Exact Software Continues with Its Share of Judicious Acquisitions

Positional Analysis

Amid its competitors' high-profile strategic moves (see Is "Sage" Wiser and Better Than "Best"?), Exact Software North America (http://www.exactamerica.com), an Andover, Massachusetts-based (US) provider of integrated accounting, payroll, customer relationship management (CRM), enterprise resource planning (ERP), business process management (BPM), etc. enterprise software solutions remains firm on a different course. Its solutions connect the people, processes, and knowledge essential to a user organization. Exact is a division of Delft, the Netherlands-based Exact Holding N.V. (Amsterdam: EXACT.AS, http://www.exactsoftware.com).

The corporation appears to have "backpedaled" from the bold growth projections made by its North American strategic group in 2004. At then time, it sought to double its revenue of approximately $60 million to $120 million (USD) by the end of 2006 through some aggressive acquisitions that would give it a larger market share. Instead, it appears to have intentionally shifted away from any blockbuster acquisitions to incrementally roll-out products that will give more added-value to its customers. In doing so, Exact has avoided the piling up acquired products.

The company's refined strategy has been to acquire more digestible companies with specific capabilities that support its Business Unified solution strategy, which seeks to round out integrated solutions that encompass executive control, accounting, manufacturing, distribution, on-line commerce, CRM, human resource management (HRM), document management (DM), Web portals, workflow, and more. This will empower employees, suppliers, and customers to collaborate through virtually real-time access to central Web-based corporate information and exchange. As a result, this should provide greater visibility across the organization, and maximize control, productivity, and efficiency for the entire value chain.

Exact's current plan consists of enhancing products by business type and industry segment. It seeks to continuously improve data and process integration and judiciously incorporate specific technologies that broaden its core product set by adding products that expand its market coverage and to gain human resource expertise. In other words, the vendor will continue to expand its product footprint and operations worldwide. The last few years have been a busy and transitional period for the vendor, with the deliberate acquisitions of certain resellers and partners, including the opening of new offices, and the launch of new product enhancements.

This is Part One of a multipart note. This series will explore Exact's strategic groups and global aspirations; its BPM strategy and products; and its acquisition of Vanguard. It will also present challenges and make user recommendations.

Exact Background

Exact Software is over twenty years old and is an international supplier of eighteen front-office/e-business and back-office/ERP solutions that somewhat differ (or are branded differently) within diverse regions of the world. The company's software is offered in over sixty countries, mostly through its own subsidiaries (with close to 2,400 employees worldwide). It also has nearly 2,000 business partners that help the vendor handle over 180,000 customers in 126 countries. For the fiscal year ending December 2004, Exact generated revenues of 212 million euros which was an increase of about three percent over fiscal 2003, while net income was 33 million euros in fiscal 2004, which was up 3.1 percent from 32 million euros in fiscal 2003.

Though it conducts business more tacitly than its bigger archrivals, Sage Group and Microsoft Business Division, Exact is nonetheless a textbook example of a vendor that is maintaining a steadfast course of product, revenue, and geographic expansion—and it is doing so while achieving enviable profit margins, including a twenty year stretch of profitability. Thus, Exact is a stable and predictable, cash-flow generating business.

Though its market approach, conservative business management, and attention to profitability have not changed, Exact Software is quite a different company now compared to what it was several years ago, owing to its many acquisitions and new product developments. The vendor can be placed among the leaders within its target market, trailing Sage and Microsoft, and fighting with the likes of Epicor Software (see Epicor's Mid-Market Pitch Becomes Higher for (One) Scala) for the top three position in the small and medium business (SMB) market. In some markets, Exact also competes fiercely with the likes of SYSPRO.

Three Strategic Groups

Exact Software's network has been divided into three geographically strategic groups: the Netherlands, North America, and International. Each strategic group has its own leader and revenue and profit and loss targets, and each addresses the specific needs of its market in a particular localized way. However, all share the corporate-level vision that a single, integrated solution should provide the best way to improve customer efficiency and productivity. To further enhance customer satisfaction and service, the entire Exact organization is linked by a single infrastructure, which provides access to the same customer database and information worldwide.

In the last few years, Exact has, even if only moderately, built on its traditional customer base in each of its strategic areas and strengthened its position in each one.

Dutch Strategic Group

With over 74,000 customers and a total revenue of 95 million euro in 2004 (compared to 93 million euro in 2003) Exact remains both the market share and mindshare software powerhouse in the Netherlands. The Dutch strategic group expands Exact's base of SMBs, and strengthens its position within the enterprise-level market. In the Netherlands, this focus has traditionally meant providing the SMB market with innovative back-office solutions, but this is now changing towards more integrated back- and front-office solutions.

While continuing to serve its traditional customer base (the SMB market) Exact is expanding its focus to the higher-end of the market, as well as to more modest midsize operations. The increased functionality of its products, such as the manufacturing and project management functionality for Exact Globe 2003, launched in mid 2004, has reportedly made Exact's solutions even more appealing to larger organizations. The Exact Globe 2003 Enterprise product addresses this market by segmenting into more solutions areas, serving an array of different businesses, including those involved in wholesale, manufacturing, retail, education, professional services automation (PSA), rental, and accountancy. Each of these areas is served with an industry template of Exact e-Synergy.

In terms of small businesses, the target in the Netherlands is the same as the rest of the world: to integrate the customer's complete organization using the combination of Exact Globe and Exact e-Synergy. To realize this long-term goal and to better meet the immediate needs of specific customer segments, Exact has three versions of Exact Globe: Exact Globe Enterprise, Exact Globe 2003, and Exact Compact 2003.

Additionally, the vendor supports its important reseller network in many ways, and the entire network has been trained sufficiently so that every reseller can now sell Exact e-Synergy. In 2004, Exact Netherlands aligned its organization to better serve market segments that seek specific industry solutions. Together with its traditionally loyal partner channel, this has proven to be successful in delivering solutions and implementations for the higher end of the SMB market in the Netherlands.

The local leading brands in the Netherlands are Exact Globe 2003 (financial software for SMBs), Exact e-Synergy, Exact Compact 2003 (financial software for small businesses), Exact Globe 2003 Enterprise (ERP software for larger corporations), Exact Financials (financial, project management and HRM software for medium and large organizations), and Grote Beer for Windows (financial software for small businesses).

Exact North America

The Exact North America group focuses on a specific key target group—manufacturing and distribution, although this should change with the upcoming introduction of Exact Globe. Namely, the combination of Exact Globe Enterprise and Exact e-Synergy should allow the vendor to expand sales to services organization that have project billing needs, etc. This regional market has shown weaker economic conditions, with less than bullish information technology (IT) spending, whereas tier one ERP vendors have long been pushing into the mid-market, making it even more competitive, and also businesses have been moving to outsource many parts of their operation, including manufacturing.

Nevertheless, the good news for Exact might be that these conditions also drive three key trends:

1. e-commerce
2. inter-enterprise business
3. labor optimization

These issues play directly into Exact's solution strategy which is based on the capabilities of the Exact e-Synergy product, which is an Internet-based integrated suite for CRM, financial, workflow, and resource control.

Finally, as for the strategic groups, the revenue contribution of the North American operations amounted to 48 million euro in 2004, while in US dollars, revenue from North American operations amounted to $59 million (compared to $58 million in 2003). Exact enjoys a leadership tier two and tier three vendor position in North America, with 11,000 manufacturing customers, primarily with less than $50 million (USD) in revenues.

Moreover, across the North America market, the up-and-coming Exact e-Synergy product has gained traction with around 444 customers since its launch in 2002 (although it is worth noting that all other strategic groups have contributed to the considerable increase in Exact e-Synergy revenue). These come both from its existing manufacturing customer base and from new customers in service firms, utilities, financial services, and health care. As these organizations grow and their need for efficiency increases, the number of users managing their workflow, projects, and e-commerce in Exact e-Synergy will also likely rise. In short, Exact North America should be well positioned to benefit from both a solid ERP customer base and a broader array of new clients in service industries that need a broad and integrated solution.

Exact North America uses a multichannel sales and marketing strategy, with twelve regional offices across the US and two serving the Canadian market. Furthermore, its seventy-five tried-and-true channel partners are geographically distributed to complement the vendor's direct regional presence. This extended network, in partnership with Exact worldwide, provides Exact with the competitive advantage of both a local touch and global reach. Exact Software entered the North American market in the early 2000s with the purchase of a number of local ERP systems, including Macola Technologies in 2001, and Kewill's ERP software business unit with the JobBOSS, MAX, and Alliance/MFG products in 2002 (see Is Enterprise Market Consolidating? Exactly!). Consequently, in addition to the global availability of Exact e-Synergy, there are four other North America-specific products:

Exact Macola ES (standing for Enterprise Suite) is an ERP software suite for small and medium manufacturing and distribution businesses that often require electronic data interchange (EDI) capabilities and the US Food & Drug Administration (FDA) compliance. Released in 2003, the product is the next-generation successor of the legacy Progression Series ERP product, which, through integration with e-Synergy, features enhanced user-friendliness, and built-in, native workflow, and BPM capability. The product thus goes beyond a traditional ERP solution's scope by allowing users to define business rules, workflows, and exception alerts and events. With Macola ES, businesses are able to define a process that allows, for example, a sales order to travel from credit approval through fulfillment without using a single piece of paper; to automatically generate a customer notification for an overdue invoice; or to generate an e-mail alert to a sales representative if a regular customer broke his or her purchasing pattern and did not place an order on a given date.

Exact JobBOSS is a reasonably priced and uncomplicated functional ERP product aimed at the specific needs of small job shop environments, such as machine shops, mold makers, and sheet metal processors. It has been in the market for nearly two decades and is installed in more than 3,000 sites, which are job shops and make-to-order (MTO) manufacturers that place high priority on the ability to track actual cost and labor. These sites have up to fifty employees, about $10 million (USD) in revenues, and up to ten users.

Exact MAX is a client/server-based ERP package designed for the lower-end of the discrete repetitive manufacturers market such as electronics and medical equipment manufacturers. It has broad-based appeal for enterprises with less than $50 million (USD) in revenues and less than fifty users. It offers integrated applications that include material requirements planning (MRP), advanced planning and scheduling (APS), product configuration, CRM, and integration to Microsoft Dynamics GP accounting (formerly Microsoft Great Plains).

Exact Alliance/MFG is a low-cost manufacturing-only solution (with an interface to QuickBooks Accounting) for small high-tech repetitive manufacturers. The product comes from the Kewill acquisition, which gained the product when it acquired Alliance Manufacturing Software, a provider of ERP solutions to fledgling manufacturers with annual revenues of less than $5 million (USD) and less than ten users.

The channel situation becomes somewhat complicated by Exact's differing divisional and product lines' distribution models within North America. So far, only Progression, Macola ES, and e-Synergy are offered through business partners or value added resellers (VAR), and direct regional sales offices. Contrary to this, MAX, JobBOSS, and Alliance/MFG products are still offered only through separate direct sales forces. Each of these also sells e-Synergy to their installed bases.

International Markets

Exact's third strategic group is the International Market group. Its total revenue comes from over 60,000 customers and amounted to 69 million euro in 2004, compared to 62 million euro in 2003. Exact International's geographic expansion strategy has resulted in new offices in Argentina, Denmark, Portugal, Kuwait, Chile, Colombia, and the Slovak Republic. In addition, the group opened two additional offices in China and one additional office in Russia. Exact International aims to be the preferred supplier for small to medium subsidiaries of international companies worldwide by offering one global product and a uniform level of service through its global subsidiary network.

An international network of self-owned subsidiaries sharing one infrastructure should bode well for standardized, high-quality services everywhere. Currently, Exact International has forty-two subsidiaries covering Europe, Middle East, Africa, Asia, and the Americas. In China, Exact has offices in Beijing, Shanghai, and Guangzhou. This network, impressive for the mid-market, enables international organizations to create global enterprise system standards backed by a global vendor, yet one that offers direct local support and services.

The strategy is called parenting due to the nature of cross-selling; the deeply embedded relationships within international organizations; and the entrance into parent organizations and their subsidiaries. The parenting strategy enables Exact International to serve two target market segments based on one global infrastructure. For global multinationals, this strategy seeks to establish Exact Software as the de facto tier two solution for smaller affiliates and remote divisions. Under this strategy, the Exact solution co-exists with the tier one solutions of an enterprise, such as SAP and Oracle. The tier one solution is used for large and more complex operations. The overall strategy typically enables cost efficiencies, reduces complexity, and substantially shortens implementation periods.

Most important, it integrates the process to and from the tier one solution, enabling nearly seamless integration and requires only one reporting platform within a parent organization. Small to medium international organizations can deploy a single tier ERP strategy across all their affiliates, creating enterprise-wide standardization and integration for near real time enterprise information (see Standardizing on One ERP System in a Multi-division Enterprise).

To this end, Exact Software has been offering the global Exact Globe and Exact e-Synergy. The leading local brands in certain markets outside North America and the Netherlands are Cubic Pro (financial software for small businesses in Belgium), DIMONI (ERP software for medium and large organizations in Spain), Exact Pro (financial software for small businesses in Germany), Exact Pro Lohn XL/XXL (financial software for SMBs in Germany), Soft-2000 (financial, invoicing and payroll software for SMBs in Austria), and SIIGO (financial software for SMBs in South America).

This concludes Part One of a multipart note. This series will explore Exact's strategic groups and global aspirations; its BPM strategy and products; and its acquisition of Vanguard. It will also present challenges and make user recommendations.