Epicor Software Corp.: Completing Painstaking "e"Volution Part 2: Evaluating Epicor

Part 2: Evaluating Epicor
P.J. Jakovljevic - April 2, 2001

Executive Summary 

Epicor Software has been striving to complete its evolution from a vendor of financial accounting software to a provider of holistic business performance solutions, including integrated front office, back office and e-business capabilities. This promotes it as one of the first vendors and possibly the only mid-market vendor with ability to natively embrace customer and supplier activities tied to a core transactional back-office system. The only remaining question is how far Epicor has got in executing its strategy.

Epicor generated $219.8 million in revenue in fiscal 2000, which ranks it amongst the twelve largest ERP vendors in the world. By the end of 1999, Epicor had more than 10,000 enterprise customers worldwide, including manufacturers, technology, financial services and hospitality organizations. Additionally, Epicor has more than 20,000 customers of its Windows- and DOS-based financial accounting solutions. Epicor's solutions are sold through a hybrid distribution channel, which comprises over 30 branch offices and business partner channels worldwide, and is designed to meet the needs of small-to-medium enterprises (SME).

Fiscal 2001 will prove to be very challenging for Epicor Software and we believe the next 18 months will be the company's make-or-break period.

About This Note

This is a two part note; the first part focuses on Epicor's history, how it fits in its market, recent developments of interest, and the direction the company is headed.

This part contains specific analyses of Epicor's strengths and challenges along with bottom line predictions and recommendations for the company and users.

Corporate and Product Profiles appear in both parts.

ANALYSIS 

Vendor Strengths

• Epicor has become a prominent and possibly the largest vendor with a sole focus on the mid-market from the early days. The company has long demonstrated a deep understanding of the dynamics of the ERP mid-market, which requires inexpensive products and good service. These requirements have traditionally been entry barriers for Tier 1 vendors. Furthermore, Epicor's hybrid distribution channel (direct sales to larger mid-sized enterprises and through VARs for smaller organizations) may provide additional flexibility in addressing the unique needs of the mid-market sub-segments. On the ASP/hosting side, although somewhat belated with the initiative, Epicor by providing most elements of an ASP business along with a readiness to accommodate some degree of customization of its outsourced applications, may reduce customers' initial reticence to venture into the uncertain land of ASP.
  
  
• Epicor continues to enhance its line of integrated e-business/portals, customer relationship management (CRM), advanced planning and scheduling (APS), and business intelligence components with its core ERP solutions. This promotes it as one of the first vendors overall and possibly the only mid-market vendor with the ability to natively embrace customer and supplier activities tied to a core transactional back-office system.
  
  Having evolved from the combined Platinum Software, with a long history in the sales force automation (SFA) market, and DataWorks with its long ERP expertise, Epicor is not an overnight, 'me too', ERP turned CRM vendor. Its CRM offering, eFrontOffice powered by Clientele, enables companies to gather, organize, oversee and share customer-related information. By providing over 60 detailed sales & marketing process reports out of the box, the product helps clients pinpoint the issues like sales performance or any system sluggishness. The product is also componentized and can be used as a whole solution or piecemeal, which may be attractive to technology shy smaller organizations.
  
  
• In addition to the above-mentioned product enhancements, Epicor has long developed strong back-office and discrete make-to-order manufacturing functionality, with recent initiatives to deliver sharp-focused vertical solutions. Particularly, its native APS, data collection, flow manufacturing, product configurator and the field service features of its back-office suites are recognized as possibly the strongest in its target niche.
  
  
• The company has achieved worldwide geographical coverage. Its product has traditionally exhibited strong multi-national capabilities in terms of languages and currencies support. Its large customer base, many of which are still on outdated DOS-based legacy systems, and strong widespread global presence should provide Epicor a sustained service and support revenue, and possibly a new license revenue stream in the future.
  
  
• Epicor has been very competitive in speed of implementation, total cost of ownership (TCO), and its global service and support capabilities. As a display of a high level of self-confidence in its fast and successful implementations, the company has raised the bar for cost competition by offering a genuine Up-Front Guarantee program, which pledges a fixed implementation timeframe and that implementation services costs will not exceed a certain percentage of the list price of the software.
  
  Epicor has also been proactive in service & support cost reduction by enabling users to access consultants via videoconferencing for significantly less cost than that of an on-site visit. Epicor's array of professional services enables users to gain better understanding of what Epicor's products can do for them.

Vendor Challenges 

• While acquisitions have made Epicor one of the largest mid-market ERP vendors, they have also burdened it with a long list of diverse products running on diverse platforms to be incorporated into a clear product strategy, to be stabilized, or to be discontinued. Unlike most vendors in the ERP space, Epicor maintains multiple manufacturing and non-manufacturing products, targeted at a variety of vertical markets. Continuation of inevitably unfocused, multi-product and multi-technology strategy in the markets with diverse dynamics could multiply and overstretch sales, R&D, and service & support resources jeopardizing the chances its products could stand a chance of long-term success in their respective niches.
  
  With a number of disparate applications and with each client having different needs, the delivery of a "plain vanilla" solution is virtually impossible. Connectivity from disparate back end systems to front office, e-business and external marketplaces becomes a monumental task. Therefore, Epicor's 'one-stop-shop' mantra seems dubious at this stage. The problem also lies in confusion over its product set positioning, very often even within its own sales force. Epicor still sells its point solutions under their respective banners, which contradicts its 'e from Epicor' strategy as an integrated player.
  
  
• The company has eroded its financial position for the last 18 months due to the combined effects of decreased revenue, merger and restructuring costs and ongoing R&D work in progress (see Figures 1 & 2 - Epicor Software Corp. - Annual & Quarterly Results Chart). Epicor's available assets and stock equity are significantly diminished compared to the levels at end of fiscal 1998, while its market capitalization of $65 million is notably less than its annual revenue. The blending of different corporate cultures has compounded the difficulties. Any hiccups and delays in its product development execution, possibly bundled with continued poor sales execution, may put further significant strain on the company's performance.
  

Figure 1.

Figure 2.

• Epicor has recently adopted Microsoft's proprietary technology and integration standards (BizTalk) as its product technology standard, which may be an impediment for future scalability, interconnectivity with other vendors' components and/or existing UNIX-based users migration. The company may therefore also been overlooked in selections for high-end customers. Much like during the days of EDI, if a company was interested in conducting business with, a bank or manufacturing company, for example, it was required to endorse EDI forms to transmit data. This meant configuring their data to an agreed standard in order to transact business. Digital Market Places and e-business transactions follow a similar path.
  
  Epicor faces a challenge of overcoming the notion of suppliers adapting to multiple standards in order to support multiple customers. Moreover, different marketplaces may (and do) describe their transactions differently. Additionally, Digital Market Places cover different verticals and industries (Chemdex vs. Ariba vs. GM). Therefore, Epicor's claim to connect to "any digital marketplace" remains largely open-ended and dubious
  
  
• Epicor seems to have undertaken too much at once and, thus, it faces the challenge of delivering its colossal undertaking (integration of its only recently Web-enabled front-office suite to all its back-office suites and delivery of vertical solutions) as planned.
  
  Any product integration requires a painstaking effort, and part of it is still in various stages of progress throughout the Epicor product suite, with major plans to deliver e-Commerce direct procurement and eCommerce Link for XML and EDI transactions soon. Executing these initiatives with its ever-thinning resources is a challenge. The blessing in disguise, however, is that its mid-market customers are traditionally not aggressive early adopters of new technologies. To that end, the strategy of some of its competitors like Great Plains and NavisionDamgaard, which have decided to deliver their capabilities in manageable chunks, seems to have paid off even though their offerings are narrower than Epicor's.
  
  
• Finally, possibly the greatest challenge will be to defend the territory against Great Plains' aspired onslaught on the global small-to-mid-market boosted by its recent acquisition by Microsoft (for more information, see Microsoft And Great Plains - A Friendship That Turned Into A Marriage) but also by Tier 1 vendors that are looking for additional revenue and market share growth (for more information, see SAP Claims Big Gains In The Low-End Battleground and PeopleSoft Joins The Hunt For SMEs). Epicor's reliance on Microsoft's technology makes it vulnerable given the fact that Microsoft through its Great Plains division is also becoming Epicor's archrival.
  
  
• Further, Epicor's requirement of exclusivity for its resellers has caused its indirect channel to dwindle and has reduced its ability to attract new resellers. While exclusivity might create deeper commitment and expertise in its reseller channel in the long term, we believe that the timing of the initiative was poor. As a result, new license revenues have been constantly declining, in contrast to many direct competitors, which have been maintaining immaculate relationships with their respective channels.
  

BOTTOM LINE 

Vendor Predictions

• Fiscal 2001 will prove to be very challenging for Epicor Software Corporation and we believe the next 18 months will be the company's make-or-break period. We predict flat revenues as the best scenario, with a return to profitability only in the second half of fiscal 2001 (40% probability).
  
  
• Epicor will deliver its eCommerce Link for XML and EDI transactions, with translators for many leading XML standards by the end of 2001 (60% probability). We also believe that, within the next 12 months, the company will have to announce an alliance with a vendor whose products would provide it B2B e-commerce for vertical marketplaces capabilities (60% probability). The potential alliance candidates are Peregrine, Elcom, Remedy, or Viador.
  
  
• Epicor's service & support revenue will contribute more than 70% of its total revenue within the next four fiscal years (60% probability), based on the Company's readiness to integrate its products with other 3rd party products and Internet exchanges. Within the same period of time, we believe the 'e from Epicor' product will contribute 70% of its license revenue (60% probability) assuming that it will approach marketing its non-core products (e.g., Impresa) only opportunistically. We also believe that within the next three years more than 80% of Epicor CRM license revenue will come from its existing customers.
  
  
• Despite favorably low market value, we believe that Epicor is an unlikely candidate for acquisition by a competitor within the next 2 years due to its awkwardly broad functional scope and recent restructuring activities (30% probability). We also believe that Epicor will remain among the Top 12 ERP vendors within the next 2 years (60% probability) assuming successful mining of its large customer base. Within the next 3 years, more than 25% of Epicor's revenues will come from outside the North American market (60% probability).

Vendor Recommendations 

• Epicor should further entrench itself within the global ERP mid-market in the following ways:
  
  
  • Expand business in its existing customer base, by upgrading older versions of software and by offering new extended ERP components.
    
    
  • Deliver more focused and pre-configured vertical solutions for industries, and offer application outsourcing to make its products attractive to resource-constrained enterprises.
    
    
• Epicor must remain committed to new product introductions and/or enhancements like Web and wireless enablement and take more decisive steps regarding the B2B e-commerce vertical applications delivery, preferably through product alliances.
  
  
• Conduct ongoing cost and organization scrutiny and identify opportunities for further improvements. In fiscal 1999, the research & development personnel count, as a percentage of a total number of employees, was one of the lowest in the industry, 17%, compared to the industry average of 25%. This may not be sufficient for its ambitious product development endeavors. Moreover, Sales & Marketing and General & Administrative costs as a percentage of net sales in 1999 were at exorbitant 56%, whereas the industry average was 38%.
  
  
• We encourage the company to conduct a serious 'soul searching' and justification of its target markets and respective product lines. A speedy return to profitability would be of the utmost importance. Epicor plans to market its bundle of integrated components under the brand name 'e from Epicor' (having Vantage and Platinum ERA as its manufacturing and non-manufacturing core ERP products respectively) and has created separate divisions for its Avante, Platinum for Windows, Vista and Impresa product lines. Giving each division profit and loss responsibility should help Epicor weather the impending stormy period.

User Recommendations  

• We generally recommend including Epicor in a long list of an enterprise application selection for mid-market companies (with $10M-$500M in revenue) within the following industries: dot-coms, hospitality & food service, financial services, software & computer services, metal fabrication, capital equipment manufacturing, and electronics.
  
  
• Users from industries not mentioned above may benefit from evaluating some stand-alone Epicor product components (e.g., CRM, APS, e-commerce, and business intelligence application suite) on an opportunity-by-opportunity basis. This as well as obtaining Epicor's implementation guarantee could be leveraged against other vendors in the selection. Pay due attention to the guarantee's "fine print" since it can very likely attempt to exclude any modifications and/or business process reengineering work. Perhaps Epicor can define areas of expertise or identify an integration partner responsible for implementation.
  
  
• Existing users of Epicor Windows- and DOS-based financial accounting solutions as well as back-office products that face stabilization and/or discontinuation may benefit from querying the company's future product migration path, service & support, and/or scalability strategy.
  
  
• As for the newly added and/or anticipated functionality through product alliances, users are advised to ask for firm assurances on the availability and future upgrades timeframes, and a more detailed scope of combined product functionality. Any organization evaluating Epicor should consider existing functionality only, and, in the case of final selection, should inquire and negotiate incorporation of new applications components now at negotiated license fees, given its recent and forthcoming new product introductions. The product integration and/or Web-enablement should be validated during the technical review sessions as a part of a thorough selection process. Moderate caution should be exercised now and a watchful eye should be kept on the company's future financial performance.
  
  
• Customers interested in Epicor's assistance in connecting them to digital market places (Internet exchanges) should have answers to the following questions: Which specific market places does (or will) Epicor connect with? What methodology does (or will) the company prescribe to? Will Epicor map customers' schemas to those of the marketplace? With suppliers talking to manufacturers, customers and sales people interacting via the network and a back end solution "keeping up" with all of it, what "lowest common denominator" network configuration is recommended by Epicor?

Conclusion of Part 2 

This concludes a two part note on Epicor.

Part 1 focused on Epicor's history, how it fits in its market, recent developments of interest and the direction the company is headed. Part 2 contains specific analyses of Epicor's strengths and challenges along with bottom line predictions and recommendations for the company and users.