Spend Matters PRO Week: SciQuest and Spend Radar Customer Analysis (Part 1)

To highlight the depth of what's available on Spend Matters PRO, we'll be featuring full text analysis from select research briefs this week on the Spend Matters public site. Spend Matters PRO is our response to the type of material we wanted (but never got) when we were customers of industry analyst research firms. It's fast, deep, pragmatic, and insightful. As one example, where other analyst firms often take weeks or months to turn around a high-level analysis of a solutions/software acquisition impacting procurement organizations, we often provide same-day coverage of M&A activity a level that we believe is significantly deeper (and that's just one coverage area amongst many).

We hope you enjoy this preview of what's available on Spend Matters PRO. And if you like what you see, drop us a line. We're offering a special discount to the first 25 yearly subscribers we sign up this week (individual seat costs through this offer are creditable on a pro-rotated basis to corporate/all company access accounts should you decide that you want to share in the insight with your peers). Drop us a line (smoore (at) spendmatters (dot) com) if you want to take advantage of this opportunity or click on the previous link!

Below, we feature Part 1 of the full text of our initial analysis from September 28th offering customer specific recommendations for those impacted by the SciQuest/Spend Radar acquisition. For subscribers, access the original here: SciQuest Acquires Spend Radar: Company, Customer, Partner and Competitive Analysis and Recommendations:

Earlier today, SciQuest announced it is acquiring Spend Radar.

Spend Radar is the leading independent spend analysis provider in the market without a broader suite offering. In the early years of the business, the Spend Radar founders built the firm with a limited direct sales force and a largely channel-driven model, only recently changing to a hybrid channel/direct sales approach. In general, customer satisfaction was quite high and they won a substantial portion of the deals they competed in. Yet Spend Radar has been held back by its smaller size and limited global reach, including a sales and marketing organization that was a fraction of the size of many of their suite competitors.

With Spend Radar, SciQuest gains access to a gem of an asset, albeit one with significant IP tied up only not in the product, but the manner of service delivery (which will necessitate keeping as much of the team on as possible). Most of Spend Radar's deals involve upfront expert services to arrive at initial spend snapshots (data acquisition services, data classification services, etc.)

The high margin revenue on the back end (e.g., spend refreshes and selling the classification and analytics tool) is a great business model, but only possible through the upfront delivery of their capabilities as a solution; with services included (in 99% of cases). This kind of bundled sales approach is not the way SciQuest sells their solutions and services, so current and prospective Spend Radar clients should consider the potential shift in renewals to itemized pricing.

In looking at the transaction from the acquirer/company perspective, our analysis suggests:

  • SciQuest paid a reasonable valuation, especially up-front, given Spend Radar's strong growth. The most likely reason that SciQuest was able to purchase Spend Radar at what we approximate at a modest 2X multiplier (excluding earn-outs) is the closely held ownership structure of the provider's founders (i.e., no outside investors)
  • With the acquisition of Spend Radar, SciQuest establishes itself as a value-buyer within the procurement market. They've become the Berkshire Hathaway of procurement solutions, if you will. With the acquisitions of AECsoft, Upside and now Spend Radar, SciQuest has built a consistent track record of buying high-value IP and product assets at reasonable to low valuation points. Successfully leveraging these assets over time includes both maintaining and up-selling customers (not to mention integrating products) is a different question entirely, and SciQuest does not yet have a long-enough track record for us to comment on this aspect
  • SciQuest is rapidly closing product gaps in its portfolio relative to suite vendors such as Ariba (likely soon to be Ariba/SAP). In recent quarters, SciQuest has organically built out e-invoicing and invoice automation solutions, but Spend Matters believes additional acquisitions in this area could prove to be especially valuable in accelerating market traction with AP organizations (and finance/treasury). SciQuest could also accelerate penetration of the market by acquiring a sourcing provider with advanced capabilities such as CombineNet or Trade Extensions. Other potential areas that would be an interesting fit for SciQuest include: broader procurement analytics (e.g., budgeting/savings tracking), supplier risk management, niche industry solutions (e.g., healthcare procurement, inventory management and supply chain), niche category-focused solutions (e.g., telecom, legal and related expense management), service procurement (VMS) and contract discovery (to complement Upside)
  • SciQuest will further accelerate penetration outside its historic core vertical markets with this deal. This includes access to Spend Radar's highly diversified client base across industry sectors. Yet conducting a multi-theatre war on top of integrating their recently acquired software and operational assets will be a material challenge for SciQuest
  • Spend Radar is not a pure SaaS model. No spend analysis-focused company is. Spend analysis solutions are always solutions first, software second. The amount of manual effort initially required to deliver accurate classification at 90% or greater levels will always involve some degree of expert solution-driven approach. Moreover, the creation of customized data mash-ups is expert services intensive. It is high margin, but it's a solution, not just SaaS software. This appears to be a mere nuance, but is quite important for those outside the market (e.g., investors) to understand.
  • SciQuest will significantly benefit from Spend Radar's strong channel relationships, provided it does not muck them up. Spend Radar did a commendable job of fostering relationships with many large (and some smaller) consultancies, BPOs and marketplaces. SciQuest would be wise to cultivate these relationships more broadly, especially in cases where their existing partner reach is limited inside larger potential channels (e.g., healthcare practices, rather than broader procurement practices, of Big 5 firms). In particular, SciQuest has timed the acquisition perfectly given the opportunity to more broadly introduce its portfolio of solutions to channels given Ariba/SAP post-integration challenges (if and when that deal closes: we believe it will)

To be continued.

Interested in this level of commentary everyday? We're offering a special discount to the first 25 yearly PRO subscribers we sign up this week (individual seat costs through this offer are creditable on a pro-rotated basis to corporate/all company access accounts should you decide that you want to share in the insight with your peers). Drop us a line (smoore (at) spendmatters (dot) com) if you want to take advantage of this opportunity or click on the previous link!

- Jason Busch

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