Technology, the industry and the Apax acquisition of Activant and Epicor

BY RICH SCHMITT
Management specialist

As I mentioned in last month’s column, I think technology will play a greater role in a wholesaler’s success than ever before. While the technology path has, historically, been methodical and plodding, I think it will change more rapidly than ever in the coming years. There is a saying attributed to Sir Arthur Eddington: “Not only is the universe stranger than we imagine, it is stranger than we can imagine.” To paraphrase that quote: The future use of technology in this industry may be more important than we imagine and may be more important than we can imagine.

I think the rate of change will be so significant, that we cannot envision where we will be in five years. An even more important point to consider is that wholesalers no longer control the pace of change in our industry. The end users have access to more technology and information (some good and some bad) and are starting to demand that we step up the pace to serve their needs. Technology needs to be at the top of our list going forward, because customers are telling their wholesalers to “Lead, Follow or Get out of the way.”

As I talked about technology last month, I mentioned that Apax Partners has announced their intent to purchase Activant Solutions Inc. and Epicor Software Corporation in a deal estimated to be around $2B. Activant owns several of the most widely-used ERP software packages in our industry. I asked Kevin Roach, executive vice president of Activant’s Wholesale Distribution Group, if we could discuss his view of the industry, technology in the industry and the details of the Apax deal, and he kindly agreed.

Schmitt: As we are talking, the Apax deal has not been completed, so I know you are limited in what you can discuss, but we would be interested in what you can tell us.

Roach: I am restricted in what I can say, but I can discuss what has been made public. We expect to close this quarter. We need to get some approvals, and to tender an offer for the outstanding shares of Epicor, which is a public company. The process is going fine, so we anticipate the deal closing soon. We have announced that the new combined company will operate under the Epicor name since they have a global footprint.

Schmitt: How do you see the combination of the companies impacting the various stakeholders?

Roach: I think the deal will be exciting for customers, shareholders and employees. While there is some overlap, the combined companies are very complementary and will establish great vertical position and international presence.

Schmitt: I know this will evolve, but can you describe what each of the companies does currently?

Roach: Activant provides software for small and medium retailers. Activant also provides solutions for all sizes of distributors, ranging from tiny, with three to four users, to huge, with 6,000 to 7,000 users. Our distribution customers range in size from $5M in sales to over $15B in sales. We cover the entire spectrum in distribution. We also provide services that diversify our portfolio.
While Epicor has some distribution, their focus has been in manufacturing and retail. Their retail customers include high-end retailers like J. C. Penney. Plus, they operate globally, and have translated their offering into 30 languages. So the new company will span the entire supply chain from manufacturing to distribution to retailing and servicing of products.

Schmitt: You mentioned services, what areas are you in?

Roach: We provide benchmarking services based on decades of data to create important business metrics like DSO (Days Sales Outstanding), inventory turns, lines per invoice, etc. We can show clients how they compare with the best in the industry. We consult for our products, of course, but we also offer business consulting for customers who do not use our software. In addition to consulting, we provide website creation, support and hosting, including B2B Seller, our web store product. Finally, there’s the Activant Backup Solution that allows users to recover their business data within one hour from a PC anywhere in the world. That includes every transaction that had posted prior to the failure.

Schmitt: Do you think the distribution market for software is saturated? Have most wholesalers picked their ERP software and locked themselves in for the next 20 years?

Roach: Not at all, there are 300,000 distributors in the U.S. and 80% of them have no system, a homegrown system, or are using Excel or something similar to run their business. Activant is the leader in many verticals, yet as the leader, we may only have a share of 10% to 20%. There is a lot of opportunity out there.

Schmitt: Activant has acquired many packages over the past several years. What are the plans going forward?

Roach: We’ll focus development on three products: Eclipse, P21 and Prelude. Eclipse is an enterprise class ERP for electrical, plumbing and HVAC wholesalers that currently runs as many as 7,000 users on a single system. P21 works for small to medium wholesalers in most verticals for users up to 2,000 users. Prelude has some unique capabilities for services, rental businesses and large companies with over 6,000 users.

Schmitt: What about what some of the other products you have acquired?

Roach: We’ll provide support for the other products for as long as our customers want to use them. Of course, we want to offer them a migration path so when the time is right they can move onto one of our three main products. In some cases, it may become impossible to support a legacy product. When that occurs, we will work from, a commercial and technical standpoint, to help those customers onto the right mainstream product.

Schmitt: Within Activant, does each software product have its own group?

Roach: I’ve merged the teams to create a single point of leadership and a single toolset. I’m a process guy and a lot of my experience is in manufacturing, where there is a tremendous focus on processes. Prior to working for Activant, I was president of Rockwell Software, and am a certified Six Sigma black belt. I believe that institutionalization of processes results in more consistent output. After the processes are in place, we can continue to tweak them.

Schmitt: Can you give me an example of a process you are describing?

Roach: We’ve adopted the SCRUM agile development methodology. Traditional software development cycle involves writing a design spec, getting sign-offs, coding, testing, etc., that typically runs about 18 months. After which, you release it and find out if it really meets the customer’s needs. The result is lower-quality, less-relevant software. Sometimes you may miss the mark completely. Using SCRUM methodology, we employ two-week sprints where we build, document, debug and validate chunks of code. So at the end of a sprint, we are back with the customer testing finished code. If we misunderstood, or the customer sees the finished code and changes his mind, we have a 20 man-week mistake versus a 300 man-week disaster.

Schmitt: There is a lot of press about cloud-based solutions. I think the jury is out as to whether they make sense for mission critical applications like an ERP. Does Activant have an offering for customers interested in that type of platform? Do you think the cloud is ready for ERPs?

Roach: The cloud-based ERP has some concerns like security, reliability and hacking. But don’t forget, the on-premise-based ERP has concerns like natural disasters, security and reliability, too. Currently we offer P21 and Eclipse in three options: on-premise, hosted in our data center, and on-demand, which what most people consider to be a “cloud” offering. Our customers can choose whichever approach works for their company. While most of our customers use the on-premise option, hundreds use the hosted and on-demand options. Surprisingly, size isn’t the only consideration – they range from small to multi-billion dollar companies.

Schmitt: Switching to your view of the distribution industry, any observations about where you see it headed?

Roach: There is a high density of family-owned companies where the owner is involved in the business. The intimacy these people have with their employees, their customers and suppliers is tremendous. I enjoy that part of the industry. I think that there is a lot of consolidation going on and expect a feverish pitch as the economy continues to recover and capital frees up.

Schmitt: Suggestions for wholesalers?

Roach: The industry has tended not to be early adopters of technology. This is natural, but in the future, more aggressive leveraging of technology will be critical to remain competitive. There’s still plenty of room to improve business performance, reduce costs, and increase customer satisfaction with applications like business analytics, web 2.0 collaboration, or mobile apps.

If I could recommend just one thing to distributors, it would be to value stream map every one of your processes. We and other companies offer help in doing this. You start by measuring and studying how you do things, then design processes to do them better using “lean” and “Six Sigma” principles. In simple terms, “lean” is about reducing waste, and waste is anything that does not add value to your customer. “Six Sigma” is about reducing process variations that produce defects. Applied to order entry, it can produce 30% to 40% productivity gains and similar reductions in defects for well-run distributors.

Schmitt: What is the next big technology challenge?

Roach: I think we are going to see a major shift in technology. ERP systems replaced paper and manual systems. These are referred to as “Systems of Record.” They were put in place to serve the top levels of the company and to produce the financials. There was not much for middle managers. If you compare corporate IT to consumer IT, frankly, corporate IT is lagging by comparison. As a consumer, I can do anything that I want; I can buy online 24 hours a day; I can schedule trips; I can video chat with anyone all over the world. But when I get to work, I’m constrained to e-mail or voicemail technology. We need to bring the same “systems of engagement” that we support as consumers into our business models. The future is the convergence of these “systems of record” with “systems of engagement” like Facebook, Twitter and the million other social sites that business people currently view as toys. This convergence will turn these toys into tools that can remove major chunks out of cycle time. The famous business author Geoffrey Moore is writing a book on this. We think it is going to change the way business systems work and how we support and collaborate with our customers.

****************

I enjoyed my conversation with Kevin Roach of Epicor this month and my interview last month with Andy Berry of Infor. Both guys are passionate about the industry and the challenges their companies face. They come from hands-on technology backgrounds which, I think, help them to better understand and champion changes in their companies for the benefit of their customers.

Note: As we go to press, Apax Partners has announced the completion of their acquisition of Epicor and Activant. The new company, as Kevin indicated above, will be called Epicor Software Corporation.

Rich Schmitt is president of Schmitt Consulting Group Inc., a management consulting firm focused on improving the profitability of distribution and manufacturing clients. Rich is also the co-owner of Schmitt ProfitTools Inc. (SPI), a business producing print, CD-ROM, web and palm-based catalogs as well as pricing management and analysis software for wholesalers. Go to www.go-spi.com for more information.