Coupa Enters an Agreement to Buy Trade Extensions: A Game Changing Move For Strategic Sourcing

After market close on Friday, Coupa announced it had entered into an agreement to purchase Trade Extensions, a specialist e-sourcing and strategic sourcing optimization vendor.

Coupa will pay $45 million for Trade Extensions when the transaction closes $41 million will be paid in cash and $4 million in stock (which will be issued, it appears, to employees). Spend Matters estimates the valuation range for Trade Extensions (as a multiple of revenue) is in line with other typical SaaS companies, and that Coupa did not pay a premium for Trade Extensions, especially considering how unique the asset is in the market.

Spend Matters was unable to speak to Coupa or Trade Extensions regarding the news (Coupa had “no comment” on the news, likely per SEC regulations). But according to our sources, it is believed that the existing management team at Trade Extensions will remain in place.

Buying a Niche Provider Without Equal

Spend Matters analysis of the sourcing optimization market and different technologies suggests that for firms looking for best-in-class advanced sourcing capability, Trade Extensions is in the enviable position of having no peers. The data science behinds its sourcing optimization is even respected by competitors with optimization capability themselves.

Trade Extensions counts (quietly) as customers some of the most respected Fortune 100 brands (and Global 2000) brands in the market as well as McKinsey, A.T. Kearney and other consultancies who use it to deliver highly complex sourcing and supply chain network design projects to clients.

What is Sourcing Optimization?

What is sourcing optimization compared to regular e-sourcing technology? As we have noted before in previous coverage of sourcing optimization, the process enables:

“A more fluid RFX process that yokes flexible data collection efforts with the ability to encourage supplier creativity in responses – and with the ultimate ability to see how different offers compare, when measured against any number of internal business constraints a sourcing organization may define. Supplier responses in a sourcing optimization context may include alternative specifications and alternative proposals.”

“Moreover, advanced sourcing/optimization capabilities enable organizations to fully explore all price and non-price factors in a given event, drilling into the impact of different supplier-submitted options as well as price and non-price variables calculated internally. Organizations may opt to create highly specific constraints and run different scenarios to see the additional cost they may add into an equation initially, or even potentially on a net present value basis over the life of a contract.”

In another research brief, we noted that:

“It's tempting to think that you can take any sourcing tool out there today (most are quite capable, even user-friendly), push a sourcing activity through them, pick an analysis scenario, create an award recommendation and you are off to the contracting step. Not so fast!”

“This does work in the overwhelming amount of indirect goods and services, but there are many categories where the bulk of the solution providers will buckle under the complexity. An attempt to run complex categories (e.g. logistics), or even otherwise simple categories but with overly large sets of restrictions to satisfy (e.g. multi-source, location and time specific quantities, capacity utilization), is almost guaranteed to leave value on the table.”

“Particularly, the direct side of procurement has many examples where this holds true. Think of how the many lane options (logistics), Incoterms, warehouse and other locations, and shipping nexus combinations, capacity utilization, order quantities, inventory holding costs, switching and setup costs, not to mention quality aspects and various risk and other more subjective award criteria (e.g. supplier diversity, CSR) combine to quickly make the analysis so complicated that even Excel can't handle it. You can come up with similarly complicated activities on the indirect side, so this is not direct side only.”

“But how can one address this in a single sourcing exercise? This is where various high-end solutions based on optimization (finding the optimal "compromise" among multiple decision rules) come into play - and if you want to unlock that value, realistically, you can't do it without such a tool.”

Graduating to Trade Extensions

Trade Extensions is still a “niche of a niche” today. But it is one that is increasingly capturing early adopters and innovators within procurement, especially those who are informed about their options. For example, Spend Matters knows and/or works with a number of organizations that started with CombineNet that have migrated to Trade Extensions to handle greater levels of complexity within their largest sourcing events, especially those that want to intertwine sourcing, logistics and broader supply chain considerations in large-scale activities.

CombineNet, now Jaggaer ASO, comes closest to matching Trade Extensions compared with others in its combinatorial optimization capability. But additional vendors, including BravoSolution, Keelvar, Determine/Iasta and IBM Emptoris, also bring varying degrees of optimization capability to sourcing.

Among all of these vendors, BravoSolution’s optimization capability is integrated most closely with its broader strategic procurement technologies suite. Yet all of these vendors come up short of Trade Extensions in optimization horsepower, flexibility, configurability and ultimate scale enablement on an event level for those who need to push the limits of an optimization solution from a software perspective (professional services can “kludge” some of this, but not all of it).

Customer, Competitor, Partner and Market Impact

We’ll explore the customer, competitor, partner and market impact of the transaction later this week on Spend Matters PRO. From a fortuitous timing perspective, three members of the Spend Matters research team had a long scheduled demonstration of Trade Extensions forthcoming release tomorrow, and we’ll be able to share some details on Trade Extensions spring release (which promises to make the application much easier to use for typical e-sourcing events).

But for now, our short-term summary of the transaction suggests:

  • The acquisition is by a significant margin Coupa’s most significant M&A move to date. It is without question also the biggest game changer in strategic sourcing since the time Ariba acquired FreeMarkets.
  • The acquisition will give Coupa access to best-in-class sourcing optimization technology to complement its own strategic sourcing capabilities (which continues to improve, although still represents baseline functional capability from Spend Matters perspective).
  • Coupa did not pay a premium for Trade Extensions by our own analysis.
  • The transaction represents a preemptive offensive and defensive move to thwart SAP Ariba’s effort to re-invest in the sourcing and direct materials procurement area.
  • The deal will also put significant competitive pressures on other procurement technology vendors, which previously exploited capabilities in both sourcing and spend analytics to win initial business with customers (but which will now face Coupa, with best-of-breed capability in both areas, in addition to offering its broader procure-to-pay suite at at the core).
  • There are logically up-sell/cross-sell candidates in both customer portfolios.

Longer-term, the acquisition brings many broader (and more strategic) implications for Coupa and the market. We’ll explore these in our upcoming PRO coverage of the combination as well.

And see also what our colleagues at Spend Matters UK/Europe have to say about the deal (including some clever insights and speculations behind it as well).

Disclosure: Coupa and Trade Extensions are both Azul Partners, Inc. and/or Spend Matters Europe Ltd. clients (as are other firms referenced in this analysis).

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First Voice

  1. alun@marketdojo:

    I found this comment very interesting: “The transaction represents a preemptive offensive and defensive move to thwart SAP Ariba’s effort to re-invest in the sourcing and direct materials procurement area.” It certainly seems that the eSourcing side of things is garnering more interest with respect to focus and innovation. There is still a long way to go to increase adoption but it is good to see.

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