Warranty management software has always been a tough business, with relatively small vendors facing off against relatively hesitant customers. It can take years to make a sale. And then once the customer realizes how interdependent the warranty process really is, it can take years to connect it all.

Anyone who can make a long-term career out of warranty management software sales has certainly earned their merit badge in entrepreneurship. We salute them all.

Last week, one of those Eagle Scouts was acquired by a much larger software company that was looking to round out its aftermarket product line. 4C Solutions Inc., of East Moline, Illinois, was acquired by PTC, the preferred name of what's formally known as the Parametric Technology Corporation. Price was not announced, nor were the terms of the acquisition as regards the timing or form of payment (stock or cash).

4C Solutions, of course, is one of the leading warranty management software companies, and since early 2005 has also been a leading sponsor of Warranty Week. So while it's somewhat difficult for us to remain impartial to this news, we'd probably be just as enthusiastic about it if it came from a company we didn't know as well.

Warranty Eagle Scout

We recently spoke with Ashok Kartham, the founder, president and chief executive officer of 4CS, about the acquisition. Kartham said he was also the majority shareholder of 4CS, and that there was one other shareholder, who also sold to PTC. The deal was completed on September 6.

Now Kartham, who entered the warranty business as a custom software developer 16 years ago, works for a great big public company (NASDAQ: PMTC). And as such, he said he could not discuss the selling price. But we believe the pricetag was in the neighborhood of $15 million.

Kartham also said he couldn't disclose revenue numbers for 4CS. But various outside estimates peg the company's size at $10 to $20 million; at $15 million; and even at $30 million per year. We're going to add our own revenue estimate of $16 to $17 million per year, but none of the people we spoke with were willing to confirm or deny any of those numbers.

4CS: A Profitable Company

Kartham said he was able to provide at least one financial metric. "We have been profitable for the last ten years, except for one year, since we started on the warranty side," he told Warranty Week. "Since 2003, once we introduced our [warranty management] product, we have been profitable."

That, we think, is what differentiates 4CS from most of its competitors. It grew organically, pouring its profits back into the business, and never needing to tap into outside investors. And in the process of growing from just one initial customer in the agricultural machinery business back in 1995, it virtually cornered the market for warranty management software in whatever you call that segment of the vehicle manufacturing industry -- heavy machinery, construction/agriculture equipment, trucks and buses, vocational vehicles, etc.

The company in this transaction that we didn't know much about was PTC. Luckily, before speaking with Kartham, we were given a quick quarter-century snapshot of PTC's history by Tom Sears, the senior director of product management in PTC's Arbortext Business Unit.

"Our roots are really in the engineering environment," Sears explained. Pro/Engineer, a parametric design, 3D modeling software package, was introduced just over 20 years ago. It represented a brand new approach to the way companies designed their products, he said.

PTC was incorporated in Massachusetts in 1985. In a very short time, it grew to be one of the top CAD/CAM software companies. Manufacturers of heavy equipment began to use it, as did several computer manufacturers and companies in the drivetrain sector of the automotive business. Among them: Caterpillar Inc., Deere & Co., CNH Global N.V., and Dell Inc.

History of Acquisitions

Ten years ago, PTC acquired a product line called Windchill, which moved it into the product lifecycle management arena. Among its innovations was the addition of capabilities that allowed OEMs to communicate and collaborate with their suppliers throughout the development process, Sears said.

Customers then began to ask PTC for help with their post-sales support activities, such as the creation of assembly instructions, service manuals, and parts catalogs. "In most companies, that's been disconnected from both the engineering and manufacturing environments," Sears said. "They said, 'We need better ways to create the information that needs to go along with the product to operate and support it."

So about five years ago, PTC made another acquisition, of an electronic publishing product line called Arbortext. It was named for its origins in Ann Arbor, Michigan, the city of trees, which marries well with the way the product is used by manufacturers to help save paper. For instance, the Arbortext IsoView module allows users to distribute technical illustrations and animations via the Internet. The Arbortext Interactive Electronic Technical Publications Viewer delivers technical data in a Web browser-based environment.

"We're moving away from publications," Sears said, "and actually allowing the OEMs to provide a database of information with an application where users can come in and graphically navigate their product." And because the data is online rather than in print, it's always as up-to-date as the engineering team cares to make it. With a tight connection between engineering and service, enhancements, optional equipment, and upgrades can be edited into the online user manuals, service bulletins and parts catalogs.

In 2008, Synapsis Technology was acquired, bringing environmental impact software into the PTC product line. In 2009, PTC acquired Relex Software Corp., a reliability engineering software company whose products provide system performance metrics and reliability data. And there were other acquisitions that brought in logistics support, modeling solutions, and medical equipment quality management software.

Push Me, Pull You

At that point, Sears said, PTC had a presence in engineering, in manufacturing, and in service. But it was basically always helping its customers push out information.

The next step was to help them pull information back in. Engineering wanted to know how people were using their products, and what design changes were needed in the next generation. Manufacturing wanted to know about defects, and how products were performing in the field. And the service organization wanted to know how to improve the serviceability of the product, and how to adjust the maintenance schedules in ways that would lower the cost of ownership.

"And that's where we got very interested in 4CS," Sears said. He said when he asked customers about the amount of visibility they had in terms of the performance of their products, they replied that they knew little outside of what they got back from the claims coming into their warranty management packages. And whose warranty management packages were in use by many heavy equipment and automotive manufacturers? The same answer kept coming back: 4CS iWarranty.

Sears said he went to the Warranty Chain Management Conference, and met some of the folks from 4CS. He began to realize that they had a lot of common customers. And ironically, because engineering and warranty were still so disconnected inside many shops, some of PTC's key contacts within those companies didn't even know they were common customers of both 4CS and PTC. But those who did know had lots of good things to say about 4CS.

Making Strategic Sense

Kartham said the conversations became more serious right after the conference in March. He wasn't specifically shopping the company, but he was open to something that made strategic sense. "We felt like we had reached a stage," he said, "where we were looking at how we could grow beyond where we are -- globally as well as fulfilling our vision for Service LifeCycle Management."

Going public isn't really an option in the current market. Venture capital or private equity could have been an option, but Kartham said he's always preferred to grow internally. "We feel like this is a lot better way of taking it to the next level," he said.

4CS started as a company doing custom programming for Deere & Co. back in 1995, and that project grew into the commercial launch of its iWarranty software in 2003. After that came additional customers such as Motor Coach Industries International Inc.; Takeuchi Manufacturing (U.S.) Ltd.; Mitsubishi Caterpillar Forklift America Inc.; Kubota Manufacturing of America Corp.; Mahindra USA Inc.; and Freightliner Inc., which is now a division of Daimler Trucks North America LLC.

Kawasaki Construction Machinery Corp. of America began using 4CS software in 2006. And then in 2007 bus manufacturers New Flyer Industries Inc. and Blue Bird Corp. signed on. Chain saw maker Blount International Inc. deployed 4CS iWarranty software in early 2007. Agricultural equipment manufacturer AGCO Corp. signed a deal with 4CS in 2008, as did Zenn Motor Company, makers of the Zero Emission No Noise electric vehicles.

In 2010, Coda Automotive, another maker of all-electric cars, and Dixie Chopper, a maker of fast little riding lawn mowers, both selected 4CS. And then Atlas Copco, the Swedish manufacturer of construction and mining equipment, signed up for iWarranty in April 2010. Customers announced so far this year include Azure Dynamics; Follett Ice; Home Warranty Inc.; Landmark Home Warranty; Ride-a-Way; Manitowoc Foodservice; Revent Inc.; and ZF Services North America.

Serving Additional Industries

From that list, it's pretty clear that the customer base has now begun to broaden from its heavy equipment roots to include some extended warranty and home warranty administrators, some food service equipment companies, and some consumer electronics companies. Unfortunately, there are several other well-known customers that are extremely reluctant to see their names in print, so they've never made it to the press release stage with 4CS.

Kartham noted that while 4CS was initially focused on product warranty, in the years since it has gradually added modules around that iWarranty core for extended warranty management, service parts sales, supplier recovery, fleet management, product registration, and service center operations. But how could a small company like 4CS bridge that divide between engineering, manufacturing, and service?

Here's a diagram of the 4CS wheel of Service LifeCycle Management. iWarranty the module is in the northwest of the wheel, and iParts is in the southeast. The names of the other modules are a bit hard to read, so click on the image to see a larger diagram. But notice in particular the alphabet soup of acronyms at the lower right: ERP, CRM, SCM, DBS, PLM. What's a small company to do?

Source: 4CS