Spend Management

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SPEND MANAGEMENT:One of The BestBut Least KnownROI Stories in the Technology Industry

SPOTLIGHT REPORT

TABLE OF CONTENTS

INTRODUCTION 2

EXECUTIVE SUMMARY 3

SPEND MANAGEMENT OVERVIEWCore Fundamentals Driving Spend Management 4Other Catalysts Driving Adoption 6Multi-Billion Dollar Market Poised for Strong Growth 8Spend Management - A Dynamic And Yet Highly Fragmented Market 9Challenges to the Long-Term Success of Spend Management 13

VENTURE CAPITAL / M&A ACTIVITYVenture Capital Investment 14Mergers & Acquisitions (M&A) 16Publicly Traded Companies 18

EMERGING STRATEGIC GROWTH PATHSConvergence Along the Spend Management Continuum 19The Next Frontier for ERP Franchises & Financial Management Systems 20Compelling Justification for Comprehensive Procurement BPO 23

CONCLUSION 28

TRIPLETREE CASE STUDY 29

APPENDIXTripleTree’s Technology Team 30


TripleTree is pleased to provide you with our latest Spotlight Report - “Spend Management: One of theBest But Least Known ROI Stories in the Technology Industry.” TripleTree believes that SpendManagement represents one of the strongest growth opportunities for the foreseeable future due to the co-ordination of macroeconomic challenges and the relentless quest for increased margins and earnings pershare (EPS) through revenue growth and cost containment.

Spend Management is the process of identifying, capturing, and controlling expenditures on direct andindirect goods and services that translate dollars saved into profitability improvement. With over $20trillion in annual worldwide expenditures, this sector is of high strategic importance in an economy thatremains somewhat uncertain about identifying new sources of revenue growth as a means for increasingshareholder value. In this Report, the key segments of the industry are assessed along with an analysis ofprivate equity and emerging strategic merger and acquisition activities to date. Several possible long-term strategic paths where Spend Management can play an even more prominent role are also illustratedincluding:

Movement Along the Spend Management Value Chain with major players aligning withbest-in-class domain competencies and/or enhancing business models with ‘hybrid’ solu-tions consisting of software and IP, application hosting, on-demand Software as a Service(SaaS), professional services, and/or outsourcing;

The Next Frontier for Enterprise Resource Planning (ERP) Software Franchises withSpend Management representing a logical building block and growth engine for back-endERP, databases, and financial management systems;

Compelling Justification for Comprehensive Procurement Business ProcessOutsourcing (BPO) with Spend Management offering the ROI justification neededbefore entering into smaller-scale BPO and building towards comprehensive procurementBPO.

Our research and advisory engagements have allowed us to assemble a vast body of knowledge and expert-ise about the companies and value drivers that are redefining the Spend Management sector and the cre-ation of interesting “growth platforms” along these strategic paths. As TripleTree continues its focus onSpend Management, we welcome your feedback on this topic. To learn more about the firm or to reviewour other research reports, please visit us at www.triple-tree.com.

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INTRODUCTION

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Spend Management is the process of identifying, captur-ing, and controlling expenditures of purchased goods andservices with every $1 reduction in spending translatinginto dollar-for-dollar profitability improvements. SpendManagement transforms disparate transactional data re-siding in ERP, accounts payable, general ledger, and oper-ational databases into intelligent, actionable informationand improved business processes delivering significantbottom-line savings.

We believe that Spend Management is strategically posi-tioned for sustainable growth and interest for thefollowing reasons:

• Spend Management is of high strategic importanceto almost any industry, company or organization.Confronted by ongoing macroeconomic challengesand the relentless pursuit to enhance shareholdervalue, the sector presents a very practical option forincreasing profitability and improving the bottom-line without requiring top-line growth and/or opera-tional eliminations to core operations.

• With over $20 trillion worldwide spent annually ondirect and indirect goods and services and everydollar in cost reduction translating into bottom-linesavings, the market opportunity, growth and econom-ic impact of Spend Management is enormous. Whilestill in its infancy, the sector already represents a $10 billiondollar market projected to reach $17 billion by 2007, withmore upside potential through higher end-user adoption.

• Spend Management represents a large, untappedopportunity with less than 20% of organizationsfully utilizing its key disciplines. With more than$500 billion in annual profits lost due to inefficien-cies and failure to institutionalize effective SpendManagement practices, industry analysts cite the lackof Spend Management as a corporate epidemic in thecommercial sector and raises questions of properfiscal responsibility in the public sector.

• Spend Management is fast becoming one of thebest ROI stories in the entire technology industry. Thisexceptional and quick ROI proposition has become a

key point of leverage for extending established fran-chises such as ERP and outsourcing in an environ-ment with buyers very cautiously evaluating each newinvestment.

• No one dominant player has emerged as the clearindustry leader in these fragmented, multi-billiondollar markets creating an exceptional opportunityfor a leader to emerge. TripleTree believes this sectoris one of the best positioned for growth with software,technology, consulting, and outsourcing sectors eachposing intriguing leadership opportunities.

• Industry consolidation of best-of-breed players willcontinue with strong M&A trends to deepen‘hybrid’ offerings, extend domain competencies alongthe value chain, obtain critical mass, or gain accessto new market channels and/or vertical industriesbeing the primary drivers. TripleTree anticipates addi-tional strategically-motivated consolidation as existingplayers strengthen offerings and business/deliverymodels in the race for industry leadership or in re-sponse to competitive threats presented by existingand/or new entrants to the market.

• A ‘hybrid’ business model will be an absolute ne-cessity for successfully penetrating this burgeoningmarket, industry dominance, and long-term sur-vival. Strong professional service offerings rooted indeep sourcing, category-specific spend expertise, andbusiness process knowledge coupled with software /hosted application offerings will be the minimum re-quirements to excel in this sector.

• Spend Management represents a logical extensionand a key building block for ERP franchises andoutsourcing sectors that are continually searchingfor the next new growth opportunity to dominate.Market traction will be gained through ‘hybrid’ deliv-ery models leveraging best-in-class disciplines that im-mediately validate the ROI proposition and lead togreater awareness / acceptance as well as creating a “self-funding” mechanism or “buy-in” for more technologyinvestment or outsourcing. Smaller-scale outsourcingthat has proved out the ROI value proposition will ulti-


EXECUTIVE SUMMARY

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mately lead to more comprehensive, enterprise-wideSpend Management initiatives with smaller projectsproviding a “self-funding” source for larger scale efforts.

Spend Management sits at the intersection of a variety ofother technology segments including Supply ChainManagement (SCM), back-end financial managementsystems such as ERP, databases, general ledgers, and e-Commerce Transaction Processing (see Figure 1).

• Spend Management interacts with back-office functionssuch as invoicing, purchase orders and payment by inte-grating with financial management and ERP systems;

• Spend Management integrates with SCM systems en-abling collaborative planning and inventory manage-ment that trigger event-driven procurement; and

• Spend Management increases the efficiency and con-nectivity with suppliers by directly integrating withsupplier’s e-commerce solutions such as EDI.

The focus of this report is on the dynamics and marketchanges in Spend Management. However, we do ac-knowledge and introduce the concept that other sectorssuch as SCM, ERP, or even Product Lifecycle

Management (PLM) are a part of the broader picture.

CORE FUNDAMENTALS DRIVING SPENDMANAGEMENT

Throughout our research and interactions with compa-nies, we are witnessing increased demand for end-to-endSpend Management offerings. It is our opinion that thegrowing interest in Spend Management by organizationsin both the public and private sectors is attributable tothe following:

• Intense Macroeconomic Pressures. Slower econom-ic growth, tight profit margins and intense competi-tion confront virtually every industry, company, andorganization. Traditionally, corporate executives andbusiness leaders have utilized three basic strategies toimprove profitability and increase shareholder value:i) increase unit volume growth, ii) increase the pricescharged for their goods and services, and/or iii) de-crease operational costs. Top-line revenue growth ismore difficult to achieve in today’s ultra-competitivemarketplace than is a $1 reduction in the cost ofgoods sold or operating expenses through cost man-agement programs. As many organizations continueto struggle with identifying new ways to increase top-line performance without unwanted price increasespassed along to consumers, a viable alternative hasbeen to identify operational efficiencies, e.g. businessprocess improvements, divestitures of non-core busi-ness units, and elimination of labor forces. In recentyears, many of these solutions have been pushed totheir limit and are close to running the risk of jeop-ardizing the core business.

Spend Management now affords yet a fourth and avery viable alternative. Spend Management has provento be one of the easiest and fastest ways for organizations toidentify and rationalize excess costs without risking thecore business operation, eliminating staff, or taking cal-culated risks by increasing end-user prices. Figure 2compares the historical trend for revenue growth, op-erating profit growth, and market valuations, as meas-ured by price-to-earnings ratios, for the S&P 500.This historical view further illustrates the importanceof Spend Management disciplines as well as the po-tential for enhanced value through improved operat-ing profitability.


Supply Chain Management

ERP & Backend Financial

Management Systems

E-Commerce Transaction Processing

Spend Management

▲ ▲▲▲Warehousing Inventory

Demand Planning Logistics

▲▲

▲

G/L

Databases

P/O, A/P,etc.

Transaction Connectivity

Transaction Processing (EDI)

Enablement

▲ ▲

Figure 1

Source: TripleTree, LLC

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Top-line revenue and operating profit growth are easier toachieve during periods of economic expansion. It is duringrecessionary periods where spend management initiatives actas a stop-gap in supporting company valuations. Duringthese times top-line growth is difficult or impossible toachieve leaving operating expense reductions as the criticalcomponent to maintaining flat or minimal erosion in operat-ing profit. During the opulent years in the 1990s both rev-enue and operating profit growth went hand-in-hand witheach other. It became clear in 2001-2002, with the depressedeconomy, that top-line growth was not possible and reduc-tions on the expense side of the business were necessary toeither maintain the same level of operating profit or in manycases, minimize losses. Spend Management has gained addi-tional visibility in the C-suite as executives are faced withmore challenging business conditions. On the whole, busi-nesses are beginning to realize the power of spend manage-ment as providing an additional lever to maximize profitabili-ty, both in good and bad economic times, and ultimatelysupport higher public market valuations. The main pointbeing that Spend Management initiatives afford more controland accountability over operating profitability by increasing theefficiency gained from each dollar of revenue and gaining valu-able insight into each dollar of spending.

• The Bigger Bang for the Buck – Revenue Growth or CostReductions? Organizations are constantly under pressure toincrease shareholder value. While revenue growth and itsconsistency are important, higher profitability is a key meas-ure for enhanced shareholder value. Two obvious choices pre-vail:

i) grow top-line revenue; or ii) reduce operating costs

According to Aberdeen research, enterprises spend nearlyhalf of every dollar earned on external goods and serviceswith each dollar in operational savings having five timesmore impact on profits than a commensurate dollar increasein sales. And yet, the majority of businesses focus their timeon growing the top-line. Figure 3 provides a simple illustra-tion of the comparison between top-line revenue growthversus operating cost reductions using the average profitabili-ty margin of the S&P 500. Holding all other factors constant,it takes a 10% increase in revenues to enact a 20% increase inEPS whereas it only takes a 1% decrease in operating costs togain the same 20% increase in EPS.

This economic opportunity should not be viewed as in-significant. Aberdeen research estimates that organizationsare losing $260 billion in annual profits due to the inabilityto organize and analyze spend data and implement bestpractices to capture these lost savings.

Based on this simplified analysis, it would seem straight-forward that the easier route is to better manage opera-tional costs rather than revenue growth. However,strategies for increasing revenue remain the top priority(and for many good reasons). That being said, opportuni-ties exist for organizations to improve the bottom-lineand shareholder value without aggressively growing thetop-line. The challenge associated with this is due in partto the lack of capabilities and sophistication, domain ex-pertise and business process knowledge, and technologyautomation for truly empowering Spend Managementprinciples at all levels of the organization and across allspend categories. This has forced companies to either re-spond with ad-hoc methodologies, attempt to develop


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Average Revenue Growth Average EBIT Growth Average P/E Values

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Figure 2: S&P 500 Revenue Growth, Operating Revenue Growth, P/E Multiple

Source: TripleTree, LLC, CapitalIQ

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• One of the Best ROI Stories in the Entire TechnologyIndustry. The Spend Management sector has consis-

tently ranked as one of the top ROI value proposi-tions in the entire technology industry and far outdis-tances the ROI opportunity of many other sectorssuch as ERP, CRM, among others. With return on in-vestment for properly implemented SpendManagement initiatives often exceeding ten times theinitial investment, organizations are quickly realizingthe benefit of dedicated enterprise-wide SpendManagement programs. Additionally, while manyother technology sectors require six to 18 months fordeployment before measurable savings become real-ized, certain sectors within Spend Management havegenerated very meaningful savings in a matter of a fewmonths.

internal capabilities, or find partners with these capabilities.

Figure 4 shows not only the previously men-tioned core fundamental growth drivers but alsoincludes additional mounting drivers that are in-fluencing the growth and acceptance of SpendManagement initiatives.

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Elevated Strategic View within theOrganization

Enterprise-Wide Deployment

Total Cost of Ownership (TCO)

Exceptional ROI

IntenseMacroeconomic

Issues

IncreasingShareholder Value

Core

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Figure 4: Spend Management Industry Growth Drivers


Description Baseline 10% revenue growth 1% decrease in costs

Result 20% EPS growth 20% EPS growth

Revenue $250,000,000 $275,000,000 10% $250,000,000 0%

Expenses $225,000,000 $247,500,000 $222,500,000 -1%

Operating Profit $25,000,000 $27,500,000 10% $27,500,000 10% 10% 11%

Other $12,500,000 $12,500,000 $12,500,000

Net Income $12,500,000 $15,000,000 $15,000,000 Net Margin% 5% 5% 5%

EPS $1.00 $1.20 20% $1.20 20%

Scenario A %Chg. Scenario B %Chg.

Figure 3: Comparison of the Net Impact to EPS/Shareholder Value Revenue Growth vs. Operating Cost Reduction

Source: TripleTree, LLC, Aberdeen, & IDC

OTHER CATALYSTS DRIVING ADOPTION

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• Elevated Strategic View within the Organization. Theramp-up in expected demand for Spend Managementproducts and services is occurring as corporations andorganizations view the procurement and sourcing as-pects of their business much more strategically.Historically, the sector has been viewed as a back-office, transactional, support function and is now be-coming viewed more strategically within the execu-tive suite and board room. While the market is poisedfor robust growth, the speed at which this occurs isdue mainly in part to the education of the market onthe benefits of Spend Management. This educationalprocess is well underway as people, organizations, andgovernmental bodies have realized the merits of thebusiness process and the profitability improvements itprovides. The tremendous growth in the SpendManagement market over the past few years empha-sizes this point. Three major trends have helped cata-pult Spend Management to a more prominent andstrategic role within organizations:

° Refinement of tools, processes, and technologiesthat empower organizations with more in-depthspend visibility and transparency into specific busi-ness issues (i.e., gaining valuable insight into off-contract or “maverick spending”);

° Rapid expansion of global markets as sources ofsupply, manufacturing, services, and demandextend beyond the boundaries any organizationserves, thus heightening an executive’s interest inprocurement and cost efficiencies;

° Internet connectivity has provided companieswith a new medium to identify, negotiate, analyzeand engage suppliers and partners on an ongoinginteractive basis;

• Movement from Opportunistic Point-based Solutionsto Perpetual Programs. Many organizations are mov-ing from being opportunistic players in SpendManagement to becoming more proactive and strate-gic participants. As a result, a shift has occurred inthe way that organizations view long-term procure-ment programs. Organizations are moving away fromidentifying point-based approaches whereby immedi-ate savings are realized from “low-hanging fruit” to acomplete organizational realignment with best prac-

tices, including integrated organizational and groupcoordination, that bring forth a more automated andbest-in-class procurement process. This paradigmshift has brought about a more influential type ofSpend Management doctrine.

• Global Total Cost of Ownership (TCO). Globalcompetitiveness, new entrants to already competitivemarkets, low-cost labor in developing nations, as wellas outsourcing initiatives are forcing organizations tooptimize their cost structures on a global total cost ofownership (TCO) basis. Many organizations areproactively adopting a global Spend Managementperspective as it has shown to improve operationalproductivity and performance, allowing organizationsto do “more with less” on a global basis rather than inisolation. Spend Management is providing the neces-sary means for procurement processes to be enactedenterprise-wide on a global TCO basis.

• Fiscally Responsible with Corporate Governance /Regulatory and Budgetary Compliance. With thepassing of Sarbanes-Oxley in the United States, or-ganizations and C-level executives are now, morethan ever, concerned with maintaining proper corpo-rate governance. Due to the negative implicationsthat improper governance has caused, and the devas-tating impact it can have on market valuations, thisissue has become relevant to more than just U.S.based companies. While in the public sector, SpendManagement is becoming a practical choice for de-livering immediate, multi-million dollar cash savingsfor budget-constrained government agencies con-fronted with the unpopular alternatives of raisingtaxes, eliminating programs, or making staff reduc-tions. Spend Management allows greater visibilityand control on corporate or budgetary spending thatC-level executives or administrators desire and canbe viewed at the most granular and category-specificlevel to enact better spend controls and compliance.

• Technology Automation. Organizations have beenenabled by improved software technology that allowsthem to analyze, organize and act upon spend data toeliminate unnecessary costs. Spend Management toolshave evolved first from spreadsheets to licensed soft-


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ware packages into today’s “on-demand” web-based so-lutions. The costs associated with purchasing and im-plementing a Spend Management program have de-creased over time, in part due to changes in thedelivery model (licensing software vs. “on-demand”web based solutions), and now has been lowered toallow not only large organizations but many SMBs toparticipate in and deploy Spend Management initia-tives. Additionally, the ROI achieved from the initialsmall-scale Spend Management projects has provided aself-funding mechanism for more comprehensive, en-terprise-wide Spend Management solutions.

MULTI-BILLION DOLLAR MARKETS POISED FORSTRONG GROWTH

The Spend Management market is projected to reachnearly $17 billion in 2007, which represents a 14%annual growth rate, from $10 billion in 2003, accordingto various industry analysts (see Figure 5). While we willdefine the segments comprising Spend Management inthe next section of this report, it is worth mentioninghere that sectors such as Spend Analysis, StrategicSourcing, and Procurement Business Process Outsourcing(BPO) are projected to grow in excess of the composite.We believe this is probably best understood by the imme-diate and significant cost savings that the client gainsfrom these activities.

In drilling into the information in more detail, severalpoints are worth exploring:

• Highly Attractive Growth Compared to OtherTechnology Sectors. The Spend Managementmarket size and projected growth is important incomparison to other technology sectors. The sector isprojected for solid top-line growth while many othersegments remain flat or with marginal levels of pro-jected growth.

• Several Market Forces are leading to SustainableGrowth Trends. The higher projected levels ofgrowth are due to many of the factors indicated inthe previous section – the elevated strategic impor-tance of Spend Management in the corporation, thecontinued search for cost reduction efforts withoutjeopardizing the core business, a better educatedmarket and understanding of the true leverage gainedby enterprise-wide Spend Management, amongothers. In addition, Spend Management is by nomeans a saturated market as less than 20% of organi-zations are fully utilizing all capabilities according toindustry analysts.

• Privately-held, Best-of-Breed Specialists are Leadingthe Way. The Spend Management market and specif-ically the “best-in-class” providers of SpendManagement software and services will prosper asmore organizations seek to gain additional leverageout of existing technology investments such as back-office applications and financial management systemsand extend these existing capabilities into sustain-able cost saving mechanisms. Probably the biggestobstacle to growth for these privately-held companiesis the ability for the marketing message to be properlycommunicated and fully understood by end-usersthat still remain cautious about new IT investments.


$20

$15

$10

$5

$0

2003 2004 2005 2006 2007

Figure 5: Worldwide Spend Management Solutions Market Size ($, Billions)

Source: TripleTree, LLC, IDC, & Aberdeen

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In the end, Spend Management is poised for contin-ued prosperity in an industry and among end-usersthat demand a strong ROI-based value propositionwith proven, tangible results.

The Spend Management sector can be divided into a va-riety of sub-sectors with different capabilities, industrydrivers, and ROI value proposition (see Figure 6).Included below is a brief description of the capabilitiesprovided by each of these sub-sectors. It is important tonote that each of these categories possesses more sophisti-cated capabilities than is being outlined in this report andin some cases are deserving of a more detailed discussion.We have highlighted what we believe are the key princi-ples within each.

• Spend Analysis is the process of aggregating, cleansing,validating, categorizing, and analyzing transactionalenterprise- and business-level spend for the purposes ofidentifying and implementing cost reduction initia-tives. Spend Analysis extracts transactional data resid-ing in various back-end financial management systemsand formats such as ERP, general ledgers, A/P, invoices,spreadsheets, p-cards, supplier reports and assigns cate-gory-specific intelligence in order to analyze a consoli-dated view of enterprise spend.

This capability provides spend visibility at all levels ofthe enterprise by category, department, division, andvendor. Often times, it is considered the first step in amore detailed Spend Management process as it allowsthe end-user to identify off-contract spending, trackand enforce superior spending practices and identifywhere inefficiencies are occurring in the procurementprocess. In itself this step does not ensure savings or

Figure 6: Spend Management Market Segmentation and Industry Drivers

Source: TripleTree, LLC, Aberdeen, IDC, Forrester

Spend AnalysisSupplier DataEnrichment

Strategic Sourcing& e-Sourcing

ComplianceManagement

ContractManagement

Supplier RelationshipManagement (SRM) e-Procurement

-Aggregate, cleanse & analyze spend data

-Extract from multiple sources

-Gain visibility into spending

-No unified data source

-Lack of data consistency

-Manual sourcing processes -No coordination across groups

-Lack of spend visibility

-Spreadsheet remains #1 tool

-Reduce spending 2% - 15%

-Cut cycles by more than 80%

80% of firms rank Spend Analysiscritically to very important to operational success

-Ongoing, long-term procurement of materials & services

-Refine RFx sourcing

-Find & qualify best suppliers

-Offline, manual methods

-phone, fax, email for order processing

-<50% of spend is strategically sourced

-60% of negotiated savings remain unrealized

-Dollar discounts of more than 10%

-Reduce sourcing cycles time by 50%+

-Categorizes suppliers, vendors, and products by type

-Proper classification on idustry defined nomenclature

-Essential for effective Spend Analysis

-Back-end systems are ill-equipped for detailed reporting or automated procurement processes

-Improper company/ product classification

-Data spread across muliple systems unrealized

-Reduce spending by 2% -15%

-Reduce sourcing cycle times

-Coordinate, catalog & monitor compliance with supplier contracts

-Monitor & manage supplier relations as well as employee awareness and compliance

-'Maverick' buying

-Lack of clear responsibilities procedures and controls for gauging spend compliance

-Lack of employee compliance to spend guidelines

-No executive mandate

-Improve compliance by 50%

-Contracting cycles reduced 50%

-Reduce operating costs 2% - 5%

-Coordinated supplier relations & buying

-Integrated supplier mgmt. for tracking, benchmarking & analysis

-Poor supplier selection & management

-Failed supplier coordination

-Lack of realizing volume discounts

-25%+ supplier improvement

-Reduce supplier mgmt. by 50%

-Online procurement handling order mgmt. & payment support functions

-Coordinated auction/ multiple bid process

-'Spot' purchases leads to ineffective price-to-quality

-Manual procure-to-pay process

-<20% channeled via online

-Improve prices by 10%

-Reduce process costs by 70%+

$121 billion in goods& services managedthrough online sourcing

Critical component foreffective Spend Analysisand Spend Managementcapabilities

Contract Managementincreases productivityby reducing customerdowntime due to deliveryand/or quality issues

50% increase in SpendCompliance results in a2 - 5% reduction in Operating Costs

$2 billion existing market for supplier relationship management

$3 billion existing market for procurement systems

-Ensures that goods and services bought meet their specifications: location, delivery time, price, level of quality

-Monitor and manage relations

-'Off-contract' purchasing

-Lack of volume purchases

-Lack of supplier/contract compliance

-Ineffective control and management of contracts costs the private sector $153 billion per year

Descri

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Spend Analysis Supplier Analysis Sourcing Analysis Compliance/Budgeting Contract PerformanceSupplier Analysis& Performance Procurement Analysis

Analytics

SPEND MANAGEMENT

Identify Create Sustain

A DYNAMIC AND YET HIGHLY FRAGMENTEDMARKET

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change the procurement process but rather capturesrelevant data (e.g., volume and price) on what is beingpurchased from whom and how these purchases alignwith the current organizational spend guidelines.

Some of the challenges solved by Spend Analysisinclude:

° Disparate Data – Spend data typically resides acrossmultiple, disconnected systems (e.g., A/P, ERP, cor-porate purchasing, e-procurement systems, EFT). Aneffective Spend Management strategy must supportthe automated aggregation, cleansing, and analysis ofall spending information from internal and externalbusiness systems to provide an enterprise-wide viewinto spending.

° Inaccurate Information – Spending data is ofteninconsistently captured because of errors, mis-spellings, duplications, or leaving a large amount ofdata classified as “other”. A Spend Analysis initia-tive ensures that spend data files are accurate andcomplete. This data must be consistently verified,cleansed, categorized, and deployed across theentire enterprise.

° Inconsistencies in Vendor and Product Information– Incorrect naming practices for vendors, productsand services further muddle the spending data pool,which limit an organization’s visibility into spendingpatterns and decreases negotiation leverage withvendors. The identification of relationships betweenvendor parent and subsidiaries is also critical in ana-lyzing spending patterns in order to effectively lever-age preferred supplier relationships.

° Limited Analytics Capabilities – Research hasshown that more than 80% of companies still usebasic spreadsheet applications or reporting tools fordata analysis, which limit the ability to enact trueSpend Management practices across the enterprise.Spreadsheet tools do not have the ability to aggre-gate data from multiple systems and are generallyinflexible in how they capture, analyze, and displayinformation. A more robust Spend Analysis solu-tion is necessary to pull together the associated

data and categorize it in a meaningful way to allowfor analysis.

• Supplier Data Enrichment is the proper categorizationof suppliers by vendor identification numbers in orderto increase overall spend visibility, reduce supplier risk,lower supply acquisition costs, increase supplier diversi-ty and better manage supplier data content. Back-endsystems are not well equipped for detailed reporting orautomating procurement processes by supplier orvendor categorization with duplications, improper ac-count or product classification, among a host of otherinaccuracies. Supplier Data Enrichment provides struc-ture supporting the classification or taxonomy of suppli-ers, products and services to industry defined nomen-clature, such as the United Nations Standard Productsand Services Code (UNSPSC), as well as any propri-etary format related to the organization’s spendingareas, business units, accounting functions and geogra-phies. Data enrichment components combine to givethe associated data quality, value, accessibility andtimeliness. This data incorporated into a SpendManagement solution provides quality informationabout suppliers and allows organizations the ability toderive immediate spend savings through enterprise-wide supplier and spend visibility. This visibility enablesmore effective management of supplier relationships,spend practices and offers greater financial control forthe organization. This level of organization and analy-sis also provides a relevant format enabling organiza-tions to better analyze, plan, and execute full suiteSpend Management and is often the impetus beforeStrategic Sourcing.

• Strategic Sourcing / e-Sourcing delivers significantsavings by streamlining the on-going, long-term pro-curement of materials and services. StrategicSourcing / e-Sourcing initiatives begin with gatheringspend data, determining service level requirements,researching and analyzing suppliers and the market,and issuing requests for information (paper or elec-tronic), proposals and quotations (collectively knownas RFx) as well as including forward / reverse manualor online auctions, where appropriate. StrategicSourcing allows for competitive bidding; facilitatingoptimal pricing and vendor selection on a wide rangeof spend categories which results in very large savings


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when compared to traditional processes. This com-bines best-in-class processes with automation to com-plete the sourcing cycle, inclusive of project manage-ment, RFx automation, vendor / supplier identification,bidding / negotiations, and advanced optimizationtools. Over the past several years, e-Sourcing has seendramatic increases in its use with the value of goodsand services procured reaching $121 billion in 2003and projected to grow to $345 billion in 2005, ac-cording to IDC.

Strategic Sourcing and e-Sourcing have becomesomewhat synonymous with each other as e-Sourcingwas thought to be the ‘holy-grail’ of cost reductionmethods. By itself unfortunately, e-Sourcing has notdelivered on actual savings to the extent that hasbeen proclaimed. A recent study conducted byAberdeen of 125 supply management executives sug-gests that e-Sourcing cost savings have been overstat-ed and under-delivered at most organizations. In addi-tion, Aberdeen estimates that 60% of organizationsusing e-Sourcing methods have been unable to imple-ment and realize the savings negotiated online. Thetypical e-Sourcing program fails to realize 20 – 25% ofthe cost savings negotiated online. The reason for un-realized savings varies. The first step towards prevent-ing this savings leakage is to implement a robustSpend Management program that begins with SpendAnalysis and subsequently evaluates when the use ofe-Sourcing is optimal.

Strategic Sourcing and e-Sourcing initiatives are ef-fectively aimed at reducing or eliminating:

° Offline / Unorganized Methods - Less than 50% ofall spend is strategically sourced. Offline and unor-ganized sourcing methods lead to missed opportuni-ties in negotiated contracts with vendors.

° Localized Decision Making - Most sourcing pro-cedures are implemented at the local level andoften involve a price only metric. These processesare labor intensive and time consuming. StrategicSourcing / e-Sourcing programs allow for the de-ployment of sourcing procedures and standardizedmetrics that span the entire enterprise. Decisionscan be made on goods and services purchased

based on best total value and alignment with cor-porate-wide goals with the result that sourcing willbecome less fragmented and better aligned acrossall business units and functional levels.

° Non-Repeatable Processes - Strategic Sourcinginitiatives involve technological advances suchthat processes are refined and repeatable. Morethan 50% of sourcing activities are conducted ad-hoc with no defined or repeatable methodology inmind, thus providing limited supplier coordination.

• Compliance Management is the process of ensuring allenterprise-wide purchases are in line with corporatepolicies, established budgets and negotiated suppli-er/vendor agreements in order to avoid costly off-con-tract or “maverick” purchases. ComplianceManagement has become a key topic as spend savingshave been identified but not fully realized. These so-lutions monitor enterprise-wide spending at a consol-idated level and down to the line-item across depart-ments, divisions, geographies and categories in orderto ensure conformity with preferred suppliers, negoti-ated terms, and volume discounts. ComplianceManagement provides key performance indicators(KPIs) measuring adherence to these stated policiesand includes in-depth, drill-down analytical capabili-ties where deviations from the norm exist.

An organization often fails to realize its objectives dueto a lack of clear responsibilities, procedures and con-trols for ensuring performance and spend compliancebeyond initial phases. Often times there is limited in-volvement of the necessary and/or proper stakehold-ers in sourcing requirements development, supplierdiscovery, and sourcing award decision-making activi-ties to effectively ensure compliance. Critical to thesuccess of a compliance mandate is the ability to com-municate the negotiated sourcing parameters to allstakeholders and have in-place an infrastructure thatallows for ease-of-use of the procurement system.Such a system and infrastructure will reduce the ten-dency to resort to maverick buying when purchasinggoods and services.

Organizations that put in place an executive mandatethat includes strict compliance guidelines have the

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best success in capturing savings from their SpendManagement initiatives. According to research indus-try analysts, improving spend compliance from 60%to 95% would reduce Cost of Goods Sold by 4%,translating into a dollar-for-dollar tradeoff in operat-ing cost reduction and profitability. In our examplefrom Figure 3 (page 6) this would translate into a36% increase in operating profit and a 72% EPS in-crease.

Compliance Management is becoming mainstream asorganizations look to crack-down on those who donot follow organizational spend guidelines. As notedin CRM-Daily, American Express is taking spendcompliance seriously. American Express delivers aletter from the CFO and $1,000 is charged to the costcenter of any employee making an off-contract pur-chase of an item that could have been purchasedunder a contract provided through the e-Procurementsystem. A second infraction costs the employee’s costcenter $10,000. Fortune 500 companies are takingnotice of where cost savings are not being realized andputting in place compliance management programs toforce employee adherence to spend guidelines.

• Contract Management is the process of ensuring thatthe goods and services bought are delivered to thecorrect locations at the contracted time, at the con-tracted price, and at the contracted level of quality.This type of oversight also allows organizations toprevent maverick spending as well as coordinatesupply contracts across the entire enterprise.Contract Management and ComplianceManagement advance the Spend Management doc-trine down to all levels of the organization.

Contract Management solutions provide automatedsystems to gain enterprise-wide contract visibility thatallows for reduced contract cycle times, improved con-tract renewal rates, a lower total cost of ownership, andincreased compliance. Many organizations work in-credibly hard to negotiate long-term contracts withpreferred suppliers only to have the savings from thesecontracts lost as maverick buying dilute the intendedvalue. The ability to track and monitor supplier con-tracts is essential for an organization to fully realize thebenefits of their Spend Management initiatives.

Aberdeen estimates that approximately $153 billion islost each year due to missed savings opportunities andadditional process costs that result from the ineffectivemanagement of contracts.

• Supplier Relationship Management (SRM) is designedto handle sourcing, procurement, transaction process-ing, order management, and payment support func-tions, all of which are interrelated, to create a singleview of an organization’s spending practices andlevels. With many organizations using many suppli-ers, SRM allows a company to view how its purchas-ing activities are integrated into a supplier communi-ty and offers the ability to track, benchmark andanalyze the supplier network. This includes capabili-ties such as supplier catalog content management, in-tegration and syndication, which maintains real-timesupplier content across the supplier network for thou-sands of products and hundreds of thousands ofunique product/service attributes. Additionally, sup-pliers are able to monitor their performance, status oftransactions, and administer self-service capabilities.The end goal is to improve supplier performancethrough the use of scorecarding and supplier evalua-tion systems in the hopes of improving efficienciesand reducing the overall operational costs to the or-ganization. SRM is geared toward managing the over-all relationship with the supplier network whereasSpend Management is focused on the reductions inthe overall cost of goods and services purchased.Reducing spending at individual suppliers might alsomean sacrificing favorable supplier relationships thatexist. SRM takes into account these nuances andworks to reduce overall supplier spend while simulta-neously improving supplier performance and collabo-ration.

• e-Procurement is the electronic acquisition of directand indirect products and services from “purchaseorders to payables”. These systems utilize the Internetand new technologies to facilitate a seamless, end-to-end stream of strategic procurement activities by con-necting buyers and suppliers. e-Procurement providesautomated workflow and integration thereby improv-ing cycle times. This includes the tools and businessintelligence systems that enable improved responsive-ness and analysis within the procurement organiza-

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WWW.TRIPLE-MINNEAPOLIS 952.253.5300 SAN DIEGO 858.792.3406

tion and provides the linkages between suppliers andinternal systems across the supply chain.

The capabilities and benefits of these subsector solutionscan be delivered through software applications, professionalservices or outsourcing and each will be revisited in the“Emerging Strategic Growth Paths” section of this Report,as we believe they intersect.

CHALLENGES TO THE LONG-TERM SUCCESS OF

SPEND MANAGEMENT

While the potential savings benefits and ROI are clearlyimpressive, there are roadblocks and hurdles that must beovercome before the anticipated growth will be fully real-ized. The most representative of these are: lack of end-usersophistication; an ongoing need to educate the market; and aneed to dispel the apprehension of immediate savings andROI:

• Lack of End-User Sophistication and OngoingMarket Education. Spend Management is in its in-fancy and as such is still working on creating its ownidentity. The sector does not gain instant credibilityon its own merit or through a long history of achieve-ment. Many organizations lack the inter-divisionalvisibility to truly have a Spend Management programthat can span the entire enterprise. With these inter-divisional conflicts, it is difficult to realize the scalebenefits of having a truly enterprise-wide SpendManagement discipline. We believe a critical compo-nent is to educate the market about the core disci-plines of Spend Management as well as the merit ofinstitutionalizing them throughout the enterprise.

The boundaries have been blurred as to who has re-sponsibility for these initiatives. All areas of the or-ganization – from C-level executives to order entryclerks – benefit from properly implemented SpendManagement programs. As a result, Spend Manage-ment disciplines are being pushed to all edges of theorganization. With the goals of a Spend Manage-ment program aligning the organization across divi-sions, functions and geographies, there will be plentyof internal “champions” to push / pull through theseSpend Management initiatives. Yet, the critical com-ponent will be ensuring the successful education ofthe end-user and communication of the opportunityfrom the outset.

• Importance of the ROI and Immediate Savings. Itwill be difficult for organizations, with increasedglobal competition and macroeconomic pressures, tocompletely ignore headlines touting 150% – 1,000%ROI for many Spend Management programs. Criticalto the sector’s growth and maturation is both thequalitative and quantitative proof of ROI. A verifi-able dollar amount must be attributable to goods andservices cost savings or process efficiency improve-ments and it must be fairly immediate. A lingeringproblem from prior technology deployments has beenthe continuous investment of time and resourcesbefore an economic benefit was realizable or sus-tained. With a more skittish buyer, SpendManagement cannot fall into the same predicamentand thus savings must be trackable and immediate. Inour research, Spend Analysis and Strategic Sourcingare the critical components ensuring a high and im-mediate transaction-based ROI. Figure 7 shows theexpected payback period for any IT project based on aQ1 2005 study of 300 business-technology managersconducted by Information Week magazine. It is abun-dantly clear that the payback period for IT projects iscontinuously becoming shorter and shorter with ap-proximately 65% of managers requiring a paybackwithin 1 year of deployment and 26% requiring a pay-back within 3 months.


Figure 7: Expected Payback Period for IT Projects

Source: Information Week

Within 3 Years14%

Within 60 Days3%

Within 120 Days12%

Upon Launch11%

Within 1 Year38%

Within 2 Years22%

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VENTURE CAPITAL DEAL FLOW AND MERGERS& ACQUISITIONS

During the 1990s, application solutions for SpendManagement and the B2B space were among the mosthighly prized for both new investment and IPOs withtheir popularity rivaling most any other enterprise soft-ware sector. With the Internet craze and the enormousB2B market opportunity, many vendors were quicklyadding Spend Management capabilities to their solutionset. Pure-plays amassed multi-billion dollar market capi-talizations and astronomical valuations only to later fallprecipitously due to much slower growth than was origi-nally anticipated, compounded by disappointing operatingresults. Similar to other technology areas, the sector hasgone through a number of changes due to challengingmacroeconomic conditions, shifting end-user attitudesand fundamental changes in the business model. Thatbeing said, the sector now appears poised for success aseconomic conditions and business model realignmentsplay to its core strengths.

From our analysis and interactions with nearly 200 privateand public companies in the sector, we are seeing a grow-ing resurgence of investment and merger & acquisition(M&A) activity. As detailed further in this Report, thesedevelopments are suggestive of sustainable long-termgrowth trends benefiting from the aforementioned valuedrivers that will ultimately result in: i) convergence to a‘hybrid’ model requiring participants to have best in tech-nology capability as well as a professional services compo-nent that provides deep sourcing expertise; ii) new en-trants to the market; iii) increased M&A activity as

consolidation occurs among best-of-breed players andcompanies look to add new capabilities; and iv) definingentry points for comprehensive procurement BusinessProcess Outsourcing (BPO) opportunities. We believethat much of the new activity and value being created inthis sector is among a new class of best-of-breed, privatelyheld companies rather than public companies. The key forthese privately-held firms will be to strengthen their com-petitive position for a sequence of industry events andchanges expected to occur.

The following summarizes our in-depth research into pri-vate capital markets and M&A activity in the SpendManagement sector:

As previously mentioned, similar to the entire IT indus-try, venture capital investment into the SpendManagement sector experienced a significant downturn.In a two year period from 2000 – 2002, venture capitalinvestments dropped from a high of $560 million to a lowof $100 million. Despite this, there is growing evidence ofrenewed interest in Spend Management by venture capi-tal investors.

• Venture capital investors are slowly turning theirattention back to Spend Management. The strategicimportance of Spend Management has not waned.However, due to macroeconomic challenges andmissed expectations, there was unquestionably a set-back for the sector in the late 1990s and early 2000s.


Figure 8: Spend Management Venture Capital Investment Since 2000


$600

$500

$400

$300

$200

$100

$02000 2001 2002 2003 2004

In M

illio

ns

VENTURE CAPITAL INVESTMENT

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In our recent interactions, the strategic relevancy ofROI-based Spend Management has only been elevat-ed by end-users in need of greater operational effi-ciency to improve bottom-line results and EPSgrowth without sacrificing the performance of thecore business. As privately-held companies are restor-ing investor confidence in this basic premise, we be-lieve that new venture capital investment will con-tinue to follow. However, due to the significantchanges that the sector has historically witnessed, thismessage with investors requires proper communica-tion with an audience that still remains cautious.

• Private capital investment has increased over 100%since 2002 after experiencing a significant declinefrom 2000 to 2002. While not growing at the swiftrate of the 1990s, recent new investments being madesuggest that the sector is returning to favor and thatlong-term growth prospects remain strong (see Figure8). We believe that one of the best investment oppor-

tunities will be with those companies providing on-demand, hosted applications capable of supportingInternet delivery of the application in a shared, multi-tenancy environment. Please see TripleTree’s report on“Software as a Service: Changing the Paradigm in theSoftware Industry” for more information on this gen-eral theme.

• While the total number of private equity investmentshas not returned to levels experienced since 2000, theaverage investment amount has increased substantial-ly from its lows during the 2001 – 2003 timeframe.With total volume at lower relative levels, investorshave been selective in making new or supporting exist-ing portfolio investments as evidenced by Figure 9.However, it is interesting to note that in 2004 the aver-age investment was $20 million, which is comparativeto the amounts seen in 2000. In our interactions, we be-lieve that venture capital investors are beginning torecognize the success of privately-held Spend

30

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20

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$25

$20

$15

$10

$5

$0

Avg.

Inves

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# Investments Avg. Investment

Figure 9: Comparison of Total # of Investments to the Average Investment Amount


100%

80%

60%

40%

20%

0%2000 2001 2002 2003 2004

% o

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Figure 10: Percentage of Total Investment Round Since 2000

Series:Source: TripleTree, LLC

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Management companies as well as see the opportunityto seize a leadership position in a multi-billion dollarsegment that currently lacks many large, well estab-lished players and public companies.

• New private equity investment has flowed to laterstage and more mature companies with proven busi-ness models and well-developed strategies. Not sur-prisingly, the trend over the past five years has been to-wards later-stage privately held companies that haverefined their business models and go-to-market strate-gies. As Figure 10 demonstrates, in 2004 there was asignificant acceleration of the three-year trend towardslate-stage investment, which comprised 80% of thetotal private equity investment activity compared to40% during the past several years.

Venture capital investment in Spend Management willlikely maintain these trends with the use of proceeds fo-cused on strengthening the core product offerings, enhanc-ing the delivery and business models, and/or gaining addi-tional market channels and strategies through acombination of internally developed strategies or comple-mentary niche-based acquisitions.

Leading up to 2004, we would characterize much of theM&A activity in the Spend Management category as nicheacquisitions filling a specific product or need or thosedriven by financially distressed situations. However, recent-ly the tides have shifted as several strategic acquisitionshave grabbed the headlines, including the $493 millionmega-merger of Ariba and FreeMarkets.

Several key M&A trends are illustrated below:

• Increased Spend Management M&A Activity: Overthe past three years, there has been a significant in-crease in the level of M&A activity with over 20transactions occurring in 2004 compared to less than10 transactions in 2002. More recently, the trend hascontinued to grow with the last five quarters averag-ing five M&A deals per quarter with the precedingsix quarters reporting less than three deals per quarter(see Figure 11). And yet despite this activity, theSpend Management sector remains highly fragment-ed with nearly 200 privately-held, specialty playersestablishing interesting niches and unique offerings.

• Enhancing the Business Model with a ‘Hybrid’Solution: As demand for a more complete solutionfrom “best-in-class” technology to business process


Figure 11: Number of Spend Management M&A Transactions Since 2000


DECEMBER 2005

MERGERS & ACQUISITIONS (M&A)

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and subject matter expertise to total Business ProcessOutsourcing has continued, a flurry of M&A deal ac-tivity has occurred. This trend will continue to accel-erate fueled by acquisitions that seek to augment andfurther extend existing capabilities by increasing thebreadth of the offerings with ‘hybrid’ technology,services, and outsourcing capabilities.

• Niche Acquisitions Filling a Specific Product Gapor Market Need: Many of the acquisitions in theearly 2000’s were smaller transactions that fulfilled aparticular market need such as a specific product of-fering, an enhancement of the business model ortechnology, or gaining access to different marketchannels. While these forces will persist, much of thefuture acquisition activity will be uniquely driven by“growth platform” acquisitions, particularly as newcategories of acquirers become active.

• Strengthening the Competitive Position in a Largebut Fragmented Growth Sector: Somewhat similarto the first point, some of the M&A activity has been

motivated by a need to stand apart from the competi-tion by acquiring more robust offerings, differentmarketplace channels, or an enhancement of thebusiness model. In a large multi-billion dollar growthsector that remains highly fragmented, these com-petitively motivated trends to continue for the fore-seeable future.

• Financially Motivated Acquisitions. The past fiveyears have seen many vendors struggle to successful-ly address challenging market dynamics and ulti-mately relent to acquisition pursuits. Most such ac-tivity has been predicated on the acquirers’ desirefor a larger client base, broader product offering ortechnology niche; often at the chagrin of the ac-quired. While consolidations under these condi-tions will continue, it will occur less frequently..

Over the past few years, there have been a number of keyM&A events in the Spend Management sector. This pastyear alone had over 12 significant acquisitions. In Table 1and the commentary below, we have provided just a fewexamples of the M&A activity and the relevance to theabove stated trends:

• Science Applications International Corporation (SAIC)announced in November 2004 its acquisition of pri-vately-held ProcureNet, a provider of electronic pro-curement, logistics, and supply chain management serv-ices for the Department of Defense (DoD) and otherfederal government departments. With $250 million inrevenue and 175 employees, ProcureNet is strategicallyimportant to SAIC’s growth in logistics and productsupport by emphasizing the key importance of SpendManagement in the government sector.

• IBM recently announced its acquisition of KeyMRO,which strengthens IBM’s procurement services offer-ing. KeyMRO, a procurement and sourcing servicesfirm with a BPO offering, combines with IBM’s tech-nology and global consulting capabilities to create afull procurement solution that allows the technologygiant to gain a valuable market presence in the bur-geoning procurement BPO market.

• Ariba has been among the most active in the industryin its effort to capture meaningful market share and


Table 1: Recent Spend Management M&A Transactions

DATE7/22/2005

7/13/2005

6/6/2005

5/4/2005

3/21/2005

2/22/2005

2/8/2005

1/26/2005

1/25/2005

1/3/2005

12/13/04

11/29/04

10/26/04

7/19/04

5/19/04

4/23/04

4/12/04

3/31/04

2/2/04

1/23/04

1/7/04

12/31/03

11/17/03

10/1/03

9/15/03

7/16/03

5/18/03

1/28/03

10/17/02

9/12/02

7/11/02

BUYERVerticalnet

The Carlyle Group

Emptoris

Selectica

Procuri

Profitline

Tourtellotte Consulting

Accenture

eWork

Emptoris

IBM

SAIC

Perfect Commerce

Verticalnet

USinternetworking

NuStar Holdings

Trinity Ventures

Ariba

Verticalnet

Ariba

Ariba

FreeMarkets

Procuri

Agile

Emptoris

eScout

B2eMarkets

Ariba

Epicor

Perfect Commerce

Ketera

TARGETDigital Union

CompuSearch Software

Intigma

Determine Software

Contract Management Solutions

Tallgrass

Inovis, Inc.-Sourcing Business

CPGmarket.com

ProSavvy

Valuedge

KeyMRO

ProcureNet

Pantellos

B2eMarkets

Strong3

Alor Software

SciQuest

Softface

Tigris

FreeMarkets

Alliente

Covisint

SupplierInsight

Tradec

Zeborg

Perfect Commerce

Diligent

Goodex

Clarus Corporation

Purchasepro

Acentropy

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be a leader in the sector. Ariba has made three impor-tant acquisitions in the past year that augments theiroverall business strategy. The Softface acquisition hasstrengthened its technology offering in the areas ofautomated spend data cleansing, enrichment andclassification. The acquisition of Alliente, a procure-ment BPO provider, was made to enhance Ariba’sBPO capabilities. And, perhaps the most significantindustry event was the $493 million acquisition ofpublicly traded FreeMarkets, which added highlyvaluable strategic sourcing services expertise to com-plement Ariba’s platform. With these acquisitions,Ariba is clearly the most visible in terms of its pursuitto broaden its product offerings, enhance its technol-ogy offerings with services and outsourcing, andstrengthen its go-to-market positioning.

• VerticalNet acquired Tigris and B2eMarkets, whichstrengthened its software suite and added consultingto its business model. B2eMarkets brings its sourc-ing suite to VerticalNet rounding out its product of-ferings from Spend Analysis to Advanced Sourcing.The Tigris acquisition brings the professional servic-es component of Spend Analysis and StrategicSourcing and the ability to offer a more completeoffering to its clients.

• SciQuest was acquired by Trinity Ventures in a goingprivate transaction in April 2004. SciQuest, a hosted,on-demand supplier relationship management (SRM)solutions firm for the life sciences and higher educationmarkets, was acquired in a transaction valued at morethan $25 million, which represented a 50% premium toits share price at the time of the announcement. (Seepage 29 for Case Study.)

We expect strategically-motivated M&A activity willremain strong as these trends continue to reshape the in-dustry as well as open up new opportunities for a newbreed of acquirers such as ERP software, back-end finan-cial management systems, and business process outsourc-ing firms seeking to gain market leadership in these highgrowth markets.

As previously stated, much of the activity in the space isbeing led by a new breed of privately-held companiesrather than among a long list of public companies. Whilethere are a few pure-play public companies in the SpendManagement space, it is mainly occupied by other largertechnology players, consulting / outsourcing firms, or con-tent enrichment firms including SAP, Oracle/PeopleSoft,Lawson, Accenture, EDS/A.T. Kearney and Dun &Bradstreet, who are not necessarily 100% committed tothis sector.

It is notable that a sector projected to reach $17 billion by2007 has no single, dominant player. Because of this,TripleTree believes that Spend Management representsone of the single best growth opportunities for companiesin search of establishing market relevance in a multi-bil-lion dollar growth sector. The next section - “EmergingStrategic Growth Paths” - explores several possibilities.

EMERGING STRATEGIC GROWTH PATHS

Spend Management represents the next frontier ofgrowth and market opportunity for ERP software, back-end financial management systems, and outsourcing sec-tors. There are a number of industry defining events sug-gesting Spend Management will increase its strategicimportance with executives at most major corporationsand government entities. Spend Management provides avaluable extension for back-end ERP and financial man-agement systems as well as a much needed building blockand ROI justification for full-suite outsourcing / BPO.

Looking ahead, we believe the Spend Management sectorwill evolve with a new breed of entrants and with threemajor trends that will ultimately define this sector andthreaten conventional methodologies:

PUBLICLY TRADED COMPANIES

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• Convergence along the Spend Management Continuumled by ‘Hybrid’ Software, Services, and OutsourcingOfferings with major players aligning with best-in-classdomain competencies and/or enhancing businessmodels with a combination of software and IP, on-demand applications, services, and outsourcing;

• The Next Frontier for Enterprise Resource Planning(ERP) Franchises & Financial Management Systemswith Spend Management representing a logical build-ing block and growth engine for back-end ERP, data-bases, and financial management systems; and

• Compelling Justification for Comprehensive ProcurementBusiness Process Outsourcing (BPO) with variousSpend Management capabilities providing the muchneeded ROI justification before entering into smaller-scale BPO engagements or building towards even morecomprehensive procurement BPO.

The following section explores each of these points inmore detail:

The latest strategic M&A developments and partnershipalignments prove that convergence is underway in theSpend Management sector and that changing develop-ments will continue on two fronts:

• ‘Hybrid’ offerings combining software/technology, profes-sional services, and outsourcing. It is becomingclearer that a winning combination is one that con-stitutes a ‘hybrid’ solution offering approach. Thisbrings together advanced software functionalityeither delivered in the traditional software license orin a hosted, on-demand Software as a Service modelcombined with category-specific professional servicescapabilities and outsourcing, which features businessprocess excellence. The key point being that thelines of demarcation that have traditionally existedbetween software, application hosting, professional

consulting services, and BPO/outsourcing are becom-ing blurred with each new product and service offer-ing increasingly becoming a part of a more complete,‘hybrid’ offering. We believe success and marketdominance will continue to follow this path.

As the importance of the professional services compo-nent is realized, software and technology alone is recog-nized as not totally fulfilling client needs or providingan immediate ROI justification. Additionally, large-scale procurement BPO has proven to be a difficultsales pitch as vendors work to educate end-users andthe overall market. Consulting work focused on aSpend Management ROI proof of concept is often themost viable first step. Ironically, few companies withscale possess the necessary focus, domain expertise, andinfrastructure to provide a compelling SpendManagement solution.

• Enhanced domain expertise gained through strength-ened Spend Management offerings: As we have dis-cussed earlier in the M&A section of this report,Spend Management remains highly fragmented, occu-pied by best-of-breed, pure-play specialty firms focusedin a few key areas such as Spend Analysis, StrategicSourcing, Contract Management, or SRM. Addition-ally, the landscape is defined by larger, well-establishedcompanies like ERP software vendors, managementconsulting firms, and BPO/outsourcing firms that lacksophistication across all Spend Management categoriesor a fully dedicated commitment to the marketplace.

The past several years have witnessed consolidationwith a vast majority of the strategic M&A beingdriven by an interest in niche-based, specialty firmsthat add a higher level of differentiation along a fewcategories and fill critical product gaps. We continueto believe that this level of activity will continue; par-ticularly as the current players and new entrants rec-ognize the need for a strong end-to-end SpendManagement offering. More recently, we have ob-served larger strategically-motivated activity with ex-isting and new entrants seeking “growth platforms” asa mechanism for quickly establishing a strong marketposition. The most recent strategic moves by SAICare an illustration of this trend. With the possibility of

CONVERGENCE ALONG THE SPEND MANAGEMENTCONTINUUM LED BY ‘HYBRID’ SOFTWARE, SERVICES,AND OUTSOURCING OFFERINGS

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new entrants, we believe that motivations will be fo-cused on identifying the right point of entry or growthplatform in this sector.

Convergence along both fronts will continue as majorplayers seek to strengthen their competitive position andnew entrants search for an effective point of entry.

THE NEXT FRONTIER FOR ERP FRANCHISES & FINANCIAL MANAGEMENT SYSTEMS

Spend Management and e-Procurement transform dis-parate transactional data residing in back-office ERP, ac-counts payable, general ledger, and operational databasesinto intelligent, actionable enterprise and business-levelinformation for improved procurement processes thatgenerate significant bottom-line savings (see Figure 12).

ERP and back-end systems store thousands of transactionalactivities that remain highly fragmented among many dif-ferent data stores and financial systems. At the same time,these back-end systems have traditionally lacked sophisti-

cated supplier category mapping, spend category consolida-tion and intelligence, supplier or industry analysis capabili-ties, or complete sourcing, which is the baseline for muchmore advanced procurement data analysis and execution.

Historically, most of the ERP software vendors either de-veloped e-Procurement modules, which were developedin the 1990s during the build-out of B2B networks or vir-tual exchanges, or Supplier Relationship Management(SRM) modules, which ties to fully integrated and collab-orative Supply Chain Management. Initially, many of theERP software vendors sought to participate in the muchanticipated B2B market opportunity and aggressively de-veloped e-Procurement capabilities as an extension tocore ERP franchises. Presently, most of the ERP vendorsfocus on the “source to settlement processes,” which in-cludes software modules for Strategic Sourcing, SRM, e-Procurement transaction engines, and even Contract /Catalog Management (see Figure 13). However, missingin the gap analysis is a full suite of Spend Analysis andSupplier Data Enrichment capabilities that combine pro-fessional services with automation, which is the essentialcomponent for client ROI validation before more com-prehensive Spend Management is typically considered.

Spend Management-Data Extract, Cleanse

& Validate

Spend Management-Enterprise-&

Business-Level Analysis

FragmentedTransactional Data

Enterprise Reporting

Detailed, Drill.Down Reporting

ERP

AP/GL

Spread-sheets

P-Card

SupplierReports

SpendAnalysis

OpportunityAssessment

Spend &SupplierAnalysis

Category(Commodity)

Mapping

Figure 12: Fragmentation of ERP End Systems: Analysis along Spend Management Value Chain


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Some of the existing features / functionalities include:

• Strategic Sourcing and e-Sourcing° Consolidated, enterprise-level sourcing° Automated RFx° Real-time, complex auctions (forward or reverse)° Supplier rating systems

• Supplier Relationship Management (SRM)° Supplier selection° Collaborative supplier catalog management° Syndicated catalog content° Supplier performance & scorecards° Supplier portals

• e-Procurement° Automate purchasing and streamline procurement

processes° Purchase orders & requisitions° Order management

° Automated purchasing workflows & eSettlements° e-Commerce & supplier connectivity

• Contract Management° Contract integration & management° Contract compliance

Despite this exceptional opportunity, existing ERP and fi-nancial management systems remain primarily focused onfinancial reporting and less on procurement data analysiscapabilities. This has been one of the major drawbacks ofback-office financial management systems and their limi-tation in appealing to the needs of comprehensive SpendManagement. Another one of their drawbacks has beenthe focus purely on the software / technology platformrather than a more complementary suite of software, serv-ices, and outsourcing offerings. This in part might changeas others have also recognized the need for a wider breadthto their own solution offerings. As many analysts havepointed out, end-users typically require a combination of


SAP

Oracle

Peoplesoft

Microsoft

SSA GlobalTechnologies

Epicor

LawsonSoftware

ROSSSystems

GEAC

QAD

AmericanSoftware

Sourcing to Settlement

Vendor SpendAnalytics

SupplierData

Enrichment

StrategicSourcing/e-Sourcing


ContractManagement

SRM e-Procurement

Figure 13: ERP Players in Spend Management


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software/technology, professional services, or outsourcingrather than the one-size-fits-all approach with technologyautomation. This has put ERP software vendors at a disad-vantage in the marketplace due to the lack of dedicatedprofessional services, domain expertise, business processmethodologies, and outsourcing capabilities. Additionally,noticeably missing in the “source-to-settlement” process isSpend Analysis, which is the impetus behind proving theSpend Management ROI story. This valuable piece of theequation is not often fully satisfied by automation and yetabsolutely critical for end-user success.

Future Developments & Opportunities

The gap that exists between back-office transactional ap-plications and sophisticated enterprise Spend Manage-ment is bridged by a range of solutions that bring mean-ing to supplier and transactional information/data by firstextracting, cleansing, validating, categorizing, and analyz-ing the data, and then implementing new procurementpolicies and change management initiatives to drive costsavings and business efficiencies. Due to the interconnec-tivity with back-office transactional information residing,captured, and stored in back-end systems, SpendManagement represents a logical extension and newgrowth frontier for traditional ERP and back-office finan-cial management system vendors (see Figure 14).

Spend Management provides ERP software franchiseswith an exceptional point of leverage with their corebusiness offerings and existing client relationships. Andyet despite this, there is limited market penetration bymany of the major ERP software vendors creating a com-pelling opportunity for a leader to emerge. Perhaps the

most advanced in this sector are SAP and PeopleSoft(now Oracle) with their software modules. However,many of the ERP vendors lack a full suite of solutions thatis complemented by the hybrid delivery model demandedby end-users.

As previously stated, we believe that Spend Managementis a logical building block for ERP software franchises par-ticularly since this sector directly leverages the existinginvestments made by corporations and organizations inback-office automation. Additionally, due to the very im-pressive ROI resulting from Spend Management deploy-ments, ERP vendors stand a higher probability of fortify-ing their ERP position and capturing incremental marketshare away from competitors. Despite this exceptional op-portunity for ERP leadership in the Spend Managementsector, we do not believe that most of the ERP players arebest suited to build these capabilities internally due to theadvances of best-of-breed Spend Management specialistsand the demand for ‘hybrid’ offerings. As a result, we be-lieve that ERP vendors will soon become active in thissector by acquiring niche needs to expand their SpendManagement product suite across the entire continuum,deepening their core software / technology offerings withdomain-specific professional services and outsourcing,and taking a frontline position with Spend Analysis andSupplier Data Enrichment rather than purely focusing onStrategic Sourcing, SRM, e-Procurement and ContractManagement modules.


ERP

ManufacturingFinancial

ManagementSpend

ManagementHuman

Resources

SpendAnalysis

SupplierData

Enrichment

StrategicSourcing


ContractManagement

SupplierRelation.Mgmt.

e-Procurement

Figure 14: Spend Management – The Next Frontier for ERP & Financial Management Systems

Source: TripleTree. LLC

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COMPELLING JUSTIFICATION FORCOMPREHENSIVE PROCUREMENT BUSINESSESPROCESS OUTSOURCING (BPO)

Procurement BPO is the process in which all or part ofthe procurement process, including Spend Managementactivities, are transferred to a third party. ProcurementBPO might address several components of the SpendManagement process or provide more comprehensive ful-fillment.

The Procurement BPO market is estimated at $6 billioncurrently and projected to double within the next severalyears growing to $12 billion, according to IDC research(see Figure 15). Despite these positive trends, Procure-ment BPO remains a very small component of the totaloutsourcing market (less than 5%), but is expected togrow at a faster rate (more than 24% annually) for the

next five years. The primary motivation for outsourcing,with Procurement BPO being no exception, is to reduce op-erational costs thereby allowing an organization to focus onits core competencies. Outsourcing in general has becomemore prevalent over the past decade as organizations havemade the decision to keep internal those functions that arecore and strategic to the business and contract out functionsthat are considered less strategic. According to a recentAccenture survey of 400 executives from U.S. companies,businesses that outsource have a history of faster growth andhigher profitability than those that do not.

Organizations have been outsourcing services such as IT,transportation / logistics, call centers, manufacturing, HRpayroll & benefits, as well as some finance & accountingactivities for many years with Procurement BPO being abyproduct of one of these other outsourcing activities.However, increasingly many organizations are evaluatingProcurement BPO as a stand alone option rather than a

Figure 15: Worldwide Procurement BPO Market

Source: IDC

$15.0

$12.0

$9.0

$6.0

$3.0

$0.02002 A 2007 E

In B

illi

ons

$12.0

$5.9

Figure 16: Growth in Projected Procurement Outsourcing Usage

Source: Accenture

80%

60%

40%

20%

0%

% ofCompanies

Hosting of e-sourcingapplications

Hosting of e-procurementapplications

Requisitionto Pay

InventoryManagement

StrategicSourcing

18%

Current PSP Services Used Considered Future Use

42%

22%

44%

26%

60%

39%

74% 74%

45%

DECEMBER 2005

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small subset of a different outsourcing arrangement. Assuch, Procurement BPO is on the rise:

• Sub-components of procurement outsourcing arecurrently being utilized. Today, 43% of enterprisescurrently outsource select procurement processes orspend categories, with outsourcing being most preva-lent among larger enterprises with experience in out-sourcing other functions (e.g., IT, manufacturing, HR& payroll). Another 15% of enterprises plan to out-source procurement within the next three years.

• Higher projected future use of Procurement BPO.Procurement BPO is on the rise with some SpendManagement components being strongly consideredfor outsourcing in the future according to Accenture re-search (see Figure 16). As the figure depicts, most ofthe outsourcing activities being considered are infra-structure or transactional-related in comparison toprocess-centric. Additionally our research has found thatmost organizations evaluating procurement outsourcingfirst start with indirect spend categories as it is consideredless strategic than direct spend categories.

To capitalize upon these positive trends, the continuousmarket education of end-users is an absolute necessity. Wedefine this on many fronts from how procurement and orga-nizational processes are evaluated, to evaluating and analyz-ing how internal functions are performing compared to bestpractices, to evaluating and analyzing where internal spend

category expertise and sourcing is lacking. The ultimategoal is to self-educate end-users about the savings opportu-nity through procurement outsourcing. Listed in Figure 17are some of the main challenges and reasons why organiza-tions outsource a portion or all of these procurement func-tions. Organizations often times do not realize their defi-ciencies and lack the level of sophistication to handleprocurement. In today’s ultra-competitive marketplace, itis increasingly difficult to internally build these processesand gain domain expertise. There are numerous benefitsof Procurement BPO, both economically and strategical-ly, and we are just beginning to see this segment gaintraction in the overall outsourcing space. It is thereforebecoming much more commonplace to outsource part or all ofthe procurement functions to Procurement Service Providers(PSPs) that possess more in-depth domain and process expert-ise. Thus, the opportunity exists for Procurement BPO playersto step in and assume Spend Management responsibility.

And yet despite this exceptional opportunity, there remainsno dominant market leader possessing all the necessary in-gredients to help educate the market of the advantagesgained from Procurement BPO, deliver best-in-classdomain expertise with proprietary methodologies and au-tomation, and manage the full-suite of solutions needed.However, through our research, we believe that themarket is changing by focusing on a few key drivers thatwill soon define leadership in this multi-billion dollaroutsourcing segment. These drivers are:

Outs

ourc

ing

Opport

unit

ies

Industry

Challe

nges

• Domain expertise is limited to the most strategic or high dollar

volume spend

• Clear visibility into total spending is elusive with most lacking spend analysis

• Nearly 70% of companies make strategic sourcing decisions at divisional or site levels

• Enterprises have applied strategic sourcing principles to less than 50% of spending

• Few enterprises have standardized sourcing or procurement processes • Nearly a third of purchases are off-contract ("maverick" buys)

• Few companies can manage supplier contracts & relationships

• Less than 20% of spending is channeled through e-procurement

• Price/cost advantages (15 - 25% reductions)

• Spend category & market knowledge; domain expertise

• Standard & proven procurement processes

• Procurement transaction management

• Procurement execution and supplier management

• Best-of-breed sourcing and procurement technologies

• Supplier enablement and catalog management services

• Purchase volume aggregation across multiple clients

• Leveraged operating and technology infrastructure

Figure 17: Industry Challenges & Outsourcing Opportunities

Source: TripleTree, LLC , Aberdeen, IDC

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• Initial Point of BPO Penetration & LeverageGained with ‘Hybrid’ Solutions: One of the neces-sary traits of a PSP is that of a diverse background.End-users expect PSPs to possess a combination ofoutsourcing expertise, project-based service capabili-ties, and access to best-in-class Spend Managementautomation. These end-user demands make it com-pletely necessary for PSP players to have extensivebackgrounds with a diverse set of capabilities.

Additionally, due to the lack of end-user sophistica-tion, we believe that PSPs will need to identify aneasier point of entry rather than attempting to sellcomprehensive BPO to the client at the outset. AsFigure 18 illustrates this begins with end-user educa-tion and immediate delivered savings through Phase Iprofessional services and automation before sub-seg-ment outsourcing of Phase II or selling the compre-hensive, full-suite Procurement BPO of Phase III be-comes permissible. This approach requires a morecomplete solution offering extending far beyond out-sourcing capabilities and is best delivered with a‘hybrid’ offering consisting of category-specific profes-sional services and/or narrowly-focused automation orhosted applications.

Combining professional services expertise with deepdomain and procurement process knowledge along

with advanced software/hosted applications and au-tomation providing procurement analysis affords organ-izations the best opportunity to capitalize on procure-ment efficiencies with PSPs. Unfortunately, there is noeasy answer, since there is no one dominant marketleader possessing all attributes or fully committing toProcurement BPO. We believe more opportunisticgrowth strategies complemented with selective acquisi-tions that combine ‘hybrid’ offerings with outsourcingplayers are likely; particularly, as vendors seek to roundout capability gaps in software / technology, domain-spe-cific professional services and outsourcing.

• Justifying Procurement BPO with the ROI Story:As Procurement BPO activity continues to gain mo-mentum, it is important for PSPs to focus on a quickand easy entry point when proposing procurementBPO projects. Procurement BPO buyers are still inthe very early stages of BPO adoption and the ven-dors that show past success and meaningful ROI willmake the most inroads the fastest. The critical factorfor early adoption of Procurement BPO being howthe ROI story is communicated and delivered. As dis-cussed earlier, many organizations lack any under-standing of its inefficiencies or the benefits to begained from Procurement BPO. The ability of a PSPto deliver an immediate savings and high ROI on aninitial Procurement BPO project is essential for com-

Figure 18: Easing the Point of Entry with Hybrid Solutions


INC

REASED

VALU

E T

HR

OU

GH

DELIV

ER

ED

SER

VIC

ES

PHASED EVOLUTION

PHASE III

PHASE II

PHASE I

Full-ServiceProcurement BPO

Component-basedProcurement BPO






IT/SoftwareAutomation

Upfront ConsultingServices

Market Education &Proven ROI

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municating the longer-term benefits and ROI mes-sage of comprehensive Procurement BPO. Once aPSP has proven their worth, a more comprehensiveBPO attack plan or even possibilities with sharedsavings models can be explored.

We simplify the ROI message on two primary levels:

• Transactional ROI: where immediate dollar-for-dollar savings result from eliminating inefficiencieswith spending and improving sourcing / negotia-tions, complying with supplier contracts, and pre-venting “maverick” spending. Transaction ROIand savings are often identified in category-specificSpend Analysis, Strategic Sourcing, and Comp-liance Management;

• Process ROI: where savings are gained throughbetter efficiencies, workflow processes, streamlin-ing operations, or back-end fulfillment processes.Savings result from improving cycle times, elimi-nating duplicative manual processes, standardizingto enterprise-wide procedures, etc. Process ROIand savings are derived from Contract Manage-ment, SRM and e-procurement.

Consequently, we believe much of the opportunity forinitial BPO success lies in identifying opportunities

that justify and deliver a transactional ROI, since theROI and savings are most imminent and more easilyunderstood by end-users. Procurement BPO will beadopted more slowly than other outsourcing functionsuntil the ROI message becomes fully understood. Atthe outset, Procurement BPO will continue to be asmall part of the overall outsourcing market with themajority of Procurement BPO deals coming on theheals of a much broader outsourcing plan (e.g., IT, HR& payroll, transportation/logistics). Procurement BPOwill gain significant traction once a significant ROI inthe form of cost savings or process improvement is de-livered upon, causing organizations to consider a morecomprehensive Procurement BPO strategy. We will re-visit this topic in the next section of this report.

• The “Self-funding” Mechanism to Bridge the Voidbetween Small-Scale BPO & Comprehensive BPO.The Procurement BPO opportunity is not easily under-stood or readily accepted by end-users. As a result, theselling value proposition of complete outsourcing iseven more challenging. Different approaches withhybrid solutions and the communication of the ROImessage become critically important in the saleprocess. Additionally, we believe that immediate de-livered savings has just as much of an impact and wehave seen numerous instances where the upfront pro-fessional consulting and automation produce signifi-

Figure 19: Competitive & Marketing Opportunity

Source: IDC

...............................................................................

..................................................................................

Opportunity Alignment

Niche Leadership

Crisis Potential Legacy

Hig

h

HighLow

Low

Abi

lity

to

Gai

n S

hare

IBM

ACSCSC

EDSHP

Infosys

CapGemini

Accenture

Wipro

Unisys

▲

▲

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cant savings measured at more than 12 times the ini-tial investment. With savings of this magnitude, theselling value proposition of more comprehensive BPObecomes easier. Interestingly, these savings also pro-vide a “self-funding” mechanism bridging the gap thatexists between internally developed programs, smallsub-segment BPO and comprehensive BPO as depictedby the leverage gained from Phase I, Phase II, andPhase III of Figure 18.

We believe the expansion in scope of BPO deals willfirst take place along sub-segments, before expandingacross all segments, as defined by Phase II. Category-specific outsourcing rather than comprehensive willevolve first, as the most frequently outsourced ex-penses are indirect and non-strategic such as businessservices, travel & printing services, contract labor,IT equipment and office equipment. Broader out-sourcing deals will likely be comprehensive acrossspecific sub-segments of the Spend Managementvalue chain and not across the entire spectrum, untildemonstrated value is attained. For example,Accenture’s BPO deal with Deutsche Bank involvesoutsourcing the procure-to-pay cycle for all procure-ment categories but Deutsche Bank will continue toretain its sourcing and SRM activities in-house.However, the PSPs goal in each instance is to get inquickly, demonstrate a clear cost savings and ROI withprofessional services and smaller BPO, and then scalethe project from there.

Future Developments & Opportunities

The landscape for Procurement BPO providers is highlyfragmented with no one player controlling more than a 10%market share. The Outsourcing / BPO market will continueto be dynamic with players looking to add competencieswhere they are lacking. We believe that this sector will beled by a solutions provider who brings a full suite of offeringson both the technology and professional services side.

Figure 19 is IDC’s depiction of the Procurement BPO land-scape. Companies like IBM and Accenture continue tocomplement their offerings with additional acquisitions orcontractual agreements. In particular, IBM’s acquisition of KeyMRO’s sourcing and procurement capabilities suggeststronger interest in outsourcing and Procurement BPO.

Accenture continues to build market share with newProcurement BPO wins in the educational and financialservice sectors. Additionally, new entrants will likely emergeas traditional Spend Management vendors continue tostrengthen their product and service offerings, eventuallyrecognizing that they have the ideal “bag of goodies” withprofessional services and technology automation to not onlypenetrate but capture meaningful market share in this highgrowth market. The Procurement BPO market will contin-ue to evolve over the upcoming 12 to 36 months as new en-trants will gain market share with their superior technologyand deep rooted sourcing process expertise.

With mounting competitive factors, current participantsand new entrants will need to strengthen core product andservice Spend Management offerings. We believe thatstrategically motivated M&A activity will flourish in thissector as players quickly scramble to fill capabilities gaps andgain domain expertise to strengthen their outsourcing offer-ings and value proposition.


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The Technology - and specifically Spend Management -field is dynamic and growing. As competition heats up,today's leaders could easily find themselves tomorrow'slaggards as new entrants, evolving technology and newapproaches help to change the landscape. New businessmodels, consolidation, increased attention from the pro-fessional investment community - all these and numerousother factors will help shape the field in the monthsahead.

As an investment bank with a considerable amount of ex-perience in Technology, IT Services, and Outsourcing,TripleTree can assist your business to capitalize on thevarious strategic implications we have outlined in thisreport. If we can be helpful to you as you think throughthese and other emerging themes happening within yourorganization, please don't hesitate to call any member ofour team.

Seek Growth Capital And ExpandFor a significant number of market participants, the cur-rent environment represents a terrific opportunity forgrowth. The key is determining whether your organiza-tion has what it takes to expand successfully. Some fac-tors to consider…

• Do you have a strong, experienced management

team?

• Are you delivering a unique and high quality suite of

Spend Management Software and/or Services?

• Do you have a scalable operating model?

• What is the quality of your operations?

• Do you have a leveragable technology platform?

• Have you replicated your model in other locations?

• Where and at what cost can you access growth capital?

Getting objective answers to these and other importantquestions is the key to determining whether to seriouslyevaluate specific growth opportunities in your market. Itis usually advisable to get professional input regarding theanswers to these and other questions before spendingtime and money seeking outside capital.

Consider a Sale In the current environment, some market participantsshould consider a sale. Some firms within the industryhave been self-funded and are still without professionalcapital. Many of these business owners are experiencinghealthy cash flows and sitting on comfortable lifestylebusinesses. Given the increased attention and the on-coming competition, these operators should consider asale in the near term because they may experience a re-duction in growth and profitability which will drasticallyreduce enterprise value.

There are a number of steps that can be taken to maxi-mize the value of Technology, Spend Management and ITServices companies during a sale.

Effective Positioning/Packaging - During the saleprocess, it is critical to position the business effectively,highlighting in a number of ways the key strengths of theorganization.

Effective Process - Getting the right players to the table,including some unexpected strategic acquirers who mighthave an incentive to bid aggressively, ensures a competi-tive process. It is critical to conduct the process on theseller's rather than the buyer's turf and terms.

Correct Timing - Conduct the process when one or morepurchasers have a strong desire to enter the market(s) orto defend an existing position. Carefully evaluate the or-ganization's performance and local market conditions andproceed accordingly.

Stay the CourseOftentimes, TripleTree will advise an emerging companyto stay the course and focus on organic growth.Nonetheless, as an advisor to numerous growth-orientedfirms over the years, we have found that regardless ofwhat strategic alternative is right for your company, allentrepreneurs and business leaders can benefit from anoutsider's perspective. Ongoing dialogue with an advisorthat possesses in-depth industry knowledge and insightcan be a tremendous help as you focus on your goals.


CONCLUSION

WHAT STRATEGIC ALTERNATIVE IS RIGHT FORYOUR BUSINESS?

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“TripleTree’s knowledge and experience in working withsmall cap public companies proved invaluable to assistingSciQuest evaluate and address important decisions relativeto future growth and shareholder value. Combined withtheir industry and transaction expertise, TripleTree’s abilityto execute a process that best positioned the company forthe future, managed the inputs of multiple parties involved,and maximized the return to SciQuest shareholders was aresounding success.”

Stephen WiehePresident and CEOSciQuest, Inc.

COMPANY DESCRIPTION

Founded in 1995, SciQuest, Inc., a publicly-held Raleigh, N.C.-

based company, is an industry leader in on-demand procure-

ment solutions that integrate organizations with their suppliers

to enable comprehensive spend management for the life sci-

ences and higher education markets. Many of the world’s lead-

ing pharmaceutical, biotechnology, and academic organizations

rely on SciQuest solutions such as Biogen Idec,

GlaxoSmithKline, Pfizer, Roche, Schering-Plough, Arizona

State University, Indiana University, University of Michigan,

and the University of Pennsylvania.

OBJECTIVES

SciQuest’s board initiated a process to evaluate capital alterna-

tives, engaging TripleTree to develop and execute a formal

strategy that would maximize shareholder value and position

the company to expand its leadership position in the supplier

relationship management (SRM) market.

RESULT

TripleTree’s approach to assisting small and micro-cap public com-

panies in developing a future growth and capital strategy leverage

multiple perspectives: deep financial experience, hands-on oper-

ating backgrounds, executive leadership under diverse ownership

structures, and leading industry expertise. Given SciQuest’s

robust on-demand solutions model and strong early sales momen-

tum, TripleTree believed both equity funds and strategic firms

would see tremendous value in an acquisiton that in turn would

maximize the risk/reward potential for SciQuest’s shareholders.

In gaining acceptance from the board, TripleTree worked with

SciQuest management and the board’s acquisition subcommit-

tee to execute a sale process that addressed a number of key

components:

• Draw attention to SciQuest’s rapid customer adoption via

its on-demand model, capturing growing market interest for

hosted software solutions;

• Engage a select group of both strategic and financial buyers

– clearly defining the unique value proposition inherent to

both sets of prospects;

• Articulate the future growth opportunities within the

Supplier Relationship (SRM) market and the ability to

leverage SciQuest as a platform for expansion;

• Conduct an intense and rapid solicitation process within a

two month timeframe; and

• Address the unique benefits of SciQuest’s solutions in the

SRM market relative to much larger enterprise providers.

In a competitive process that yielded interest from name brand

public companies, venture backed private firms, and public equity

funds, TripleTree successfully negotiated the sale of SciQuest to

Trinity Ventures, a $1 billion private equity firm out of Palo Alto,

California, that invests in early stage and growth technology com-

panies. Additional capital was contributed by two additional

funds: Intersouth Partners and River Cities Capital Funds. The

transaction consisted of a final sale price of $25.25 million in a

cash merger, translating to a per share premium of 55% over the

closing per share price at the time of announcing the initial sign-

ing of the definitive agreement. For Trinity and its co-investors,

SciQuest becomes a strong growth platform whose early success

can be further accelerated under private ownership and the sup-

port of additional capital resources for expansion. For SciQuest,

100% of its attention can now be focused on servicing its clients

and building the company under the support of an engaged and

experienced ownership group. The result: a win/win for

SciQuest’s employees, shareholders, and new owners.


CASE STUDY: PUBLIC TO PRIVATE SALE

was acquired byCUSTOMIZED INVESTMENT BANKING

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The TeamTripleTree today has 20+ professionals with back-grounds as business builders, operators of publicand private firms, lawyers, accountants, bankersand investors. Within IT/Spend Management, wehave a team with significant transaction and oper-ating experience exceeding 75 years. Our team hascompleted dozens of technology transactions andwe have helped our clients create hundreds of mil-lions of dollars of value for their owners.

Kevin Green, Managing Partner. As ManagingPartner, Kevin advises companies on maximizingthe value of their firm by leveraging 25 plus yearsof operational, M&A and capital raising experi-ence. His broad industry background and relation-ships, extensive transactional experience, andhands-on operating experience bring unique per-spectives to each client engagement. Prior to co-founding TripleTree, Kevin held several senior ex-ecutive roles at private and public companieswithin the healthcare and technology industries.He served as CEO of both Summit Medical andIntegrated Medical Systems (IMS). During histenure, IMS grew from a start-up company to ahigh growth business that was sold to Eli Lilly.Previously, he served as an executive at Cycare,which grew from a private firm to a NYSE companyand was later sold to McKesson. Kevin started hiscareer at Westinghouse.

Dave Henderson, Managing Partner. Dave found-ed TripleTree with the vision of providing industryleading financial advisory services based on senior-level, hands-on involvement. He has assisted nu-merous business owners and executive teams inplanning and executing successful transactionstrategies to create and maximize the value of theirfirm. Dave brings a well-rounded perspective to in-vestment banking. Prior to forming TripleTree,Dave spent 22 years in venture capital, business de-velopment and as a senior operating executive,

combined with seven years of public accounting ex-perience at Arthur Andersen. His operating experi-ence includes serving as CEO of a $400 millionasset bank holding company and COO of RepublicTelcom Corporation. He has served on the Board ofDirectors of numerous public and private compa-nies as a venture investor, working closely withCEOs to develop and implement successful businessand financing strategies.

Brian Klemenhagen, Senior Principal. Brianjoined TripleTree in 1999 and was promoted toSenior Principal in 2003. Brian has over eight yearscombined investment banking and Wall Street re-search experience as the engagement manager onmerger and acquisition, private placement, andstrategic advisory engagements across a number oftechnology and communication sectors. Throughboth transaction activity and industry research,Brian has developed in-depth expertise in the soft-ware, IT services, and mobile/wireless industries in-cluding such domains as enterprise content man-agement (ECM), business intelligence, applicationhosting, mobile data applications, and systems soft-ware and security. Prior to joining TripleTree, Brianwas an Associate at RBC Dain Rauscher Wessels,focusing on medical devices and wireless communi-cation. He was directly involved in publishingbuy/sell research and investment recommendationsfor over 20 companies and was active in the IPOprocess for several emerging private companies.Previous experience also includes financial lendingand wealth management and investments atAmerican Commercial Bank, Craig Hallum, andSalomon Smith Barney.

Chris Hoffmann, Senior Principal/ResearchDirector. Chris joined TripleTree in August 2005.Chris has over 17 years of experience as an operat-ing executive, consultant and analyst in the tech-nology industry. He is leveraging this experienceat TripleTree in his role as Research Director aswell as assisting on transaction activity in the areasof software and technology services. Chris joinsthe firm from Tier1 Research, where he was presi-


APPENDIX

TRIPLETREE’S TECHNOLOGY TEAM

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dent and lead analyst for the enterprise softwaresector. At Tier1, Chris architected the growth ofthe firm toward a successful acquisition in June2005 by The 451 Group. Prior to Tier1 Research,Chris held executive positions at Zamba Solutions,Gartner, GE Capital Consulting, IBM GlobalServices and a consulting firm which he founded.He has worked with the world's leading technologyfirms including IBM, Microsoft, Accenture, EDSand HP; has been quoted in numerous trade and in-dustry publications including the Wall StreetJournal, the New York Times and Investors BusinessDaily; and is a frequent presenter at industryevents.

Kevin Jakuc, Associate. Kevin joined TripleTreein November 2004 as an Associate focused in theTechnology sector. Kevin assists in TripleTree'smerger & acquisition, private placement, growthcapital and strategic advisory engagements in thesoftware, IT services, and the mobile/wireless in-dustry space. Prior to joining TripleTree, Kevinworked for two privately held companies in bothsales / marketing and management positions withresponsibility for global strategic planning and newproduct development initiatives. Collectively, hebrings to TripleTree nearly ten years of professionaland industry experience as well as international ex-posure in both the Asia-Pacific and European re-gions.

Erik Latterell, Analyst. Erik assists TripleTree'sinvestment banking services by providing industryand company research as well as financial analysisin support of the company's engagements. He isspecifically responsible for analyzing and tracingindustry trends within software and IT services.

Erik has held several internships with firms such asMoss & Barnett, ActiFi, Inc., and Merrill Lynch.


CUSTOMIZED INVESTMENT BANKING

ABOUT TRIPLETREE

TripleTree is a leading investment banking firm dedicated to meeting the needs of technology,

healthcare, and business services companies. Specializing in M&A, private placements and fi-

nancial advisory services, the firm represents growth-oriented companies in pursuing strategic

alternatives that drive premium valuations. Unlike most investment banking firms, TripleTree

brings a unique approach to advisory services through the leverage of experienced executives,

strict industry focus, and extensive commitment to research. Such a commitment has allowed us

to build an investment bank focused on identifying and delivering strategic solutions that

enable shareholders and business executives to maximize the value of their firm in a dynamic

and rapidly changing marketplace.

For further information, visit our website at: http://www.triple-tree.com

Copyright (C) 2005 by TripleTree, LLC

MINNEAPOLIS

T 952-253-5300

F 952-253-5301

7601 France Avenue South

Suite 150

Minneapolis, Minnesota 55435

SAN DIEGO

T 858-792-3406

F 858-792-3407

12526 High Bluff Drive

Suite 300

San Diego, California 92130

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