By “focused,” you mean focused on your specific niches?
I wouldn’t call them niches, but yes. Here’s the interesting thing: two years ago, we derived about 35%–40% of our revenues from five vertical markets — health care, public sector, fashion, food and beverage, and equipment-service management and rental — and one horizontal market, strategic human-capital management. Now it’s 65% from those areas. That’s important, because the way we’ve allocated our capital is in markets where we know we can win.
And we’ve gotten very vertical within those verticals. It’s very different selling an ERP system to a hospital than to a fashion manufacturer, but it’s also different selling to a jeans manufacturer rather than a sports-footwear manufacturer. An ERP application is a relatively large, complex sale, and you have a lot more credibility if you really understand the issues the customer deals with. We’ve developed a great deal of intellectual capital in those particular verticals.
How did you arrive at them?
The merger with Intentia created a company of global scale and critical mass. But we found that we were spread too thin. We didn’t have a sufficient focus in a targeted number of verticals. So we made an assessment of which verticals we were the strongest in and which had the highest growth prospects over the next three to five years.
One of the areas, equipment-service management and rental, was completely new for us. The customers are large distributors of heavy equipment, like Caterpillar dealerships. Now we have 8 of the 10 largest Caterpillar dealerships in the world as customers. It then becomes much easier to sell to other Caterpillar dealers, as well as Komatsu dealers.
Each one of these environments does business a little bit differently, and that dictates a certain degree of customization in the application. I’m not saying that Oracle and SAP don’t do that. Where Lawson does well in competing against them is with companies between $250 million and $3 billion in revenue. About 75% of our customers are in that range, and our software tends to be architected in a fashion that’s more suitable for that size customer because it requires less in the way of internal resources to do the implementation.
You also have a consulting business, but it has been significantly downsized. Why?
We made a strategic decision to move more of the services business to our third-party partners, like IBM and Deloitte. Expanding the third-party network allows us to supplement resources and meet customer demands. In our revenue mix, over the past three years our maintenance revenue has gone from 39% to 46%, and our services revenue has done exactly the opposite, from 46% to 39%. And in the same time period, our gross margin has gone from 51% to 59%, and our operating margin from 3% to 15%.
Historically we differentiated ourselves by doing the great majority of our own implementations. You maintain quality control better that way and it’s a closer relationship with the customer. But we also wanted to push more of our consulting work to third-party providers. We’ll continue to do most of the implementations ourselves, but there’s other ad hoc consulting-services work that we want our third-party network to provide.