Oversight Systems — TCV acquisition, spend compliance intro and sector musings

On Wednesday, Oversight Systems announced that TCV, a private equity firm, had acquired a majority stake in the provider of spend compliance solutions from Luminate, the previous investor.

Oversight competes in the spend compliance market, a clever overlay that sits alongside — or on top of — source-to-pay process and data flows, primarily for indirect and expense-based spend. It augments the capabilities of spend management and T&E providers, although Coupa does have home-grown capabilities in this area as well.

Oversight largely grew under the radar in recent years, and it is not well known in the procurement and finance technology sector. But along with Appzen, Oversight has carved out a leadership position in this market (although there are material differences between the two providers).

While both providers are worthy of consideration for organizations looking to complement existing procure-to-pay and T&E investments, we’ll leave additional practitioner analysis to a PRO update in the months to come, and today will focus our Spend Matters Nexus coverage on explaining this market segment and how Oversight Systems slots into it. We’ll start with a back-of-the-napkin estimate on the transaction.

Related coverage:

CORONAVIRUS RESPONSE: Fraud, P2P and Vendor Management Safeguards — Protecting cash and rapidly vetting suppliers in a crisis 

Oversight Systems: Vendor Analysis (Part 1) — Background and Solution Overview

Oversight Systems: Vendor Analysis (Part 2) – Product Strengths and Weaknesses

Oversight Systems: Vendor Analysis (Part 3) — Competitive and Summary Analysis

Jason Busch is Managing Partner of Azul Partners’ Investor Advisory Group. He works with sponsors, CEOs and boards on data-driven due diligence, M&A and business strategy. Jason is also the lead author of Spend Matters Nexus, a private newsletter.

Transaction Background

TCV and Oversight did not release details surrounding the transaction. But we can do a back-of-the-napkin as follows:

• Linkedin suggests that Oversight has 144 employees. Let’s round up to 150.
• If we take the “$250,000 per employee rule” which is useful for SaaS companies, and multiple employees times revenue, we get $37.5 million in revenue. This would seem reasonable, although some providers are able to value price in the market based on savings/recovery/cost avoidance so Oversight’s revenue might be higher. But let’s take $37.5 million as a baseline.
• We can assume that Oversight is realizing material growth, based on its ranking on at least one list of high-growth regional firms. Valuations in the procurement/spend world continue to remain strong, with greater demand than available assets.
• Oversight is large enough to bump it to a level where even if it is not “Scout-like” in terms of consistently beating the rule of 40/50+ growth over the past decade, it would likely achieve a multiple of at least 12-14X recurring revenue.
• This provides a valuation guidance in the range of $450 million to $525 million, assuming all of its revenue is classified as recurring/ARR — perhaps less if services factor in to revenue recognition.

I’d ballpark this estimate as conservative based on market dynamics at the moment, but I always find it to be better to be reasonable than speculative in these things.

Sector Overview

While Oversight describes the aspirational sector they compete in as “spend optimization,” we would more accurately say the provider competes in the spend compliance market (inclusive of fraud detection).

Spend compliance concerns the control of spending processes and stakeholders (by businesses) to drive desired behaviors and outcomes. We can consider it a subset or overlay on top of “spend management.” Non-compliant spending risks include overpayments, lost discounts, costs related to underperformance, fines and brand damage.

The chart below showcases the three categories of spend compliance:

Fraud detection is a component of spend compliance, as we define it. The most common type of fraud is asset misappropriation — when employees or third parties steal monetary or other assets from a business. Technology for fraud detection and prevention covers transactions and interactions that are digitally intermediated (i.e., stock “shrinkage” and cash larceny are not focuses).

The next chart, below, suggests the types of fraud that procurement organizations must combat with spend compliance solutions:

Source: Spend Matters

According to the association of Certified Fraud Examiners, T&E fraud alone accounts for 14.5% of all corporate fraud, a number that is growing as employees find it easier to slip in personal “perks” on their corporate cards that are out of compliance with policy.

Ideal Fit

Spend compliance solutions are typically a strong fit for companies in situations when:

• Current transaction and record-keeping systems (e.g., ERP) do not offer sufficient analytics/fraud detection capability
• T&E spending is managed loosely via general-purpose apps or card systems only
• Audit recovery processes that are in place identify only a fraction of overspend/issues
• Spend and related data exist across multiple heterogeneous systems and need to be holistically analyzed
• A large enterprise is overwhelmed by the volume of expense and invoice data it needs to analyze
• Compliance to internal policies/business rules (e.g., contracts, permitted expenses) is a challenge
• Finance organizations are managing T&E spend in high-volume/transaction industries (e.g., financial services, media)

How Oversight Fits into the Market

Oversight offers a web-based software solution designed for Fortune 500 firms for automatic spend analysis and identification of high-risk or potentially fraudulent transactions. It supports the identification of at-risk transactions in the travel & expense, procure-to-pay, and purchase card processes, as well as supports detection for FCPA, Anti-Bribery and Corruption Risk, including the identification of known politically-exposed parties.

Oversight leverages data sources, including all of the larger providers of supplier and financial data like Dun & Bradstreet, Bureau van Dijk and Creditsafe. It also integrates with providers of risk indicator data like EcoVadis and Sedex Global.

Of note, Oversight’s solution features:

• Evidentiary learning to refine algorithms over time and weight risks so that only the most likely scenarios rise to the top — a truly holistic approach to payment/fraud analytics
• Fraudulent party linkage for identifying parties associated with multiple suspicious transactions and altering the associated risk thresholds accordingly
• Adaptable system capable of supporting ontology-driven semantic mappings to catch changing fraud tactics as fraudsters evolve
• Dashboard and broader BI/analytical environment is effective at surfacing information at all levels for the appropriate party

Appzen is closest to Oversight as a comparable vendor. It’s an expense and accounts payable auditing platform that uses AI to help businesses identify spending risks before they make payments. Appzen offers two main modules: Expense Audit and AP Audit (with plans for AR Audit on the roadmap). Key capabilities include a Star Match, an m-way matching tool that compares both structured and unstructured data across multiple sources for expense/invoice validation (e.g., POs, GR, emails, text messages, websites). Appzen is also sold via Concur.

Coupa is the only suite or P2P vendor we are aware of that offers related capabilities on spend going through its platform. Specifically:

• Coupa Spend Guard is a fraud detection and reduction tool that operates across all applications in its suite to spot suspicious spend across expenses, procurement and invoicing
• It compares employee/user activity with the normal levels observed across the Coupa community to help auditors identify emerging trends and fraudulent behaviors
• The focus is on using machine learning to spot suspicious patterns and stop fraudulent spend before it becomes a payment

The Final Word

What excites us most about Oversight is how it is positioned to tackle both invoice and non-invoice-based (T&E inclusive) spend as a spend compliance overlay to existing solutions. Moreover, the potential total addressable market (TAM) as spend compliance (inclusive of fraud detection) is potentially as large — or larger — than existing market segments, including sourcing and spend analytics. It will be fascinating to watch this market grow, as well as how it intersects with adjacent solution areas in the decade to come. But in the meantime, my analyst colleagues are excited to get an updated briefing and demonstration from Oversight in the month to come, and will feature this coverage on Spend Matters PRO.