A little more than a decade ago when I joined Gartner and started out as an analyst, there were basically a handful of vendors that mattered and another handful that you had to keep an eye on (a slight exaggeration, but you get my point). And these vendors were fairly easy to classify — you had e-sourcing, CLM, spend analytics, e-procurement, and a few other types of solutions.
Fast forward to 2023 where much has changed. There are now several hundred solution providers under nearly as many categories. Procurement had been so drastically underserved by supporting software that it caught the eye of not only ambitious entrepreneurs but, perhaps most importantly, investors. Inspired, at least in part, by Coupa’s meteoric rise (and Scout RFP’s equally impressive fast entrance and big exit), money poured into the space. But that trend took a turn when inflation and interest rates started to increase and suddenly profitability became more important than growth (while the inverse had been true for the last 10 years or so).
So even as the procurement tech market keeps growing (and it will based upon Ardent Partners research), a tighter investment market with lower valuations generally indicates that not all of today’s providers will make it. So what does this mean?
Buyer Scenario and Context Insight
Well, in my opinion, it means different things depending on who you are and your context, or as we analysts love to say: “it depends!” Let’s look at a few scenarios.
Critical due diligence. If you are an end-user investing in core procurement technology with significant integrations and/or a large number of users that need training, you have to be more careful than ever with your financial due diligence. If the vendor you pick isn’t profitable, it at least needs a realistic path to profitability before it runs out of cash. Pretty obvious. If you invest heavily in deploying a solution, you need to make sure that solution is available long term (or at least for as long as it takes to deliver on the business case). Because you have made a business case, right?.
You would be surprised how little effort many put into the financial due diligence of critical software providers. For a long time, solution providers have been able to get the necessary funding, and that’s not the case anymore. Make sure the vendor has a path to profitability without additional investments. You also need to be more careful than ever with buying solutions based on roadmap items. The risk of a vendor going out of business, or being acquired by someone with a different agenda, or having to cut down on development resources, before being able to deliver is higher than ever.
Solution differentiation and scalability. But that doesn’t mean that you should avoid startups. After all, that’s where most of the exciting innovation and potential competitive advantages are created. Yes, the risk is greater but there is some really cool innovation out there and funding is still available for the truly innovative solution providers. Here, it becomes more important than ever to look for clear differentiation (is this vendor really doing something new?) and value add (is what this vendor is offering really going to solve our business problem?).
Make sure you see through the smoke and mirrors and really understand what the solution actually can do and how it works. The latter part might not matter as much from a user perspective as long as the solution delivers what’s promised. But if it’s not doing so in a scalable way, the path to profitability and/or further investments is less likely.
Strike a balance between vendor capabilities and growth. Another question to ponder is how are these vendors going to grow. Almost all vendors have branched out quickly to cover more procurement needs, nearly always at the urging of customers and at the expense of the original solution. There is a difficult balance to strike between depth and breadth of capabilities. Few vendors are able to resist customer pressure to expand into adjacent areas until they are truly able to do so.
So What About the Solution Provider/Vendor Side?
Well, it’s about being able to respond to the questions above. Are you already profitable? Great, leverage that. What if you’re not? Make sure you have a realistic plan how to get there and the story to go with it. Be clear about what you do. Surprisingly, many vendor websites are extremely vague about what the solution actually does. There are claims about streamlining this and that, end-to-end automation, or AI-powered platforms, but no real specifics on exactly what or how it’s being done. And in the more established markets, there’s often a clear lack of differentiation. I remember asking the participants in one of the MQ’s I led at Gartner to name their top three differentiators. 12 out of 15 answered superior UI/UX and customer experience …
To sum it up, if you are a buyer:
- Brush up on those financial due diligence skills.
- Be aware, and plan for, higher risks with start ups and non-profitable vendors.
- Look for clear differentiation and solutions to real business problems.
- Understand how the solution works. Don’t accept vague statements around AI (it’s just as often rules-driven logic, which is fine as long as it does what it’s supposed to) or other technical terms.
If you are a solution provider:
- If you aren’t profitable, make sure you have a realistic plan to reach profitability, ideally with existing funding; but if funding is required, make sure to reset expectations based upon current market dynamics.
- Be clear on what you offer, what business problems you solve, and how you do it.
If you are struggling with any of these questions (both buyers and solution providers), we are more than happy to help.
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