Investor perspective: Direct procurement technology has an identity crisis
Spend Matters welcomes this guest post from Jack Freeman, Principal at PeakSpan Capital who is a growth-stage software investor.
We take a highly thematic approach to investing at PeakSpan. As a group, we’ve looked at business software exclusively for the past 20+ years. Within business software, each investment professional at PeakSpan can only pursue 3-4 themes at any point in time. Taking the supply chain market and the procurement market in tandem — our team is probably spending about 50% of our time in the space.
The direct procurement segment is fascinating to us for one primary reason: The stakes are higher.
Nothing against saving dollars on office supplies, but is there anything more strategic than optimizing the spend and supply chain surrounding your core product or service?
We set out with this thesis in 2016, and five years in are sad to report: The market is not as robust as we thought (for clarity, that’s defined as the number of scale-up firms targeting direct procurement specifically).
Indirect procurement is an extremely well-defined category with players attacking various segments, various customer verticals, various categories of indirect spend and even specializing for specific nodes in the source-to-pay value chain. Rarely however, do you find players positioned as “direct procurement software platforms.”
Why is that?
We arrived at the realization years ago that “direct procurement” is really just “supply chain.” Optimizing your communication/engagement and spend with direct materials suppliers is central to supply chain optimization. After accepting this, we then began to unpack what software platforms are best positioned to add the most value to manufacturers’ supply chains in this space, regardless of how they are positioned.
A gap in the direct procurement software market
Direct procurement software platforms automate all or a portion of the source-to-pay value chain surrounding an enterprise’s direct costs.
Relative to the market awareness/voice for indirect procurement, we see a gap in the direct procurement software market. This may be a “real” gap and could be for a specific reason (too nuanced, too complex, not enough start-up founders arrived at this mission, etc.). However, the more likely scenario is a lack of category definition, unclear product positioning and a softer market voice.
Over the years, we have started to identify and come across players who clearly fit the “direct procurement software” space and were surprised to find a wide variance in how these various subsegments described the value prop and market. Nonetheless, we see ample opportunity in the long term for software platforms to automate the direct procurement supply chain.
We’re unsure that “direct procurement” will ever be spoken about as a defined category, but nonetheless it continues to be a top area of interest given the strategic nature of the function it serves. Spoiler alert, it’s only becoming more mission critical!
Market landscape for direct procurement technology
Below are a few ways we’ve looked at the market:
- Procurement of Logistics Spend: For providers of physical goods, shipping costs are a significant line item on the P&L as it relates to delivering your core product of service. The stakes are high when it comes to sourcing and contracting with logistics providers. Moreover, the nuances associated with procuring logistics goods/services couldn’t be higher. As anyone in the logistics world knows, these processes are STILL incredibly antiquated, involving droves of employees, phone calls, faxes and maybe even a carrier pigeon or two. While many freight marketplaces have risen to match supply and demand, we still see such a large opportunity to simply digitize the logistics procurement process. The inefficiencies of logistics spend will yield incredible opportunities for cost savings and operational efficiencies over time.
- Digitization of Supplier Communication: Supplier communication is both the cornerstone and the Achilles’ heel of the manufacturing supply chain. For some of the largest manufacturers globally, it’s not uncommon to work with upward of 50,000 suppliers. Given the importance of these supplier relationships, we see the current communication channels and mechanisms as severely lacking. Not only that, it’s shocking how many enterprises still don’t know who their suppliers are. By way of example, one of our sector advisors leads global e-commerce for one of the largest carriers in the world. He notes that it is not uncommon for a large carrier like his company to have several contracts with the same enterprise with different pricing structures around the world. As with any relationship … communication is key 😊.
- PO/AP Automation for Manufacturers: Sticking with relationship advice, the No. 1 topic that married couples argue about is money, and the same holds true for the buyer/supplier relationships. If money flow is positive, the relationship will be positive. For this reason, we expect to see enhanced focus on all subcategories relating to supplier payments for years to come. This starts with purchase order automation and AP automation, but we see plenty of other exciting use cases coming to market, including expediting international payments, allowing suppliers to pay early, pay later, pay in installments, getting truckers and supply chain employees/contractors paid faster, etc. The financial supply chain and physical supply chain will continue to merge.
- Strategic Sourcing for Direct Procurement: Strategic sourcing has gotten a lot of attention over the years, in general — and rightfully so. Using AI to identify a single sourcing event that can save you millions is an easy sell! This thought process certainly extends to our direct procurement software thesis, where any sourcing wins might be multiplied at a grand scale! Imagine finding a key component to the widget you sell globally. If you save just $1 on this component and sell 10 million units next quarter, that is a $10 million savings to your bottom line. With globalization continuing to persist, the opportunities for costs savings are ample between optimizing physical goods or just simply the logistics spend involved. Contrast this to indirect procurement where even a big win might be in a silo (not multiplied by 10 million units) given the indirect nature of the spend.
- Direct Procurement Marketplaces: We’ve seen several exciting B2B marketplaces arise over the past several years and think these vertically focused solutions are super logical: from CNC to metals, to food, to spare parts — certain categories lend themselves to bespoke marketplace environments. Amazon doesn’t necessarily tackle raw materials (yet? I think? I hope not?), as there is much nuance and complexity. As the industrial world continues to digitize, we see B2B e-commerce/marketplaces as a next logical frontier, following in the footsteps of B2C.
In summary, while we’ve been disappointed by the general lack of start-ups to back in these spaces, as well as the lacking market definition, we are starting to see the tide turn. We’re encouraged by what is to come — a byproduct of the hyper-strategic nature of the direct materials supply chain, plus the overall uptick in adoption of technology with antiquated verticals in the built world. We will one day write a part 2 to this post and hope each of the five buckets referenced above have several enduring market leaders!
How do you find the right procurement technology and vendor for your company? Spend Matters’ new 5-step “Procurement Technology Buyer’s Guide” can help — with how-to documents, checklist templates and other tips.
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AP/I2P EPRO P2P SOURCING08/23/2017
EPRO SOURCING ANALYTICS03/26/2019
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