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2020 M&A and Procurement Investment Predictions: 10 Trends to Watch (Part 2)

01/22/2020 By


M&A and investor interest in the procurement technology sector is at an all-time high. Of course it also helps that there are more than 1,000 providers in the procurement solutions market (software, consulting, outsourcing, managed services, market intelligence, etc.) and adjacent markets than ever before — and new start-ups popping up on what feels like a weekly basis.

In the first installment of this series, we covered the first three sector M&A and investments trends that we’re paying attention to in 2020. These are competition growing between strategic and financial buyers; ERP and big tech getting more active in the sector; and buyers/investors expanding their definition of procurement technology.

Today, we turn our attention to our next two trends. These are:

Trend 4: Convergence of sourcing, category and market intelligence solutions: blurring the lines (i.e., application/technology, services, content/intelligence, etc.)

Trend 5: Payments, accounts payable and procurement intersections accelerate

Jason Busch serves as Managing Director of Spend Matters Nexus, a research and advisory group that works with sponsors, CEOs and boards on due diligence, M&A strategy and product strategy. Publishing 50+ times per year, Nexus content is available via separate subscription. Spend Matters and Spend Matters Nexus are owned by Azul Partners.

The Trends

Trend 4: Convergence of sourcing, category and market intelligence solutions: blurring the lines (i.e., application/technology, services, content/intelligence, etc.)

As we wrapped up the first installment in this series, we mentioned PowerAdvocate, which was acquired by Verisk in November 2017. PowerAdvocate was ahead of its time, not through delivering technology alone (or focusing on vertical specific requirements alone), but because it was successfully able to blur the line with its offering between application/technology, services and content/intelligence. In the procurement technology market, we call this trend “solution convergence,” and it is one we expect to see significantly more of from an M&A and investment perspective in 2020.

Many of these solutions are difficult to put into a box, although business decision makers are almost entirely driving the decision process to purchase them (as to a decision, such as for e-procurement, in which IT will provide input or serve as a stakeholder, at minimum).

As noted in a forthcoming Spend Matters PRO analysis, these solutions typically fall into five categories:

  • Category/industry-specific expert sources — Providers that emphasize a single set of categories, commodities or industry capabilities, including analytics, market intelligence, data, benchmarking, forecasting and/or related offerings. Select examples include: Brightfield (TDX), MetalMiner, PowerAdvocate and Trax.
  • Cross-category/industry expert sources — Providers that either 1) emphasize multiple sets of categories, commodities or industry capabilities with analytics, market intelligence, data, benchmarking, forecasting and/or related offerings. Select examples include: Beroe, Fastmarkets, GEP, IHS Markit and The Smart Cube.
  • Publishers — Offline/electronic trade publication models or firms that offer a variety of online data, intelligence and other services (and sometimes still print), typically as aggregators rather than originators of data. Select examples include: InfoMine, Plastics Today, Thomas and SIA.
  • Services firms — Consulting and advisory firms that have access to unique data/insights based on activities in their regular course of business or aggregate data as part of benchmarking, BPO and other service offerings. These firms may opt to sell this insight (often software enabled) independent of professional services offerings. Select examples include: GEP, LogicSource, NPI and RTI.
  • SaaS firms — SaaS providers with content, data and analytics capabilities that also may be bundled with other offerings (e.g., spend analytics, e-procurement, should-cost modeling, sourcing optimization, ITSM, etc.). This group can also include “community-based” models. Select examples include: aPriori, Coupa, Mintec, Jaggaer and Zylo.

Spend Matters has spoken to multiple sponsors that are interested in investing in these types of solutions in large part because of their defensibility in combination with multi-year committed revenue streams (in certain cases) which look like SaaS/cloud relationships in fee schedule and usage/adoption rather than monthly or annual data subscription services.

Unfortunately, however, there is not the same level of information transparency in many sub-sectors of the “convergence universe” as there is in traditional source-to-pay, AP automation, services procurement and related markets alone. This can make it difficult to identify targets for acquisition or investment. But sponsors and strategic acquirers are spending more time in learning about converged solutions outside of Saas alone, in large part because investor demand (and capital) is generally outstripping supply in application/technology-only areas.

Trend 5: Payments, accounts payable and procurement intersections accelerate

The world of payments is increasingly converging with procurement and finance technology (inclusive of source-to-pay, e-procurement, procure-to-pay, AP automation, invoicing, services procurement and early payment/financing solutions).

Spend Matters is ramping up its coverage of payments as an independent solution area this year. But when coupled with invoice-to-pay, procure-to-pay or AP automation capabilities, we’ve found that the value proposition of payment solutions rises exponentially as they become coupled with procurement and finance technology based on:

  • Increased “stickiness” and consistency
  • Adoption across larger numbers of suppliers
  • Vendor and AP compliance (both onboarding and full lifecycle)
  • Efficiency gains / productivity
  • Working capital management

To enable these gains, our payments systems checklist (for P2P) is below:

Incorporating these capabilities alongside P2P and AP solutions is a systems- and procurement-centric answer to how to get the most from B2B payment capabilities. But more pragmatically, the rising interest in the AP procurement and payments intersection by investors is primarily driven by a single factor: interchange (or more specifically, rebate income).

As noted, B2B payments is something that we have covered peripherally as the last mile of source-to-pay (see: selected coverage), especially through solutions such as Coupa Pay and Tradeshift that dovetail payment management, working capital, FX, cards and related areas together.

But what is really driving investor interest in these areas is not necessarily the complexity of managing all aspects of payments alongside procurement and AP. Rather, the interest is centered on rebate-driven business models that charge suppliers 2-4% (on average) receive early payments or even on-time payments, as is so often the case. These rebates are then split between the payment provider, payment card partners and the buying organization.

Tradeshift, AvidXchange and other firms have raised large investment rounds in recent quarters based on a rebate-driven value proposition, in large part. And providers like Nvoicepay, Acom and others have been acquired for these capabilities as well. These business models scale with the adoption of P2P and AP solutions by procurement and AP teams, providing high-margin, transactionally-based revenue streams by driving suppliers to accept card-based payments.

In 2020, we expect investor interest in these models to increasingly grow — and for procurement and AP to be seen as a Trojan horse to get to payments. Ironically, however, we do not believe M&A and investor interest in rebate-driven models is necessarily aligned with what represents the optimal mix of solution and functional capabilities (including different payment mechanisms not limited to card-based models) for procurement and finance organizations, let alone suppliers.