IBM/Emptoris Divests Rivermine, Tangoe Picks Up $10M TEM Business: Vendor and Market Analysis

Mergers and Acquisition News in procurement industry

Yesterday, Tangoe announced it was purchasing the Rivermine business from IBM. Rivermine, a telecom expense management (TEM) provider, was part of the Emptoris product line. It was acquired by the sourcing suite vendor the same year that IBM announced it was acquiring the overall business in 2011.

In the press release announcing the acquisition, Tangoe said, “IBM’s Rivermine TEM business includes comprehensive fixed and mobile telecom expense management software and related services, as well as a global blue chip customer base. The business fits particularly well within the core of Tangoe’s broader Matrix solution suite, which helps clients turn on, track, manage, secure and support its IT assets, expense and usage including mobile, fixed, machine-to-machine, cloud software and services, enterprise social and IT.”

From an IBM perspective, it will be curious to see if the divestiture allows a refocusing of developing on the other Emptoris assets, including what Spend Matters believes would be a helpful re-platforming of the Emptoris product line to more effectively compete with where other competitive upstream suite solutions (e.g., BravoSolution, Iasta/Selectica, SciQuest, Ivalua, GEP) have headed or are going. For generic sourcing suites, single stack – and ideally a platform-as-a-service (PaaS) model – is the future; spanning sourcing, supplier management, contract management, analytics and more.

Beyond the Numbers

Financially speaking, the Rivermine acquisition is a small one for Tangoe – which likely explains the rationale for divesting the product line from within IBM (since it appears to have stagnated since the original Emptoris acquisition, at least based on our understanding of the original size of the transaction and revenue at the time). In its quarterly earning announcement, Tangoe reports the deal will be “expected approximate contribution of $10.0 million to total revenue" in 2015.

But while Rivermine only slightly moves the needle for Tangoe from an overall P&L perspective, it is more strategic in consolidating a segment of the market. Now, it appears that a single provider will have the upper hand in terms of market share if not breadth of solution (it will also likely create less pricing pressure on TEM solutions generally, although IBM was never in the business of lowering prices).

From a technical capability perspective, the acquisition will bring added or enhanced capabilities to Tangoe including string mobility management, a mobile storefront for mobile asset acquisition, monthly user airtime rate optimization saving assessments and total telecom (wire line, network equipment, mobile) asset management. On the flip side, Tangoe is now becoming even more of an INFOR type organization with a large treasure chest of platforms that are only loosely coupled, if at all.

The fragmented asset base is not nearly as scalable as a single purpose-built platform ­­– and we hope that Tangoe will be able to pull off that transition. Financially speaking, Tangoe appears to need a shot in the arm as the company is barely profitable (FY 2014 saw total revenues of $215.6MM and EBITDA of $16.6MM and net income right over $3MM) and the company's stock (NASDAQ: TNGO) has dropped in half over the past 18 months, and the acquisition announcement hammered the stock even further. IBM on the other hand, needs to do something to get its stock price back on the growth path; the past 12 quarters have been on a disappointing downward trend. From our vantage point, it would be great to see procurement and sourcing (including the Emptoris line) move the needle for IBM.

In regards to Tangoe, the combination, based on our back-of-the-napkin analysis, creates the largest TEM provider (a near complete list of providers, some of which provide specialized capabilities, can be found here). Other sizable competitors include Calero (originally formed from a hodgepodge of various assets including the Veramark and PINNACLE TEM product lines), MDSL and WidePoint Solutions. Smaller providers that are likely to benefit from this consolidation include Avotus, which offers deep telecom and IT spend analytics services and category-specific sourcing technology.

Looking Ahead

Further consolidation of what Spend Matters describes as “complex services categories” and the vendors addressing these needs within the broader procurement area is just heating up. Specialized providers in related areas including facilities, legal, IT vendor management, energy and other complex services are likely to further come together (and consolidation in certain markets like energy has been going on for years).

The TEM space below Rivermine/Tangoe is extremely fragmented, with most providers looking at only segments of the spend (e.g. auditing, expense management, category sourcing or services) without delivering a holistic perspective.

It would be easy to look at the acquisition, as with Calero, as a corporate development or PE engineered “plug and chug” combination based on the numbers – one that is not terribly interesting over the short term, but on a DCF basis, once you reign in costs, it begins to look somewhat interesting over a 4-5 year period. However, this rather financially-oriented view denies the product richness of what Rivermine was originally able to create (albeit whose innovation slowed somewhat within IBM).

For the sake of procurement organizations who need better approaches to manage the lifecycle of complex categories, the Spend Matters team hopes that the combination will result in a new round of TEM innovation – rather than simply moving the EBITDA needle a bit over the longer haul for Tangoe.

After all, this market is anything but simple. If you’d like to learn more about TEM, we encourage you to read on.

TEM Ain’t Simple

As we’ve written before, TEM is a complex category:

It is a category that consumes over $100 million in annual spending inside the typical Fortune 500 organization. For nearly all large organizations, potential telecom savings opportunities from better sourcing, inventory management, compliance, demand management, device/line provisioning and invoice auditing range from the high seven to the low/mid 8-figure (yes, you read that correctly). But in reality, there is not one "telecom" category. There are many, from connectivity and bandwidth (e.g., the fat pipes that feed data going into and coming out of organizations) to mobile (e.g., smart phones and mobile devices used by front line employees) and a tremendous amount in between.

The fundamental challenge of managing these diverse sub-categories within telecom revolves around a common set of contracting, provisioning, compliance and invoicing challenges. Today, solutions from procurement and ERP vendors such as Ariba, SAP and Oracle (and previously Emptoris) don't begin to address the nuances of telecom procurement outside of initial negotiation and contracting, transaction/document exchange and limited aspects of vendor management, areas that represents a small component of the overall challenge.

What contributes to the TEM challenge? We’ve observed the following items:

  • SKU/service proliferation contributes to the telecom challenge; companies pay for hundreds of different services from 1-800 numbers to T1 and OC3 connections that are often individually managed/administered by dozens of individuals spread across different functions in the business.
  • Aside from paying too much for services that could be sourced and managed more effectively, companies know they are overpaying or incorrectly paying telecom vendors, as 8%-10% of invoices contain errors (almost always in favor of the supplier).
  • The fundamental challenge of telecom, as it is with other complex categories, seems relatively simple – control and compliance. But the actual hurdles are immense, given the size and complexity of the problem. In this case, organizations have a difficult time matching contracted rates with invoices and available inventory, which leads to a significant contract compliance headache.
  • Challenges with carrier (i.e., supplier) billing systems are complex and fraught with errors, change intensive processes, high volume contracts and transactions, format complexity (hundreds of invoice and format types, including electronic and paper), and security and compliance complicate matters further.
  • Billing from carriers is hard to disseminate, as is a tie-back to contracted pricing, and even harder to couple to the right CRM activities (to assign to the right sales activity) as well as charge-backs to internal clients and other cost centers (centralized procurement or CoEs needing to parse out expenses to the right P&Ls). The "blue and green money" aspect is particularly challenging in the telecom expense area.
  • Services – underestimated by most providers in our opinion – the spend is complicated, and few companies know how best to deal with this internally. Merely getting a great software tool in your hands is not enough to drive success.

We encourage Spend Matters readers and subscribers to get in touch if you would like to see us explore TEM and related areas in more depth alongside our coverage category coverage of procurement technology, services procurement/labor, industrial distribution and metals.

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