Workday’s acquisition of Scout RFP (Part 2: ERP competitors analyzed)

Yesterday, the finance and HR solutions provider Workday announced it was buying Scout RFP, an easy-to-use sourcing solution. You can find previous free coverage on the transaction on Spend Matters here and here. In our first Nexus subscriber brief covering the procurement technology sector’s M&A news, we offered background on Scout, explored the provider’s strengths and weaknesses, and gave our initial insights into the rationale for the transaction.

As we continue our analysis on Spend Matters Nexus, we turn our attention to landscape implications of the transaction that may affect other technology providers. Today’s research brief provides a competitive analysis for the ERP market segment including providers such as Epicor, Infor, Oracle, Microsoft, Netsuite (Oracle), SAP, Sage and Unit4.

In this analysis, we also provide context via a brief history lesson on how (and why) ERP providers have traditionally offered procurement capability as an extension of financials, tracing the emergence of ERP from MRP. Specifically, we trace how and why this legacy has led to a situation of technology that is inadequate for procurement’s needs (which gave rise to the source-to-pay technology market in the first place).

Subsequent competitive analyses of the transaction will consider both suite and best-of-breed / independent procurement technology providers, including the valuation impact on the sector (and what some of the key drivers to valuation have been recently). We will also explore in greater detail the process, sales and technical integration considerations for Workday as it digests this procurement amuse-bouche.

But for now, let’s dust off our competitive bifocals as we magnify the competitive considerations of the deal, examining Workday’s ERP peers competing for their share of the $50 billion procurement technology total addressable market (TAM), as estimated by Coupa’s  Business Spend Management TAM.

 Jason Busch serves as Managing Director of Spend Matters Nexus, a membership, research and advisory organization serving technology acquirers (private equity, corporate development, etc.) and CEOs in the procurement and finance solutions marketplace (including contract management, B2B marketplaces/connectivity, indirect procurement, services procurement, direct procurement, commodity management, payment, trade financing, GRC/third-party management and related adjacent sectors).

ERP Market: General Analysis

For competitive ERP providers like Workday, it is important to understand what Scout RFP is and what Scout is not. Specifically, Scout is a point solution that targets the sourcing process focused especially on the management of sourcing projects, events and related resources and suppliers. It also offers rudimentary capability in the supplier management and contract management areas. Scout is not a leader in the sourcing sector from a functional perspective (see Spend Matters’ SolutionMap ranking for Sourcing), but even if it was, this would not materially change our competitive perspective for three reasons.

1. Scout’s growth has been fueled by high levels of usability and customer satisfaction, which in the procurement technology sector have generally proven more important to vendor growth than feature/function capability.
2. Scout is not a solution for Workday that will allow it to target procurement holistically, at least not yet. Rather, as noted above, it is a point solution that only partially supports broader source-to-pay requirements alongside Workday’s current modules. More strategically, until Workday develops broader source-to-pay capabilities with an emphasis on e-procurement and invoice-to-pay capabilities, supplier management and contract management, it will not have an end-to-end procurement solution that is competitive with Oracle and SAP.
3. It is clear that this move signals that Workday is serious about the procurement market, and we believe this step will be the first of many in which it will ultimately release a broad-based business user-centric set of capabilities that eventually deliver end-to-end functionality, especially for services industries and non-manufacturers.

There is another subtle shift that ERP providers should consider based on the strategy Workday is following with Scout (and arguably with its financials in general). Specifically, Workday is prioritizing the importance of the overall user experience that first emphasizes delighting business users (e.g., finance, procurement, etc.) with a walk-up experience over “classic” IT-centric buying criteria.

This may help — as Coupa did originally in e-procurement — change the basis of competition in procurement technology in terms of how technology is selected from an emphasis on absolute capability to one centered almost entirely on maximizing adoption and consistent, foundational results.

Provider Analysis and Recommendations

Above all, on a macro level, other ERP providers will need to decide if they are going to pursue the procurement technology sector or not (Oracle and SAP withstanding). For ERP providers that have not pursued procurement holistically yet, the clock will be ticking to target their customers, as the 100+ independent suite and best-of-breed providers targeting core source-to-pay increasingly descend on their installed base (not to mention rival cloud ERPs like Workday selling financials and procurement together).

In terms of specific guidance for providers that have not yet committed to delivering source-to-pay capabilities as a business applications focus (including Infor, Microsoft, Epicor, Netsuite (Oracle), Sage and Unit4), Workday’s move should drive urgency to act, not only to create a broader compelling offering in new financials opportunities, but also to defend their own turf as Workday goes after customers with legacy deployments. For all of these providers today, procurement components or extensions to core financials represent very constrained capability that is often more developed (depending on provider) for a manufacturing environment.

It is important to remember that for these providers, ERP (and procurement capability) grew out of MRP. And MRP was designed as a production planning and inventory control system used to manage manufacturing processes with an emphasis on product planning & development, manufacturing, market and sales forecasting, inventory management, shipping schedules and a central data of information.

As such, these solutions generally present similar weaknesses across the source-to-pay spectrum as below:

Sourcing

• RFX evaluation — traditional ERP systems have no or very limited RFX capabilities because they were originally designed to store the award information (in large part because traditional purchasing used to be “3-bids-and-a-buy” offline)
• Market data — traditional ERP systems do not store market & commodity data

Contracting 

• Contract storage and searching — document management was always an afterthought
• Contracting is usually a bolt-on module with limited integration, minimal meta-data support and poor search functionality

Supplier Management

• Offers limited to no capabilities (e.g., supplier onboarding/enablement, portal, supplier information management, master data management, supplier information management, supplier compliance, supply risk management, etc.)

Procure-to-Pay

• Baseline capability gaps — newer ERP systems have SCM modules, but these modules generally do not permit integration with third-party networks or supplier systems that allow for automated PO submission, supplier acknowledgement, invoice receipt, goods receipt transmission, etc. And this typically results in dual data entry — as the buyer will have to enter the same information in the AP / AR systems that are being used to manage the transaction and the ERP.
• As important as core functional gaps, the buying interface in ERP does not support modern shopping and user requirements (and various catalog management requirements).
• Dispute resolution processes — ERP systems do not contain collaborative dispute resolution mechanisms so the resolution process has to take place entirely outside of the system; in addition, basic ERP systems do not support invoice versioning or audit trails, so all of the offers and counter-offers get lost, and no one knows why an invoice was modified.
• Payment — ERP systems do not support payments and often don’t support integration with EFT payment platforms; payment receipts need to be pushed from the AP system into the ERP.
• Tax reclamation — many ERPs do not support detailed tax type and rate information, so an analyst doesn’t know the tax breakdown and whether or not the organization can apply for reimbursement without cross-reference with the AP system or, in some cases, the original invoice.

Regarding the only two ERP providers with more advanced procurement solutions targeting source-to-pay process workflow end-to-end, our analysis and recommendations in the wake of Workday’s announced acquisition of Scout follows below.

Oracle should continue to decouple sales and marketing for Cloud / Fusion sourcing, a product that can stand on its own two feet (unlike Oracle Cloud / Fusion P2P) without an upgrade to Oracle Cloud Financials. It should also extend the marketing of this solution into the Netsuite customer base.

Spend Matters spoke to one Netsuite customer this week who uses Zycus for other areas of procurement and did not seriously consider Netsuite (or broader Oracle) offerings when it made its investment decisions. Had this organization known of Oracle’s Cloud / Fusion sourcing, it would likely have been seriously considered it as an alternative.

More broadly, to counter Workday in the middle market, Oracle should also extend deeper source-to-pay capability to Netsuite customers (beyond sourcing alone) and continue to emphasize simplification and elevation of the user experience in future Cloud / Fusion releases.

In contrast to Oracle, SAP has no time to waste in natively rebuilding SAP Ariba’s procurement suite capabilities on S/4HANA (Note: This is SAP’s latest, enterprise-level ERP backbone that’s built on one code base). And, in the meantime, SAP should emphasize making its current portfolio of capabilities more user friendly. SAP Ariba Sourcing, for example, represents capability that is still superior to Scout in certain areas from a functional depth perspective, but that is wrapped in a UI that has historically limited adoption for many customers. The good news: SAP Ariba’s forthcoming UI upgrade is planned, even if cannot come a moment too soon for the ERP provider (and its customers).

More strategically beyond driving “Intelligent Spend” revenue, as Workday increasingly targets select SAP customers with its financials offering, SAP will need to find a way to respond with a more modern set of sourcing and strategic procurement technology capabilities that is natively integrated with ERP, built on a common data model and platform.

Until SAP releases this capability, it is likely that SAP could find itself in a situation where the non-native SAP Ariba capabilities on top of S/4HANA may continue to deliver significantly superior functional capabilities to Workday for many years, but lose as much (or more) than it wins in the market in combined financials / procurement deals owing to Workday’s usability and data model integration, especially as Workday builds out broader source-to-pay capabilities.

The final word: The triad of focus that Workday’s acquisition of Scout* based on (1) user experience, (2) an emphasis on the delivery of baseline functionality that is widely adopted and (3) deep, native ERP integration (i.e., we expect Workday and Scout to become natively integrated at the data model level within 12-18 months) could help change the basis of competition in the broader ERP and financials market for procurement technology. In certain cases — and this is the biggest risk for Workday ERP competitors — this shift may also impact the decisions for core financials as well.

* in combination with its own internal product development efforts