Investing in Procurement — How to "Play" the Sector Beyond Ariba (Part 3: Basware)

Please click here for Part 1 (SciQuest) and Part 2 (ICG Commerce) of this series.

There's a joke about Finnish people that goes something like this, according to an old friend (an American) who works with a bunch of Finnish colleagues. Two Finns walk into a bar. They both begin to drink. After 30 minutes of silent contemplation and imbibing passes, one of the Finns asks the other: "How is your family?" The gentleman replies: "Are we here to talk or are we here to have a drink?" Now, not all Finns are contemplative and serious people (though a surprising number I've met, going back to my first consulting gig after graduate school, are). Nor do all Finns drink (although the proximity to Russia has undoubtedly had some general influence in this area).

But in general, I haven't met or worked with anyone in a different culture that is so heads down and focused in whatever they do (down to the best taxi driver I've ever had in my life in Helsinki). At the same time, though, the Finns are quite horrible at standing up and taking credit for what they're good at, especially in a global marketing context. Imagine, for example, if Apple had created the original Nokia Communicator over fifteen years ago. You can be sure the world would have known about it rather than just a select few business people. The same can be said for a Finnish vendor that only a small minority of folks in procurement on this side of the Atlantic has ever heard about: Basware. If another vendor had their depth of solution in the A/P automation and electronic invoicing area, you can be sure they'd be a procurement and A/P corporate household name like an Ariba.

I can almost guarantee that Basware is the biggest pure-play public company Spend Management vendor you've never heard of (or one that you might remember in passing, but fail to understand the depth and increasing breadth of what they do). Part of this stems from the fact that Basware floats on a European exchange and is not really known or understood by US sell-side analysts (or fund managers, for that matter). But Basware's real problem when it comes to both global investor and customer awareness goes back to its Finnish culture of heads-down product building and an adversity to selling the afterlife of their solutions.

Clearly, Basware excels in substance rather than general marketing hype. They're doing much behind the scenes right not to remedy where they're not as strong (e.g., eProcurement) relative to where they lead the market (electronic invoicing, A/P automation and procurement/finance joint visibility). Our sources suggest that their rumored next generation platform/architecture could potentially transform the P2P product market by truly linking best of breed capability on both sides of the purchase-to-pay equation. Yet in the meantime, they're selling a more than capable solution that, compared to Ariba on the electronic invoicing front, is like comparing an Accord to a Maybach, and in other suite areas, can often hold its own. They're also quietly consolidating the European e-invoicing market with a strategy focused on buying network operators and supporting a model that encourages interoperability rather than attempting to drive all suppliers and users to a single standard. Basware's articulated strategy is built on a "long-term target is to grow annually 15-30 percent in net sales and more than 50 percent in Automation Services."

Unlike Ariba, Basware makes no apologies for selling a combination of enterprise software, SaaS solutions, network connectivity and enabling BPO services. Indeed, it's the combination of capabilities and flexibility that makes it so invaluable in the electronic invoicing area. Finland may be closer to the Arctic circle than Sunnyvale, but no one I've met at Basware has their head stuck in the clouds to create valuation hype. With Basware, what you see (if you open your eyes enough to look) is what you get -- a highly focused vendor with an expanding value proposition to address existing product areas where it knows it can grow and improve. Moreover, Basware's revenue and EPS multiples compared with US-based companies in similar markets is quite reasonable, owing to the general discount negatively afforded to European-based software companies (and this, despite some recent stock price appreciation).

In short, our case for putting Basware in a broader procurement-focused investment portfolio is based on the following rationale:

  • Overall growth of the Spend Management sector
  • Increasing linkages between procurement and finance
  • Deep electronic invoicing and AP automation capability
  • Finance-focused (second "P" in P2P) complement to a procurement-focused Ariba (first "P" in P2P)
  • Broader suite coverage in eProcurement (and improving capability)
  • European market penetration and particular strengths in the Nordic market
  • Opportunity to build additional share in North American and other European markets
  • Substance over style and cloud hype (combined with deployment flexibility)
  • Network component of business model
  • Growing supplier network invoice and related volume
  • Ease of making a complimentary acquisition case for both other vendors (e.g., SAP, Oracle, Ariba, Infor) and BPO providers (e.g., Capgemini, Infosys, Accenture, IBM, Wipro)

Disclosures: Spend Matters has worked with Basware in advisory and related capacities in the past. Over fifty other providers have engaged Spend Matters and our affiliates in recent years, including a range of competitors/substitutes to Basware. See our "Disclosures" section for a partial list. Jason Busch, the author of this post, is not an investor in Basware, Internet Capital Group, Ariba, SciQuest or any other solution vendors in the procurement marketplace because of his role covering the solutions market.

Jason Busch

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