Epicor's Mid-Market Pitch Becomes Higher For (One) Scala Part Two: How Scala Complements Epicor

How Scala Complements Epicor

Epicor Software Corporation (NASDAQ: EPIC) and Scala Business Solutions (formerly Euronext: A.SCALA, delisted in July 2004), an Amsterdam, the Netherlands-based provider of collaborative enterprise software for mid-size enterprises and subsidiaries of global corporations have completed a merger that began in late 2003. The merger creates the largest independent global mid-market provider of collaborative ERP, customer relationship management (CRM), and supply chain management (SCM) applications based on Microsoft's .NET platform and Web services, with approximately $250 million (USD) annual revenues, nearly 1,500 employees and with over 20,000 customers. The combined company has an expanded global presence with operations and customers in 143 countries, including worldwide coverage of sales, consulting and support for mid-market and large multinationals as well as local enterprises, offering a broad suite of integrated solutions.

Given Epicor's ordeal of the past and the fact that divesting two lateral products in 2001 greatly helped it achieve some much needed stability nowadays (see Latest Development on Epicor's Trying The Divestiture Tack), one could wonder about the wisdom of the renewed Epicor's appetite for acquisitions. After all, the acquisition of former Dataworks had left Platinum (subsequently Epicor) with multiple unrelated ERP products and the inherited daunting task of rationalizing its product development strategy, and, who on earth with a sound mind would like to revisit that experience? Well, concurrently with achieving a turnaround both in terms of its financial performance and of its strategy clarity, Epicor has also for over two years reverted to its, this time possibly more selective, and thus successful acquisition streak starting with the Clarus e-procurement acquisition at the end of 2002, and former ROI Systems and TDC Solutions acquisitions mid-2003 (for more information, see Epicor Picks Clarus' Bargain At The Software Flea Market and Epicor Conducts Its Own ROI Acquisition Rationale).

Moreover, one should note that Epicor has since its progenitor's inception twenty years ago been competing primarily in the true mid-market, which it defines as enterprises with revenues between $50 million and up to $1 billion (USD), and to that end, the vendor has competed mainly with the Vantage (for new business opportunities), Manage 2000, and Avant products in the manufacturing arena, and with the Epicor Enterprise suite (formerly e by Epicor) and the Clientele standalone CRM product for certain service industries. Increasingly, since customers in this mid-market segment are looking for Microsoft SQL Server-based solutions, the Vantage manufacturing product (and its "smaller sibling" Vista, as an introductory-level product) have turned out as better positioned to address this requirement, although both major manufacturing product lines include the broad range of modules for the upper echelon of midsize manufacturing enterprises.

This is Part Two of a five-part note.

Part One detailed the event.

Part Three will discuss the market impact.

Part Four will present merger synergies and challenges.

Part Five will address more challenges and make user recommendations.

Scala Products

Therefore, Scala should complement and further bolster Epicor's offering in many regards, but possibly the royal one would be its ability to firmly position Epicor as a standardized tier 2 or divisional solution for Global 1000 companies. This is owing to Scala's unrivaled global product capabilities amongst peer vendors, which will be explained in more detail later in the text. Otherwise, at first glance the merger looks like a positive move for both companies and their customers, since Epicor obtains a foothold in some complementary geographic regions, and in certain discrete manufacturing and service industries where it has not really penetrated in the past (e.g., industrial machining, pharmaceuticals, light engineering, hospitality, retail, not-for-profit [NFP] organizations, etc.) by acquiring a reasonably run vendor without much excessive baggage.

It is interesting to note that during Epicor's trying years at the turn of the century Scala had performed much better. For example, although the market turbulence during these few years had also taken its toll in Scala's restructuring and cost-containment exercise, still, with revenue of approximately EUR 74 million in 2002, which was a slight 4 percent growth over 2001, Scala then remained a prominent mid-market enterprise applications provider. Although 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 continued to pay for maintenance. This was, in part, due to an aggressive development program, which saw the release of iScala 2.1 in mid-2002 (see Scala Shows Far More Than a Bit of a Backbone) and a newer version iScala 2.2 in 2003. From 2001 to the end of 2002, the company also doubled its research and development (R&D) headcount to over 200 (out of a 700 total employee headcount at the time), plus 50 development contractors, and geared up its in-house training center, the Scala University in Budapest, Hungary to train and certify its growing ranks of 140 resellers that accounted for 23 percent of its business in 2002.

But, despite impressive growth and cash flow during these years, Scala unfortunately posted a quite disappointing performance in early 2003, possibly at an unwanted time, resulting with a restructuring program that included rationalization of the company's bloated R&D base with the closure of some satellite R&D facilities and the transfer of expertise to the company's cost-effective center of technical R&D excellence in Moscow, Russia, and headcount reduction of approximately 30 percent from the previous employee level, including consolidation of a number of senior management positions.

Possibly more disconcerting was the fact that long-standing customer interest in the new functionality of Web services-enabled iScala 2.2 release then resulted in overcommitment to customer-related developments (whereas the iScala 2.1 release was mainly focused on improvements in the underlying technology platform). As a result, the commercial release had to be delayed to September 2003 instead of previously indicated mid-2003. This delay created a vicious circle-like adverse impact on new license sales, as customers had to wait for new functionality. Even as all these events took place at possibly the worst time for Scala,,Epicor, who struggled at the turn of the century, had ironically meanwhile quite straightened its ship to even appear attractive as a savior to former Scala board in 2003.

Also, these rationalization measures and the eventual release of the product have reverted to increased revenues and a positive operating income afterwards. Namely, by the end of 2003, Scala's results were again exceeding expectations owing to a new product released in September, iScala 2.2 Collaborative ERP, which was hailed as the biggest release of new functionality in more than 10 years, and which has several modular or individual enhancements of interest to manufacturers, including service management, CRM, SCM, asset management, contract management, resource management, business intelligence (BI), workflow management, user interface (UI) customization, and connectivity.

The company has since reportedly seen strong customer demand for the new iScala version, reflected in its healthy sales pipeline, especially in markets where Scala traditionally performs well, including Scandinavia, Eastern Europe, Russia, and China. Nearly 60 percent of Scala's top customers, including both global and local enterprises, have supposedly been actively involved as early adopters since 2002, with many of them already running the new version live. As an example, Tetra Pak is one of Scala's longest-standing customers, with Scala solutions implemented in nearly fifty countries, against SAP at the corporate level.

iScala 2.2

The iScala 2.2 Collaborative ERP system includes

• iScala Core Business Processes, which is a set of business processes that includes multicurrency and multi-legislative financial functionality, asset management, and a set of packaged integration solutions (eXtensible markup language [XML]-electronic data interchange [EDI], financials, and master data integration) which helps customers to improve the business efficiency of their core processes.
  
  
• iScala CRM, which is powered by Microsoft CRM (for more information, see Scala and Microsoft Become (Not So) Strange CRM Bedfellows), accessible from both Microsoft Outlook and the Web, and integrates with iScala ERP and other business systems.
  
  
• iScala SCM, which is packaged to address typical business needs, starting with logistics (purchase and inventory management), warehouse management (including quality control), manufacturing (planning, configuration, shop floor control), tools (such as lead time management, available to promise [ATP] and drop shipment), and integration solutions.
  
  
• iScala Contract Management, Project Management, Service Management, which is a set of business processes that has been significantly improved and extended in the new version of iScala to help customers automate their pertinent business processes.
  
  
• iScala Human Resource Management, which includes the global version of the iScala Payroll module that customers can use to improve their personnel management in almost any country, regardless of how complex the legislation requirements.
  
  
• iScala Business Intelligence (BI) Server, which provides a broad set of BI and analytics tools to give users access to information they need when they need it to make the right decisions quickly. Designed to make operational and management reporting easier, the product enables users to relatively quickly perform drill-down enquiries and comparative analysis to find out exactly how the business is doing and where improvements are needed.
  
  
• iScala Developer, which is an entire development solution for creating vertical and unique company-specific processes inside and outside the iScala system.

Thereafter, in May, Scala announced that the first service release (SR1) of the latest version of the iScala Collaborative ERP system is now available for all existing and potential customers worldwide. iScala 2.2 SR1 includes a wide range of new and enhanced business functionality, such as better connectivity with other best-of-breed warehouse and manufacturing systems, improved features in the supply chain and service management processes as well as availability in two additional languages—Korean and traditional Chinese.

The company has also enhanced its iScala CRM offering to give customers better visibility into the sales pipeline and across sales activities, to improve the quality of leads and closure rates and be able to fully integrate with Microsoft Outlook and other Microsoft Office programs. iScala CRM now comes with standard reports that are reasonably fast and easy to run and with a familiar interface, similar to Outlook, which will possibly help a company extend its applications to more users. For example, a user can create a sales proposal from a Microsoft Word template, use pricing data from their iScala ERP system, and save all versions of that proposal within iScala CRM, keeping track of all the changes in the sales cycle until the sale is closed.

Last but not least, the addition of a brand new iScala Manager Software Developer Kit should interest Scala's indirect channel, who will now be able to add further value by designing new business processes that can easily be added to the standard iScala workflow, to support customer- or industry-specific needs.

This concludes Part Two of a five-part note.

Part One detailed the event.

Part Three will discuss the market impact.

Part Four will present merger synergies and challenges.

Part Five will address more challenges and make user recommendations.