Epicor Software Corp.: How Far From Being 'One-Stop' Shop?

Vendor Summary

Epicor Software Corporation, formerly Platinum Software, is possibly the largest provider of integrated enterprise and e-business applications exclusively for mid-market companies as well as divisions and subsidiaries of larger global corporations.

Founded in 1984 with headquarters in Irvine, CA, USA, Epicor generated $258.1 million in revenue in fiscal 1999, which ranks it among the ten largest ERP vendors in the world. Approximately 64% of the company's sales come from consulting, maintenance, and other support services, while approximately 28% of its total revenue is derived outside of the US market. Its flagship product, 'e' for Epicor (formerly called Platinum ERA) software suite, automates business processes for sales, customer service, e-commerce, accounting, distribution, and light manufacturing. Epicor also offers a number of different back-office software applications (e.g., Vantage, Vista, Avante, etc.) geared for small and mid-sized manufacturers, and customer relationship management (CRM) software. The company more than doubled its size with its 1998 acquisition of DataWorks, a rival US ERP vendor.

Gerald Blackie, a former CEO of bankrupt software maker Heritage Computing, and two former associates founded platinum Holdings in 1984. In 1985, they introduced the Platinum line of financial accounting software. Platinum expanded by creating partnerships with Arthur Andersen in 1987 and IBM in 1989.

In 1992, the company went public and changed its name to Platinum Software. In 1994, Platinum revealed that it had misstated its earnings by reporting some sales before they had been closed. The company paid $17 million to settle a class-action lawsuit and reorganized itself by recruiting George Klaus as CEO in 1996. With him at the helm, the company expanded into ERP applications through a number of acquisitions. In 1997, it bought CRM software developer Clientele Software and manufacturing and distribution software provider FocusSoft. These moves helped Platinum to a profitable fiscal 1998, its first in six years.

In late 1998, it bought larger rival DataWorks Corporation (a mid-range manufacturing ERP supplier which with a history of acquisitions of its own, had a diverse set of products for different markets and/or company sizes), cut 15% of its workforce, and changed its fiscal year to December.

In 1999, the company settled a trademark lawsuit, which was filed in 1997, with Platinum Technology (now part of Computer Associates), and changed its name to Epicor Software.

Vendor Trajectory and Strategy

Epicor 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. The company has three primary areas of focus for its software products:

1. Front Office applications, which include Clientele and Platinum ERA (Enterprise Ready Applications) sales force automation (SFA) and customer service & support applications for small and medium-sized companies
   
   
2. General Service applications, which include Platinum ERA Financials, Platinum ERA Distribution, and Platinum for Windows, designed to satisfy the requirements of distributors and service organizations
   
   
3. Manufacturing applications, which include Platinum ERA Manufacturing - an ERP suite designed for assemble-to-order (ATO) and light manufacturers, Avante - an ERP solution for mid-sized manufacturers of discrete and highly engineered products, Vantage - an integrated solution for engineer-to-order (ETO) and job shop manufacturers, Vista - a Windows-based desktop business management system specifically designed for the needs of small job shops and make-to-order (MTO) departments of larger enterprises, and Impresa - an ERP system specifically designed to manage the unique business requirements of Maintenance, Repair and Overhaul (MRO) organizations

In February 2000, Epicor announced 'e by Epicor', its next generation flagship e-business product suite for the mid-market. It is envisaged as a comprehensive line-up of solutions tailored to empower mid-market organizations seeking to take advantage of the Internet. 'e by Epicor' delivers financials, budgeting, distribution, manufacturing, sales & marketing, and customer service solutions into an integrated suite of following six applications: Epicor eCommerce, Epicor eFrontOffice, Epicor eBackOffice, Epicor ePortals, Epicor eIntelligence, and Epicor eIndustry. It currently incorporates Epicor's Platinum ERA (for non-manufacturing applications), Vantage (for manufacturing customers) and Clientele suites.

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). Platinum ERA and Clientele are sold through a combination of direct sales representatives and exclusive value added resellers (VARs). Avante, Vantage and Impresa are sold through direct sales representatives and supplemented by select VARs. Platinum for Windows is sold exclusively through authorized VARs. Vista is sold through an internal telesales organization.

We expect Epicor to continue its focus on the ERP mid-market (companies with $10 million - $500 million in revenues), by rounding-up the functionality of its 'e by Epicor' solution. The product will be enhanced also through 3rd-party alliances in the area of Human Resources/Payroll, Warehouse Management Systems (WMS), budgeting & reporting, and e-Procurement. We also expect the company to pursue alliances for business-to-business (B2B) e-commerce and supply chain collaboration within its industries of interest. Additionally, Epicor will invest more aggressively in sales and marketing, international business expansion through distributors, and will seek to become more vertically oriented, concentrating on the number of industries (See "Industry Focus" in the sidebar company information).

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 ERP mid-market dynamics and requirements of inexpensive products and good service, which have traditionally been entry barriers for Tier 1 vendors. Furthermore, its hybrid distribution channel (direct sales to larger mid-sized enterprises and through VARs for smaller organizations) may provide additional flexibility in addressing unique needs of the mid-market sub-segments.
  
  
• Epicor has gradually introduced a 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 ability to natively embrace customer and supplier activities tied to a core transactional back-office system.
  
  
• In addition to the above-mentioned product enhancements, Epicor has long developed strong back-office and discrete ETO 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.

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 to be incorporated into a clear product strategy, to be stabilized, or to be discontinued. Continuation of 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 each client having different needs the delivery of a "plain vanilla" solution is almost 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 12 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 cash resources of less than $7 million are significantly diminished compared to $22 million at the end of the fiscal 1998, while its market capitalization of $176 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, e.g., a bank or manufacturing company, 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.
  
  
• Epicor faces the challenge of delivering its ambitious undertaking (integration of its front-office suite to all its back-office suites and delivery of vertical solutions) as planned. Any product integration requires a painstaking effort, and most 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 by the end of 2000. Executing these initiatives with its ever-thinning resources will be a notable challenge.

Figure 3.

BOTTOM LINE

Vendor Predictions

• Fiscal 2000 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. We predict flat revenues as the best scenario, with a return to profitability in 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 2000 (60% probability). We also believe that, within the next 6 months, the company will have to announce 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 65% of its total revenue within the next 4 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.
  
  
• 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 10 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 and take more decisive steps regarding the B2B e-commerce vertical applications delivery, possibly 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% (See Figure 3). 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 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. 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?