Written by 1:46 pm analytics, Network of Networks, New technologies, Procurement

Market Beat. Four Thumbs Down and One Thumb Up.

Today, supply chain excellence matters more than ever. During the pandemic, the supply chain discussions take new importance. Sniffing opportunity, the venture capitalists are like sharks in the water. While the supply chain technology market lost its allure at the start of the last decade, it is now cool again.

I forecast that this interest will grow and the market is going to become more confusing. Why? The supply chain matters more than ever and in the market, we have many thought leaders and opportunists. Unraveling the market happenings to understand the difference between hype and value is tougher.

Reflection

Globally ten percent of jobs are in manufacturing, while 37% are associated with supply chain management. The supply chain career is new. The discipline, first defined in 1982, includes source, make, deliver, and planning functions. Since 1995, the number of supply chain positions quadrupled. Evolution is messy.

Challenges abound. Note the lack of training on next-generation supply chain thinking in Figure 1. As an industry, we struggle to embrace new ways of thinking. Leaders are starting to experiment with new technology approaches giving rise to new spending and interest by Venture Capitalists. This is true even though we are not clear on the definition of next-generation processes.

Figure 1. Top Three Challenges for Supply Chain Employees

Over the last decade, consultants and analysts pushed a vision of ERP as the backbone of supply chain management that has not delivered on the goods. The harsh reality is that efficient transactions in functional silos do not provide the most effective organizations or better balance sheet results. As companies wrestle with pandemic results, they must face the reality that a new form of decision support is required to sense market shifts in markets and make decisions at the speed of business.

The question is, “How?” Companies know they have a problem with adopting new technologies, but they do not have clear answers on what to do next.

Business leaders wrap the discussions in pretty platitudes like end-to-end supply chain management, control towers, and customer-centric supply chains, but most are hollow words without clear definitions. As a result, organizations struggle with how to move forward. Millennials are growing in numbers in the supply chain. They are impatient that they know more about pizza’s status for lunch before their zoom meeting than the inbound shipment status for their critical manufacturing run. Job satisfaction wanes as the days filled with an endless cycle of meetings, with many not useful.

The Market Response

The supply chain technology market is responding. There is an active battle to define next-generation processes. Until there are clear answers, business leaders should avoid buying software from companies with deep investments by venture capitalists. They are just too risky.

In this blog, I share my thoughts on recent announcements. Simply put, I have four thumbs down ratings and one thumbs-up evaluation.

Thumbs Down Rating

A thumbs down rating means that business leaders should head caution. As a part of this due diligence, I interviewed the Company, participated in briefings, and talked to references and employees to write this article.

Palantir IPO. On September 30, the big data company Palantir went public in an initial 22B$ market valuation. I am frequently asked, “Can a big data data science company help to alleviate the current market pain in the supply chain?” My answer is no. Data science is only useful when companies are clear on the question to ask. Teams struggle to understand the power of unstructured data and are unclear on formatting the right questions. Likewise, data scientists are long on the understanding of software approaches but short on understanding the business.

Figure 2. Talent Demand

With the shortage of data scientists as shown in Figure 3, you might think that the Palantir approach offers promise. You might wonder why I am thumbs down. The Palantir approach of generalized data science is ok for project augmentation, but it does not bode well for long-term success. The reason? The method is not systemic and the data scientists lack an understanding of supply chain management. One of my favorite supply chain leaders has a stack of Palantir reports in black binders on his desk. The stack is formidable, but the insights are lacking. His struggle is how to make data discovery, mining, and wrangling into day-to-day processes. His answer is not Palantir. My take? The Palantir approach is not a good fit for the supply chain management market.

Kinaxis Purchase of Rubikloud. The purchase of Rubikloud by Kinaxis shows just how little the Kinaxis team knows about demand management. Kinaxis, with 2019 revenues of $191.5M, is flush with cash and slow to invest. The Rubikloud acquisition was a $60M cash purchase.

Rubikloud, with advanced analytics for trade promotions, price, and assortment, positions new solution techniques with artificial intelligence for traditional data model constructs for modeling. Traditional demand shaping technologies are inside-out focused on order patterns and do not drive baseline insights across demand management. Newer and more promising approaches are outside-in using market data to redefine demand management.  Rubikloud is an inside-out technology with a focus on retail.

Before the acquisition, Rubikloud was a private company with $39M in venture financing from Horizons Ventures, Intel Capital, Salesforce Ventures, and Inovia. The winner of this deal is the venture capitalists that backed Rubikloud. The solution demos are weak, and the leadership vision is lacking. I believe that Kinaxis can do better. My advice for Kinaxis clients is to watch from the sidelines. Kinaxis has a lot of work to do here. Don’t fall for the initial hype.

E2open Moves for an IPO. In 2015, after a failed IPO, Insight Venture Partners (Insight) acquired E2open for $273M. In an effort for Insight to turn their cash, E2open LLC will go public by merging with a blank-check company, a Special Purpose Acquisition Company (SPAC), CC Neuberger Principal Holdings I. At the close of the transaction, the combined entity’s enterprise value estimate is $2.6B, including $500 million of net debt. The Company’s revenue forecast for February 2020 is $335M.

For comparison, JDA had $2B in debt with a minority investment by Blackstone Partners in 2016. JDA posted revenues of SAS recurring revenues of $222M in 2019. The press release is silent on total revenues, but 2018 total revenues were 1B$. Debt-laden JDA struggled to capitalize on its assets, and while revenue grew through acquisition, innovation stalled.

I give the current CEO Michael Farkelas, credit for balancing the E2open P&L and returning the Company to profitability in 2016, but I disagree with his acquisition strategy. Let me explain. E2open grew revenues through a series of acquisitions that I liken to a closet of misfit toys.  Purchases include ICON-SCM in 2013; SERUS Corporation in 2014; Orchestro and Terra Technology in 2016; Steelwedge and Zyme in 2017; Inttra, Cloud Logistics, Entomo and Birch Worldwide in 2018; and Amber Road in 2019. While E2open touts an end-to-end vision, the assets align around logistics flows and are not aligned at an industry or solution level to deliver on an industry-specific end-to-end value proposition.

Following the transaction, E2open will hold a minority position of 38% of the Company. My worry is that a minority investment gives the current leadership team less say in the direction. The combined entity listing is E2open on the New York Stock Exchange, and the trade is ETWO.

My recommendation for business users is to stabilize their E2open assets at a portfolio level and not invest in future solutions. The reason? Be wary. The current leadership team has less say. The Company has a portfolio of undervalued assets churned through many financial transactions that do not align to deliver value. The E2open Harmony platform needs work.

The number of acquisitions is a focus issue, and the new transaction brings a new board with little supply chain experience. This market move lines the pockets of financial institutions and leaves business leaders at the back of the line. My belief? Supply chain leaders lose with this transaction.

A SPAC transaction is a way for venture capitalists to turn their capital in the financial market. Expect for E2open to cut costs and streamline investments as they meet the SPAC commitments.

Elemica Purchase by Eurazeo. In August, a Paris investment company acquired Elemica from Thoma Bravo. Founded in 2000 by a group Global Process Industries, Elemica is a Supply Chain Operating Network enabling business-to-business commerce primarily in the chemical and rubber industries.

Elemica was acquired by Thoma Bravo, a leading private equity investment firm, in 2016. Eurazeo Capital will acquire full ownership of Elemica with an investment of approximately $250 million (equity invested by Eurazeo and its affiliates).

Thoma Bravo has a history of buying Business-to-Business networks, stripping out overhead, and reducing innovation. Eurazeo is buying a weakened asset, and interviews with the leadership team demonstrate little understanding of the supply chain market. Investors in Elemica should proceed cautiously, and prospects should look at other options–perhaps exploring options with GT Nexus, an Infor company, or Coupa now entering the B2B Direct Material market.

Thumbs Up

I have one thumbs-up in this market:

Llamasoft now a Coupa Business. This week, Llamasoft, a network design, and optimization technology provider became a Coupa business. The purchase was $1.5B: a healthy multiple of 15 times revenue. The goal is to build a direct material software offering.

When I got the press release, I scratched my head. I like Llamasoft’s culture and reject the notion that the solutions are complimentary. Time-and-time again, I see companies buying assets resulting in the turnover of talent and product roadmaps discontinuity. The press release touted that Coupa and Llamasoft would work together to create a solution to manage direct materials. For me, this promise did not hold water. I liken it to ordering a peanut butter sandwich without the peanut butter. Yes, there were some useful assets in both companies, but one plus one did not equal two. My overarching question centered on the vision and definition of a direct material solution.

Then I talked with Rob, the Coupa CEO. Coupa is well funded and performed well in the indirect procurement software market. Client and employee satisfaction is high. Leadership is well-defined, and the organization is stable. The leaders are controlling their destiny unencumbered by debt. I have been trying hard for a decade to get someone to take the direct material market seriously; perhaps this is the time for two partners with great developers to tackle an essential white space.

Success will be driven by Coupa’s move from the traditional definition of spend management to drive value creation. There is tension within organizations: the move from procurement as a self-serving function to enabling effective trading partner flows. Over the last two decades, the automation of procurement has made it very efficient but delivered a largely ineffective set of processes that are a barrier to trade. Technology innovation in indirect procurement is not relevant to direct.

My question for Coupa is do they have the courage to redefine the market? It is my hope that they do and I am encouraged by the initial discussions. It is also my hope that all of the thought leaders of the space recognize the quagmire from traditional approaches. With this acquisition, the value is not as simple as one plus one equals two. The assets do not naturally align. Indirect purchasing is not a fit for direct material processes. Neither Company has direct material capabilities, but they have the bookend requirements. For Coupa this is contract management, spend analysis, and material requirements. For Llamasoft it is sourcing rationalization and risk management network design. Each has very smart people that can redefine the space if they are not limited by traditional thinking. The market has not defined direct material applications in a meaningful way.

I am thumbs up because of the potential and belief in the people. With that said, current Llamasoft customers need to actively work with the Llamasoft team to drive product developments and continue supporting network design capabilities. My concern? I worry that Llamasoft could get so fascinated by the new market opportunity that the Company misses the market’s support that they defined and became a market leader for serving so well.

Recommendations for Business Users

The software market is moving through gyrations. Traditional technologies are consolidating and moving through multiple financial investment options, while software leaders are stepping out to redefine the market. Through this period, the business buyer needs to maximize the value of their current deployments while avoiding the purchase of technologies with large venture capital underpinning.

The shifts in technology capabilities and the promise of the art of the possible ups the ante. As a result, throw the concepts of IT standardization out the window. Welcome new application frameworks and build a guiding coalition for outside-in processes that make the current concepts of CRM, SRM, and APS obsolete.

I welcome your thoughts. What do you see in the market?

Source Data: The Supply Chain Economy and the Future of Good Jobs in America, Mercedes Delgado and  Karen Mills, March 9, 2018, https://hbr.org/2018/03/the-supply-chain-economy-and-the-future-of-good-jobs-in-America.

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