Just When We Thought M&A Had Peaked … WorkDay Tries for the Win with Scout!

Now, while I thoroughly agree with the acquisition, as I quoted in Spend Matters’ initial coverage … because it does make perfect sense for Workday and for Scout … I have to admit that the valuation is incredible and the multiple almost non-sensical at first, second, and even tenth glance.

So let’s take a step back. One of the rules that investors follow is the rule of 40, which means that, in 5 years, the company revenue should be 5X what it is today. It might be a bit less, but if growth stays steady, revenue should at least be 3.5 to 4X what it is today, and that’s enough to justify a 7X investment as the investor should be able to “sell the company up the chain” to a bigger investor at 3X what they invest today. And if the deal is just right, maybe a 8X to 10X if there is a lot of cross-company application synergy with another company in the portfolio and they can quickly market and sell to a larger customer base than either company could on its own, but that’s about it. (And of course, assuming the revenue is focussed entirely on license/subscription fees and not services.)

But, as far as can be fathomed, Workday payed a 20X+ multiple for Scout, and that, on the surface, is usually beyond absurd. Even at aggressive growth, it will take Workday at least a decade to make their investment back if we follow the rule of 40. And a lot can change in the market in ten years. But it’s more than just an application and another market for Workday. It’s a strategic acquisition that will give Workday much more than a key component missing in its B2B wheelhouse. Why?

Whatever the reason the acquisition team came up with internally, Workday has to contend with the fact that not only was it’s suite lacking in S2P, and significantly lacking in upstream capability, but that in order to move upstream in the ERP world, and contend with the likes of Oracle and SAP (and fend off any efforts of SAP and Oracle to poach Workday’s customers as the customers grew and matured), Workday needed a good S2P offering, tightly integrated with their Finance and HR applications, and Workday needed one fast. Scout, with which they already have a few integrations with, fits the bill and has a track record, like Workday, of rapid development. It is Workday’s best shot at building and integration an 80% S2C solution for the mid-market quickly.

Also, Workday also has to contend with the fact that some of its earlier interfaces, while more modern than many of Oracle’s and SAP’s older interfaces, are not as modern as some of its newer applications and even some of its newer applications could use a facelift. And Scout has the interface customers like.

Finally, if the mid-market is moving towards a combined Procurement/Finance suite, Workday is going to need to have a true cloud-native S2P platform integrated sooner rather than later. (It’s not a party that Workday, with its ambitious growth plans, wants to miss.)

So while a deal like this would usually be absurd and one that any investment firm should run from as fast as they can, this was a very strategic acquisition investment for Workday and the sooner they got started on the S2P path, the better their chances of actually becoming a serious player both in the ERP market and the S2P market before it’s too late to make a difference.

(This is just a high level analysis. If you really want to understand all of the nuts and bolts behind a deal such as this, I recommend checking out the prophet‘s 4-part deep analysis over on Spend Matters Nexus [membership required]: Part I, Part II, Part III, and Part IV. In addition, the prophet and the maverick teamed up for a customer recommendation piece over on Pro [membership required]. Note that the prophet‘s views may not entirely correspond with the doctor‘s.)

However, the end result is that they’ve just taken the M&A mania up a notch, and now firms that don’t have a solid grip on the models, but want in on the action, will be making mad men bids and all hell is sure to break loose. So buckle up, the ride’s about to get rough!

Magnus Bergfors joins Spend Matters Today …

And here’s a key excerpt from the ex-Gartner analyst as to why and the importance Solution Map (co-designed by the doctor) plays in solution section (and key insights into why Magnus joined Spend Matters):

Q: How do procurement departments go about doing a tech selection and deciding which vendor among so many to spend their business’ money on? From your perspective, what role does SolutionMap play in that process?

A: Businesses need to review (and probably redesign) the way you work as part of the implementation. I saw a quote from someone that said something like, “If you digitalize a crappy process you get a crappy digital process” … and this is really true.

Unfortunately the vendor marketing here doesn’t help. The big vendors are (for obvious reasons) pushing their whole suites, and very few organizations have the resources and change management capabilities to implement a full suite at once.

So going back to your question: Identify the key areas, start there and implement carefully. Build on this success to expand the program. Even if the end goal is a full S2P suite, it needs to be implemented step by step and continuously adjusted and improved.

As for what solution, this is where SolutionMap comes in: The ability to focus in on the specific module you need and look at it from a persona perspective is incredibly powerful. Other analyst ratings don’t get into that level of detail and often includes parameters that have little to do with the actual functionality.

For the full story, check out Technology analyst Magnus Bergfors joins Spend Matters’ team from Gartner.

CSR, Procurement and North America: Creating a Market

In our previous article, we asked if you could solve the modern compliance challenge, and, more specifically if you could do it with Ecovadis. This is because compliance has morphed over the past few years from insuring you weren’t doing any illegal trading and simply satisfying the tax man (and import/export compliance is essentially just respecting the legality of the country you are trading with and satisfying its tax man) to having to comply and deal with a lot of regulations around financial reporting and global trade to having to respect the environment (pretty much everywhere but the US, with the exception of California) to having to take corporate social responsibility for the organization’s entire supply chain and ensure there is no violation of worker’s rights, child labour, or human trafficking — or face the consequences that can not only include bad press (at internet speed) and large fines but, in some countries, criminal charges against the officers of the corporation.

We also noted that solving the compliance challenge was tough because you needed environmental data, sustainability data, social compliance data, and even third party audits on your suppliers, and sources of this data (outside of internal surveys that were unverifiable without site audits) were few and far between. The few players with even remotely recognizable names that exist are in Europe, and Ecovadis is the largest. As a result, it likely has the best shot at championing a market in North America, especially with its increasing partner footprint, supplier database (with over 55K assessed companies), and global reach (as they cover suppliers across 155 countries).

But Ecovadis is not a household brand in North America. To become one, it really must drive material commercial traction outside of the EU and, most important, prove that the market for CSR ratings and compliance in North America is as central to supplier management as other supplier management initiatives (e.g., risk, EHS, etc.) to truly “go global”.

The case for an Ecovadis model is sound. Most major procurement departments at US F500s and larger mid-size companies are still focussed on cost-cutting. And using Ecovadis to get the sustainability data the organization needs is roughly 20% of the cost of trying to do it in house.

Further:

  • Organizations that are embarking upon more strategic category management want deep supplier information before selecting potential strategic suppliers and the response rate to Ecovadis-initiated assessments is 90%
  • The average organization will struggle with a 70% response rate in such initiatives, especially when you consider the average supplier turn-over (as identified in a recent QIMA survey) is 27%
  • Once a supplier is in the Ecovadis network, the chances that their overall CSR rating will improve on their next (annual) assessment is 64%
  • For an average company, unless they initiate a supplier development program and work with the supplier, the chances the supplier will otherwise improve on their own is, as we all know, closer to 6.4% than 64%

Less money. Better results. You’d think it would be an instant buy, but it’s not. So why. Is it because it’s European?

Not necessarily — Jaggaer One+ and Jaggaer One Direct from Jaggaer, which is one of the S2P juggernauts, has good NA penetration, and those solutions (formerly BravoSolution and Pool4Tool) are European.

So that’s not it.

Is it because the space is new or unproven? Can’t be. Ecovadis has been around for 12 years and Sedex Global for 18. Plus, there are a number of other players in the space. Is it because the solution is not user friendly? No — it’s delivered via a simple SaaS platform and they even have public quotes from F500s to that effect. So what’s the problem?

North American companies.

First of all, with apologies to Spike Lee, many will “only do the right thing” when they are forced, and then only to the extent necessary (although this may be changing).

Second, they’d rather profit today than save tomorrow (even if the long term savings would be multiples of the short term profit gains). This means that for them to invest in a solution, they want to see a large, immediate, sometimes unreasonable ROI.

Third, they tend to only act when they’re scared (e.g., losing budget if they have extra).

This means that, unless something changes, for Ecovadis to create a true market in North America with a similar reasonable TAM for say, the compliance management side of supplier / contractor management, it will need to lead with evangelism and, perhaps, more.

All things are possible. But as Vincent Ngo speculated decades ago, it takes a superhero to change the mind of the corporate culture. Can Ecovadis be that superhero?

For the sake of procurement and a better world, we hope that they’ll do it — or someone else.

For more information on Ecovadis, check out Spend Matters’ recent post on Catching Up on a Provider to Know (which also includes links to a deep 3-Part Vendor snap-shot co-written by the doctor and the maverick).

Can You Solve the Modern Compliance Challenge? Can Ecovadis?

Compliance used to be easy. Collect the tax information. Make sure the other party is not on a denied party list. Don’t buy or sell a restricted material without the right permits and don’t buy or sell a banned substance. Done.

But then came globalization. Now you had to collect information for import / export requirements. Satisfy a new slew of tax regulations. Comply with additional inspection and security requirements. Track all of the restricted substances, denied materials, and denied parties of another country. And then as supply chains lengthened and ships made multiple port stops, multiply these requirements.

And that was manageable, but then came a new round of financial regulations, like SOX, in the wake of corporate meltdowns (like Enron) which made compliance more cumbersome. And that was somewhat doable. But with the global penetration of the internet, news spread faster and faster and the unsafe and sometimes inhumane working conditions that outsourced providers were comfortable with made the news regularly, the dangers of poor “recycling” efforts which just saw almost toxic waste dumped on mass to ill-equipped “recycling” centers, and the use of slave/child labour where it was not known before.

As a result, ethical countries started implementing laws on environmental protection, dangerous substances, especially around recycling and disposal, ethical and safe working conditions in the supply chain, and even anti-trafficking and anti-slavery laws — all of which the last link in the chain, the end buying organization, was responsible for.
This makes compliance a bit more tricky. There’s lots of data on financial performance and financial risk, certifications, import/export, and even public sector performance data, but when it comes to corporate social responsibility — environmental compliance, worker’s rights, anti-trafficking, and so on – where do you get that data. Not D&B. Not BvD.

This is where a new generation CSR player comes into play – one that tracks environmental data, sustainability data, social compliance data, and third party audits. But there aren’t many players here yet, and Ecovadis is the largest. But will they be able to take their European success and globalize? While there are a few other players in Europe (Sedex Global, FLO-CERT, e-Atestations, etc.), there are few, if any in North America.

Ecovadis likely has the best shot, especially with their ever-increasing partner footprint, but they need to be the first to scale and win over the hearts (and wallets) of global procurement organizations, especially those in North America, which generally are not as advanced around CSR tracking compared with their European counterparts. The road ahead will be interesting to watch.

Reuse, Recycle, Re-manufacture … Now! (Updated)

Sourcing Innovation has been promoting sustainability since the beginning and design for recycle since the very early days, which is essentially what you are doing if you are designing for remanufacturing, which is taking way too long to take hold in the manufacturing sector, with even fashion poised to overtake it (considering H&M and Zara are not only taking back clothes, but working on technology to create fabrics that can be more easily reused in the future).

When you think about the average complexity of today’s consumer products, especially in electronics, it becomes clear that when a product breaks, it is typically only one component that is broken and a replacement of that component makes the product useable again. That’s why a lot of computer, tablet, and phone manufacturers have entered the refurbishment business — once the damaged or defective part in a product that was returned under warranty or reclaimed upon disposal by a customer, it can be reused and, more importantly, resold.

But the concept doesn’t end with electronics, and doesn’t end with refurbishment. Electronics can be designed more modularly with re-manufacture in mind, so that parts can be upgraded en-masse when the products are returned en-masse in a regular upgrade cycle. For example, if laptops were designed for easy replacement of not only memory and drives, but processors and peripheral connectors (in anticipation of USB 4, Thunderbolt 2, etc.), the previous generation models could become the next generation models and resold as either lower-end offerings in the same market or new offerings in a foreign, emerging market.

And automotive suppliers, who not only know that parts wear out, but when parts are likely to wear out, and which parts wear out together, could not only design their engines to make it easy to replace parts, such as spark plugs, batteries, belts, filters, and pumps that wear out quickly, but also the engine block as a whole, that is going to wear out in 7 to 15 years, depending on the average annual mileage, if the rust-proof frame can last for 15 to 30 years. Given the choice, many people on a fixed income (who don’t live by the ocean and have rust to worry about) would rather replace the engine for 3,000 to 5,000 and keep the car for another 7-10 years if the frame is fine than pay 25,000 or 30,000 for a new car. And while this may not look as attractive from a bottom line perspective to a manufacturer, it significantly reduces the chance of the customer migrating to a different car company, which is very common if a competitor is offering a significantly better deal on a comparable car.

Plus, if the components are themselves designed for remanufacturing, it will be relatively easy for the manufacturer to reclaim the raw materials from the damaged or defective components, which is where a lot of the cost comes in, especially if we are talking rare earth metals. For example, the price of praseodymium-neodymium oxide exceed 1.70 an ounce and prices of terbium oxide (a semi-conductor that is used as an activator for green phospors in colour TV tubes) exceeded 112.00 an ounce this summer, and it keeps rising!  Gold, a metal used in many electronics products, is now hovering around $1500 an ounce. And while there is not much gold in a single laptop, when you put fifty of them together, you’d likely get an ounce. And given that there are roughly 100 Million PC laptops and computers sold a year, that’s close to 2 Million ounces of gold that need to be reclaimed!

And, as per a now classic green & clean article, remanufactured products offer cost savings in the 45% to 60% range! So if doing the right thing isn’t enough, that should be enough of a justification to invest in remanufacturing! This goes double if you are in electronics (for some of the reasons given above) or automotive, where the global market for remanufactured auto parts is projected to reach $91 Billion by 2026. (Source:
Persistence Market Research)

So, regardless of what you want to call it, it’s time to do it. It’s not just good environmental stewardship, it’s good economics.