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?