Overview of the ERP Marketplace
Over the past five years, the enterprise software market has been anything but stable. A proliferation of disruptive technologies and a general commoditization of software have led to a wave of consolidation.
This volatility has been creating both excitement and worry in our firm’s client base. The companies that tend to be excited are those whose enterprise software vendors have articulated a clear vision of the software’s future that happens to align with the companies’ own IT strategies. The companies that tend to be concerned are the ones who remain to be convinced that the software they have acquired – or are evaluating – will ultimately prove viable for the long-term.
Recently, some in the concerned group have been asking me to assess risks associated with the recent leadership shakeup at Epicor Software Corporation – a nearly $1 billion vendor of enterprise resource planning (ERP) software and various other enterprise applications.
About Epicor and its Private-Equity Ownership
Epicor’s target customer base includes small and mid-sized companies that generate between $25 million and $1 billion in annual sales. Companies that operate Epicor applications are positioned throughout the value chain, and typically manage service, retail, distribution, or manufacturing concerns.
The vendor’s applications portfolio was partly built organically and partly through M&A activity. The company itself is owned by British private equity firm Apax Partners. Apax acquired Epicor in 2011 and merged it with Activant, an ERP vendor that served a distribution-centric customer base.
Epicor had barely begun digesting Activant when it went out and acquired another target. In September of 2012, it bought Canadian ERP vendor Solarsoft Business Systems in an effort to plug a gap in its ability to serve process manufacturing verticals.
Fast forward to the close of fiscal 2013. Epicor now sits on a diverse product portfolio consisting of 61 applications (review a complete list here). Based on its net loss of $50 million over 2013, it appears that Epicor has had a tough time extracting value from across it various product lines.
Epicor’s Leadership Shakeup, and a History of Joseph Cowan
Two years into its ownership, Epicor’s private equity overlords had apparently been hoping to see greater value creation. In October of 2013, Epicor made a significant leadership change. It hired renowned software company turnaround expert Joseph L. Cowan as CEO. Cowan replaced the summarily departed CEO and board member Pervez Qureshi.
Here’s a brief history of Cowan’s recent employment. From 2002 to July of 2013, Cowan held CEO positions at four troubled enterprise software and IT service companies. In each case, he presided over the company for a one to three-year period. And, in each case, the company was sold at the end of Cowan’s tenure.
Under present circumstances, Cowan was presumably brought onboard to deliver value that would position Apax for a profitable exit event. Given Apax’s and Cowan’s respective track records, it would not stretch credulity to speculate that Epicor will be up for sale sometime between 2015 and 2017.
Speculating on Near-Term Implications for Epicor
Epicor customers and prospects might want to take pause and assess whether and how their actual or intended software investments might get caught in the (almost certain) impending cost-cutting cross-hairs. They should also turn their minds to the medium-term – namely, how they might be impacted by an ownership change, software asset sale, or software retirement.
Cowan will probably look to continue his predecessor’s strategy of converging Epicor’s various software applications into a common framework, but will probably pick up the pace. He might also consider shedding applications whose convergence value may no longer justify the continued development, support, and service costs.
Epicor’s ERP applications whose futures remain clouded by uncertainty include the legacy Solarsoft Tropos application and the legacy Activant Prophet21, Eclipse, and Prelude applications. All the while, Epicor continues actively market and sell these ERP suites to companies that are looking to make a 10 to 15-year software investment.
Companies that invest in any application that is not core to a vendor’s long-term strategy run a risk of acquiring a piece of software whose development might be prematurely halted, for which bugs may cease to be patched, and for which IT services may prove difficult to procure.
Due-Diligence Recommendations for the C-Suite
To the C-Suite responsible for making enterprise software investment decisions, the message is clear. You can’t fully eliminate the risks associated with structural and other corporate changes at your software vendors. But, you can mitigate those risks by doing some basic due diligence. For example:
- Evaluate the vendor’s ownership structure, senior leadership, solvency ratios, and financial performance to assess the likelihood of M&A activity or an insolvency event.
- Evaluate growth in revenues and customers associated with the product version being proposed relative to prior years, relative to other products in the vendor’s portfolio, and relative to competitive offerings by other vendors.
- Assess the product development roadmap for the software being proposed.
- Evaluate the percentage of the company’s R&D budget allocated to the proposed software as compared to the R&D budgets allocated to other products in its portfolio and to what competitors are investing in their own products.
It would be a shame for a company that places a long-term bet on enterprise software to have to choose between 1) operating a legacy system subsisting on life-support, and 2) sinking initial software investment costs and undergoing a premature, costly, and disruptive ERP implementation project. Neither alternative is a good one.