Fourth Shift Corporation: Working Overtime To Provide Complete Customer Care

Vendor Summary

Fourth Shift Corporation is a provider of Internet-enabled business applications almost exclusively for small and mid-market companies as well as divisions and subsidiaries of larger Global 2500 corporations. Founded in 1982 with headquarters in Minneapolis, MN, USA, Fourth Shift generated $69.2 million in revenue in fiscal 1999. Approximately 66% of the company's sales come from consulting, maintenance, and other support services, while approximately 27% of its total revenue is derived outside of the North American market.

Its flagship product, Fourth Shift (formerly MSS), comprises over 60 modules that track business operations such as accounting, manufacturing, customer service, inventory, sales, and shipping. Fourth Shift also resells fully integrated third-party human resources management systems (HRMS), advanced planning & Scheduling (APS), and business relationship management (BRM) software under its private OEM label. The company went public in 1993 and currently trades on NASDAQ under FSFT ticker symbol.

Fourth Shift Corporation's origins go back to a software-consulting firm founded in 1982 by Marion Melvin Stuckey, a former IBM sales manager and executive at Control Data. In 1984, it was reincorporated as Microtechnology Sources to sell PC-based MRP business software. The MSS software line was launched in 1985. Soon thereafter, the company was renamed Fourth Shift. In 1992, Fourth Shift bought manufacturing software maker Just In Time Resources International (JIT) to expand its market and sell to larger companies with UNIX-based computers. Integrating JIT's operations and fixing the software's reliability problems led to a string of losses. Consequently, Fourth Shift sold JIT in 1995.

In 1997 the company introduced OBJECTS Enterprise Software, its twice-delayed MSS upgrade that was supposed to enable users to link to multiple sites using the Internet or wireless technology. Disappointing sales sent the company back to the drawing board, where it combined OBJECTS with MSS, releasing MSS for OBJECTS in 1998.

In 1999, Fourth Shift began developing a set of applications to enable its customers to conduct business-to-business (B2B) e-commerce. It acquired underlying technology for these applications through the purchase of Computer-Aided Business Systems (CABS), a Colorado-based developer of workflow-based e-Business solutions. In the same year, the company expanded its e-business products with third-party human resources, advanced planning & scheduling and customer relationship management applications.

In 2000 Fourth Shift teamed with accounting and technology consulting and services firm Grant Thornton to provide an innovative, free Web-based service called BenchmarkReport.com to help manufacturers measure their performance against peers and identify areas of their business that need improvement.

Vendor Trajectory and Strategy

Fourth Shift has been striving to complete its evolution from a vendor of traditional MRP software to a provider of holistic business applications, including integrated front office, back office and e-business capabilities for its target market - small-to-medium manufacturing enterprises (SME). 1999 was the year of substantial progress in its effort to expand its product offering scope and business.

Fourth Shift claims to have grasped the requirements of its target market (SMEs) that wish to acquire most of their business applications from a single source, even if that means possibly not the best functionality across the board. To that end, the company launched in February 2000 a program to promote itself as a sole solutions provider. The program is called Complete Care and is possibly the most comprehensive approach for small and midsize manufacturers to obtain needed business enterprise applications, backed by professional services and a long-term commitment to the customer's success.

The Complete Care solution is made up of the Fourth Shift 7 e-ERP backbone; a Customer Care business relationship management (BRM) system; Employee Care HRMS and Payroll modules; Supplier Care for real-time trading relationships; e-Business Solutions that include online ordering, inventory visibility, order status, shipping status, etc.; and a service and support organization within Fourth Shift known as Client Business Solutions.

In addition to improving Internet usability and interconnectivity for its ERP product, Fourth Shift has also been expanding its global business, thanks in part to the recovered Asian economies. By the end of 1999, Fourth Shift had more than 3,700 customers worldwide, primarily discrete and process manufacturing SME organizations. The Company distributes its products and services through a direct sales force and value-added resellers in major markets, and through sales agents in secondary markets. The Company maintains 10 regional sales offices in the US and 15 wholly owned subsidiaries abroad, and sells through distributors in over 30 countries worldwide. During 1999, approximately 95% of the Company's software license revenue was generated through direct sales force.

We expect Fourth Shift to continue its focus on the ERP mid-market (companies with $10 million - $150 million in revenues), by rounding-up the functionality of its Complete Care solution. The product will be enhanced also through 3rd-party alliances in the area of Product Lifecycle Management (PLM), Distribution Requirements Planning (DRP) & Transportation, Plant Maintenance, and Manufacturing Execution Systems (MES).

We also expect the company to further pursue alliances for business-to-business (B2B) e-commerce, Internet trade exchanges and supply chain collaboration within its industries of interest like its recent alliance announcement with SupplierMarket.com. Additionally, Fourth Shift will invest more aggressively in sales and marketing, international business expansion through distributors, and will seek to become more vertically oriented, focusing on the number of industries (See "Industry Focus" in the sidebar company information). It is very likely that it will also start pursuing alliances with ASPs to further its penetration into this increasingly popular marketplace.

ANALYSIS

Vendor Strengths

• Fourth Shift, which from its early days had a sole focus on the SME ERP market, has become a prominent vendor (and possibly one of the largest) in that market. The company has long demonstrated a deep understanding of the low-end of the ERP market dynamics and its requirements of inexpensive products, fast and easy implementations and good service. These requirements have traditionally been entry barriers for larger vendors. This market segment is risk-averse, and the Complete Care program might alleviate some of the usual uncertainty and anxiety that many decision-makers have when selecting a new business application software module. Furthermore, its Complete Care program begins even before a customer commits to any purchase, as a Fourth Shift project manager is assigned to participate in meetings with potential customers. This thought leadership in the pre-sales phase might provide additional flexibility in addressing the unique needs of its target segments.
  
  
• The company has gradually introduced or incorporated, in an "embedded approach" OEM fashion, a line of integrated e-business, customer relationship management (CRM), and advanced planning and scheduling (APS) components within its core ERP solutions. It has been known for adroit blending of 3rd party products with its own and delivering the combination as a tightly integrated unit. This promotes it as one of the first smaller ERP vendors with ability to embrace customer and supplier activities tied to core transactional back-office system. Fourth Shift offers very competitive e-commerce ability within its market niche, including but not limited to online catalogs, Internet storefronts, online credit checking, credit card validation, rules-based parametric product configurator, online procurement, and order fulfillment.
  
  
• Fourth Shift has long embraced concepts of component (modular) technology in designing its product. The company has been providing a great number of middleware APIs for interconnectivity among its own and 3rd-party components, all providing for flexibility and incremental deployment. Fourth Shift 7 provides connectivity to other applications based on the Microsoft standards regarding BizTalk and XML, which we consider appropriate for its target niche. Although the company keeps abreast of the latest developments, it tries not to alienate its more conservative customers with abrupt new technology introductions. A good example is its new thin client called Net UI, which supports Internet connectivity and is still overwhelmingly popular with plant-level users.
  
  
• The company has achieved enviable worldwide geographical coverage compared to its peers. Its product has traditionally exhibited strong multi-national capabilities in terms of languages (17) and currencies support. Fourth Shift was the first vendor that has been certified by Chinese authorities to sell in an expanding market. Its large customer base, many of which are still on outdated MRP systems but with a pressing need to be in tune with the demands of the new economy, and strong widespread global presence should provide Fourth Shift a sustained service and support revenue, and possibly a new license revenue stream in the future.
  
  
• Fourth Shift has been very competitive in speed and ease 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 free-of-charge initiative. Possibly differentiating Fourth Shift from its main competitors is its ability to measure, at a strategic level, the cost, benefits, and business justification of the new technology. Fourth Shift's new website BenchmarkReport.com is a portal where manufacturing companies can benchmark themselves against comparable companies contained in an online database of more than 150,000 firms. This site is co-sponsored by Grant Thornton a leading accounting and management consulting firm that provides a broad range of professional services to growing entrepreneurial organizations. Fourth Shift has also been proactive in service & support cost reduction by harnessing the latest technology, like CBT, to deliver inexpensive users' training.

Vendor Challenges

• Fourth Shift has long been trailing the market in terms of growth. This has kept it in the difficult position of having to maintain tight cost controls, while executing a visionary strategy. Moreover, an increasingly competitive market and declining market growth caused the company to post disappointing results in the first two quarters of fiscal 2000. Recent revenue has been driven primarily by the existing customer base, with significant deceleration in license revenue (down 39%), total revenue (down 15%), and a hefty loss of $3.9 million compared to a profitable second quarter of the last year (see Fig. 2). The corporate viability metrics expressed as revenue per all groups of employees, (R&D, sales & marketing, etc.) has been much below the market's respective averages. Particularly disconcerting is the low revenue per sales & marketing employee ($0.56M vs. $0.86M market average in 1999) owing to its strong direct sales force, which we consider as a cost ineffective sales approach within the SME market segment. Fourth Shift has yet to demonstrate substantial progress in developing an indirect channel to supplement its strong direct sales force. Without it, we believe the company's growth will be insufficient and it will remain marginally profitable.

Figure 1.

Figure 2.

• Fourth Shift has long depended on less sophisticated development technology (Titanium non-relational database by MDBS and C code), which was a drawback for the following reasons: 1) a need for a special skill set and 2) scalability and integration difficulties for the higher end of the SME market. While its recently (Q4 1998) released MS SQL Server version of the product may have mitigated the above concerns, there may still be issues related to existing customers' migration from older product versions. Furthermore, its continued two-pronged product database strategy will inevitably create some duplication of its R&D and Service & Support resources. The company has recently adopted Microsoft's proprietary technology and integration standards as its sole product technology standard. This action may be an impediment for future scalability, interconnectivity with other vendors' components and/or existing users migration. Moreover, as Digital Market Places and e-business transactions follow a path similar to EDI (endorsing specific EDI standards to transmit data), Fourth Shift faces the challenge of overcoming the notion of suppliers adapting to multiple standards in order to support multiple customers. To make things even more complicated, different marketplaces may (and do) describe their transactions differently and cover different verticals and industries.
  
  
• Fourth Shift faces the challenge of delivering its ambitious undertaking (integration of its front-office suite to all current and older back-office components, functionality footprint extension, 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 Fourth Shift 7 product suite, with major plans to deliver browser-based GUI and Microsoft message queuing technology (which would make integration among components real-time and event-based) by the end of 2000. Executing these initiatives with its ever-thinning resources will be a notable challenge. 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.
  
  
• While its functionality supports both discrete and process manufacturing, its native core ERP functionality across the board, particularly distribution functionality has not been recognized as a differentiator in the market. While the latest product version offers significant functionality enhancements, Fourth Shift is still perceived as a strong contender mainly for less-complex single-site enterprises. The CABS' acquisition has only recently somewhat improved the company's multi-site product functionality, which was mediocre in the past. The situation has been further aggravated by a drab user interface, although it should be resolved with the release of new Web-based GUI. Therefore, its license cost per user has been often regarded as unjustifiably high given only the basic product functionality compared to its opponents in some selections within the low-end of the market. The outlook changes significantly when the total costs of implementation is taken into consideration and the company should make every attempt to appropriately articulate this fact.

BOTTOM LINE

Vendor Predictions

• Fiscal 2000 will continue to be challenging for Fourth Shift. We predict flat revenues or only a minor growth (less than 5%) as the best scenario, with a return to profitability in fiscal 2001 (60% probability).
  
  
• Fourth Shift will deliver its Web GUI and real-time integration tool by the end of 2000 (70% probability). We also believe that, within the next 12 months, the company will put more emphasis on technological development rather than functionality enhancement of its product suite (60% probability).
  
  
• Fourth Shift's service & support revenue will contribute more than 70% 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. For the next two years, approximately 80% of license revenue will come from its existing customer base, which will want to either replace an old MSS product or add new modules to an existing Fourth Shift instance (70% probability).
  
  
• Despite favorably low market value, we believe that the company is an unlikely candidate for acquisition by a competitor within the next 2 years because of its awkwardly broad functional scope, the result of recent OEM agreements (30% probability). No major acquisitions by the company are expected in the foreseeable future either (20% probability). Instead, the focus will be on interfacing with partnered applications, as well as on expanding its own product functionality and offering new vertical industry solutions.
  
  
• Within the next 4 years, more than 30% of Fourth Shift's revenues will come from outside the North American market (60% probability). We believe that its business in Asia will grow extremely well (50%-80%) during the next 4 years (60% probability).

Vendor Recommendations

• Fourth Shift should further entrench itself within the global small-to-medium ERP 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.
    
    
  • Further expand its global presence, primarily by developing new affiliate partnerships.
    
    
  • Deliver more focused and pre-configured vertical solutions for industries, and offer application outsourcing through ASPs to make its products attractive to resource-constrained enterprises.
    
    
• Fourth Shift must remain committed to ambitious new product introductions and/or enhancements (e.g., multi-site capabilities and transportation) and take more decisive steps regarding its e-commerce vertical marketplaces delivery (online collaboration, e-procurement, XML connectivity to online trading exchanges, B2B and B2C e-commerce capabilities, online catalogs, online bidding, Internet storefronts, etc.), 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 only 17%, compared to the industry average of 25%. This may not be sufficient for its ambitious product development endeavors. Moreover, in fiscal 1999, the general & administrative personnel count, as a percentage of a total number of employees, was high, 15%, compared to the industry average of 11%. Also, the sales & marketing personnel count, as a percentage of a total number of employees, was also high, 25%, compared to the industry average of 21%. Therefore, Sales & Marketing and General & Administrative costs as a percentage of net sales in 1999 were at high 43%, whereas the industry average was 38%.
  
  
• We encourage the company to more clearly articulate its value proposition and TCO benefits to more price sensitive customers from the low-end of the market. To that end, we commend its BenchmarkReport.com portal initiative.

User Recommendations

• Fourth Shift's target market, manufacturing and distribution companies in the $10 - $150 million-a-year revenue range, should certainly consider the company's latest value proposition, but avoid selecting it without looking at what the other vendors have to offer. We generally recommend including Fourth Shift in a long list of an enterprise application selection to lower-end of the mid-market companies. These have limited IT budgets and conservative IT strategies, as well as having significant manufacturing, CRM, supply chain and B2B e-commerce requirements. The industries that would most likely benefit from using Fourth Shift 7 are electronics, computers, machinery, fabricated products, and medical devices.
  
  
• Users from other industries may benefit from evaluating some stand-alone Fourth Shift's product components (e.g., CRM, APS, e-commerce) on an opportunity-by-opportunity basis. Organizations seeking a Web-based solution and out-of-box functionality with little or no re-engineering effort may want to inquire about the company's ASP offering. Support, connectivity, ease of use, security, acceptance, and scalability are only a few of the regular considerations. Companies with more intricate business processes may want to inquire how Fourth Shift would deal with the issues of customizations and/or 3rd-party products bundling in an ASP setup.
  
  
• Existing users of earlier product releases that face stabilization and/or discontinuation may benefit from querying the company's future product migration path, service & support, and/or scalability strategy.
  
  
• Customers should insist on a contractual timeframe for delivery of a solution, and seek reference sites (preferably in their vertical market space), which have been successful with the product suite. Each e-business component should be put through its paces using a well-documented set of requirements, scripted scenario demonstrations, and rigorous reference checking. As for the new added functionality through partnerships, users are advised to ask for firm assurances on the availability and future upgrades timeframes, and more detailed scope of combined product functionality.
  
  
• Customers interested in Fourth Shift's assistance in
  connecting them to digital market places may want to ask the following questions: Which specific market places does (or will) Fourth Shift connect with? What methodology does (or will) the company prescribe? Will Fourth Shift 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 the company?