Tom Milay, Vice President of Industry Solutions at Made2Manage
, contacted me concerning my article last week on his firm's recent acquisition of Encompix
. Generally, he felt that what I wrote was accurate, but he noted my questioning of how the firm could make money by running each of its acquisition as a separate business unit. So, I took him up on his offer to do a phone interview, which now forms the basis for this post.Background
Back in 2003, Made2Manage was a small publicly-held Tier III ERP focused on small industrial manufacturers. I had evaluated the vendor's products once or twice and was impressed with its "small footprint" and web-based training that seemed to be appropriate for the small-company market that it was going after.
Shortly thereafter, Made2Manage was taken private by Battery Ventures, a venture capital firm, for $30 million. The word I heard from inside and outside the company was that the new management team was scaling back on product development in order to focus on selling into the installed base: sort of a "back to basics" strategy.
Since then, I noticed that Made2Manage was quietly accumulating several niche vendors in the small business ERP space, several of which I had evaluated in the past. Its acquisitions included DTR Software (ERP for plastics manufacturers), ADS (a former M2M reseller and developer of M2M extensions), Cimnet Systems (ERP for PCB manufacturers), and AXIS (ERP for manufacturers of "rolled products," such as cable and sheet metal). Then, last month Made2Manage acquired Encompix, a tiny vendor focused on the engineer-to-order segment.
So, what's behind this series of acquisitions and how does Made2Manage rationalize them? If the targets were struggling prior to being acquired, what does Made2Manage plan to do differently? Milay came to Made2Manage with the Battery Ventures deal, so he was in a position to clarify the firm's strategy.The benefits of an industry focus
I would sum up the strategy as one of intense focus on very narrow manufacturing niches. This would be in contrast to the major Tier I vendors such as SAP and Oracle, which build systems that apply horizontally across a broad range of industries--manufacturing and non-manufacturing--with industry-specific functionality that can be switched on or off according to the client's needs.
Made2Manage is taking the opposite approach. Instead of configuring a general-purpose package to serve a specific industry, M2M offers a package that simply serves that industry, or sub-industry, and nothing more. If SAP is a Swiss army knife, M2M's portfolio of packages is a draw of knives, each for a specific use: one might be a meat cleaver knife, another a filleting knife, and another a paring knife. So, with this approach, M2M does not want to rewrite its acquired systems to a common code-base. In other words, it does not want to turn them into a single Swiss army knife. It wants to keep them as separate knives.
"The fit of a product to a specific manufacturing sector requires separate products," Milay told me. "The market is shifting away from generalized applications, such as SAP, which requires extensive configuration, to packages that fit the customer's industry sector out of the box."
A little side note, here, to say that I'm partial toward industry-specific solutions. I've seen the advantage of a niche approach in many sales demonstrations that I've viewed in the past 15 years. A tiny vendor such as DTR (plastics) or Encompix (engineer-to-order) can beat SAP or Oracle in a sales demonstration simply by bringing in presales personnel that speak the language of the prospect.
For example, an Oracle or SAP rep might be assigned to the process manufacturing sector. But even that might not be enough of a focus. The rep might be selling to a pharmaceutical manufacturer on Monday, and a winery on Tuesday. Wednesday he makes a sales call at an injection-molding plant. What does he know about injection-molding? Not much. He knows a lot about Oracle's Fusion middleware and its vision for next-generation web services but not much about finite scheduling, which is critical to an injection molding company.
On Thursday, the DTR sales guy calls on the same injection-molding plant. He's never been in a drug plant or a winery. All week he has been talking to other plastics manufacturers.
Who connects better with the prospect?
Now, DTR may not win the deal. The prospect might be more comfortable going with a name-brand, such as Oracle or SAP. But in most cases, the prospect will be far more comfortable with the DTR sales guy. I have seen scenario many times, not just with DTR but with other niche vendors as well.Four strategic elements
With that background, here are key points of M2M's strategy, according to Milay.
- First, shift from a software focus to a solution focus. The firm's deep industry expertise allows it to make money by providing post-implementation assessments and general business consulting, beyond the initial sale and installation of the software. This deepens the relationship with the client and brings additional revenue from the client base.
- Second, automate customer service and support. One of the first things that M2M does when integrating a new acquisition is to document the most frequently encountered customer service problems and post them on its Web portal for customer support. It also deploys Web-based training for customers, if it does not already exist. As a result, 55% of customer incidents can be resolved by the customer using the Web, requiring little if any intervention by a customer support representative. According to Milay, automation of the support function is key to making the operating units profitable.
- Third, centralize some corporate functions. M2M does operate each software package in its portfolio as a separate operating unit, but it is centralizing corporate functions such as marketing, administration, finance, and senior management. Although this does not cut as much cost as combining the software development organizations, it does provide some economies of scale.
- Fourth, deliver all sales and service activities directly. M2M employs a separate direct sales force and services group for each software package in its portfolio. This flies in the face of conventional wisdom that says the best way to serve the small business market is through resellers and value-added resellers. M2M, in contrast, maintains a small selling team for new sales of each software product, plus a single salesperson to maintain contact with the installed base. On the service side, there is a small team of consultants for each software product.
I have my doubts about that last point. Over the past ten years, I've short-listed some of the products that are now in the M2M portfolio, and I've had to explain to clients why the vendor was flying in sales people from the other side of the country. It's not a plus, and it's even more of a problem when the client realizes that if he buys the software he'll be paying major travel expenses for the implementation consultants. Furthermore, I would be concerned that if M2M is successful in ramping up sales of its software products, it will find it difficult to scale up implementation services to assist those new customers. Milay agrees that there are some shortcomings with this model, but feels that the benefits outweigh the costs.
Concerning the need to maintain four separate software organizations, Milay said that over time, they do expect to realize some economies of scale in software development, by transitioning all their products to a service-oriented architecture, using Microsoft's .NET framework. Even though the packages will remain separate, there may be opportunities to share software components, especially where they provide functionality outside of the core niche manufacturing processes that make each package unique.
Milay realizes that continuing to operate each acquisition as a separate business unit may appear to be the most cost-effective approach. But it's important to see the whole picture. "We believe that our industry focus leads to greater market share in each industry niche, which leads to overall revenue for the company," he said. "This more than offsets the less-than-optimal organizational structure of operating each software package as a separate business unit."
Whether Made2Manage will be successful in the long run with its strategy is an open question. It is sticking to a traditional software license model at a time when only a few vendors are able to make money with it. Most of the buzz these days is around offering software as a service and leveraging open source. But, conventional wisdom is often wrong,
If early results are any indication, Made2Manage may have found a different path to success. The firm does not reveal financial results, but Milay assured me that ever since the company started on this road, it has been highly profitable.Related postsMade2Manage acquiring ETO vendor EncompixMade2Manage sees bright future in plasticsMade2Manage going private