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I recently received an update from ERP software vendor Epicor, my first since it was acquired in May 2011 by Apax Partners, a private equity company, and simultaneously merged with Activant, an ERP and point-of-sale software company serving midsize retailers and distributors. In my view, taking the company private is a good idea since it will have to make ongoing investments that would not have been treated kindly by the stock market. Bringing Epicor and Activant together (and perhaps adding other companies to the portfolio) could allow the entity to spread some development costs over a broader base of revenues, but software combinations are difficult to execute well.

Epicor, with total 2011 revenues of about US$834 million, has a global presence and sells mainly to midsize companies, in contrast to, for example, Oracle and SAP, which focus on larger ones. Because of their greater economic resources, large organizations can afford to spend more money and time customizing and configuring their software. They also can have larger and more specialized IT departments than midsize ones to implement and support them. Yet the functional requirements of these two sets of buyers are quite similar. For that reason, midsize companies benefit when a software vendor has offerings tailored to a specific industry (or a specific line of business – from an ERP system perspective, grocery is a very different business than retail) and that are easily configurable to the practices and requirements of a given company. Epicor’s focus is in manufacturing, distribution, retail, hospitality as well as financial and professional services. It mainly uses its own direct sales force worldwide and has a professional services arm to assist in implementations, unlike Microsoft Dynamics and Sage, which utilize partners for these functions. The direct sales approach has advantages if a customer prefers to deal with the software company rather than a representative. Epicor’s midmarket focus and direct sales approach most closely resemble Infor, which also is owned by a private equity group.

I listen to such briefings partly in the context of the basic business issues facing the vendors. The core business strategy for software companies in mature markets is to retain maintenance-paying customers and, if possible, increase the cash flow from each of them. The latter may be achieved by increasing maintenance fees. However, major ongoing gains are possible only by adding more fee-based services – either expanding the software footprint (more users and/or additional functionality) or adding complementary offerings (such as monthly third-party data feeds or reference table updates such as for taxes). Meanwhile, even though the pace of technology change has decelerated in the ERP category in recent years, it is not standing still, so vendors must at least maintain technical parity to offer competitive capabilities and minimize the total cost of ownership.

In the briefing company executives focused mainly on the Epicor ERP (not Activant) side of the business. This part of the company is largely the result of a combination of Platinum Software (one of the first client/server ERP systems on the market, aimed mainly at larger midsize companies), Dataworks (ERP aimed at midsize manufacturing companies) and Scala (ERP, supply chain, manufacturing execution systems, field service and project management. To retain its customer base, Epicor has been taking an approach it describes as “protect-extend-converge” that is similar in concept to other software companies that consolidate a string of acquisitions.

The protect part involves ensuring that users are comfortable with the company’s intention to support their software, adding functionality (and potentially revenue) while moving the development of the legacy applications to a common, integrated platform. Epicor runs all of its products on Microsoft’s .NET architecture. It continues to invest in its legacy applications, making it easier, for example, to support a geographically distributed organization by enabling configurations (not modifications, which are harder to implement and maintain) that control local currencies, accounting standards, calendars, charts of account, rounding routines and other small but crucial differences. Its business process management capabilities simplify the implementation and modification of workflows, even complex conditional ones, without having to alter the underlying application, and that facilitates software maintenance and upgrades.

The Epicor product extensions include a human capital management (HCM) application and embedded CRM capabilities. The HCM product category goes beyond the traditional human resources management system (HRMS). Its broader set of capabilities is an increasingly important as corporations look to manage their workforces more intelligently. Companies now have more varied relationships with employees (for instance, the growing use of contractors in the United States) and more complex regulatory environments, especially if they operate in multiple countries. Embedding CRM into Epicor ERP is another enhancement that enables customer-facing employees to access all customer-related information and processes (easier search and, for instance, a case or trouble ticket) and at the same time work with invoices, projects, returned material authorizations and other items typically managed by an ERP system.

To remain competitive in the enterprise applications market, Epicor has been investing in mobility, easy access to business information (through dashboards, alerts and search) and the use of social media techniques to enhance visibility into customers or collaborate with colleagues. Epicor also offers options in deploying the software: on the customer’s premises or through the Internet via a hosted license or an on-demand subscription. Although most finance organizations continue to want on-premises deployment, a hosted option can be attractive in situations where a company wants to use the same software in a smaller facility and/or a geographically remote location but would find it difficult to support an on-premises deployment at that site.

I see a couple of reasons why Apax acquired Epicor along with Activant. One is that to enhance their competitiveness, both needed to invest in R&D, sales and marketing and professional services. Doing this as a public company is challenging, less so for a private equity firm. Another is that Apax also may be planning to bulk up its enterprise applications software portfolio through additional acquisitions. In this respect, it would be following the same path as Golden Gate Capital with its investments in Infor, which I recently reviewed. However, amalgamations of enterprise applications software companies rarely go smoothly, and most of the attractive targets have been acquired.

I think Epicor’s key challenge over the next several years will be to stay competitive despite being smaller than most of its key rivals, notably InforMicrosoft Dynamics and Sage Group, as well as to a much lesser extent, Oracle and SAP. Thus, it needs a knowledgeable and patient private equity parent willing to make the investments that will enable it to keep up.


Robert Kugel – SVP Research

I recently met with Infor’s management team, led by CEO Charles Phillips. Phillips joined Infor in October 2010 after leaving Oracle, taking several other executives with him, including Duncan Angove, now president of Infor, and Pam Murphy, now the COO. In addition to the changes in the executive suite, Soma Somasundaram, who had been at Infor and its predecessor companies since 1995, became EVP in charge of R&D. A private company, Infor had been keeping a low profile for the past several years, probably because results were nothing to brag about, and I suspect Phillips wanted to wait until there were substantive improvements to point to before fully engaging with analysts. Subsequent to his arrival, Golden Gate Capital, the private equity firm that assembled Infor from dozens of once-independent software companies, acquired ERP vendor Lawson Software in July 2011. Lawson itself had merged with Intentia, a Swedish ERP company in 2005. I estimate pro-forma 2011 revenues for Infor plus Lawson for a full year at $2.7 billion (the company has not published this number). This is only a fraction of 2011 revenues for SAP (about $14.5 billion) and Oracle’s applications ($6.8 billion). Infor reported that organic growth in license revenues was 17 percent, roughly in line with comparable companies, and executives indicated in the meeting that maintenance renewals have improved.

The management team described their strategy and objectives as a departure from the past, but having followed this company for five years, I found that with one exception these sounded very much like the previous management’s.

As before, Infor’s key strategic differentiation is its focus on verticals, which is much deeper in a broader range of industries (machinery, hospitality, automotive original equipment, fashion, food processing and hospitals, to name a handful) than Microsoft, Oracle or SAP can offer without customization and configuration. For companies purchasing the software this means they can spend less to implement and maintain it, a consideration that is particularly important to the midsize organizations that form the largest part of Infor’s installed base. The vertical focus remains a core aspect of the company’s strategy. A second continuing piece of strategy is derived from Infor’s legacy of being cobbled together from many constituent parts. That has made it important to find ways to reduce the cost of maintaining those code bases, to make it easy for existing customers to add functionality from Infor’s other software (such as performance management and analytics) and ultimately to facilitate their migration to a new, rationalized set of applications. This is still the roadmap. Third, evolving technology has elevated the importance of mobility and easier collaboration in executing tasks; this, too, remains a major objective.

What’s new in the go-to-market strategy since the new team took over is that the company is setting its sights more on Global 1000 companies, both at their headquarters and in subsidiaries, especially where vertically specific ERP capabilities are needed. Infor has increased its global accounts team to more than 75 from only four before. I suspect some of this is the result of absorbing Lawson, which had larger customers, but it also reflects the revitalization of some of Infor’s core ERP software components such as Baan, which has large customers around the world. The economics of serving large customers generally are more attractive than for midsize ones, and it’s probably more satisfying for Infor’s executives to flaunt familiar logos on their customer pages. Nevertheless I expect midsize companies and smaller, division-level customers will be Infor’s core market for years to come. Among larger organizations, I expect Infor will be competitive almost exclusively in market niches where it’s specific product functionality provides advantages that Oracle and SAP cannot easily match. Otherwise, these two vendors’ investments in mobile capabilities, cloud-based offerings, in-memory processing, advanced analytics along with the overall richness of their existing applications portfolios gives them a substantial advantage in broad functional requirements required by the market.

Overall this management team strikes me as more effective in molding a consolidated organization, achieving sales growth and expanding profit margins. The high-level goals may be largely the same as before, but the probability of achieving them has increased because of a more disciplined approach to operations. For example, the professional services organization has implemented a series of measures to increase accountability for running profitable operations, and the corporation is now running on a single general ledger instance rather than dozens. For me as a finance analyst, the latter is especially telling, since I’ve found that a failure to rationalize administrative operations and systems after a series of acquisitions is often a sign of deeper issues in management effectiveness. As well, the consolidation of accounting functions has led to considerable savings, which management has redirected to product development.

The company recently released Infor10, a set of industry-specific suites that incorporates common application elements such as reporting, localization and business rules. Infor10 Workspace brings together data from multiple applications and sources so people can get all the information they need to do their jobs immediately. The new release incorporates ION, middleware that’s designed to be easier and more economical to implement, which midsize companies need (it’s not unattractive for larger ones, either). ION makes it easier to get multiple applications to work together to execute end-to-end processes, whether the software is on-premises, in the cloud or in a mixed environment. Being able to support mixed deployments is increasingly important. Although a large majority of companies continue to prefer to deploy their core ERP systems on-premises, almost all expense management and a majority of human capital management software deployments are in the cloud.

Infor has begun to partner to expand its ability to deliver applications in the cloud. Last September, Infor announced InForce, three applications to be built on’s platform. InForce Everywhere enables users to work with information from Infor ERP applications, such as transactions and customer data. In future releases, InForce Order Management will offer quote, order and proposal management capabilities, and InForce Marketing will provide marketing automation capabilities, linking Salesforce to Infor CRM (the evolved version of Epiphany Software).

Phillips said that product development is his focus, which at this stage of Infor’s development is strategically correct. Solidifying the technical underpinnings of the application suites has been a long, difficult process, and there’s still work to be done. Yet there’s a great deal of potential for innovation using Infor’s considerable roster of applications. Its Hospitality Solutions, which I reviewed last year, is in a market where corporations can find value in integrating advanced consumer-focused capabilities with run-the-business software (such as systems for reservations, property management and back-office operations). The company has already integrated Epiphany’s marketing into Hospitality, but there’s considerable scope to broaden the capabilities of the offering. As an example, executives cited the ability to bring together publicly available information from social media to provide information about soon-to-arrive guests, which can help hotels more closely match their preferences.

I asked Phillips what would be the company’s top three sources of incremental revenue would be over the next several years, but he didn’t give me a clear answer. Here’s my guess: The first source is sales of existing portfolio products into the installed base, the second is sales of software to new accounts (mainly in emerging markets as well as displacing vendors such as Epicor, Microsoft and QAD in developed ones), and the third is sales of new products, either acquired or internally developed. Although the financial and manufacturing software markets are mature in the developed parts of the world, I believe there is considerable demand in them for complementary software. Moreover, as technology drives down the cost of deploying and maintaining these systems, vendors have the opportunity to capture a large portion of these savings by offering an expanded set of capabilities (and value) to their customers.

In recent years Infor has been quiet while dealing with a challenging economy, less-than-stellar results and straightening out the company’s management. That noted, although Infor appears to be in better hands, the proof of this will have to be demonstrated in sales growth and customer additions in the upcoming years in a mature and crowded market. Moreover, adding to the challenge, the market will demand further development of cloud and mobile capabilities as well as ongoing enhancements in usability and maintainability at a faster pace than what was acceptable over the past decade. I also believe Lawson, with its focus on people-intensive businesses will be increasingly vulnerable to encroachment from Workday as the latter enhances the financial management elements of its cloud-based offering.

From my perspective, Infor has been “the biggest software company you never heard of” because it’s privately held and because it has been challenged to manage the transition from existing multiple brands. I don’t expect Infor to go public any time soon, but I do expect it to become a more well recognized force in the software industry.


Robert Kugel CFA – SVP of Research

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