Spend Management

SPEND MANAGEMENT: One of The Best But Least Known ROI Stories in the Technology Industry

SPOTLIGHT REPORT WWW.TRIPLE-TREE.COM

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TABLE OF CONTENTS INTRODUCTION

2

EXECUTIVE SUMMARY

3

SPEND MANAGEMENT OVERVIEW Core Fundamentals Driving Spend Management Other Catalysts Driving Adoption Multi-Billion Dollar Market Poised for Strong Growth Spend Management - A Dynamic And Yet Highly Fragmented Market Challenges to the Long-Term Success of Spend Management

4 6 8 9 13

VENTURE CAPITAL / M&A ACTIVITY 14 16 18

Venture Capital Investment Mergers & Acquisitions (M&A) Publicly Traded Companies

EMERGING STRATEGIC GROWTH PATHS Convergence Along the Spend Management Continuum The Next Frontier for ERP Franchises & Financial Management Systems Compelling Justification for Comprehensive Procurement BPO

19 20 23

CONCLUSION

28

TRIPLETREE CASE STUDY

29

APPENDIX 30

TripleTree’s Technology Team

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INTRODUCTION TripleTree is pleased to provide you with our latest Spotlight Report - “Spend Management: One of the Best But Least Known ROI Stories in the Technology Industry.” TripleTree believes that Spend Management represents one of the strongest growth opportunities for the foreseeable future due to the coordination of macroeconomic challenges and the relentless quest for increased margins and earnings per share (EPS) through revenue growth and cost containment. Spend Management is the process of identifying, capturing, and controlling expenditures on direct and indirect goods and services that translate dollars saved into profitability improvement. With over $20 trillion in annual worldwide expenditures, this sector is of high strategic importance in an economy that remains somewhat uncertain about identifying new sources of revenue growth as a means for increasing shareholder value. In this Report, the key segments of the industry are assessed along with an analysis of private equity and emerging strategic merger and acquisition activities to date. Several possible longterm strategic paths where Spend Management can play an even more prominent role are also illustrated including: • Movement Along the Spend Management Value Chain with major players aligning with best-in-class domain competencies and/or enhancing business models with ‘hybrid’ solutions consisting of software and IP, application hosting, on-demand Software as a Service (SaaS), professional services, and/or outsourcing; • The Next Frontier for Enterprise Resource Planning (ERP) Software Franchises with Spend Management representing a logical building block and growth engine for back-end ERP, databases, and financial management systems; • Compelling Justification for Comprehensive Procurement Business Process Outsourcing (BPO) with Spend Management offering the ROI justification needed before entering into smaller-scale BPO and building towards comprehensive procurement BPO.

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Our research and advisory engagements have allowed us to assemble a vast body of knowledge and expertise about the companies and value drivers that are redefining the Spend Management sector and the creation of interesting “growth platforms” along these strategic paths. As TripleTree continues its focus on Spend Management, we welcome your feedback on this topic. To learn more about the firm or to review our other research reports, please visit us at www.triple-tree.com.

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EXECUTIVE SUMMARY Spend Management is the process of identifying, capturing, and controlling expenditures of purchased goods and services with every $1 reduction in spending translating into dollar-for-dollar profitability improvements. Spend Management transforms disparate transactional data residing in ERP, accounts payable, general ledger, and operational databases into intelligent, actionable information and improved business processes delivering significant bottom-line savings.

key point of leverage for extending established franchises such as ERP and outsourcing in an environment with buyers very cautiously evaluating each new investment. No one dominant player has emerged as the clear industry leader in these fragmented, multi-billion dollar markets creating an exceptional opportunity for a leader to emerge. TripleTree believes this sector is one of the best positioned for growth with software, technology, consulting, and outsourcing sectors each posing intriguing leadership opportunities.

•

Industry consolidation of best-of-breed players will continue with strong M&A trends to deepen ‘hybrid’ offerings, extend domain competencies along the value chain, obtain critical mass, or gain access to new market channels and/or vertical industries being the primary drivers. TripleTree anticipates additional strategically-motivated consolidation as existing players strengthen offerings and business/delivery models in the race for industry leadership or in response to competitive threats presented by existing and/or new entrants to the market.

•

A ‘hybrid’ business model will be an absolute necessity for successfully penetrating this burgeoning market, industry dominance, and long-term survival. Strong professional service offerings rooted in deep sourcing, category-specific spend expertise, and business process knowledge coupled with software / hosted application offerings will be the minimum requirements to excel in this sector.

•

Spend Management represents a logical extension and a key building block for ERP franchises and outsourcing sectors that are continually searching for the next new growth opportunity to dominate. Market traction will be gained through ‘hybrid’ delivery models leveraging best-in-class disciplines that immediately validate the ROI proposition and lead to greater awareness / acceptance as well as creating a “selffunding” mechanism or “buy-in” for more technology investment or outsourcing. Smaller-scale outsourcing that has proved out the ROI value proposition will ulti-

We believe that Spend Management is strategically positioned for sustainable growth and interest for the following reasons: •

Spend Management is of high strategic importance to almost any industry, company or organization. Confronted by ongoing macroeconomic challenges and the relentless pursuit to enhance shareholder value, the sector presents a very practical option for increasing profitability and improving the bottomline without requiring top-line growth and/or operational eliminations to core operations.

•

With over $20 trillion worldwide spent annually on direct and indirect goods and services and every dollar in cost reduction translating into bottom-line savings, the market opportunity, growth and economic impact of Spend Management is enormous. While still in its infancy, the sector already represents a $10 billion dollar market projected to reach $17 billion by 2007, with more upside potential through higher end-user adoption.

•

•

Spend Management represents a large, untapped opportunity with less than 20% of organizations fully utilizing its key disciplines. With more than $500 billion in annual profits lost due to inefficiencies and failure to institutionalize effective Spend Management practices, industry analysts cite the lack of Spend Management as a corporate epidemic in the commercial sector and raises questions of proper fiscal responsibility in the public sector. Spend Management is fast becoming one of the best ROI stories in the entire technology industry. This exceptional and quick ROI proposition has become a MINNEAPOLIS 952.253.5300 952.253.5300 MINNEAPOLIS

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SPEND MANAGEMENT, PAGE 3

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DECEMBER 2005

Figure 1 Warehousing

▲

▲

P/O, A/P,etc.

▲

▲

▲

Management (PLM) are a part of the broader picture. Logistics

▲

ERP & Backend Financial Management Systems

Spend Management

E-Commerce Transaction Processing

▲ Transaction Connectivity

•

Transaction Processing (EDI) Enablement

Source: TripleTree, LLC

mately lead to more comprehensive, enterprise-wide Spend Management initiatives with smaller projects providing a “self-funding” source for larger scale efforts. Spend Management sits at the intersection of a variety of other technology segments including Supply Chain Management (SCM), back-end financial management systems such as ERP, databases, general ledgers, and eCommerce Transaction Processing (see Figure 1). • Spend Management interacts with back-office functions such as invoicing, purchase orders and payment by integrating with financial management and ERP systems;

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• Spend Management integrates with SCM systems enabling collaborative planning and inventory management that trigger event-driven procurement; and • Spend Management increases the efficiency and connectivity with suppliers by directly integrating with supplier’s e-commerce solutions such as EDI. The focus of this report is on the dynamics and market changes in Spend Management. However, we do acknowledge and introduce the concept that other sectors such as SCM, ERP, or even Product Lifecycle MINNEAPOLIS952.253.5300 952.253.5300 MINNEAPOLIS

CORE FUNDAMENTALS DRIVING SPEND MANAGEMENT Throughout our research and interactions with companies, we are witnessing increased demand for end-to-end Spend Management offerings. It is our opinion that the growing interest in Spend Management by organizations in both the public and private sectors is attributable to the following:

Supply Chain Management

▲

Databases

Demand Planning

▲

G/L

Inventory

Intense Macroeconomic Pressures. Slower economic growth, tight profit margins and intense competition confront virtually every industry, company, and organization. Traditionally, corporate executives and business leaders have utilized three basic strategies to improve profitability and increase shareholder value: i) increase unit volume growth, ii) increase the prices charged for their goods and services, and/or iii) decrease operational costs. Top-line revenue growth is more difficult to achieve in today’s ultra-competitive marketplace than is a $1 reduction in the cost of goods sold or operating expenses through cost management programs. As many organizations continue to struggle with identifying new ways to increase topline performance without unwanted price increases passed along to consumers, a viable alternative has been to identify operational efficiencies, e.g. business process improvements, divestitures of non-core business units, and elimination of labor forces. In recent years, many of these solutions have been pushed to their limit and are close to running the risk of jeopardizing the core business. Spend Management now affords yet a fourth and a very viable alternative. Spend Management has proven to be one of the easiest and fastest ways for organizations to identify and rationalize excess costs without risking the core business operation, eliminating staff, or taking calculated risks by increasing end-user prices. Figure 2

compares the historical trend for revenue growth, operating profit growth, and market valuations, as measured by price-to-earnings ratios, for the S&P 500. This historical view further illustrates the importance of Spend Management disciplines as well as the potential for enhanced value through improved operating profitability.

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Figure 2: S&P 500 Revenue Growth, Operating Revenue Growth, P/E Multiple 40.0x

30.0% 25.0%

35.0x

20.0% 30.0x

25.0x

10.0%

20.0x

5.0% 0.0% 1996

1997

1998

1999

2000

2001

2002

2003

P/E MULTIPLE

YEAR OVER YEAR GROWTH

15.0%

2004 15.0x

-5.0% 10.0x -10.0% 5.0x -15.0% 0.0x

-20.0% Average Revenue Growth

Average EBIT Growth

Top-line revenue and operating profit growth are easier to achieve during periods of economic expansion. It is during recessionary periods where spend management initiatives act as a stop-gap in supporting company valuations. During these times top-line growth is difficult or impossible to achieve leaving operating expense reductions as the critical component to maintaining flat or minimal erosion in operating profit. During the opulent years in the 1990s both revenue and operating profit growth went hand-in-hand with each other. It became clear in 2001-2002, with the depressed economy, that top-line growth was not possible and reductions on the expense side of the business were necessary to either maintain the same level of operating profit or in many cases, minimize losses. Spend Management has gained additional visibility in the C-suite as executives are faced with more challenging business conditions. On the whole, businesses are beginning to realize the power of spend management as providing an additional lever to maximize profitability, both in good and bad economic times, and ultimately support higher public market valuations. The main point being that Spend Management initiatives afford more control and accountability over operating profitability by increasing the efficiency gained from each dollar of revenue and gaining valuable insight into each dollar of spending.

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Source: TripleTree, LLC, CapitalIQ

According to Aberdeen research, enterprises spend nearly half of every dollar earned on external goods and services with each dollar in operational savings having five times more impact on profits than a commensurate dollar increase in sales. And yet, the majority of businesses focus their time on growing the top-line. Figure 3 provides a simple illustration of the comparison between top-line revenue growth versus operating cost reductions using the average profitability margin of the S&P 500. Holding all other factors constant, it takes a 10% increase in revenues to enact a 20% increase in EPS whereas it only takes a 1% decrease in operating costs to gain the same 20% increase in EPS.

This economic opportunity should not be viewed as insignificant. Aberdeen research estimates that organizations are losing $260 billion in annual profits due to the inability to organize and analyze spend data and implement best practices to capture these lost savings.

Based on this simplified analysis, it would seem straightforward that the easier route is to better manage operational costs rather than revenue growth. However, strategies for increasing revenue remain the top priority (and for many good reasons). That being said, opportunities exist for organizations to improve the bottom-line and shareholder value without aggressively growing the top-line. The challenge associated with this is due in part to the lack of capabilities and sophistication, domain expertise and business process knowledge, and technology automation for truly empowering Spend Management principles at all levels of the organization and across all spend categories. This has forced companies to either respond with ad-hoc methodologies, attempt to develop

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SPEND MANAGEMENT, PAGE 5

• The Bigger Bang for the Buck – Revenue Growth or Cost Reductions? Organizations are constantly under pressure to increase shareholder value. While revenue growth and its consistency are important, higher profitability is a key measure for enhanced shareholder value. Two obvious choices prevail: i) grow top-line revenue; or ii) reduce operating costs

Average P/E Values

DECEMBER 2005

Figure 3: Comparison of the Net Impact to EPS/Shareholder Value Revenue Growth vs. Operating Cost Reduction Scenario A Description

Baseline

%Chg.

10% revenue growth 10%

Scenario B

Revenue

$250,000,000

$275,000,000

Expenses

$225,000,000

$247,500,000

Operating Profit

$25,000,000

$27,500,000

10%

10%

11%

10%

$250,000,000

0%

$222,500,000

-1%

$27,500,000

Other

$12,500,000

$12,500,000

$12,500,000

Net Income

$12,500,000

$15,000,000

$15,000,000

5%

5%

5%

Net Margin%

EPS

$1.00

$1.20 Result

20%

20% EPS growth

%Chg.

1% decrease in costs

$1.20

20%

20% EPS growth Source: TripleTree, LLC, Aberdeen, & IDC

OT

internal capabilities, or find partners with these capabilities. Figure 4 shows not only the previously mentioned core fundamental growth drivers but also includes additional mounting drivers that are influencing the growth and acceptance of Spend Management initiatives.

OTHER CATALYSTS DRIVING ADOPTION • One of the Best ROI Stories in the Entire Technology Industry. The Spend Management sector has consis-

tently ranked as one of the top ROI value propositions in the entire technology industry and far outdistances the ROI opportunity of many other sectors such as ERP, CRM, among others. With return on investment for properly implemented Spend Management initiatives often exceeding ten times the initial investment, organizations are quickly realizing the benefit of dedicated enterprise-wide Spend Management programs. Additionally, while many other technology sectors require six to 18 months for deployment before measurable savings become realized, certain sectors within Spend Management have generated very meaningful savings in a matter of a few months.

Total Cost of Ownership (TCO)

Mo

unt ing

Ind

ustr

yD

rive

rs

Figure 4: Spend Management Industry Growth Drivers

Enterprise-Wide Deployment

Exceptional ROI

Fun Core d Drivamenta ers l

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Elevated Strategic View within the Organization

Intense Macroeconomic Issues

Increasing Shareholder Value Source: TripleTree, LLC

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• Elevated Strategic View within the Organization. The ramp-up in expected demand for Spend Management products and services is occurring as corporations and organizations view the procurement and sourcing aspects of their business much more strategically. Historically, the sector has been viewed as a backoffice, transactional, support function and is now becoming viewed more strategically within the executive suite and board room. While the market is poised for robust growth, the speed at which this occurs is due mainly in part to the education of the market on the benefits of Spend Management. This educational process is well underway as people, organizations, and governmental bodies have realized the merits of the business process and the profitability improvements it provides. The tremendous growth in the Spend Management market over the past few years emphasizes this point. Three major trends have helped catapult Spend Management to a more prominent and strategic role within organizations: °

°

°

•

tices, including integrated organizational and group coordination, that bring forth a more automated and best-in-class procurement process. This paradigm shift has brought about a more influential type of Spend Management doctrine. Global Total Cost of Ownership (TCO). Global competitiveness, new entrants to already competitive markets, low-cost labor in developing nations, as well as outsourcing initiatives are forcing organizations to optimize their cost structures on a global total cost of ownership (TCO) basis. Many organizations are proactively adopting a global Spend Management perspective as it has shown to improve operational productivity and performance, allowing organizations to do “more with less” on a global basis rather than in isolation. Spend Management is providing the necessary means for procurement processes to be enacted enterprise-wide on a global TCO basis.

•

Fiscally Responsible with Corporate Governance / Regulatory and Budgetary Compliance. With the passing of Sarbanes-Oxley in the United States, organizations and C-level executives are now, more than ever, concerned with maintaining proper corporate governance. Due to the negative implications that improper governance has caused, and the devastating impact it can have on market valuations, this issue has become relevant to more than just U.S. based companies. While in the public sector, Spend Management is becoming a practical choice for delivering immediate, multi-million dollar cash savings for budget-constrained government agencies confronted with the unpopular alternatives of raising taxes, eliminating programs, or making staff reductions. Spend Management allows greater visibility and control on corporate or budgetary spending that C-level executives or administrators desire and can be viewed at the most granular and category-specific level to enact better spend controls and compliance.

•

Technology Automation. Organizations have been enabled by improved software technology that allows them to analyze, organize and act upon spend data to eliminate unnecessary costs. Spend Management tools have evolved first from spreadsheets to licensed soft-

Refinement of tools, processes, and technologies that empower organizations with more in-depth spend visibility and transparency into specific business issues (i.e., gaining valuable insight into offcontract or “maverick spending”); Rapid expansion of global markets as sources of supply, manufacturing, services, and demand extend beyond the boundaries any organization serves, thus heightening an executive’s interest in procurement and cost efficiencies; Internet connectivity has provided companies with a new medium to identify, negotiate, analyze and engage suppliers and partners on an ongoing interactive basis; Movement from Opportunistic Point-based Solutions to Perpetual Programs. Many organizations are moving from being opportunistic players in Spend Management to becoming more proactive and strategic participants. As a result, a shift has occurred in the way that organizations view long-term procurement programs. Organizations are moving away from identifying point-based approaches whereby immediate savings are realized from “low-hanging fruit” to a complete organizational realignment with best prac-

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SPEND MANAGEMENT, PAGE 7

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DECEMBER 2005

Figure 5: Worldwide Spend Management Solutions Market Size ($, Billions) $20 $15 $10 $5 $0 2003

2004

2005

ware packages into today’s “on-demand” web-based solutions. The costs associated with purchasing and implementing a Spend Management program have decreased over time, in part due to changes in the delivery model (licensing software vs. “on-demand” web based solutions), and now has been lowered to allow not only large organizations but many SMBs to participate in and deploy Spend Management initiatives. Additionally, the ROI achieved from the initial small-scale Spend Management projects has provided a self-funding mechanism for more comprehensive, enterprise-wide Spend Management solutions.

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In drilling into the information in more detail, several points are worth exploring:

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2007

Source: TripleTree, LLC, IDC, & Aberdeen

•

Highly Attractive Growth Compared to Other Technology Sectors. The Spend Management market size and projected growth is important in comparison to other technology sectors. The sector is projected for solid top-line growth while many other segments remain flat or with marginal levels of projected growth.

•

Several Market Forces are leading to Sustainable Growth Trends. The higher projected levels of growth are due to many of the factors indicated in the previous section – the elevated strategic importance of Spend Management in the corporation, the continued search for cost reduction efforts without jeopardizing the core business, a better educated market and understanding of the true leverage gained by enterprise-wide Spend Management, among others. In addition, Spend Management is by no means a saturated market as less than 20% of organizations are fully utilizing all capabilities according to industry analysts.

•

Privately-held, Best-of-Breed Specialists are Leading the Way. The Spend Management market and specifically the “best-in-class” providers of Spend Management software and services will prosper as more organizations seek to gain additional leverage out of existing technology investments such as backoffice applications and financial management systems and extend these existing capabilities into sustainable cost saving mechanisms. Probably the biggest obstacle to growth for these privately-held companies is the ability for the marketing message to be properly communicated and fully understood by end-users that still remain cautious about new IT investments.

MULTI-BILLION DOLLAR MARKETS POISED FOR STRONG GROWTH The Spend Management market is projected to reach nearly $17 billion in 2007, which represents a 14% annual growth rate, from $10 billion in 2003, according to various industry analysts (see Figure 5). While we will define the segments comprising Spend Management in the next section of this report, it is worth mentioning here that sectors such as Spend Analysis, Strategic Sourcing, and Procurement Business Process Outsourcing (BPO) are projected to grow in excess of the composite. We believe this is probably best understood by the immediate and significant cost savings that the client gains from these activities.

2006

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In the end, Spend Management is poised for continued prosperity in an industry and among end-users that demand a strong ROI-based value proposition with proven, tangible results.

•

A DYNAMIC AND YET HIGHLY FRAGMENTED MARKET The Spend Management sector can be divided into a variety of sub-sectors with different capabilities, industry drivers, and ROI value proposition (see Figure 6). Included below is a brief description of the capabilities provided by each of these sub-sectors. It is important to note that each of these categories possesses more sophisticated capabilities than is being outlined in this report and in some cases are deserving of a more detailed discussion. We have highlighted what we believe are the key principles within each.

Spend Analysis is the process of aggregating, cleansing,

validating, categorizing, and analyzing transactional enterprise- and business-level spend for the purposes of identifying and implementing cost reduction initiatives. Spend Analysis extracts transactional data residing in various back-end financial management systems and formats such as ERP, general ledgers, A/P, invoices, spreadsheets, p-cards, supplier reports and assigns category-specific intelligence in order to analyze a consolidated view of enterprise spend. This capability provides spend visibility at all levels of the enterprise by category, department, division, and vendor. Often times, it is considered the first step in a more detailed Spend Management process as it allows the end-user to identify off-contract spending, track and enforce superior spending practices and identify where inefficiencies are occurring in the procurement process. In itself this step does not ensure savings or

Figure 6: Spend Management Market Segmentation and Industry Drivers

SPEND MANAGEMENT Create

Identify

Sustain

Analytics Spend Analysis

Description

Spend Analysis

-Aggregate, cleanse & analyze spend data -Extract from multiple sources -Gain visibility into spending

Supplier Analysis

Supplier Data Enrichment

Sourcing Analysis

Strategic Sourcing & e-Sourcing

Industry Challenges Cost & Process Savings

Compliance Management

Contract Management

-Ongoing, long-term procurement of materials & services

-Coordinate, catalog & monitor compliance with supplier contracts

-Proper classification on idustry defined nomenclature

-Refine RFx sourcing

-Monitor & manage supplier relations as well as employee awareness and compliance

-Find & qualify best suppliers

-Lack of volume purchases

-Poor supplier selection & management

-Lack of supplier/contract compliance

-Failed supplier coordination

-Reduce spending by 2% -15%

-Dollar discounts of more than 10%

-Improve compliance by 50%

-Cut cycles by more than 80%

-Reduce sourcing cycle times

-Reduce sourcing cycles time by 50%+

-Contracting cycles reduced 50%

-Lack of spend visibility

-Integrated supplier mgmt. for tracking, benchmarking & analysis

-'Off-contract' purchasing

-Reduce spending 2% - 15%

-No coordination across groups

-Coordinated supplier relations & buying

-Lack of clear responsibilities procedures and controls for gauging spend compliance

-Spreadsheet remains #1 tool

-Manual sourcing processes

-Monitor and manage relations

Supplier Relationship Management (SRM)

-'Maverick' buying -Back-end systems are -Offline, manual methods ill-equipped for detailed reporting or -phone, fax, email for automated procurement order processing processes -<50% of spend is -Improper company/ strategically sourced product classification -60% of negotiated -Data spread across savings remain muliple systems unrealized unrealized

-Lack of data consistency

-Ensures that goods and services bought meet their specifications: location, delivery time, price, level of quality

Supplier Analysis & Performance

-Lack of realizing volume discounts

-Lack of employee compliance to spend guidelines

Procurement Analysis

e-Procurement

-Online procurement handling order mgmt. & payment support functions -Coordinated auction/ multiple bid process

-'Spot' purchases leads to ineffective price-to-quality -Manual procure-to-pay process -<20% channeled via online

-No executive mandate

-Ineffective control and management of contracts costs the private sector $153 billion per year

-25%+ supplier improvement

Contract Management increases productivity by reducing customer downtime due to delivery and/or quality issues

$2 billion existing market for supplier relationship management

-Reduce supplier mgmt. by 50%

-Improve prices by 10% -Reduce process costs by 70%+

-Reduce operating costs 2% - 5%

80% of firms rank Spend Analysis critically to very important to operational success

Critical component for effective Spend Analysis and Spend Management capabilities

$121 billion in goods & services managed through online sourcing

50% increase in Spend Compliance results in a 2 - 5% reduction in Operating Costs

$3 billion existing market for procurement systems

Source: TripleTree, LLC, Aberdeen, IDC, Forrester

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SPEND MANAGEMENT, PAGE 9

Marker Drivers*

Contract Performance

-Categorizes suppliers, vendors, and products by type

-Essential for effective Spend Analysis

-No unified data source

Compliance/Budgeting

DECEMBER 2005

change the procurement process but rather captures relevant data (e.g., volume and price) on what is being purchased from whom and how these purchases align with the current organizational spend guidelines.

data and categorize it in a meaningful way to allow for analysis. •

of suppliers by vendor identification numbers in order to increase overall spend visibility, reduce supplier risk, lower supply acquisition costs, increase supplier diversity and better manage supplier data content. Back-end systems are not well equipped for detailed reporting or automating procurement processes by supplier or vendor categorization with duplications, improper account or product classification, among a host of other inaccuracies. Supplier Data Enrichment provides structure supporting the classification or taxonomy of suppliers, products and services to industry defined nomenclature, such as the United Nations Standard Products and Services Code (UNSPSC), as well as any proprietary format related to the organization’s spending areas, business units, accounting functions and geographies. Data enrichment components combine to give the associated data quality, value, accessibility and timeliness. This data incorporated into a Spend Management solution provides quality information about suppliers and allows organizations the ability to derive immediate spend savings through enterprisewide supplier and spend visibility. This visibility enables more effective management of supplier relationships, spend practices and offers greater financial control for the organization. This level of organization and analysis also provides a relevant format enabling organizations to better analyze, plan, and execute full suite Spend Management and is often the impetus before Strategic Sourcing.

Some of the challenges solved by Spend Analysis include: °

Disparate Data – Spend data typically resides across multiple, disconnected systems (e.g., A/P, ERP, corporate purchasing, e-procurement systems, EFT). An effective Spend Management strategy must support the automated aggregation, cleansing, and analysis of all spending information from internal and external business systems to provide an enterprise-wide view into spending.

°

Inaccurate Information – Spending data is often inconsistently captured because of errors, misspellings, duplications, or leaving a large amount of data classified as “other”. A Spend Analysis initiative ensures that spend data files are accurate and complete. This data must be consistently verified, cleansed, categorized, and deployed across the entire enterprise.

°

Inconsistencies in Vendor and Product Information – Incorrect naming practices for vendors, products and services further muddle the spending data pool, which limit an organization’s visibility into spending patterns and decreases negotiation leverage with vendors. The identification of relationships between vendor parent and subsidiaries is also critical in analyzing spending patterns in order to effectively leverage preferred supplier relationships.

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°

Limited Analytics Capabilities – Research has shown that more than 80% of companies still use basic spreadsheet applications or reporting tools for data analysis, which limit the ability to enact true Spend Management practices across the enterprise. Spreadsheet tools do not have the ability to aggregate data from multiple systems and are generally inflexible in how they capture, analyze, and display information. A more robust Spend Analysis solution is necessary to pull together the associated MINNEAPOLIS952.253.5300 952.253.5300 MINNEAPOLIS

Supplier Data Enrichment is the proper categorization

•

Strategic Sourcing / e-Sourcing delivers significant

savings by streamlining the on-going, long-term procurement of materials and services. Strategic Sourcing / e-Sourcing initiatives begin with gathering spend data, determining service level requirements, researching and analyzing suppliers and the market, and issuing requests for information (paper or electronic), proposals and quotations (collectively known as RFx) as well as including forward / reverse manual or online auctions, where appropriate. Strategic Sourcing allows for competitive bidding; facilitating optimal pricing and vendor selection on a wide range of spend categories which results in very large savings

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when compared to traditional processes. This combines best-in-class processes with automation to complete the sourcing cycle, inclusive of project management, RFx automation, vendor / supplier identification, bidding / negotiations, and advanced optimization tools. Over the past several years, e-Sourcing has seen dramatic increases in its use with the value of goods and services procured reaching $121 billion in 2003 and projected to grow to $345 billion in 2005, according to IDC. Strategic Sourcing and e-Sourcing have become somewhat synonymous with each other as e-Sourcing was thought to be the ‘holy-grail’ of cost reduction methods. By itself unfortunately, e-Sourcing has not delivered on actual savings to the extent that has been proclaimed. A recent study conducted by Aberdeen of 125 supply management executives suggests that e-Sourcing cost savings have been overstated and under-delivered at most organizations. In addition, Aberdeen estimates that 60% of organizations using e-Sourcing methods have been unable to implement and realize the savings negotiated online. The typical e-Sourcing program fails to realize 20 – 25% of the cost savings negotiated online. The reason for unrealized savings varies. The first step towards preventing this savings leakage is to implement a robust Spend Management program that begins with Spend Analysis and subsequently evaluates when the use of e-Sourcing is optimal. Strategic Sourcing and e-Sourcing initiatives are effectively aimed at reducing or eliminating: Offline / Unorganized Methods - Less than 50% of all spend is strategically sourced. Offline and unorganized sourcing methods lead to missed opportunities in negotiated contracts with vendors.

°

Localized Decision Making - Most sourcing procedures are implemented at the local level and often involve a price only metric. These processes are labor intensive and time consuming. Strategic Sourcing / e-Sourcing programs allow for the deployment of sourcing procedures and standardized metrics that span the entire enterprise. Decisions can be made on goods and services purchased MINNEAPOLIS 952.253.5300 952.253.5300 MINNEAPOLIS

°

•

Non-Repeatable Processes - Strategic Sourcing initiatives involve technological advances such that processes are refined and repeatable. More than 50% of sourcing activities are conducted adhoc with no defined or repeatable methodology in mind, thus providing limited supplier coordination.

Compliance Management is the process of ensuring all

enterprise-wide purchases are in line with corporate policies, established budgets and negotiated supplier/vendor agreements in order to avoid costly off-contract or “maverick” purchases. Compliance Management has become a key topic as spend savings have been identified but not fully realized. These solutions monitor enterprise-wide spending at a consolidated level and down to the line-item across departments, divisions, geographies and categories in order to ensure conformity with preferred suppliers, negotiated terms, and volume discounts. Compliance Management provides key performance indicators (KPIs) measuring adherence to these stated policies and includes in-depth, drill-down analytical capabilities where deviations from the norm exist. An organization often fails to realize its objectives due to a lack of clear responsibilities, procedures and controls for ensuring performance and spend compliance beyond initial phases. Often times there is limited involvement of the necessary and/or proper stakeholders in sourcing requirements development, supplier discovery, and sourcing award decision-making activities to effectively ensure compliance. Critical to the success of a compliance mandate is the ability to communicate the negotiated sourcing parameters to all stakeholders and have in-place an infrastructure that allows for ease-of-use of the procurement system. Such a system and infrastructure will reduce the tendency to resort to maverick buying when purchasing goods and services. Organizations that put in place an executive mandate that includes strict compliance guidelines have the

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SPEND MANAGEMENT, PAGE 11

°

based on best total value and alignment with corporate-wide goals with the result that sourcing will become less fragmented and better aligned across all business units and functional levels.

DECEMBER 2005

best success in capturing savings from their Spend Management initiatives. According to research industry analysts, improving spend compliance from 60% to 95% would reduce Cost of Goods Sold by 4%, translating into a dollar-for-dollar tradeoff in operating cost reduction and profitability. In our example from Figure 3 (page 6) this would translate into a 36% increase in operating profit and a 72% EPS increase. Compliance Management is becoming mainstream as organizations look to crack-down on those who do not follow organizational spend guidelines. As noted in CRM-Daily, American Express is taking spend compliance seriously. American Express delivers a letter from the CFO and $1,000 is charged to the cost center of any employee making an off-contract purchase of an item that could have been purchased under a contract provided through the e-Procurement system. A second infraction costs the employee’s cost center $10,000. Fortune 500 companies are taking notice of where cost savings are not being realized and putting in place compliance management programs to force employee adherence to spend guidelines. •

Contract Management is the process of ensuring that

PAGE 12, SPEND MANAGEMENT

the goods and services bought are delivered to the correct locations at the contracted time, at the contracted price, and at the contracted level of quality. This type of oversight also allows organizations to prevent maverick spending as well as coordinate supply contracts across the entire enterprise. Contract Management and Compliance Management advance the Spend Management doctrine down to all levels of the organization.

Aberdeen estimates that approximately $153 billion is lost each year due to missed savings opportunities and additional process costs that result from the ineffective management of contracts. •

Supplier Relationship Management (SRM) is designed

to handle sourcing, procurement, transaction processing, order management, and payment support functions, all of which are interrelated, to create a single view of an organization’s spending practices and levels. With many organizations using many suppliers, SRM allows a company to view how its purchasing activities are integrated into a supplier community and offers the ability to track, benchmark and analyze the supplier network. This includes capabilities such as supplier catalog content management, integration and syndication, which maintains real-time supplier content across the supplier network for thousands of products and hundreds of thousands of unique product/service attributes. Additionally, suppliers are able to monitor their performance, status of transactions, and administer self-service capabilities. The end goal is to improve supplier performance through the use of scorecarding and supplier evaluation systems in the hopes of improving efficiencies and reducing the overall operational costs to the organization. SRM is geared toward managing the overall relationship with the supplier network whereas Spend Management is focused on the reductions in the overall cost of goods and services purchased. Reducing spending at individual suppliers might also mean sacrificing favorable supplier relationships that exist. SRM takes into account these nuances and works to reduce overall supplier spend while simultaneously improving supplier performance and collaboration.

Contract Management solutions provide automated systems to gain enterprise-wide contract visibility that allows for reduced contract cycle times, improved contract renewal rates, a lower total cost of ownership, and increased compliance. Many organizations work incredibly hard to negotiate long-term contracts with preferred suppliers only to have the savings from these contracts lost as maverick buying dilute the intended value. The ability to track and monitor supplier contracts is essential for an organization to fully realize the benefits of their Spend Management initiatives.

• e-Procurement is the electronic acquisition of direct and indirect products and services from “purchase orders to payables”. These systems utilize the Internet and new technologies to facilitate a seamless, end-toend stream of strategic procurement activities by connecting buyers and suppliers. e-Procurement provides automated workflow and integration thereby improving cycle times. This includes the tools and business intelligence systems that enable improved responsiveness and analysis within the procurement organiza-

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DECEMBER 2005

tion and provides the linkages between suppliers and internal systems across the supply chain. The capabilities and benefits of these subsector solutions can be delivered through software applications, professional services or outsourcing and each will be revisited in the “Emerging Strategic Growth Paths” section of this Report, as we believe they intersect.

CHALLENGES TO THE LONG-TERM SUCCESS OF SPEND MANAGEMENT While the potential savings benefits and ROI are clearly impressive, there are roadblocks and hurdles that must be overcome before the anticipated growth will be fully realized. The most representative of these are: lack of end-user sophistication; an ongoing need to educate the market; and a need to dispel the apprehension of immediate savings and ROI:

•

Lack of End-User Sophistication and Ongoing Market Education. Spend Management is in its infancy and as such is still working on creating its own identity. The sector does not gain instant credibility on its own merit or through a long history of achievement. Many organizations lack the inter-divisional visibility to truly have a Spend Management program that can span the entire enterprise. With these interdivisional conflicts, it is difficult to realize the scale benefits of having a truly enterprise-wide Spend Management discipline. We believe a critical component is to educate the market about the core disciplines of Spend Management as well as the merit of institutionalizing them throughout the enterprise.

Figure 7: Expected Payback Period for IT Projects Upon Launch 11%

Within 3 Years 14%

Within 120 Days 12%

• Importance of the ROI and Immediate Savings. It will be difficult for organizations, with increased global competition and macroeconomic pressures, to completely ignore headlines touting 150% – 1,000% ROI for many Spend Management programs. Critical to the sector’s growth and maturation is both the qualitative and quantitative proof of ROI. A verifiable dollar amount must be attributable to goods and services cost savings or process efficiency improvements and it must be fairly immediate. A lingering problem from prior technology deployments has been the continuous investment of time and resources before an economic benefit was realizable or sustained. With a more skittish buyer, Spend Management cannot fall into the same predicament and thus savings must be trackable and immediate. In our research, Spend Analysis and Strategic Sourcing are the critical components ensuring a high and immediate transaction-based ROI. Figure 7 shows the expected payback period for any IT project based on a Q1 2005 study of 300 business-technology managers conducted by Information Week magazine. It is abundantly clear that the payback period for IT projects is continuously becoming shorter and shorter with approximately 65% of managers requiring a payback within 1 year of deployment and 26% requiring a payback within 3 months.

Within 2 Years 22% Within 1 Year 38%

Source: Information Week

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SPEND MANAGEMENT, PAGE 13

Within 60 Days 3%

The boundaries have been blurred as to who has responsibility for these initiatives. All areas of the organization – from C-level executives to order entry clerks – benefit from properly implemented Spend Management programs. As a result, Spend Management disciplines are being pushed to all edges of the organization. With the goals of a Spend Management program aligning the organization across divisions, functions and geographies, there will be plenty of internal “champions” to push / pull through these Spend Management initiatives. Yet, the critical component will be ensuring the successful education of the end-user and communication of the opportunity from the outset.

DECEMBER 2005

Figure 8: Spend Management Venture Capital Investment Since 2000 $600 $500

In Millions

$400

$300 $200

$100 $0 2000

2001

VENTURE CAPITAL DEAL FLOW AND MERGERS & ACQUISITIONS

PAGE 14, SPEND MANAGEMENT

During the 1990s, application solutions for Spend Management and the B2B space were among the most highly prized for both new investment and IPOs with their popularity rivaling most any other enterprise software sector. With the Internet craze and the enormous B2B market opportunity, many vendors were quickly adding Spend Management capabilities to their solution set. Pure-plays amassed multi-billion dollar market capitalizations and astronomical valuations only to later fall precipitously due to much slower growth than was originally anticipated, compounded by disappointing operating results. Similar to other technology areas, the sector has gone through a number of changes due to challenging macroeconomic conditions, shifting end-user attitudes and fundamental changes in the business model. That being said, the sector now appears poised for success as economic conditions and business model realignments play to its core strengths. From our analysis and interactions with nearly 200 private and public companies in the sector, we are seeing a growing resurgence of investment and merger & acquisition (M&A) activity. As detailed further in this Report, these developments are suggestive of sustainable long-term growth trends benefiting from the aforementioned value drivers that will ultimately result in: i) convergence to a ‘hybrid’ model requiring participants to have best in technology capability as well as a professional services component that provides deep sourcing expertise; ii) new entrants to the market; iii) increased M&A activity as MINNEAPOLIS MINNEAPOLIS952.253.5300 952.253.5300

2002

2003

2004

Source: TripleTree, LLC

consolidation occurs among best-of-breed players and companies look to add new capabilities; and iv) defining entry points for comprehensive procurement Business Process Outsourcing (BPO) opportunities. We believe that much of the new activity and value being created in this sector is among a new class of best-of-breed, privately held companies rather than public companies. The key for these privately-held firms will be to strengthen their competitive position for a sequence of industry events and changes expected to occur. The following summarizes our in-depth research into private capital markets and M&A activity in the Spend Management sector:

VENTURE CAPITAL INVESTMENT As previously mentioned, similar to the entire IT industry, venture capital investment into the Spend Management sector experienced a significant downturn. In a two year period from 2000 – 2002, venture capital investments dropped from a high of $560 million to a low of $100 million. Despite this, there is growing evidence of renewed interest in Spend Management by venture capital investors. •

Venture capital investors are slowly turning their attention back to Spend Management. The strategic importance of Spend Management has not waned. However, due to macroeconomic challenges and missed expectations, there was unquestionably a setback for the sector in the late 1990s and early 2000s.

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Figure 9: Comparison of Total # of Investments to the Average Investment Amount $25

30 25

$20

# of Investments

$15 15 $10 10 $5

5

$0

0 2000

2001

2002

# Investments

In our recent interactions, the strategic relevancy of ROI-based Spend Management has only been elevated by end-users in need of greater operational efficiency to improve bottom-line results and EPS growth without sacrificing the performance of the core business. As privately-held companies are restoring investor confidence in this basic premise, we believe that new venture capital investment will continue to follow. However, due to the significant changes that the sector has historically witnessed, this message with investors requires proper communication with an audience that still remains cautious. •

Avg. Investment (in millions)

20

Private capital investment has increased over 100% since 2002 after experiencing a significant decline from 2000 to 2002. While not growing at the swift rate of the 1990s, recent new investments being made suggest that the sector is returning to favor and that long-term growth prospects remain strong (see Figure 8). We believe that one of the best investment oppor-

2003

2004

Avg. Investment

Source: TripleTree, LLC

tunities will be with those companies providing ondemand, hosted applications capable of supporting Internet delivery of the application in a shared, multitenancy environment. Please see TripleTree’s report on “Software as a Service: Changing the Paradigm in the Software Industry” for more information on this general theme. • While the total number of private equity investments has not returned to levels experienced since 2000, the average investment amount has increased substantially from its lows during the 2001 – 2003 timeframe. With total volume at lower relative levels, investors have been selective in making new or supporting existing portfolio investments as evidenced by Figure 9. However, it is interesting to note that in 2004 the average investment was $20 million, which is comparative to the amounts seen in 2000. In our interactions, we believe that venture capital investors are beginning to recognize the success of privately-held Spend

Figure 10: Percentage of Total Investment Round Since 2000 100%

60% 40% 20% 0% 2000

2001

Series: MINNEAPOLIS 952.253.5300 952.253.5300 MINNEAPOLIS

2002 A

B

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2003 C

2004

D

Source: TripleTree, LLC

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SPEND MANAGEMENT, PAGE 15

% of Total

80%

DECEMBER 2005

Figure 11: Number of Spend Management M&A Transactions Since 2000

Number of Transactions

Spend Management M&A - Last Twelve Quarters 10 9 8 7 6 5 4 3 2 1 0 Q4 '02 Q1 '03 Q2 '03 Q3 '03 Q4 '03 Q1 '04 Q2 '04 Q3 '04 Q4 '04 Q1 '05 Q2 '05 Q3 '05

Source: TripleTree, LLC

Management companies as well as see the opportunity to seize a leadership position in a multi-billion dollar segment that currently lacks many large, well established players and public companies.

PAGE 16, SPEND MANAGEMENT

•

New private equity investment has flowed to later stage and more mature companies with proven business models and well-developed strategies. Not surprisingly, the trend over the past five years has been towards later-stage privately held companies that have refined their business models and go-to-market strategies. As Figure 10 demonstrates, in 2004 there was a significant acceleration of the three-year trend towards late-stage investment, which comprised 80% of the total private equity investment activity compared to 40% during the past several years.

MERGERS & ACQUISITIONS (M&A) Leading up to 2004, we would characterize much of the M&A activity in the Spend Management category as niche acquisitions filling a specific product or need or those driven by financially distressed situations. However, recently the tides have shifted as several strategic acquisitions have grabbed the headlines, including the $493 million mega-merger of Ariba and FreeMarkets. Several key M&A trends are illustrated below: •

Increased Spend Management M&A Activity: Over the past three years, there has been a significant increase in the level of M&A activity with over 20 transactions occurring in 2004 compared to less than 10 transactions in 2002. More recently, the trend has continued to grow with the last five quarters averaging five M&A deals per quarter with the preceding six quarters reporting less than three deals per quarter (see Figure 11). And yet despite this activity, the Spend Management sector remains highly fragmented with nearly 200 privately-held, specialty players establishing interesting niches and unique offerings.

•

Enhancing the Business Model with a ‘Hybrid’ Solution: As demand for a more complete solution from “best-in-class” technology to business process

Venture capital investment in Spend Management will likely maintain these trends with the use of proceeds focused on strengthening the core product offerings, enhancing the delivery and business models, and/or gaining additional market channels and strategies through a combination of internally developed strategies or complementary niche-based acquisitions.

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Table 1: Recent Spend Management M&A Transactions DATE

BUYER

TARGET

7/22/2005

Verticalnet

Digital Union

7/13/2005

The Carlyle Group

CompuSearch Software

6/6/2005

Emptoris

Intigma

5/4/2005

Selectica

Determine Software

3/21/2005

Procuri

Contract Management Solutions

2/22/2005

Profitline

Tallgrass

2/8/2005

Tourtellotte Consulting

Inovis, Inc.-Sourcing Business

1/26/2005

Accenture

CPGmarket.com

1/25/2005

eWork

ProSavvy

1/3/2005

Emptoris

Valuedge

12/13/04

IBM

KeyMRO

11/29/04

SAIC

ProcureNet

10/26/04

Perfect Commerce

Pantellos

7/19/04

Verticalnet

B2eMarkets

5/19/04

USinternetworking

Strong3

4/23/04

NuStar Holdings

Alor Software

4/12/04

Trinity Ventures

SciQuest

3/31/04

Ariba

Softface

2/2/04

Verticalnet

Tigris

1/23/04

Ariba

FreeMarkets

1/7/04

Ariba

Alliente

12/31/03

FreeMarkets

Covisint

11/17/03

Procuri

SupplierInsight

10/1/03

Agile

Tradec

9/15/03

Emptoris

Zeborg

7/16/03

eScout

Perfect Commerce

5/18/03

B2eMarkets

Diligent

1/28/03

Ariba

Goodex

10/17/02

Epicor

Clarus Corporation

9/12/02

Perfect Commerce

Purchasepro

7/11/02

Ketera

Acentropy

•

Niche Acquisitions Filling a Specific Product Gap or Market Need: Many of the acquisitions in the early 2000’s were smaller transactions that fulfilled a particular market need such as a specific product offering, an enhancement of the business model or technology, or gaining access to different market channels. While these forces will persist, much of the future acquisition activity will be uniquely driven by “growth platform” acquisitions, particularly as new categories of acquirers become active. Strengthening the Competitive Position in a Large but Fragmented Growth Sector: Somewhat similar to the first point, some of the M&A activity has been MINNEAPOLIS 952.253.5300 952.253.5300 MINNEAPOLIS

•

Science Applications International Corporation (SAIC)

announced in November 2004 its acquisition of privately-held ProcureNet, a provider of electronic procurement, logistics, and supply chain management services for the Department of Defense (DoD) and other federal government departments. With $250 million in revenue and 175 employees, ProcureNet is strategically important to SAIC’s growth in logistics and product support by emphasizing the key importance of Spend Management in the government sector. •

IBM recently announced its acquisition of KeyMRO,

which strengthens IBM’s procurement services offering. KeyMRO, a procurement and sourcing services firm with a BPO offering, combines with IBM’s technology and global consulting capabilities to create a full procurement solution that allows the technology giant to gain a valuable market presence in the burgeoning procurement BPO market. •

Ariba has been among the most active in the industry

in its effort to capture meaningful market share and

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SPEND MANAGEMENT, PAGE 17

•

Financially Motivated Acquisitions. The past five years have seen many vendors struggle to successfully address challenging market dynamics and ultimately relent to acquisition pursuits. Most such activity has been predicated on the acquirers’ desire for a larger client base, broader product offering or technology niche; often at the chagrin of the acquired. While consolidations under these conditions will continue, it will occur less frequently..

Over the past few years, there have been a number of key M&A events in the Spend Management sector. This past year alone had over 12 significant acquisitions. In Table 1 and the commentary below, we have provided just a few examples of the M&A activity and the relevance to the above stated trends:

and subject matter expertise to total Business Process Outsourcing has continued, a flurry of M&A deal activity has occurred. This trend will continue to accelerate fueled by acquisitions that seek to augment and further extend existing capabilities by increasing the breadth of the offerings with ‘hybrid’ technology, services, and outsourcing capabilities. •

motivated by a need to stand apart from the competition by acquiring more robust offerings, different marketplace channels, or an enhancement of the business model. In a large multi-billion dollar growth sector that remains highly fragmented, these competitively motivated trends to continue for the foreseeable future.

DECEMBER 2005

be a leader in the sector. Ariba has made three important acquisitions in the past year that augments their overall business strategy. The Softface acquisition has strengthened its technology offering in the areas of automated spend data cleansing, enrichment and classification. The acquisition of Alliente, a procurement BPO provider, was made to enhance Ariba’s BPO capabilities. And, perhaps the most significant industry event was the $493 million acquisition of publicly traded FreeMarkets, which added highly valuable strategic sourcing services expertise to complement Ariba’s platform. With these acquisitions, Ariba is clearly the most visible in terms of its pursuit to broaden its product offerings, enhance its technology offerings with services and outsourcing, and strengthen its go-to-market positioning. •

VerticalNet acquired Tigris and B2eMarkets, which

strengthened its software suite and added consulting to its business model. B2eMarkets brings its sourcing suite to VerticalNet rounding out its product offerings from Spend Analysis to Advanced Sourcing. The Tigris acquisition brings the professional services component of Spend Analysis and Strategic Sourcing and the ability to offer a more complete offering to its clients. • SciQuest was acquired by Trinity Ventures in a going private transaction in April 2004. SciQuest, a hosted,

PAGE 18, SPEND MANAGEMENT

on-demand supplier relationship management (SRM) solutions firm for the life sciences and higher education markets, was acquired in a transaction valued at more than $25 million, which represented a 50% premium to its share price at the time of the announcement. (See page 29 for Case Study.) We expect strategically-motivated M&A activity will remain strong as these trends continue to reshape the industry as well as open up new opportunities for a new breed of acquirers such as ERP software, back-end financial management systems, and business process outsourcing firms seeking to gain market leadership in these high growth markets.

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PUBLICLY TRADED COMPANIES As previously stated, much of the activity in the space is being led by a new breed of privately-held companies rather than among a long list of public companies. While there are a few pure-play public companies in the Spend Management space, it is mainly occupied by other larger technology players, consulting / outsourcing firms, or content enrichment firms including SAP, Oracle/PeopleSoft, Lawson, Accenture, EDS/A.T. Kearney and Dun & Bradstreet, who are not necessarily 100% committed to this sector. It is notable that a sector projected to reach $17 billion by 2007 has no single, dominant player. Because of this, TripleTree believes that Spend Management represents one of the single best growth opportunities for companies in search of establishing market relevance in a multi-billion dollar growth sector. The next section - “Emerging

Strategic Growth Paths” - explores several possibilities.

EMERGING STRATEGIC GROWTH PATHS Spend Management represents the next frontier of growth and market opportunity for ERP software, backend financial management systems, and outsourcing sectors. There are a number of industry defining events suggesting Spend Management will increase its strategic importance with executives at most major corporations and government entities. Spend Management provides a valuable extension for back-end ERP and financial management systems as well as a much needed building block and ROI justification for full-suite outsourcing / BPO. Looking ahead, we believe the Spend Management sector will evolve with a new breed of entrants and with three major trends that will ultimately define this sector and threaten conventional methodologies:

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• Convergence along the Spend Management Continuum led by ‘Hybrid’ Software, Services, and Outsourcing Offerings with major players aligning with best-in-class domain competencies and/or enhancing business models with a combination of software and IP, ondemand applications, services, and outsourcing; •

As the importance of the professional services component is realized, software and technology alone is recognized as not totally fulfilling client needs or providing an immediate ROI justification. Additionally, largescale procurement BPO has proven to be a difficult sales pitch as vendors work to educate end-users and the overall market. Consulting work focused on a Spend Management ROI proof of concept is often the most viable first step. Ironically, few companies with scale possess the necessary focus, domain expertise, and infrastructure to provide a compelling Spend Management solution.

The Next Frontier for Enterprise Resource Planning (ERP) Franchises & Financial Management Systems with Spend Management representing a logical building block and growth engine for back-end ERP, databases, and financial management systems; and

• Compelling Justification for Comprehensive Procurement Business Process Outsourcing (BPO) with various Spend Management capabilities providing the much needed ROI justification before entering into smallerscale BPO engagements or building towards even more comprehensive procurement BPO. The following section explores each of these points in more detail:

CONVERGENCE ALONG THE SPEND MANAGEMENT CONTINUUM LED BY ‘HYBRID’ SOFTWARE, SERVICES, AND OUTSOURCING OFFERINGS The latest strategic M&A developments and partnership alignments prove that convergence is underway in the Spend Management sector and that changing developments will continue on two fronts: •

consulting services, and BPO/outsourcing are becoming blurred with each new product and service offering increasingly becoming a part of a more complete, ‘hybrid’ offering. We believe success and market dominance will continue to follow this path.

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Enhanced domain expertise gained through strengthened Spend Management offerings: As we have discussed earlier in the M&A section of this report, Spend Management remains highly fragmented, occupied by best-of-breed, pure-play specialty firms focused in a few key areas such as Spend Analysis, Strategic Sourcing, Contract Management, or SRM. Additionally, the landscape is defined by larger, well-established companies like ERP software vendors, management consulting firms, and BPO/outsourcing firms that lack sophistication across all Spend Management categories or a fully dedicated commitment to the marketplace. The past several years have witnessed consolidation with a vast majority of the strategic M&A being driven by an interest in niche-based, specialty firms that add a higher level of differentiation along a few categories and fill critical product gaps. We continue to believe that this level of activity will continue; particularly as the current players and new entrants recognize the need for a strong end-to-end Spend Management offering. More recently, we have observed larger strategically-motivated activity with existing and new entrants seeking “growth platforms” as a mechanism for quickly establishing a strong market position. The most recent strategic moves by SAIC are an illustration of this trend. With the possibility of

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SPEND MANAGEMENT, PAGE 19

‘Hybrid’ offerings combining software/technology, professional services, and outsourcing. It is becoming clearer that a winning combination is one that constitutes a ‘hybrid’ solution offering approach. This brings together advanced software functionality either delivered in the traditional software license or in a hosted, on-demand Software as a Service model combined with category-specific professional services capabilities and outsourcing, which features business process excellence. The key point being that the lines of demarcation that have traditionally existed between software, application hosting, professional

•

DECEMBER 2005

Figure 12: Fragmentation of ERP End Systems: Analysis along Spend Management Value Chain

Fragmented Transactional Data

Spend Management-

Spend Management-

Data Extract, Cleanse & Validate

Enterprise-& Business-Level Analysis

ERP

AP/GL Category (Commodity) Mapping

Spreadsheets

Spend Analysis

Supplier Reports

P-Card

Enterprise Reporting

Spend & Supplier Analysis

Detailed, Drill. Down Reporting

Opportunity Assessment

Source: TripleTree, LLC

new entrants, we believe that motivations will be focused on identifying the right point of entry or growth platform in this sector. Convergence along both fronts will continue as major players seek to strengthen their competitive position and new entrants search for an effective point of entry.

PAGE 20, SPEND MANAGEMENT

THE NEXT FRONTIER FOR ERP FRANCHISES & FINANCIAL MANAGEMENT SYSTEMS Spend Management and e-Procurement transform disparate transactional data residing in back-office ERP, accounts payable, general ledger, and operational databases into intelligent, actionable enterprise and business-level information for improved procurement processes that generate significant bottom-line savings (see Figure 12). ERP and back-end systems store thousands of transactional activities that remain highly fragmented among many different data stores and financial systems. At the same time, these back-end systems have traditionally lacked sophistiMINNEAPOLIS952.253.5300 952.253.5300 MINNEAPOLIS

cated supplier category mapping, spend category consolidation and intelligence, supplier or industry analysis capabilities, or complete sourcing, which is the baseline for much more advanced procurement data analysis and execution. Historically, most of the ERP software vendors either developed e-Procurement modules, which were developed in the 1990s during the build-out of B2B networks or virtual exchanges, or Supplier Relationship Management (SRM) modules, which ties to fully integrated and collaborative Supply Chain Management. Initially, many of the ERP software vendors sought to participate in the much anticipated B2B market opportunity and aggressively developed e-Procurement capabilities as an extension to core ERP franchises. Presently, most of the ERP vendors focus on the “source to settlement processes,” which includes software modules for Strategic Sourcing, SRM, eProcurement transaction engines, and even Contract / Catalog Management (see Figure 13). However, missing in the gap analysis is a full suite of Spend Analysis and Supplier Data Enrichment capabilities that combine professional services with automation, which is the essential component for client ROI validation before more comprehensive Spend Management is typically considered.

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Figure 13: ERP Players in Spend Management

Sourcing to Settlement

Vendor

Spend Analytics

Supplier Data Enrichment

Strategic Sourcing/ e-Sourcing

Compliance Management

Contract Management

SRM

e-Procurement

SAP

Oracle

Peoplesoft

Microsoft

SSA Global Technologies

Epicor

Lawson Software ROSS Systems GEAC

QAD

American Software

Source: TripleTree, LLC

Some of the existing features / functionalities include: • Strategic Sourcing and e-Sourcing ° Consolidated, enterprise-level sourcing ° Automated RFx ° Real-time, complex auctions (forward or reverse) ° Supplier rating systems

• e-Procurement ° Automate purchasing and streamline procurement processes ° Purchase orders & requisitions ° Order management MINNEAPOLIS 952.253.5300 952.253.5300 MINNEAPOLIS

• Contract Management ° Contract integration & management ° Contract compliance Despite this exceptional opportunity, existing ERP and financial management systems remain primarily focused on financial reporting and less on procurement data analysis capabilities. This has been one of the major drawbacks of back-office financial management systems and their limitation in appealing to the needs of comprehensive Spend Management. Another one of their drawbacks has been the focus purely on the software / technology platform rather than a more complementary suite of software, services, and outsourcing offerings. This in part might change as others have also recognized the need for a wider breadth to their own solution offerings. As many analysts have pointed out, end-users typically require a combination of

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• Supplier Relationship Management (SRM) ° Supplier selection ° Collaborative supplier catalog management ° Syndicated catalog content ° Supplier performance & scorecards ° Supplier portals

° Automated purchasing workflows & eSettlements ° e-Commerce & supplier connectivity

DECEMBER 2005

Figure 14: Spend Management – The Next Frontier for ERP & Financial Management Systems ERP

Manufacturing

Financial Management

Spend Analysis

Spend Management

Human Resources

Supplier Data Enrichment

Strategic Sourcing

Compliance Management

Contract Management

Supplier Relation. Mgmt.

e-Procurement

Source: TripleTree. LLC

software/technology, professional services, or outsourcing rather than the one-size-fits-all approach with technology automation. This has put ERP software vendors at a disadvantage in the marketplace due to the lack of dedicated professional services, domain expertise, business process methodologies, and outsourcing capabilities. Additionally, noticeably missing in the “source-to-settlement” process is Spend Analysis, which is the impetus behind proving the Spend Management ROI story. This valuable piece of the equation is not often fully satisfied by automation and yet absolutely critical for end-user success.

PAGE 22, SPEND MANAGEMENT

Future Developments & Opportunities The gap that exists between back-office transactional applications and sophisticated enterprise Spend Management is bridged by a range of solutions that bring meaning to supplier and transactional information/data by first extracting, cleansing, validating, categorizing, and analyzing the data, and then implementing new procurement policies and change management initiatives to drive cost savings and business efficiencies. Due to the interconnectivity with back-office transactional information residing, captured, and stored in back-end systems, Spend Management represents a logical extension and new growth frontier for traditional ERP and back-office financial management system vendors (see Figure 14). Spend Management provides ERP software franchises with an exceptional point of leverage with their core business offerings and existing client relationships. And yet despite this, there is limited market penetration by many of the major ERP software vendors creating a compelling opportunity for a leader to emerge. Perhaps the MINNEAPOLIS952.253.5300 952.253.5300 MINNEAPOLIS

most advanced in this sector are SAP and PeopleSoft (now Oracle) with their software modules. However, many of the ERP vendors lack a full suite of solutions that is complemented by the hybrid delivery model demanded by end-users. As previously stated, we believe that Spend Management is a logical building block for ERP software franchises particularly since this sector directly leverages the existing investments made by corporations and organizations in back-office automation. Additionally, due to the very impressive ROI resulting from Spend Management deployments, ERP vendors stand a higher probability of fortifying their ERP position and capturing incremental market share away from competitors. Despite this exceptional opportunity for ERP leadership in the Spend Management sector, we do not believe that most of the ERP players are best suited to build these capabilities internally due to the advances of best-of-breed Spend Management specialists and the demand for ‘hybrid’ offerings. As a result, we believe that ERP vendors will soon become active in this sector by acquiring niche needs to expand their Spend Management product suite across the entire continuum, deepening their core software / technology offerings with domain-specific professional services and outsourcing, and taking a frontline position with Spend Analysis and Supplier Data Enrichment rather than purely focusing on Strategic Sourcing, SRM, e-Procurement and Contract Management modules.

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Figure 15: Worldwide Procurement BPO Market

$15.0 $12.0

In Billions

$12.0 $9.0

$6.0 $5.9 $3.0 $0.0 2002 A

COMPELLING JUSTIFICATION FOR COMPREHENSIVE PROCUREMENT BUSINESSES PROCESS OUTSOURCING (BPO)

2007 E

Source: IDC

Procurement BPO is the process in which all or part of the procurement process, including Spend Management activities, are transferred to a third party. Procurement BPO might address several components of the Spend Management process or provide more comprehensive fulfillment.

next five years. The primary motivation for outsourcing, with Procurement BPO being no exception, is to reduce operational costs thereby allowing an organization to focus on its core competencies. Outsourcing in general has become more prevalent over the past decade as organizations have made the decision to keep internal those functions that are core and strategic to the business and contract out functions that are considered less strategic. According to a recent Accenture survey of 400 executives from U.S. companies, businesses that outsource have a history of faster growth and higher profitability than those that do not.

The Procurement BPO market is estimated at $6 billion currently and projected to double within the next several years growing to $12 billion, according to IDC research (see Figure 15). Despite these positive trends, Procurement BPO remains a very small component of the total outsourcing market (less than 5%), but is expected to grow at a faster rate (more than 24% annually) for the

Organizations have been outsourcing services such as IT, transportation / logistics, call centers, manufacturing, HR payroll & benefits, as well as some finance & accounting activities for many years with Procurement BPO being a byproduct of one of these other outsourcing activities. However, increasingly many organizations are evaluating Procurement BPO as a stand alone option rather than a

Figure 16: Growth in Projected Procurement Outsourcing Usage % of Companies

Current PSP Services Used

80%

74%

74% 60%

60%

22%

18%

45%

39% 26%

0% Strategic Sourcing

Inventory Management

Requisition to Pay

Hosting of e-procurement applications

Hosting of e-sourcing applications Source: Accenture

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SPEND MANAGEMENT, PAGE 23

44%

42%

40% 20%

Considered Future Use

DECEMBER 2005

small subset of a different outsourcing arrangement. As such, Procurement BPO is on the rise: •

Sub-components of procurement outsourcing are currently being utilized. Today, 43% of enterprises currently outsource select procurement processes or spend categories, with outsourcing being most prevalent among larger enterprises with experience in outsourcing other functions (e.g., IT, manufacturing, HR & payroll). Another 15% of enterprises plan to outsource procurement within the next three years.

•

Higher projected future use of Procurement BPO. Procurement BPO is on the rise with some Spend Management components being strongly considered for outsourcing in the future according to Accenture research (see Figure 16). As the figure depicts, most of the outsourcing activities being considered are infrastructure or transactional-related in comparison to process-centric. Additionally our research has found that most organizations evaluating procurement outsourcing first start with indirect spend categories as it is considered less strategic than direct spend categories.

To capitalize upon these positive trends, the continuous market education of end-users is an absolute necessity. We define this on many fronts from how procurement and organizational processes are evaluated, to evaluating and analyzing how internal functions are performing compared to best practices, to evaluating and analyzing where internal spend

category expertise and sourcing is lacking. The ultimate goal is to self-educate end-users about the savings opportunity through procurement outsourcing. Listed in Figure 17 are some of the main challenges and reasons why organizations outsource a portion or all of these procurement functions. Organizations often times do not realize their deficiencies and lack the level of sophistication to handle procurement. In today’s ultra-competitive marketplace, it is increasingly difficult to internally build these processes and gain domain expertise. There are numerous benefits of Procurement BPO, both economically and strategically, and we are just beginning to see this segment gain traction in the overall outsourcing space. It is therefore becoming much more commonplace to outsource part or all of the procurement functions to Procurement Service Providers (PSPs) that possess more in-depth domain and process expertise. Thus, the opportunity exists for Procurement BPO players to step in and assume Spend Management responsibility. And yet despite this exceptional opportunity, there remains no dominant market leader possessing all the necessary ingredients to help educate the market of the advantages gained from Procurement BPO, deliver best-in-class domain expertise with proprietary methodologies and automation, and manage the full-suite of solutions needed.

However, through our research, we believe that the market is changing by focusing on a few key drivers that will soon define leadership in this multi-billion dollar outsourcing segment. These drivers are:

Figure 17: Industry Challenges & Outsourcing Opportunities

• Domain expertise is limited to the most strategic or high dollar volume spend

• Price/cost advantages (15 - 25% reductions) • Spend category & market knowledge; domain expertise

PAGE 24, SPEND MANAGEMENT

• Enterprises have applied strategic sourcing principles to less than 50% of spending • Few enterprises have standardized sourcing or procurement processes

Industry Challenges

• Nearly 70% of companies make strategic sourcing decisions at divisional or site levels

Outsourcing Opportunities

• Clear visibility into total spending is elusive with most lacking spend analysis

• Nearly a third of purchases are off-contract ("maverick" buys)

• Standard & proven procurement processes • Procurement transaction management • Procurement execution and supplier management • Best-of-breed sourcing and procurement technologies • Supplier enablement and catalog management services • Purchase volume aggregation across multiple clients

• Few companies can manage supplier contracts & relationships • Leveraged operating and technology infrastructure • Less than 20% of spending is channeled through e-procurement

Source: TripleTree, LLC , Aberdeen, IDC

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Figure 18: Easing the Point of Entry with Hybrid Solutions

INCREASED VALUE THROUGH DELIVERED SERVICES

PHASE III Full-Service Procurement BPO

PHASE II Component-based Procurement BPO

Component-based Procurement BPO

Component-based Procurement BPO

Component-based Procurement BPO

Component-based Procurement BPO

Component-based Procurement BPO

PHASE I IT/Software Automation

Upfront Consulting Services

Market Education & Proven ROI

Source: TripleTree, LLC

PHASED EVOLUTION

•

Initial Point of BPO Penetration & Leverage Gained with ‘Hybrid’ Solutions: One of the necessary traits of a PSP is that of a diverse background. End-users expect PSPs to possess a combination of outsourcing expertise, project-based service capabilities, and access to best-in-class Spend Management automation. These end-user demands make it completely necessary for PSP players to have extensive backgrounds with a diverse set of capabilities.

‘hybrid’ offering consisting of category-specific professional services and/or narrowly-focused automation or hosted applications.

Combining professional services expertise with deep domain and procurement process knowledge along

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growth strategies complemented with selective acquisitions that combine ‘hybrid’ offerings with outsourcing players are likely; particularly, as vendors seek to round out capability gaps in software / technology, domain-specific professional services and outsourcing.

•

Justifying Procurement BPO with the ROI Story: As Procurement BPO activity continues to gain momentum, it is important for PSPs to focus on a quick and easy entry point when proposing procurement BPO projects. Procurement BPO buyers are still in the very early stages of BPO adoption and the vendors that show past success and meaningful ROI will make the most inroads the fastest. The critical factor for early adoption of Procurement BPO being how the ROI story is communicated and delivered. As discussed earlier, many organizations lack any understanding of its inefficiencies or the benefits to be gained from Procurement BPO. The ability of a PSP to deliver an immediate savings and high ROI on an initial Procurement BPO project is essential for com-

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Additionally, due to the lack of end-user sophistication, we believe that PSPs will need to identify an easier point of entry rather than attempting to sell comprehensive BPO to the client at the outset. As Figure 18 illustrates this begins with end-user education and immediate delivered savings through Phase I professional services and automation before sub-segment outsourcing of Phase II or selling the comprehensive, full-suite Procurement BPO of Phase III becomes permissible. This approach requires a more complete solution offering extending far beyond outsourcing capabilities and is best delivered with a

with advanced software/hosted applications and automation providing procurement analysis affords organizations the best opportunity to capitalize on procurement efficiencies with PSPs. Unfortunately, there is no easy answer, since there is no one dominant market leader possessing all attributes or fully committing to Procurement BPO. We believe more opportunistic

DECEMBER 2005

municating the longer-term benefits and ROI message of comprehensive Procurement BPO. Once a PSP has proven their worth, a more comprehensive BPO attack plan or even possibilities with shared savings models can be explored.

that justify and deliver a transactional ROI, since the ROI and savings are most imminent and more easily understood by end-users. Procurement BPO will be

adopted more slowly than other outsourcing functions until the ROI message becomes fully understood. At the outset, Procurement BPO will continue to be a small part of the overall outsourcing market with the majority of Procurement BPO deals coming on the heals of a much broader outsourcing plan (e.g., IT, HR & payroll, transportation/logistics). Procurement BPO will gain significant traction once a significant ROI in the form of cost savings or process improvement is delivered upon, causing organizations to consider a more comprehensive Procurement BPO strategy. We will revisit this topic in the next section of this report.

We simplify the ROI message on two primary levels: • Transactional ROI: where immediate dollar-fordollar savings result from eliminating inefficiencies with spending and improving sourcing / negotiations, complying with supplier contracts, and preventing “maverick” spending. Transaction ROI and savings are often identified in category-specific Spend Analysis, Strategic Sourcing, and Compliance Management; •

The “Self-funding” Mechanism to Bridge the Void between Small-Scale BPO & Comprehensive BPO. The Procurement BPO opportunity is not easily understood or readily accepted by end-users. As a result, the selling value proposition of complete outsourcing is even more challenging. Different approaches with hybrid solutions and the communication of the ROI message become critically important in the sale process. Additionally, we believe that immediate delivered savings has just as much of an impact and we have seen numerous instances where the upfront professional consulting and automation produce signifi-

• Process ROI: where savings are gained through better efficiencies, workflow processes, streamlining operations, or back-end fulfillment processes. Savings result from improving cycle times, eliminating duplicative manual processes, standardizing to enterprise-wide procedures, etc. Process ROI and savings are derived from Contract Management, SRM and e-procurement. Consequently, we believe much of the opportunity for initial BPO success lies in identifying opportunities

Ability to Gain Share

▲ ▲ IBM Accenture

CapGemini

HP

Wipro

Infosys

Low

Leadership

ACS CSC

..................................................................................

PAGE 26, SPEND MANAGEMENT

Niche

...............................................................................

High

Figure 19: Competitive & Marketing Opportunity

Crisis Potential Low

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Unisys

EDS

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Legacy High

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Source: IDC

DECEMBER 2005

cant savings measured at more than 12 times the initial investment. With savings of this magnitude, the selling value proposition of more comprehensive BPO becomes easier. Interestingly, these savings also provide a “self-funding” mechanism bridging the gap that exists between internally developed programs, small sub-segment BPO and comprehensive BPO as depicted by the leverage gained from Phase I, Phase II, and Phase III of Figure 18.

We believe the expansion in scope of BPO deals will first take place along sub-segments, before expanding across all segments, as defined by Phase II. Categoryspecific outsourcing rather than comprehensive will evolve first, as the most frequently outsourced expenses are indirect and non-strategic such as business services, travel & printing services, contract labor, IT equipment and office equipment. Broader outsourcing deals will likely be comprehensive across specific sub-segments of the Spend Management value chain and not across the entire spectrum, until demonstrated value is attained. For example, Accenture’s BPO deal with Deutsche Bank involves outsourcing the procure-to-pay cycle for all procurement categories but Deutsche Bank will continue to retain its sourcing and SRM activities in-house. However, the PSPs goal in each instance is to get in quickly, demonstrate a clear cost savings and ROI with professional services and smaller BPO, and then scale the project from there.

Accenture continues to build market share with new

Procurement BPO wins in the educational and financial service sectors. Additionally, new entrants will likely emerge as traditional Spend Management vendors continue to strengthen their product and service offerings, eventually recognizing that they have the ideal “bag of goodies” with professional services and technology automation to not only penetrate but capture meaningful market share in this high growth market. The Procurement BPO market will continue to evolve over the upcoming 12 to 36 months as new entrants will gain market share with their superior technology and deep rooted sourcing process expertise. With mounting competitive factors, current participants and new entrants will need to strengthen core product and service Spend Management offerings. We believe that strategically motivated M&A activity will flourish in this sector as players quickly scramble to fill capabilities gaps and gain domain expertise to strengthen their outsourcing offerings and value proposition.

Future Developments & Opportunities

SPEND MANAGEMENT, PAGE 27

The landscape for Procurement BPO providers is highly fragmented with no one player controlling more than a 10% market share. The Outsourcing / BPO market will continue to be dynamic with players looking to add competencies where they are lacking. We believe that this sector will be led by a solutions provider who brings a full suite of offerings on both the technology and professional services side. Figure 19 is IDC’s depiction of the Procurement BPO landscape. Companies like IBM and Accenture continue to complement their offerings with additional acquisitions or contractual agreements. In particular, IBM’s acquisition of KeyMRO’s sourcing and procurement capabilities suggest stronger interest in outsourcing and Procurement BPO. MINNEAPOLIS 952.253.5300 952.253.5300 MINNEAPOLIS

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CONCLUSION The Technology - and specifically Spend Management field is dynamic and growing. As competition heats up, today's leaders could easily find themselves tomorrow's laggards as new entrants, evolving technology and new approaches help to change the landscape. New business models, consolidation, increased attention from the professional investment community - all these and numerous other factors will help shape the field in the months ahead. As an investment bank with a considerable amount of experience in Technology, IT Services, and Outsourcing, TripleTree can assist your business to capitalize on the various strategic implications we have outlined in this report. If we can be helpful to you as you think through these and other emerging themes happening within your organization, please don't hesitate to call any member of our team.

WHAT STRATEGIC ALTERNATIVE IS RIGHT FOR YOUR BUSINESS? Seek Growth Capital And Expand

PAGE 28, SPEND MANAGEMENT

For a significant number of market participants, the current environment represents a terrific opportunity for growth. The key is determining whether your organization has what it takes to expand successfully. Some factors to consider… • Do you have a strong, experienced management team? • Are you delivering a unique and high quality suite of Spend Management Software and/or Services? • Do you have a scalable operating model? • What is the quality of your operations? • Do you have a leveragable technology platform? • Have you replicated your model in other locations? • Where and at what cost can you access growth capital? Getting objective answers to these and other important questions is the key to determining whether to seriously evaluate specific growth opportunities in your market. It is usually advisable to get professional input regarding the answers to these and other questions before spending time and money seeking outside capital. MINNEAPOLIS952.253.5300 952.253.5300 MINNEAPOLIS

Consider a Sale In the current environment, some market participants should consider a sale. Some firms within the industry have been self-funded and are still without professional capital. Many of these business owners are experiencing healthy cash flows and sitting on comfortable lifestyle businesses. Given the increased attention and the oncoming competition, these operators should consider a sale in the near term because they may experience a reduction in growth and profitability which will drastically reduce enterprise value. There are a number of steps that can be taken to maximize the value of Technology, Spend Management and IT Services companies during a sale. Effective Positioning/Packaging - During the sale process, it is critical to position the business effectively, highlighting in a number of ways the key strengths of the organization. Effective Process - Getting the right players to the table, including some unexpected strategic acquirers who might have an incentive to bid aggressively, ensures a competitive process. It is critical to conduct the process on the seller's rather than the buyer's turf and terms. Correct Timing - Conduct the process when one or more purchasers have a strong desire to enter the market(s) or to defend an existing position. Carefully evaluate the organization's performance and local market conditions and proceed accordingly.

Stay the Course Oftentimes, TripleTree will advise an emerging company to stay the course and focus on organic growth. Nonetheless, as an advisor to numerous growth-oriented firms over the years, we have found that regardless of what strategic alternative is right for your company, all entrepreneurs and business leaders can benefit from an outsider's perspective. Ongoing dialogue with an advisor that possesses in-depth industry knowledge and insight can be a tremendous help as you focus on your goals.

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CASE STUDY: PUBLIC TO PRIVATE SALE COMPANY DESCRIPTION Founded in 1995, SciQuest, Inc., a publicly-held Raleigh, N.C.-

would see tremendous value in an acquisiton that in turn would

based company, is an industry leader in on-demand procure-

maximize the risk/reward potential for SciQuest’s shareholders.

ment solutions that integrate organizations with their suppliers to enable comprehensive spend management for the life sci-

In gaining acceptance from the board, TripleTree worked with

ences and higher education markets. Many of the world’s lead-

SciQuest management and the board’s acquisition subcommit-

ing pharmaceutical, biotechnology, and academic organizations

tee to execute a sale process that addressed a number of key

rely on SciQuest solutions such as Biogen Idec,

components:

GlaxoSmithKline, Pfizer, Roche, Schering-Plough, Arizona State University, Indiana University, University of Michigan, and the University of Pennsylvania.

• Draw attention to SciQuest’s rapid customer adoption via its on-demand model, capturing growing market interest for hosted software solutions;

OBJECTIVES

• Engage a select group of both strategic and financial buyers

SciQuest’s board initiated a process to evaluate capital alternatives, engaging TripleTree to develop and execute a formal strategy that would maximize shareholder value and position

– clearly defining the unique value proposition inherent to both sets of prospects; • Articulate the future growth opportunities within the

the company to expand its leadership position in the supplier

Supplier Relationship (SRM) market and the ability to

relationship management (SRM) market.

leverage SciQuest as a platform for expansion; • Conduct an intense and rapid solicitation process within a

RESULT

two month timeframe; and

TripleTree’s approach to assisting small and micro-cap public companies in developing a future growth and capital strategy leverage

• Address the unique benefits of SciQuest’s solutions in the SRM market relative to much larger enterprise providers.

multiple perspectives: deep financial experience, hands-on operating backgrounds, executive leadership under diverse ownership

In a competitive process that yielded interest from name brand

structures, and leading industry expertise. Given SciQuest’s

public companies, venture backed private firms, and public equity

robust on-demand solutions model and strong early sales momen-

funds, TripleTree successfully negotiated the sale of SciQuest to

tum, TripleTree believed both equity funds and strategic firms

Trinity Ventures, a $1 billion private equity firm out of Palo Alto, California, that invests in early stage and growth technology companies. Additional capital was contributed by two additional funds: Intersouth Partners and River Cities Capital Funds. The transaction consisted of a final sale price of $25.25 million in a cash merger, translating to a per share premium of 55% over the closing per share price at the time of announcing the initial signing of the definitive agreement. For Trinity and its co-investors, SciQuest becomes a strong growth platform whose early success can be further accelerated under private ownership and the support of additional capital resources for expansion. For SciQuest, 100% of its attention can now be focused on servicing its clients

Stephen Wiehe President and CEO SciQuest, Inc.

and building the company under the support of an engaged and experienced ownership group. The result: a win/win for SciQuest’s employees, shareholders, and new owners.

was acquired by

CUSTOMIZED INVESTMENT BANKING

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SPEND MANAGEMENT, PAGE 29

“TripleTree’s knowledge and experience in working with small cap public companies proved invaluable to assisting SciQuest evaluate and address important decisions relative to future growth and shareholder value. Combined with their industry and transaction expertise, TripleTree’s ability to execute a process that best positioned the company for the future, managed the inputs of multiple parties involved, and maximized the return to SciQuest shareholders was a resounding success.”

DECEMBER 2005

APPENDIX TRIPLETREE’S TECHNOLOGY TEAM The Team TripleTree today has 20+ professionals with backgrounds as business builders, operators of public and private firms, lawyers, accountants, bankers and investors. Within IT/Spend Management, we have a team with significant transaction and operating experience exceeding 75 years. Our team has completed dozens of technology transactions and we have helped our clients create hundreds of millions of dollars of value for their owners.

PAGE 30, SPEND MANAGEMENT

Kevin Green, Managing Partner. As Managing Partner, Kevin advises companies on maximizing the value of their firm by leveraging 25 plus years of operational, M&A and capital raising experience. His broad industry background and relationships, extensive transactional experience, and hands-on operating experience bring unique perspectives to each client engagement. Prior to cofounding TripleTree, Kevin held several senior executive roles at private and public companies within the healthcare and technology industries. He served as CEO of both Summit Medical and Integrated Medical Systems (IMS). During his tenure, IMS grew from a start-up company to a high growth business that was sold to Eli Lilly. Previously, he served as an executive at Cycare, which grew from a private firm to a NYSE company and was later sold to McKesson. Kevin started his career at Westinghouse. Dave Henderson, Managing Partner. Dave founded TripleTree with the vision of providing industry leading financial advisory services based on seniorlevel, hands-on involvement. He has assisted numerous business owners and executive teams in planning and executing successful transaction strategies to create and maximize the value of their firm. Dave brings a well-rounded perspective to investment banking. Prior to forming TripleTree, Dave spent 22 years in venture capital, business development and as a senior operating executive, MINNEAPOLIS952.253.5300 952.253.5300 MINNEAPOLIS

combined with seven years of public accounting experience at Arthur Andersen. His operating experience includes serving as CEO of a $400 million asset bank holding company and COO of Republic Telcom Corporation. He has served on the Board of Directors of numerous public and private companies as a venture investor, working closely with CEOs to develop and implement successful business and financing strategies. Brian Klemenhagen, Senior Principal. Brian joined TripleTree in 1999 and was promoted to Senior Principal in 2003. Brian has over eight years combined investment banking and Wall Street research experience as the engagement manager on merger and acquisition, private placement, and strategic advisory engagements across a number of technology and communication sectors. Through both transaction activity and industry research, Brian has developed in-depth expertise in the software, IT services, and mobile/wireless industries including such domains as enterprise content management (ECM), business intelligence, application hosting, mobile data applications, and systems software and security. Prior to joining TripleTree, Brian was an Associate at RBC Dain Rauscher Wessels, focusing on medical devices and wireless communication. He was directly involved in publishing buy/sell research and investment recommendations for over 20 companies and was active in the IPO process for several emerging private companies. Previous experience also includes financial lending and wealth management and investments at American Commercial Bank, Craig Hallum, and Salomon Smith Barney. Chris Hoffmann, Senior Principal/Research Director. Chris joined TripleTree in August 2005. Chris has over 17 years of experience as an operating executive, consultant and analyst in the technology industry. He is leveraging this experience at TripleTree in his role as Research Director as well as assisting on transaction activity in the areas of software and technology services. Chris joins the firm from Tier1 Research, where he was presi-

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DECEMBER 2005

dent and lead analyst for the enterprise software sector. At Tier1, Chris architected the growth of the firm toward a successful acquisition in June 2005 by The 451 Group. Prior to Tier1 Research, Chris held executive positions at Zamba Solutions, Gartner, GE Capital Consulting, IBM Global Services and a consulting firm which he founded. He has worked with the world's leading technology firms including IBM, Microsoft, Accenture, EDS and HP; has been quoted in numerous trade and industry publications including the Wall Street Journal, the New York Times and Investors Business Daily; and is a frequent presenter at industry events. Kevin Jakuc, Associate. Kevin joined TripleTree in November 2004 as an Associate focused in the Technology sector. Kevin assists in TripleTree's merger & acquisition, private placement, growth capital and strategic advisory engagements in the software, IT services, and the mobile/wireless industry space. Prior to joining TripleTree, Kevin worked for two privately held companies in both sales / marketing and management positions with responsibility for global strategic planning and new product development initiatives. Collectively, he brings to TripleTree nearly ten years of professional and industry experience as well as international exposure in both the Asia-Pacific and European regions. Erik Latterell, Analyst. Erik assists TripleTree's investment banking services by providing industry and company research as well as financial analysis in support of the company's engagements. He is specifically responsible for analyzing and tracing industry trends within software and IT services.

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SPEND MANAGEMENT, PAGE 31

Erik has held several internships with firms such as Moss & Barnett, ActiFi, Inc., and Merrill Lynch.

SAN DIEGO DIEGO 858.792.3406 858.792.3406 SAN

ABOUT TRIPLETREE TripleTree is a leading investment banking firm dedicated to meeting the needs of technology, healthcare, and business services companies. Specializing in M&A, private placements and financial advisory services, the firm represents growth-oriented companies in pursuing strategic alternatives that drive premium valuations. Unlike most investment banking firms, TripleTree brings a unique approach to advisory services through the leverage of experienced executives, CUSTOMIZED INVESTMENT BANKING

strict industry focus, and extensive commitment to research. Such a commitment has allowed us to build an investment bank focused on identifying and delivering strategic solutions that enable shareholders and business executives to maximize the value of their firm in a dynamic and rapidly changing marketplace.

For further information, visit our website at: http://www.triple-tree.com Copyright (C) 2005 by TripleTree, LLC

MINNEAPOLIS

SAN DIEGO

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952-253-5300

T

858-792-3406

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952-253-5301

F

858-792-3407

7601 France Avenue South

12526 High Bluff Drive

Suite 150

Suite 300

Minneapolis, Minnesota 55435

San Diego, California 92130