What are the advantages of a larger distribution software company? We'll soon find out.
It would be difficult to overstate the importance of enterprise resource planning (ERP) software in the electrical distribution market today. There have been cases of electrical distributors closing their doors or being more or less forced to sell the business to a competitor with greater resources because they were unable to compete any longer using their existing technology and unable to handle the expense of installing a new system. This has been a significant but often unseen driver in the consolidation of electrical distribution for years.
The companies that develop, sell, install and support these information systems, meanwhile, have faced a constant torrent of technological change and new competitors. Often they too have had to face the difficult choice of selling the business to their competition as it became increasingly evident that to sustain the systems' development and support over time it was necessary to have significant economies of scale.
Back in 1998, Electrical Wholesaling published a roundup of companies providing software to the electrical distribution market, and we found 22 companies to profile who had some involvement in the market. Through waves of consolidation, that number is down to a handful now, and the trend toward ever-larger software companies continues.
This spring, two deals announced within weeks of one another showed that the push for greater breadth and economies of scale continues to reshape the world for electrical distribution software providers.
On April 4, Activant Solutions, Livermore, Calif., announced that it was being acquired by Apax Partners, a private-equity firm, and that Apax at the same time was acquiring Epicor Software Corp., Irvine, Calif., an ERP software firm that's better known in the manufacturing and retail markets. The combined value of the deals was estimated to be around $2 billion.
On April 27, a holding company affiliated with Atlanta-based ERP giant Infor Global Solutions agreed to pay $1.8 billion for Lawson Software, St. Paul, Minn., a rival provider of ERP systems in a variety of vertical markets that's very active in industrial distribution.
Here's a rundown of what the deals may mean for the companies involved and for electrical distributors who rely on them for the central nervous systems of their businesses.
Activant Solutions has been a major player in the electrical market for many years, since before it took the Activant name. In its earlier incarnation as CCI/Triad, it was primarily known in these parts as the service provider that managed many of the back-end systems on which product-data synchronization provider IDEA, Arlington, Va., runs its electronic data interchange (EDI) and data warehousing services for the electrical industry.
In 2005, the company began collecting electrical distributor ERP systems through a string of acquisitions starting that year with Speedware and Prophet 21. The Speedware deal included Prelude Systems, and the Prophet 21 deal added not only Prophet 21's Acclaim and Commerce Center ERP systems, but also Systems Design's Prism, which Prophet 21 had bought in 2003, and Trade Service Systems' Array, which Prophet 21 had bought in 2004. In 2007, Activant added significantly to that arsenal with the purchase of Eclipse from Intuit for $100 million. Combined, these purchases gave Activant the largest installed base of users in the electrical distribution space, albeit spread across a mélange of different ERP packages. The company has further embedded itself in the electrical industry by providing SKU-level data through its Vista Information Services unit.
Activant being folded together with Epicor creates a software business with combined revenues of $835 million that will go forward under the Epicor Software name. Activant was carrying a significant debt load from the earlier acquisitions, so the financial backing of Apax Partners, which manages more than $40 billion in funds and is active in the technology, telecommunications, retail, consumer, media, healthcare and financial and business service markets, is important.
Epicor at the time of the acquisitions was larger than Activant when measured by annual revenues. According to its 2010 10-K, Epicor had sales that year of approximately $440.3 million. To date, Epicor has focused on providing ERP software for retailers, distributors and manufacturers in the restaurant, hotel, apparel, automotive manufacturing and consumer packaged goods arenas. It hadn't made a mark in the electrical wholesaling industry before the combination with Activant, but reportedly has distribution packages installed at several smaller supply houses that sell both electrical and plumbing supplies.
Activant's retail products, including services and data for hardware stores, lumber stores, auto supply stores and other companies in the retail markets actually account for a bigger slice of its total business (approximately 57 percent). Its Wholesale Group, which includes the distribution software packages for electrical distributors, accounted for $153.38 million (approximately 43 percent) of the company's total 2010 sales. Sales of systems to distributors totaled $51.56 million, while services accounted for $101.72 million.
Activant will continue to develop its relationship with IDEA and to enhance its Vista sales data offering, according to Steve Bieszczat, the company's vice president of marketing.
The combination of Activant with Epicor expands both companies' reach, both globally and in terms of markets served. Epicor has a well-developed presence in a huge number of international markets — 155 countries, and 31 languages, Bieszczat says — giving it an advantage in understanding the nuances of localized languages, market customs, tax codes and so forth, to take care of customers with global operations or aspirations.
Infor Global Solutions
Infor was founded as Agilisys in 2002, and jumped into the electrical industry in 2004 by acquiring another of the leading distribution ERP providers, NxTrend (this was part of a much larger acquisition spree that included a German company, Infor Business Solutions, from which it took its present name). The NxTrend acquisition gave Infor the SX Enterprise suite as well as Ultimate Data Systems' SHIMS ERP platform, which NxTrend had acquired earlier. Infor added to that with the acquisition of Aperum (known as Software Solutions until 2003) and its FACTS and TakeStock packages.
Acquiring Lawson adds significantly to Infor's offerings in the distribution market and elsewhere. The companies combined can offer a suite of industry-specific applications serving more than 75,000 customers in verticals such as manufacturing, health care, distribution, public sector and hospitality.
“Lawson is a natural strategic partner for Infor, offering complementary software solutions that will extend our existing portfolio, particularly in areas such as healthcare, public sector, manufacturing and human capital management,” said Charles Phillips, CEO of Infor, in a release at the time of the Lawson acquisition.
In markets such as wholesale distribution, where both companies already are active (others include healthcare, state and local government, fashion, food and beverage, equipment rental and manufacturing), Infor expects to be able to offer richer and deeper functionality.
Before the Lawson deal, Infor had already announced a plan to hire 400 additional software engineers and ship approximately 60 percent more products and enhancements than last year. In addition, the company plans to reduce the need for customizations, take responsibility for more localizations, and make reports and user extensions easier to upgrade.
Giants Facing Off
The recent acquisitions separate the two biggest players in electrical distribution ERP systems even further from most of their competitors in this market, in terms of sheer size. Smaller software providers such as DDI System, Sandy Hook, Conn., which has been developing a specialty in electrical distribution and makes the interesting claim on its website that no customer has ever converted away from its software, demonstrate that there still is space for newcomers as well.
The moves by Infor and Epicor to scale up can be seen as a bid to level the field and compete head-to-head with the biggest business system providers in the world. SAP AG, headquartered in Walldorf, Baden-Württemberg, is by some measures the largest enterprise software company in the world (key rivals include Oracle, Sage and Microsoft). SAP turned its sights on the North American electrical distribution market a few years ago and has made some inroads. Despite its moves to offer scalable solutions, though, it has found the most success among the largest electrical distributors, such as Graybar and Border States, who can gain the most benefit from SAP's enterprise solutions, which are typically heavily customized for each client.
Especially after adding Lawson to its arsenal, Infor must be counted among those largest global ERP system providers. Epicor's union with Activant puts it in the conversation as well, especially in electrical distribution, where Activant scored a coup two years ago when Rexel picked Eclipse as the platform for all its North American locations.
Opinions among the industry's software mavens differ on what the increased size of Infor and Epicor will mean for distributors on the ground. There has been widespread discussion on LinkedIn groups, web forums and private conversations about the possibility of distributors and other clients being left behind, especially those whose businesses depend on any of the myriad “legacy” systems acquired by the two giants over the years.
Both Epicor and Infor have narrowed the list to two or three software systems they will continue to aggressively develop for the electrical distribution market. For Epicor, the focus will be on Eclipse and Prophet 21, Bieszczat says. Over the long run, they hope to migrate the users of their legacy systems to these core “go-forward” systems. But they'll try to be gentle about it.
“It's not good to abandon those legacy systems, especially if we can maintain them with just a few engineers,” says Bieszczat. “Chasing customers off the systems they have is not good business. We tried that and learned it's not so cool.”
Both companies insist that no one will be abandoned, though distributors on legacy systems can expect to get the companies' most compelling sales pitches about the benefits of switching to their core systems. There's reason to listen. The increase in size and breadth at both companies will undoubtedly be channeled to development of the next generation of ERP system functionality. First off, think mobile.
Just as it's hard to imagine a distributor today trying to do business without a robust executive information system, soon it will be incomprehensible to imagine doing business without the kinds of mobile computers, communicators and media centers we still habitually call phones. For many of us, that day is already here. The software companies are on the case.
Mobile applications that will allow distributor salespeople in the field to place orders, check stock and otherwise interact with the company's ERP system are a key focus for development. “As we develop iPad apps, it puts the level of complexity on us as a provider,” said Andy Berry, Infor's vice president and general manager for distribution, in an interview earlier this year. “What do you push to a phone versus a tablet, versus a web page?”
Perhaps equally important is the further development of e-commerce capabilities, an area where size and breadth may be a significant advantage. Companies of all kinds in all industries are working on e-commerce as a critical function for the future, so a company with activities in retail and other markets will be able to spread its development investment across a broader range of industries.
E-commerce development also extends to internal operations. Infor, for example, has rolled out a new consumer-grade interface to give its ERP systems a better look and feel. Built on Microsoft SharePoint and significant development investment, Infor Workspace delivers what Infor calls “the next generation user experience” by blending a common user interface, in-context collaboration and business intelligence in a role-based user experience that allows users to access business functions using a common look-and-feel.
The growing interest in cloud computing solutions is another area where distributors can expect to see further advances. Thus far, electrical distributors have been interested in the possibility, but cloud computing has limitations that will need to be overcome. The options for customizing functions of a cloud-based application are limited and costly, and despite intensive work on data security many users remain wary. There's also the consideration about whether to account for the system as a capital investment, which an on-site system is, or an operating expense, which can tip the decision for many executives. Thus far, says Bieszczat, most distributors seem interested in knowing about cloud options so they can check a box pertaining to the company's capabilities — very few actually pursue it further.
But what about electrical? Some look at the breadth of these big companies and worry that development of functionality specific to the needs of electrical distributors will sink further down the list of priorities. There are several areas where electrical distributors' needs require technologies and configurations specific to this market. The handling of huge product databases and the ability to get at that data easily, even on products a particular distributor may not carry, are among the nuances that don't crop up as much in other markets.
The nature of distributors' relationships with their suppliers and their purchasing patterns, which are shaped by SPAs, buying-group alliances and other factors, make systems specially developed for the electrical market important. Products with special handling characteristics such as wire cutting and kitting services further complicate the process. But both companies have groups that are heavily focused on continuing to develop the electrical market, so it seems unlikely the focus will lag.
Whatever happens in the ERP market, you can expect it to happen faster. “When you look at ERP providers, the old way of development was a major release every 18 months,” says Berry of Infor. “Now customers want the latest every couple of months. We're changing to a rapid-release environment. There will be smaller, quicker releases, and the flexibility to upgrade components without upgrading the whole solution.”
Meanwhile, the market for enterprise software, like many other business investments, has been slowed by the economy and uncertainties about the recovery. This makes it hard on the providers, but for a distributor it may be a particularly good time to gather information and begin considering the options. Doing a software changeover when business volume is relatively low can be an advantage, as long as you maintain your service levels.
The ongoing growth of the electrical distribution ERP software market's largest players will provide plenty to watch and wonder about over the next few years. For those distributors facing an upgrade soon, this may be a particularly good time to make your interest known. But these guys are getting so big you might want to invite them in through the loading dock instead of the front door.
Who Owns My Brains Now?
The software system on which your company operates from day to day is like the brain and central nervous systems keeping the company alive. Here's a list some of the more prominent packages in the electrical distribution market over the past dozen years that are now part of the Epicor and Infor worlds.
(the part that was formerly Activant, which in turn was formerly CCI/Triad)
- Eclipse (bought in 2007 from Intuit for $100 million)
- Prophet 21 Acclaim and Commerce Center (bought in 2005)
- Prelude Systems (acquired in the 2005 with purchase of Speedware)
- Array (originally from Trade Service Systems, which was acquired by Prophet 21 in 2004)
- Prism (originally from Systems Design, acquired by Prophet 21 in 2003)
- SX Enterprise (originally from NxTrend, bought in 2004)
- Lawson M3
- SHIMS (originally from Ultimate Data Systems, acquired by NxTrend)
- FACTS and TakeStock (originally from Aperum, aka Software Solutions, acquired in 2004)