Will Recent Acquisition Catalyze Catalyst's Strategy? Part Three: Catalyst and SAP

Catalyst and SAP

Catalyst International, Inc. (OTC: CLYS.OB), a global provider of supply chain execution (SCE) applications, announced that it has signed an agreement with ComVest Investment Partners (www.comvest.com), an institutional private investment firm, which will result in the acquisition of all outstanding shares of Catalyst. In the proposed transaction, a company formed by ComVest would merge into Catalyst, while the shareholders of Catalyst would receive $2.50 (USD) per share, in cash, in the proposed transaction.

During the past two years, Catalyst has been promoting an innovative marketing plan to sell best-of-breed applications while implementing the SAP LES product, which has resulted in nearly 100 best-of-breed customers (using only Catalyst's components) and 200 SAP-related customers (including those where Catalyst has merely done the consulting work, without necessarily selling its SCE components). To provide a more complete product offering for their customers, Catalyst and SAP have recently reinitiated joint programs to set a new standard for integration. These include the joint development of the SAP advanced interface for integrating CatalystCommand and SAP's LES with R/3 and mySAP Enterprise, the designation of Catalyst as a principal service provider for implementation and modification of SAP's LES, and establishing Catalyst as a North American support center for SAP's LES software products.

Catalyst developed a customer service center called the Supply Chain Execution Competency Center (SCE Competency Center) back in 1999, which supports both SAP LES and Catalyst SCE software products by providing training, consulting, and support services. Under the alliance with SAP, Catalyst deploys its service organization to implement and provide support for customer and TeamSAP partner requests, including a support hotline, implementation services, and on-site support for SAP LES in North America. Ongoing customer support services monitor system performance and facilitate software configurations, modifications, upgrades, and troubleshooting, as needed. In mid-2003, Catalyst acquired Philadelphia, Pennsylvania, US-based Catalyst Consulting Services, Inc., an independent provider of consulting, implementation, and support services for SAP LES, primarily to Fortune 500 companies. The company also provides complete wireless data collection solutions incorporated with the implementation of SAPConsole.

Further, in April 2004, Catalyst introduced the new componentsNOW web site (www.componentsNOW.com), the first global marketplace for the users of SAP solutions, which features components, external applications, add-ons, complementary hardware and information for product comparisons and build/buy analysis. These components, some of which are quite granular, might help SAP's existing and prospective users more closely tailor their SAP solutions to their individual needs, since the site already has more than one hundred components for SAP customers to research, compare, and order. Given Catalyst is a SCE supplier per se, many of its supplied components within the site were logically designed to supplement the SAP Warehouse Management (WM) product. The site's Phase I rollout primarily features plug-in modules for SAP LES and related SCM applications from Catalyst and more than a dozen software suppliers, including IBM, Advanced Logistics Systems, and Seeburger.

This is Part Three of a four-part note.

Part One presented the event summary.

Part Two presented the current strategy.

Part Four will provide market analysis, challenges, and user recommendations.

Expanded Offerings

Catalyst anticipates that the site will significantly expand its offerings of finance and human resource (HR) applications in the near future. Namely, there should eventually be the following three categories or levels for the SAP components:

• The transaction level—such as a component that ties into SAPConsole and allows for special screens on an RF terminal as to assist a form of receiving that is particular for certain vertical industry;
  
  
• The application feature level—including any necessary component that would plugs into a native SAP application to extend its functionality; and
  
  
• A new independent application—for example, SAP currently does not offer a sophisticated labor management module to work with SAP WM. While these new applications would use the basic SAP data model, they would not necessarily closely integrate within SAP workflows.

While Catalyst International created this Internetbased initiative, and will develop more logistics components for the site, its ultimate success will depend upon other enterprise suppliers and the participation of third party developers. For them, the site might offer an efficient marketing channel for generating and pre-qualifying leads without the expense of direct selling, while it might also broaden their reach to a global audience, accelerate the sales cycle, and provide opportunities to sell packaged solutions. To insure neutrality, the site uses a content management system hosted by a third-party to allow suppliers to post components, insure that leads are fairly disseminated, and to prevent visibility of one supplier into the leads and revenues generated by other vendors. Catalyst hopes to recoup the investment by garnering the advertising revenues from the site's management and commercialization.

Based on the above-stated facts, Catalyst serves customers in several different industries, representing several major vertical market categories, and it targets industries that have the most demanding supply chain requirements, hoping this should enable it to leverage its expertise and experience for competitive advantage. The vendor has a dedicated sales group for each of its vertical markets—motor vehicle and parts (including automotive, aerospace, and parts distribution), retail, consumer packaged goods (CPG), process goods (including pharmaceuticals and specialty chemicals), and cross-industry applications.

While these markets will remain the primary focus for the foreseeable future, the sales teams will additionally explore opportunities to expand Catalyst's presence in sub-categories of these markets (e.g., discount stores and direct-to-consumer segments within the retail sector), as well as selected horizontal markets (e.g., third party logistic [3PL] providers).

Catalyst also strives to be the dominant firm in the tier-one market segment, where the customers are characterized by the size, complexity, and volume of their distribution facilities and supply chain network. While most Fortune 1000 firms are tier-one, the segment is not limited to these firms. In other words, the characteristics of a tier-one distribution facility typically include size of 200,000 square feet or more, volumes of 10,000 items per day or more, at least 75 concurrent users, extensive use of automated material handing equipment, RF devices and bar coding, complex warehousing strategies, and other non-standard storing requirements, such as hazardous materials, refrigeration, etc. For these enterprises, Catalyst even offers a rich set of features that can be customized according to specific customer requirements.

Worldwide Marketing

Catalyst relies predominantly on direct sales in North America and in the UK, and on a network of value-added resellers (VARs) in South America and EMEA regions (see Catalyst International Secures French Connection with Steria). Thus, its products are operating in Australia, Brazil, Canada, El Salvador, France, Germany, Guatemala, Holland, Ireland, Italy, Mexico, Spain, the UK, and the US. The UK subsidiary, Catalyst WMS International Limited, was established in 1994 in London, England to sell, service, and support Catalyst software products in certain international markets. In Latin America and Europe, the vendor utilizes the assistance of VARs to sell and assist in the implementation and support of its software products. It plans to continue strengthening its presence in these regions through relationships with supply chain participants and enterprise software vendors and by developing close relationships with system integrators in those regions. It also plans to continue to increase its international business through a more aggressive effort to recruit and manage additional VARs in selected fast-growing foreign markets. These VARs work together with Catalyst personnel in obtaining agreements for global, multi-site installations with multinational customers. CatalystCommand is currently available in English, French, Italian, Portuguese, German, and Spanish.

Nevertheless, poor execution prior to the last several years has hurt Catalyst and has all but relegated it to run status in the SCE marketplace, during which time the vendor struggled to attract new customers and persuade existing ones into major upgrades. Since then the company has returned to double digit growth (reportedly a current annual revenue run rate of $40 million [USD]) and profitability. One of Catalyst's most notable accomplishments over the last few years has been its transformation into a customer-focused organization, by investing the time to understand its customers' business and operational goals, and by working with them to develop SCE metrics that align with these objectives.

The vendor has also been delivering deeper support through its vertical market teams that manage the entire gamut of the relationship—from business development, via relationship building and implementation to ongoing customer support. As a result, it has reportedly improved the response times by over 30 percent, increased its quality fix rate by almost 50 percent and raised the customer satisfaction ratings beyond 90 percent. Still, these achievements have not drastically improved how the vendor is perceived. Its previously troublesome financials have prevented the company from closing deals with risk-averse prospects.

This concludes Part Three of a four-part note.

Part One presented the event summary.

Part Two presented the current strategy.

Part Four will provide market analysis, challenges, and user recommendations.