In Part 1 and Part 2 of this series, I covered the news around Ketera's new low-cost marketplace / network strategy, mixing in a bit of opinion with the analysis. In this final column in the series, I'll completely drop the objective journalist hat on the news and provide my own analyst-esque opinion on both the pros and cons of this radical new approach to the Spend Management market and whether or not the vision will bloom or implode. As an optimist, I'll start with the pros and then head into the cons. Let's begin.
1) Ketera's value proposition, provided the marketplace can scale and gain critical traction across categories, provides significant new value to both buyers and suppliers. Buyers will gain access to a level of price-benchmarking and views across the network which will allow them to take faster action than before -- and pinpoint where to best focus their category-driven efforts. And suppliers have the potential to get in the deal flow from such activities by reacting to how they stand in the market and changing prices (versus waiting passively for orders which is the model in other supplier networks).
2) Ketera has proven it can create easy-to-use applications that require little or no training. From what I've seen of it, the UI and design of the exchange / marketplace is first rate and a model for other Spend Management companies to follow from an interface and simplicity perspective.
3) There's a lot of collective learning in the applications from what others have done in the market (even if the execution is not 100% there yet). For example, Ketera’s past experience from partnering with Iasta in the sourcing area is evident in what they’ve learned and embedded in their latest approach to sourcing. It’s not 100%, but the 80% solution to sourcing could ultimately prove to be enough for many companies, especially at the price points Ketera is charging.
4) What Ketera has been good at in the past (i.e., eProcurement and P2P plumbing) is critical in this sort of environment -- and it's what those that failed during the initial marketplace craze in 2001-2003 lacked. I have no doubt Ketera will be able to leverage its existing technology assets and build requisite new ones -- from supplier enablement to transaction management to invoice / document exchange and management -- to meet many of the underlying buy-side technology needs of marketplace users.
5) Ketera offers a strong value proposition to suppliers over existing supplier directory / advertising models provided they can produce enough buy-side volume across enough categories to keep the sell-side audience happy. This is not without its own set of challenges, but the low cost of getting on the playing field in the Ketera model is in marked contrast to other regional- and industry-focused marketplace and supplier index models.
6) Procurement organizations in both the Global 2000 and the SMB markets are more willing than ever to consider low-cost solutions, weighing the functional pros and cons against other models. Ketera has the opportunity with their new business model to "go viral" inside procurement organizations simply by getting a quick and inexpensive foot in the door and proving the value in one area and then branching out to others. It's an ingenious go-to-market penetration strategy if it can work. Moreover, the pricing has the potential to put significant pressure on the entire legacy market if Ketera can pull it off.
1) Ketera's legacy revenue streams are not safe (this is critical because Ketera has been using these to bankroll development of their new business model). I have heard of numerous examples of existing Ketera customers shopping for alternatives in the past few months, worried about a lack of new development on the legacy On Demand toolset and a concern about Ketera's overall viability going forward. Ketera will need to preserve existing customer relationships and revenue streams if it is to succeed without significant additional capital investment -- and this is far from certain at this point. However, I reached out to Ketera on this point given my concern, and they shared that recent and past renewal rates have been at least at industry norms (mid 90% range) due to "high customer satisfaction" and a significant majority of their revenue is "contractually obligated and non-cancelable through 2010."
2) Over Confidence and History. In my view, Ketera comes off discussing the new model as if they don’t know what they don’t know about many of the challenges inherent in marketplace business models. For every success story that has pursued a marketplace model, there have been ten failures. My call here is entirely subjective. But I've been around this sector enough to know that certain attitudes are leading indicators of the potential likelihood of success, especially in an environment that is so complicated and nuanced not to mention prone to failure.
3) Even though they have a top flight list of past investors, Ketera is undercapitalized for this initiative. This is not a chicken and egg single peck at the shell sort of thing. Ketera needs consumer-like money (e.g. Yahoo) or at least MFG.com-like capital behind it (e.g., Fidelity) if it is going to realize the potential of the marketplace model and have any chance to scale it. They'll need significant capital to ramp not only technology, but a significant sales and services operation. Boot-strapping may work in certain ventures, but it only increases the risk of failure in this type of model.
4) I have reservations about Ketera’s ability to convert suppliers to paid members of the network for the rate at which they'll need to get enough of them to make the model work. It's a winner-take market in the supplier directory marketplace at the moment and Ketera is just getting on the map.
5) Ketera's investor runway raises more questions than answers. Ketera is launching an entirely new business model and their investor backing is not clear to me from discussions with different folks in the Bay area. It is unclear if the current backers are willing to ante-up another $25-$50 million or more to see this model really scale. Having done some homework with this investment community, I believe it is wishful thinking at best that a few early usage and sales wins will drive overall growth at the truly exponential rate it will need to achieve for such a business model to succeed without significant investor support. You can't bankroll a war effort scavenging what's left on the battlefield along the way (think about what happens if you lose a battle -- e.g., a customer -- when you plan to use those expected resources to fund your next campaign and they suddenly disappear). This is the precise danger inherent to their current approach. However, it's not like the company will just go away if the investors decide not to re-up -- I suspect Ketera could find a number of potential suitors should they chose to sell to another provider.
6) I have concern over the development operations and enhancements to legacy applications. Having spoken to some individuals close to Ketera's efforts, it's clear that any offshore development environment is not necessarily suited to the task at hand of building an uber-procurement marketplace taking into account all of the necessary buy-side, sell-side and collaboration requirements. Moroever, even though Ketera told me that both applications are based on the same underlying code base, the specialized requirements of large enterprises when it comes to such areas as transa
ctional procure-to-pay are often quite different than those that are necessary to build the marketplace vision Ketera is trying to achieve. Pleasing everyone -- even assuming an unlimited development budget -- would be impossible. And we know where Ketera's priorities are based on the articulated direction of the company.
At the end of the day, will this model succeed? You be the judge. Ketera has a fan in Spend Matters by pursuing such a winner-take-all, shake-up the environment model. But I also have concerns about the ability to execute and scale the operation, not to mention Ketera's ability to keep its existing legacy customers (i.e., the revenue stream funding these new developments) on board. Of course this latter concern would go away with additional investment. But regardless of where you stand, Ketera's progress will be fascinating to watch along the way. If this model can work in any situation, it's now. There's never been a better time for a network or marketplace model given that buyers are looking for value and low cost, and suppliers are desperately seeking out new business opportunities and will pay to reach the right set of customers.
Postscript: Ketera has indicated that they would like to share their thoughts on making the network model work with Spend Matters readers, as well as some of the new approaches they've taken on the buy-side path. I have invited their guest contributions (screen shots and all) and look forward to publishing them later this month.