Instant Analysis: SciQuest Sees “Upside” in Contract Lifecycle Management (II)

Posted by Andrew Bartolini on July 27th, 2012
Stored in Articles, General, Procure-to-Pay, Solution Providers, Strategic Sourcing, Strategy, Technology

Yesterday, in Part One of this story, we provided some background and then outlined the news from SciQuest (Ticker: SQI) that it had reached a definitive agreement to acquire Contract Lifecycle Management provider, Upside Software Inc. (“Upside”), for $22 million. Today, we continue with an “instant analysis” of the deal.

 Instant Analysis

  • The Upside acquisition plugs a key gap in the SciQuest solution footprint and brings one of the top independent CLM specialists (from a size and product capability standpoint) into its fold. The market continues to move towards suites and away from point solutions; this deal builds upon that market trend.
  • Although not stated explicitly, SciQuest’s CFO gave indications that Upside was not growing fast – this is also explained by an acquisition revenue multiple that is, by our estimate, slightly more than 1.5x but surely less than 2x.
  • Upside generates 55% of its revenue from license and maintenance sales; 45% of Upside’s revenues are generated by its services team (implementations, upgrades, and support).
  • Offering a blend of technology and services can be very valuable to customers particularly in areas that offer complexity and nuance like strategic sourcing and contracts. Nonetheless, given Ariba’s valuation in its recent agreement to sell itself to SAP, which was driven in part by the divestiture of its strategic sourcing services team, it is a little surprising that a Cloud-based company like SciQuest would make a sizable investment in services.
  • SciQuest is excited by the cross-sell opportunities which are common in technology acquisitions of this nature. On this point:
    • There is limited customer crossover – a handful of companies use both Upside and SciQuest
    • SciQuest believes its install base has seen pretty limited adoption of CLM solutions
    • Upside’s corporate clientele (and, I would assume, its prospect/newsletter database) may provide SciQuest with a decent entry point into the corporate market; This is something that SciQuest has been planning to pursue for some time (SciQuest’s current customers are largely higher education and research institutions).
  • SciQuest says it plans to continue Upside’s pursuit of standalone deals including non-procurement contract deals like sales and IP contracts. If the non-procurement contracts business continues to account for only 10% – 15% of the go-forward CLM business, I would expect SciQuest to revisit its commitment to develop, market and sell those product lines/capabilities. That said, there’s no reason to think that SciQuest would discontinue support of any current Upside solution.
  • While buying Upside has a good upside, SciQuest has some work ahead of it to ensure that the post-merger integration of the Upside “assets” – its people, its products, its customers, and its IP – is seamless. Specifically:
    • Upside’s solutions are predominantly installed software while SciQuest’s are Cloud-based. Beyond the time and effort needed to develop standard integrations to its eSourcing Module (the former AECSoft solution) and its P2P solutions which could be significant, it may take considerable time and effort to also re-architect Upside’s enterprise-level, installed CLM offering and bring it it onto the SciQuest platform.
    • Upside is headquartered in a different country (Edmonton, Canada) and two time zones west of the SciQuest corporate HQ in North Carolina. This could pose some logistical issues in on-boarding and retaining Upside’s 150 employees [Sidebar: The sampling of Upside employees that I have met and interacted with over the years have generally lacked the purpose or evangelical zeal that is often found among employees working for upstart technology companies].
    • Upside’s client base includes many recognizable companies, many of whom are in the Fortune 500. How well these companies adopt SciQuest’s other solutions will play a big role in determining the overall success of this deal.
    • SciQuest’s success as a long-standing provider of Cloud-based solutions with good growth prospects was the key reason that it was able to go public back in 2010. How the financial markets react to the new, non-Cloud revenue streams will be worth watching.
  • With this acquisition, SciQuest stays true to its word that its growth strategy would be built around enhancing its Accounts Payable, Contract Lifecycle Management and Spend Analysis. Earlier this year, SciQuest launched an upgraded ePayables solution, now it is acquiring a CLM solution. With a decent amount of cash remaining in its coffers, watch for SciQuest to do something in the Spend Analysis space in the next six months.

Andrew Bartolini is the Chief Research Officer at Ardent Partners, an industry analyst firm focused on supply management (i.e. sourcing, procurement, accounts payable).

Disclosures: SciQuest is a client of Ardent Partners. The author holds no financial investments in any company mentioned in this article.

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