A Solution for Every Source to Settle Process

Every once in a while, you come across an infographic or segmentation that helps you make sense of the world.  I had this experience, more than 10 years ago, when Vasuki Subbarao (now at Vendavo) showed me a variant of this chart –a segmentation of indirect spend by the nature of the category’s source to settle process.

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Since 2003 when I first saw this chart, the market for source to settle solutions has developed very much along the lines of these processes.  For every “branch of the tree”, there are now established software, managed service provider (MSP), and outsource solutions. Examples include:

  • SKU-based:  Ariba, Coupa, Sciquest, etc.
  • Travel:  Concur, Amex Travel, Deem, and other wannabes
  • Labor-based:  Fieldglass, IQNavigator, elance, MSPs
  • Custom /Complex Specs:  Innerworkings and other MSPs in print, Eved in meetings and events, numerous advertising exchanges
  • Logistics:  GT Nexus, Amber Road, Inttra, RailInc. 3PLs etc.
  • 3rd Party Services:  Software and MSP solutions in plant maintenance, facilities maintenance, energy usage, etc.

These days you can even outsource the audit of the invoices from your outsourcing provider–think about that one for a second–to a company called Swingtide.  (Thanks to Cory Bricker of Cass Information Systems for identifying Swingtide.  By the way, I bet Cory can name dozens of companies who perform just bill auditing and payments on the last three branches of the tree, which lend themselves well to complex matching and payment issues.)

Note that every branch of the tree can be even further segmented.  For example, logistics includes, Ocean, Rail, Truck, Small parcel, same day delivery, etc.  In addition, every step of the source to settle process can also be segmented, as shown previously here.  So imagine a large chart with each sub-category of spend as a row and columns for each discrete step in the source to settle process.  (You will have to imagine that because I have not built that yet, but I probably will some day.)

Each time I encounter a new company, I find myself analyzing it by imagining where they belong on this map–which categories and which part of the Source to Settle or Order to Cash process they are addressing.  I want to know if they understand this model, their competition, and if they have thought about the match between the part of the process they are focusing on and the one that causes the most pain in the categories they seem to be targeting.  True category experts may not articulate it this way, but they understand intuitively where the pain points are.

Lending Club to OnDeck Capital to Supply Chain Finance?

In August, Lending Club filed to go public.  It’s what is commonly known as a “peer-to-peer” lending marketplace. I read the prospectus with fascination, but did not write about it for two reasons:

  • “Peer-to-peer” means consumer to consumer (C2C) and I try to stick to B2B.  (To be fair, Lending Club does a little business lending and accredited/institutional investors are involved.)
  • Personal loans and consumer debt do not get my blood pumping

Then on Tuesday, OnDeck Capital filed to go public.  OnDeck offers term loans and lines of credit to small businesses.  On Deck is squarely b2B, meaning small business loans financed by debt (or equity) issued by OnDeck or loans bought by investors.  Now I have to write about the area!

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Though OnDeck and Lending Club have different target markets and challenges, they combine elements of several of the nine value propositions of B2B platforms I have written about previously:

  • Matchmaking:  These marketplaces attempt to match under-served people or companies needing loans with new, lower-cost, often non-bank sources of financing
  • Supply chain automation:  These companies seek to automate and simplify the process of obtaining a loan, buying a loan, and servicing a loan through automation of each of these interfaces
  • Industry big data:  They use algorithms to (hopefully) more accurately assess risk, (especially since they are playing in a risky parts of the market)
  • Transaction financing:  While they do not technically lend against specific payables/receivables (yet), they are all about financing

You could even think of them as crowd-funding sites, but the investment is in the debt of a person or small business, rather than a specific project.

All of these companies face the risk of:

  • a crazy patchwork of state-level regulations and regulators who are wary of the APRs they offer (OnDeck’s average APR is near 50%)
  • figuring out how to acquire good risks at affordable prices and avoid fraud
  • unknown brand names in a world with 28 million small businesses all scared that this is some sort of scam
  • volatile financial markets

These marketplaces seek to dis-intermediate banks, use better risk algorithms to reach directly into new investor classes (after all, the ratings agencies did not cover themselves in glory during the financial crisis), and, in effect, create a new asset class. They want to achieve these goals without investing in branches and associated overhead.

It’s hard not to compare and contrast their goals with those of the supply chain finance (SCF) providers.  At this point, the differences are:

  • Most SCF funding comes from the balance sheet of the client themselves (in the case of dynamic discounting) or from the banks in the case of “true” third-party supply chain finance
  • In SCF, risk is reduced, not through algorithms, but through the use of approved invoices and contractual guarantees to pay by investment grade borrowers.  It is a much lower risk, much higher volume business
  • As a result, SCF today involves a more complicated legal structure and a different asset class altogether
  • SCF is mainly B2B–big company to big supplier, and is just now getting to B2b, big company to small supplier

But SCF is striving to shed many of these “differences” and achieve many of the objectives OnDeck and others are starting to achieve in terms of  developing a new, non-bank investor pool and asset class.  And eventually, everyone in SCF wants to get to PO and other forms of financing that may be more algorithm and less contractually based.

To the extent that SCF starts to cater to small businesses and the investor pool becomes familiar with their assets, we may start to see these players who are making the headlines working with the hitherto  “obscure” B2B SCF players.

Re-visinting Covisint

In September of 2013, I wrote about the IPO filing of one of the original B2B consortia, Covisint (here).  At the time, Covisint was showing good growth, but there were two related concerns:

  1. Revenue was 37% services, not higher margin subscription software
  2. As an EDI messaging company with a large services component, I wondered whether it would be valued more like SPS Commerce (7x sales) or GXS/Sterling (1.5-2.0x sales)?

More than a year later, we have a few answers.The stock went public at $10.00 per share 9/26/2013 (Symbol: COVS).  It traded recently at $2.50 per share–a little less than 1x sales.  What went wrong?

Two things:  a) the company is trying to manage down services revenue and b) the growth in subscription bookings has stopped.  Here’s the key guidance chart from their recent investor presentation:

2014-11-06_14-30-39

It’s not clear to me why the subscription bookings have been so disappointing. Covisint made some initial progress diversifying into healthcare and are trying oil and gas as well, so perhaps those efforts are faltering.  Covisint does have a major automotive competitor in Europe, SupplyOn, that I’ve heard is doing well.

In any case, the stock is so cheap right now (relative to B2B networks generally–not relative to non-existent earnings) that it bears watching for signs of subscription growth. Ariba went through a similar period and then was able to figure out how to grow subscription revenue again, so I am empathetic.

The case for investing from Covisint (from the same investor presentation) is summarized as follows:

2014-11-06_14-39-59

It sounds good, but investors know that without growth, COVS will not make great money. Investors will wait on the sidelines until that changes.

B2B Enterprise Software IPOs: The Year in Review

I don’t want this blog to become about investing, but I write about IPOs for three reasons:

  • The stock market has been a personal interest of mine since I was a kid. (My dad taught me about stocks starting at about age nine.  He owned one share of the Cubs–which was weird for a White Sox fan–but it allowed us to go to the annual meeting and meet a few “lovable losers”.)
  • Prospectuses provide unique information on business models and history that later reports do not provide.
  • Most important, if B2B platforms are truly successful, they should be great companies to own in the long-run.  They should have pricing power, moats, stickiness, throw off cash, etc.  Watching and learning from them is part of my job.

This past year was a big one for enterprise software IPOs, including some large platforms. This year, I wrote about 12 stocks, mostly before they went public.  Now it’s appropriate to see what they have been up (or down) to since.

This table lists the stocks, how they have performed and what call, if any, I made about them (in chronological order):

Company Symbol IPO Date Subsequent Performance (as of 11/4/14) Bob’s Call at the time Verdict on Bob’s Call
Tungsten Lon:TUNG 10/16/2013 40% Fun to Watch/Skeptical Snarky/Dead Wrong
Liquidity Services LQDT NA -40% Wait Good call, bought at $12.50, let’s see how it does!  I’m nervous.
Care.com CRCM 1/24/2014 -53% Stay away and stay away from ANGI. Take Care.com, please! Right on both counts.  Rare, but gratifying.
Castlight Health CSLT 3/14/2014 -25% Did not make one NA/Wimp
Paylocity PCTY 3/18/2014 49% None, not a network NA
Amber Road AMBR 3/21/2014 8% Said it was likely to be more reasonably priced,  but non-committal NA/Wimp/Meh
The Rubicon Project RUBI 4/2/2014 -33% No. Out of my circle of competence and priced too high Better to be lucky, than good.
Sabre SABR 4/16/2014 10% Did not make one NA/Wimp
Travelport TVPT 9/24/2014 -7% Non-committal, but I went for the biggest one, Amadeus Amadeus is down nicely since I bought it.  Spank you very much.
Yodlee YDLE 10/2/2014 19% Cautious optimism, but did not buy! Wimp
Yodle NA NA NA Negative Correct. But they pulled IPO, what good did it do me?
Hubspot HUBS 10/9/2014 46% Positive, but too cheap to buy Big missed opportunity so far.

What conclusions should we draw from this?

  • IPOs are volatile creatures (no charge for this earth-shattering insight)
  • I’m a wimp.  I usually sniff out the obvious stinkers, but being a value and index-oriented investor does not mix with my professional career in B2B platforms, which are rarely cheap by conventional measures–and yet may still may be good buys.
  • It really is good to stay away from things you do not understand.  I’m sticking with B2B, and within that, true networks.

A reminder:  for those investors among you, in mid-September, I created two stock indices for B2B platforms, one for B2B commerce platforms generally, and one for vertically-focused platforms.  More information can be found here:

If you are reckless with your money, you can actually invest in these indices or modify them and then invest.  It’s a really fun way to gamble away your hard-earned money.

How do I not own this stock?

I try to know about every companies with a network and a dominant market position. And yet I’m frequently learning about new ones that are hiding in plain view as public companies.

This week’s revelation is a company called National CineMedia (Symbol: NCMI).  It’s a company whose product you know well, though you may not know the company.  NCMI runs the “First Look” network of regional and national ads that you see in movie theaters when you are waiting for the movie trailers to start.  It’s not exactly scintillating fare, but it is more professional than the old, local slide show you used to see.  And, hey you are a captive audience!

The company puts up some impressive numbers–like a 50% EBITDA margin, and a dividend yield of more than 5%.

2014-11-03_21-10-16That’s why I cannot believe I do not know this company!!!

You might be asking yourself, how does an ad network, albeit one for a captive audience, capture so much value for itself?  Well, one of the reasons might be its unique ownership structure:

2014-11-03_21-30-14Yes, that’s right, NCMI is partially owned by three of the largest cinema chains in North America (AMC, Regal, and Cinemark)–who own about 50% of all theater screens– as well as some public shareholders a lot smarter than me.  It’s a nice little duopoly which, I bet, makes pricing attractive for the owners (and NCMI).   Of course, NCMI would argue it has huge share of this market, but only a tiny share of all advertising.

I call this market a duopoly because there is one competitor that is on most of the rest of the cinema screens, Screenvision.  As you can see from the above diagram, NCMI was trying to buy Screenvision.  That is until yesterday, when the Justice Department, sued to block the transaction.  Apparently, the DoJ felt that a resulting firm, which would have had a combined market share of 88%, was simply becoming too big.  (The DoJ decision is how I learned about NCMI in the first place.)

Even though I spend my time trying to help my clients become this dominant in their markets, I’m glad the DoJ stepped in.  Can you imagine if Coke, Pepsi, and Orville Redenbacher had to pay more to advertise in theaters, what the price of soda or popcorn would be?!  Wait a second…;-)

For you investors, NCMI was down yesterday on the news that the DoJ would stop the transaction.  I remember when the Free Standing Insert business (those ad/coupon inserts in the Sunday paper) had only two competitors. They both made good money.  It still may be an interesting stock with less than interesting content. (The stock is back up some today, so apparently others agree.)

Oh, by the way, have you ever noticed the ads for the Fathom network?  These are the folks who re-broadcast theater, opera, comedy and other special events on movie screens across the nation.  That’s owned by the same three theater chains and NMCI as well.

Chutzpah in B2B Software Advertising

If you are not familiar with the term “chutzpah“, it is Yiddish which roughly translates into “cajones“, which is Spanish that roughly translates into “shameless audacity”,  “impudence” or “bravado”.

Lately, “chutzpah” has been showing up in, of all places, the normally staid, boring world of B2B ERP advertising.

Exhibit A.  By now, you have probably seen the NetSuite ad that takes a major swipe at SAP :

netsuite

That is a funny form of chutzpah.

On the SAP side of the coin, yesterday’s Wall Street Journal contained the full realization of SAP’s latest ad campaign:

  • The first page (not shown) ominously warns us: “Technology can save us all.  Provided it doesn’t kill us first.”
  • The second and third page are as follows:

SAP

(Sorry about the font size there.)  You will have to trust me that in the second and third pages SAP let’s us know how important it is to “Run Simple” and assures us future ads will demonstrate examples of how SAP helps clients to do just that.

This is a different kind of chutzpah.  This is the kind of chutzpah where a marketing guy decides “Let’s use “jiu-jitsu”!  That is, we will take one of our greatest perceived weaknesses and simply claim it to be one of our strengths”.  And everyone agrees.  I understand this approach.  It is a tried and true strategy.

But, I really want to meet the guy who then decides “Let’s run the “Run Simple” print campaign using a three page ad with two pages of copy explaining why simplicity is so important.” That is chutzpah.

Just one word: Plastics

So said Mr. McGuire to young Benjamin in the 1967 classic film, The Graduate. Apparently, Mr. McGuire was referring to B2B payments.

In an article in today’s online Wall Street Journal entitled,  “B2B Credit Cards Jump”, Hackett Group notes that B2B payments made by credit card (including p-card) continue to grow rapidly, albeit from a small base as a percentage of total B2B payments.

2014-10-28_11-24-20

 

 

 

 

 

 

 

 

 

 

The article notes the processing benefits, “perks”, and float buyers receive from use of the card, though the term “rebate” is not used.  The article also notes the relatively high fees that suppliers pay for accepting this form of payment relative to ACH.

The continued growth of P-cards surprised me a bit, as they have been around a long time (’90s).  P-cards play a great role in small dollar transactions, but data, control, and interchange concerns always limited their growth–even with the enticing buyer rebates.  If this data is to be believed, p-cards may be making more, though still limited, progress in higher dollar transactions.  Either that, or many more companies are adopting their use. Maybe all of the new interchange rates, improved data options, buyer-initiated payments, etc. are making a real difference in adoption.  Only Hackett knows the truth–and, alas, they will charge me for the answer.

For those of you involved in two-sided markets and supplier-pay versus buyer-pay arguments (and that is everyone in B2B invoicing and payments), please note that is a small data point in terms of share, but large in terms of total fees generated, on the side of supplier-pay schema.

At the recent and very good, PMNTS.com conference on B2B payments there was a lot of talk about p-cards, fleet cards, BIP cards, etc.–which I thought was a little outdated. Apparently, I’m the one outdated!