburden Catalyst's small direct sales organization. As part of the agreement, Catalyst will discontinue work on an NT platform and work with SAP to develop a standard interface with mySAP.com.

Vendor Strengths

Deep warehouse management functionality: Catalyst WMS has great depth of functionality for warehouse management and ranks above other offerings from other vendors that have broader supply chain execution suites. Catalyst's experience in making modifications can be brought to bear for certain customers with specialized requirements, though Catalyst intends to remain a packaged application vendor.

SAP alliance: As part of the deal, SAP salespeople will receive the same commission from Catalyst products as they do from SAP LES, potentially bringing Catalyst new license revenues. SAP need not divert support resources to Catalyst WMS implementations as Catalyst has sole rights to support WMS modifications that it performs, bringing it additional services revenue.

Big name clients: Catalyst's customer list boasts well-known companies in consumer goods, retail, and parts suppliers including Dollar General, General Motors, Panasonic, Nestle, Reebok, and Sony Music. Success at one customer site often leads to further licenses for additional locations.

Vendor Challenges

Uncertain Internet strategy: The newly released version 8.0 of Catalyst WMS provides a web browser interface that allows XML extensions. Beyond this, Catalyst has not worked out a clear strategy for playing a role in the business-to-business Internet commerce market, offering hosted applications, or producing a web front-end for its WMS.

Sole dependence on WMS for revenues: Although Catalyst's dedication to warehouse management has yielded a product with great depth of functionality; it has limited its growth to a single market. Adding industry verticals will allow Catalyst to achieve some expansion, but the lack of new functional areas represents a significant obstacle to long-term growth.

Maintaining its vendor partnerships in the wake of SAP alliance: Though its new contract with the German giant does not preclude existing partnerships with other ERP vendors, the time and effort required to keep up with SAP-generated sales leads and implementations will likely interfere with Catalyst's ability to maintain its relationships.

Undersized sales force: Catalyst currently has from 15-20 direct sales representatives. In theory, the SAP alliance can supplement Catalyst sales with SAP representatives. Unless SAP salespeople are truly committed to the alliance, Catalyst may be overwhelmed by unqualified leads.

Vendor Predictions

Acquisition by SAP is unlikely in the short term (12 months) given Catalyst's recent losses, although SAP has tremendous capital at its disposal (70% probability). More probable is that the proposed integration will evolve into an embedded Catalyst WMS product in SAP LES sometime in the next 2-3 years (40% probability).

The SAP alliance will yield limited total revenue growth (15-20%) for Catalyst over the next twelve months, due primarily to resource constraints among its sales and services organizations (70% probability).

Catalyst will expand its WMS to at least one new industry vertical, possibly electronics and high tech, within the next 12 months (60% probability).

Vendor Recommendations

Catalyst should increase its sales and services staff by 30-40% over the next twelve months to stay ahead of demand anticipated from SAP's customer base. Though unprofitable in the short term, some "bench time" may be necessary to ensure new hires receive adequate training prior to field deployment.

To prepare itself for a post-SAP existence, Catalyst should consider developing or acquiring functionality peripheral to its WMS, such as transportation management, order management, or labor management.

Create brand awareness within the mid market: True market acceptance of its position as a mid market software vendor will be achieved only by an aggressive marketing campaign that places strong candidates into the hands of its sales force. Catalyst's close association with SAP may work against this.

User Recommendations

Prospective customers in high volume industries with complicated warehousing requirements should consider Catalyst WMS a promising candidate. Also, users that have special requirements or those that wish to duplicate their existing processes should place Catalyst WMS on their shortlists for its proven customization capability.

Current SAP users that have found LES warehousing capability to be insufficient will want to give Catalyst preferential consideration above other packages due to the partnership that has now had six months to mature. These companies should bear in mind that an EAI tool such as Mercator will need to be purchased to connect WMS to other LES components until the proposed direct interface between WMS and LES is released in late 2000.

Users that have enterprise systems other than SAP may want to consider Catalyst, especially those with Oracle, Manugistics, and Syntra, but should obtain guarantees that interfaces will continue to be supported through the SAP alliance.