QAD Explores E-Business While Not Abandoning ERP

Event Summary

QAD, a leading ERP vendor, announced a number of product and alliance initiatives prior to and during Explore 2000, its annual user conference that took place in Nashville, TN from May 15 to May 17. Following are the excerpts from some pertinent company's press releases.

On May 16, Commerce One and QAD announced their intention to form an alliance to deliver access and integration to mid-market and multinational manufacturers in QAD's target vertical markets through the Commerce One BuySite e-procurement application and Commerce One MarketSite Global Trading Portal. Commerce One and QAD expect to finalize the terms of this alliance and execute definitive agreements by the end of May 2000. As a result, it is expected that QAD customers can lower their indirect procurement costs by leveraging BuySite's e-procurement capabilities and streamline e-business sales channels by automating the entry of sales orders from MarketSite Global Trading Portal. Both applications are to be fully integrated with QAD MFG/PRO and QAD eQ products this year

"By gaining entry to Commerce One's extensive network of suppliers, QAD customers will be well positioned to take advantage of trading communities," said Pam Lopker, president of QAD. "We foresee that companies who select QAD eQ B2B applications will also be adding the capability to receive orders from Commerce One MarketSite and will be able to intelligently distribute those orders to multiple plants and distribution centers."

Furthermore, on May 15, QAD announced the availability of reverse auctions with the QAD eQ Business-to-Business (B2B) suite of applications. QAD reverse auctions should enable manufacturers to drive down material costs by leveraging QAD eQ's demand aggregation capability and then automating the reverse auction and vendor selection processes. QAD eQ allegedly qualifies vendors based on multiple critical factors, including price, the ability to meet schedules, and shipment methods. To build intelligence into the solution, QAD eQ uses the vertical expertise of QAD service consultants to help companies address their industry-specific needs. The QAD eQ Relationship Management Framework supposedly then can apply built-in rules to each situation based on what vendor is participating.

"We're finding that many of our customers prefer to keep control of their transactions and not place their private information on a public exchange," said Pam Lopker, President of QAD. "With QAD eQ reverse auction functionality, our customers have greater control over who participates in their exchange - as many or as few vendors as they deem appropriate. The solution also offers the potential to reach out to multiple industry trading exchanges to satisfy special procurement needs."

Also on May 15, QAD and MDI Source.com announced a strategic alliance for a trading exchange focused on medical device manufacturers and their suppliers. Under a multi-year agreement, MDI Source.com will use QAD eQ B2B applications and the two companies will co-market the MDI Source.com integrated purchasing solution to approximately 3500 buyers and 10,000 suppliers in the medical device industry. QAD and MDI Source.com will jointly develop and market a set of applications that will integrate MDI Source.com's processes into existing enterprise systems, including the many medical companies utilizing QAD MFG/PRO. In addition, the two companies will aim to develop an application based on the QAD eQ architecture that may create information transparency between the user's systems and those of their suppliers.

Earlier on April 24 QAD announced an agreement with IBM to combine QAD eQ B2B applications with the IBM WebSphere Commerce Suite. The total e-business solution will possibly offer manufacturers and distributors a complete business-to-business (B2B) solution accessed through a user-friendly business storefront interface over the Internet.

"First generation storefronts cannot answer the needs of B2B trading partner relationships," said Pam Lopker, president of QAD. "QAD will provide an elegant solution to this situation that combines the sophistication of a full-featured B2B solution with IBM's e-commerce solution. This will offer manufacturers an effective way to improve operational efficiency and increase customer satisfaction."

Last but not least, at the opening presentation of its user conference, QAD also unveiled the plans regarding the new release of its core ERP product, MFG/PRO. The new product, branded as MFG/PRO eB, is due in July/August 2000, and will allegedly exhibit significant functional, interconnectivity and e-business enhancements. QAD also intends to extend this product into more vertical markets and to support more localization and regulatory requirements.

Market Impact

We believe that QAD has seen the worst in 1999. The Company seems to have successfully curbed R&D expenses (which amounted $100M during the last 3 years) while expediting the delivery of its eQ product. The prolonged and exorbitantly expensive development of eQ has seriously affected the Company's recent financial performance. In 1999, QAD also introduced the fully Internet enabled release of MFG/PRO v. 9.0 and strengthened its global service organization.

QAD will continue to nurture its large loyal customer base, which accounts for approximately 80% of its revenue. Note that 65% of them are true global, multi-national organizations. The aim of this conference was to assure its customers of QAD's intentions to help transition them successfully into the new Internet economy, just as it helped them resolve issues in the past (e.g., Y2K & Euro compliance). QAD has been making every effort to enable a smooth transition into uncharted territory and to ease the apparent anxiety among dazed customers.

There are a number of reasons to expect a brighter future for QAD.

The first is the Company's well-established leading global position in Small-to-Medium Enterprises (SME) and divisions of large global companies, where QAD has a large loyal customer base and a dispersed global network of offices and indirect channel.

Second, QAD is very competitive in speed and ease of global multi-site implementation due to its global service and support capabilities. Its average multi-site implementation often takes less than 6 months while the total cost of ownership is often a fraction of its larger competitors'.

Also, QAD has a somewhat unique vertical and vertical sub-segment focus within certain industries (e.g., with solutions for the after-market, OEMs, and suppliers segments within the automotive industry).

Finally, QAD was one of the first mid-market ERP vendors to incorporate concepts of e-commerce, Supply Chain Management, and interconnectivity with other vendors' products, which provides QAD with an opportunity for sustained future license and service and support revenue.

We favorably regard the company's recent e-business moves, which are in sync with the market trends. Moreover, QAD seems to have grasped underlying e-business customer needs and business process intricacies while most of its competitors have yet to figure those out and are mostly at the stage of providing simple B2C Web storefronts. QAD's comprehensive e-business offering, which includes the following modules speaks for it:

1. sell-side B2C (the PowerSystem Storefront Catalogue, developed in partnership with IBM)
   
   
2. sell-side B2B eQ (integrated with MFG/PRO)
   
   
3. buy-side B2B eQ for direct materials (through reverse auctions)
   
   
4. buy-side B2B for indirect materials (aggregated supplier catalogues for MRO modules developed in alliance with Commerce One and to be delivered in the ASP mode)

Very notable is the central B2B Relationship Management Framework module, envisioned to provide many-to-many relationship modeling functionality, both within an enterprise (internal suppliers and customers) and beyond enterprise borders (external business partners). Once defined, these relationships would determine workflow and will allegedly be created and/or modified by ordinary end-users on an ongoing basis. The only e-business component still to be desired is product lifecycle management (PLM) collaboration, which has been delivered by some of its competitors like MAPICS and Made2Manage.

We also agree with QAD's plans of enhancing its core ERP product and continued emphasis on integrating eQ components with back-office systems (not necessarily MFG/PRO). Companies are increasingly realizing that the fancy 'click' side of the business is a mere castle in the air without a proper 'brick' business foundation. It still matters very much what and how a company manufactures. Therefore, QAD recommends the following e-business roadmap for its current users:

1. Create a Web Storefront
   
   
2. Integrate it with MFG/PRO
   
   
3. Upgrade to MFG/PRO eB
   
   
4. Connect with eQ
   
   
5. Collaborate through reverse auctions for direct materials
   
   
6. Participate in Internet Exchanges through eQ
   
   
7. Rest (read maintain and/or improve business processes).

We believe there is a genuine need for recommending these steps beside QAD's intentions to generate more revenue from its install base.

Nevertheless, the company faces the challenge of delivering its very ambitious undertakings as planned and creating greater market recognition (mind share) for eQ outside of its current MFG/PRO customer base. The company will have to give a serious thought to how to best utilize its current sales & marketing resources to sell its two major product lines.

While the idea of spinning off the eQ business may be tempting, it may not make much sense at present, given the fact that QAD has been closing its ranks as a part of the recovery strategy. Any hiccups and delays in its product development execution, possibly bundled with bland sales execution and cautious initial eQ acceptance within MFG/PRO customer base, may put significant strain on its eroded cash resources. Any product development and/or integration with 3rd-party products requires a painstaking effort, and significant part of it is still in progress as mentioned above. Mitigating factors in this regard, however, are platform and back-office independence of eQ and the proven interconnectivity of QAD's products in the past.

Also, its partnership with IBM holds the prospect of a true synergy rather than mere a marketing pitch, where QAD would provide its proven industry expertise and IBM the underlying infrastructure.

QAD has not yet officially announced its plans regarding Customer Relationship Management (CRM) as well as a more articulated ASP strategy. During our attendance of QAD Explore we were made aware that some alliance negotiations were in progress, and the market should expect related press releases in the near future.

User Recommendations

We generally recommend including QAD in a long list of an enterprise application selection to mid-market and low-end Tier 1 manufacturing and distribution companies (with $50M-$2B in revenue), based on its broad product portfolio and outstanding global service and support. We recommend including QAD in a short list in any selection within the following industries: Automotive, Electronics, Food & Beverage, and Medical Devices.

Companies from industries other than Medical Devices may want to inquire about QAD's plans regarding Internet marketplaces in their respective industries, similar to that with MDI Source.com.

Furthermore, companies outside of above-mentioned industries may benefit from evaluating eQ on a stand-alone basis for their e-business needs and leverage that information against other vendors in the selection.

However, any organization evaluating QAD products should still exercise moderate caution and consider existing functionality only, until QAD regains a consistently profitable financial performance.

As for the new added functionality through partnerships, users are advised to ask for firm assurances on the availability and timeframes of future upgrades, and more detailed scope of combined product functionality. Also, make sure that QAD offers a single contract and help desk for all disparate components of its product offerings.