Based on the success of this series on investing in procurement thus far, we've decided to continue it. And no doubt, we'll revisit our recommendations from time to time as company strategies change and new entrants pursue the broader procurement market opportunity. Continuing on in our series on different ways to play the procurement marketplace besides Ariba from an investment perspective, we turn our attention to Hubwoo, a vendor that has undergone a massive transformation from its days as a B2B exchange to a completely different Spend Management animal of sorts. Today, Hubwoo offers a range of solutions -- including a multi-tenant, hosted version of SRM -- designed to enable SAP customers in the source-to-pay area. Perhaps of most interest to investors looking to get more engaged in the procurement sector is Hubwoo's supplier connectivity/network offering, most comparable to the Ariba supplier network.
But even more important than this is the "chosen one" status Hubwoo is afforded with SAP (incidentally, SAP's SVP of Outsourcing & On Demand Ecosystem Bernd-Uwe Pagel sits on Hubwoo's board of directors), which gives it an advantage over other SAP SRM BPO partners (e.g., Infosys, Capgemini) in getting into bigger SRM deals and existing SAP relationships, courtesy of SAP introductions. Indeed, Hubwoo can complement SAP's native capabilities -- as can other SAP partners -- in invoice automation, supplier enablement, supplier connectivity, SRM hosting, SRM rapid deployment, etc. The combination of these shared services and augmented capabilities are very important for SAP to have in its back pocket as it attempts to convince legacy Ariba Buyer customers, among others, to migrate to SAP's procurement solutions during their next ECC/financials upgrade cycle.
Hubwoo's supplier network solution, delivered in conjunction with SAP partner Crossgate (see coverage here, here and here), is a critical component of SAP's overall strategy to increase SRM adoption and usage. Although the network does not offer all of the capabilities of Ariba (e.g., supplier search/matching/discovery), it still fulfills a range of important of connectivity infrastructure/plumbing components necessary to help companies reduce the amount of paper that goes back and forth between buyers and suppliers and to let procurement and A/P organizations manage by exception. In addition, the catalog management capabilities Hubwoo brings alongside the network offering can play a key role in helping SAP customers bring extra spend under management more quickly while enhancing overall compliance on both the buyer (e.g., making sure contracted suppliers get business) and supplier (e.g., price terms, conditions).
Undoubtedly, Hubwoo has significant competition from other SAP partners and a wide range of SAP competitors. Nor is Hubwoo without non-product challenges as well. Its financial performance in recent quarters shows a continued migration away from legacy (read: pre-SAP tight partnership) revenue streams as well as some of the potential challenges in being reliant on a key partner during a sales cycle that is at least, in part, dependent outside of your control in certain cases. Hubwoo is also a materially smaller vendor than other public companies in the sector, which presents its own potential risk (but one could argue upside as well) from an investment perspective.
Yet the combination of Hubwoo's close working relationship with SAP (and other SAP partners, such as Bristlecone) and its ability to surround and enable SAP procurement solutions make it an intriguing component of a broader procurement solutions investment portfolio. Of course SAP could always opt to "turn off" Hubwoo just as they decided to sever their Commerce One ties, opting to build or bring in-house similar capability (e.g., if SAP ever acquired Ariba, they would ultimately have little need for Hubwoo). But this is a risk potential investors need to get comfortable with.
In short, our case for putting Hubwoo in a broader procurement-focused investment portfolio is based on the following rationale:
- Overall growth of the Spend Management sector and Hubwoo's singular focus on it
- The continued and growing importance SAP appears to place on both procurement software and broader solutions
- Low valuation multiple relative to Ariba and others reduces potential downside risk
- Unique working relationship and board-level involvement of SAP
- A management team and sales organizations that has sold solutions in this area going back to the early days of Commerce One and Ariba (i.e., close understanding of the market)
- Network component of business model
- Potential for an acquisition by SAP or BPO providers in the market
Disclosures: Hubwoo is a Spend Matters sponsor. Over fifty other providers have engaged Spend Matters and our affiliates in recent years, including a range of competitors/substitutes to Hubwoo. See our "Disclosures" section for a partial list. Jason Busch, the author of this post, is not an investor in Hubwoo, Basware, Internet Capital Group, Ariba, SciQuest or any other solution vendors in the procurement marketplace we've profiled in this series because of his role covering the solutions market.