Shares of expense management vendor Concur Technologies remain six percent up on where they stood at the beginning of the week (but well off their after-hours spike high) after a rumor emerged late on Tuesday that it is in talks to be bought by SAP.
It may only be scuttlebutt — I certainly have no direct knowledge either way — but whatever is really going on, it struck me there are several reasons why this could be a logical step for both companies.
Spend management is SAP's to own
The idea of putting Concur together with some of SAP's other acquisitions instantly brought to mind a mapping of enterprise applications in the cloud era that I first aired last year. I've since updated this a few times, including earlier this year when considering the cloudy future of enterprise applications, but the current, slightly more detailed version, is below.
Think of this as an overview of the core enterprise application stacks in the emerging digital era. Although the diagram is flat, imagine it more like a carousel or a lampshade, curling around so the two ends meet each other round the back, with integration and analytics running like internal connectors between all of them.
I was recently puzzling over who the leaders are in each of these sectors. It's pretty clear that Salesforce.com is dominant in the marketing sales and service segment. Collaboration, social and docs is a battleground between Microsoft and Google plus Box and a few others — more on that in another piece I'm working on.
Several leaders stand out in the other segments but not in resources and spending. There are a few names that come to mind including Coupa and SAP subsidiary Ariba, but it is the segment that seems most fragmented, especially when you consider the wide range of applications it embraces:
Spend management, crowdsourcing, asset tracking, contract management, marketplaces, etc
In a flash I realized that if SAP were to put Concur together with its existing acquisitions of Ariba in supply chain management and Fieldglass in contingent labor management then it would instantly have a huge footprint in this segment. That's when I started to muse intently about the logic of SAP buying Concur.
SAP could do with a cloud boost
As we saw when SAP reported its last quarter's results, most of SAP's growth is coming from its cloud business — now worth just over $1 billion annually — and 95 percent of that is coming from two acquisitions, Successfactors and Ariba. Concur would add another $700 million dollars annually, growing at a solid 28 percent. That's not shabby at all.
Although there's some overlap with products SAP already has, it's not extensive enough to matter. Mostly Concur would add new functionality — and a useful global customer base of some 20,000 businesses.
Now add in a line of thinking that is totally off-the-wall speculation on my part, but intriguing nonetheless. Despite retaining some strong talent from its cloud acquisitions (and recruiting others) SAP has not held on to the original leaders of those acquired companies. I'd argue that it still badly needs some more battle-hardened cloud champions on its team that can fight their corner persuasively.
One of the unique facets of the leadership team at Concur is its experience not only of running a publicly quoted cloud company but also of making the transition, while a public company, as a traditional licensed software vendor to the cloud model. It just happens that Ariba is one of the few other companies to have attempted this and succeeded, but Concur was pretty much the first.
I don't believe large companies can make the conversion. Forget their genetic code. How many will take the pain? Companies won't reinvent themselves. Think of taking a $40 billion company to on-demand. The value of the business will go through huge negative change. It will get crushed. Cash flow will get crushed. You have to layoff. The transition is really hard and it's very sudden. If you're north of $100 million it's hard. Over $1 billion it's impossible.
Today, of course, large companies are coming round to the inevitability of that course and we see some of the difficulties beginning to emerge as SAP makes that transition. Having survived with the scars of Concur's earlier experience, Singh and colleagues (including his brother Rajeev, who is COO) could perhaps make an invaluable contribution to SAP's cultural readiness to face its own cloud destiny. Unless, that is, they have other plans after selling up.
Concur could use a boost, too
Although a lot of people know of Concur because they use it at work to file expenses or to book and track travel through its TripIt app (acquired in 2011) the company has never had the profile of other SaaS leaders. Yet with $700 million in annual revenue projected for its current fiscal year, it ought to get more attention.
In part the lack of profile is a deliberate choice by Singh and his colleagues to avoid the limelight of Silicon Valley, focusing instead on getting noticed in their specialist niche of travel management. Being headquartered in Seattle rather than San Francisco may also have something to do with it. Finally there's the consideration that the 20-year-old company's hot IPO was back in 1998, before it made the switch to SaaS.
Like several publicly listed SaaS vendors of that vintage — WebEx before its acquisition by Cisco comes to mind — Concur chose to post modest profits rather than chase after breakneck growth. Look back to 2008, when I picked Concur as one of The four horsemen of SaaS, and it was already posting annual revenues of just over $200 million, compared to $1 billion for SaaS leader Salesforce.com. Six years later, Salesforce.com has grown fivefold while Concur is something over three times bigger.
It's only in the past couple of years that Concur has switched gears and chosen to post losses while pushing down on the gas pedal, nudging its annual growth rate up into the 28 percent range. It's followed the Salesforce.com playbook in other ways, too, building out a platform play and a partner ecosystem while balancing its appeal across the spectrum from large enterprises to small businesses. Where its approach is distinctive is in its use of partnerships with big names including American Express, ADP and more recently IBM to reach new customers.
Concur is not short of cash — it has about $800 million on its balance sheet in cash and equivalents — but its ability to expand is constrained by its public status and the need to convince investors that it's on the right path. Becoming part of a much larger enterprise that wants to see rapid expansion in its cloud business would give a company like Concur access to more capital for expansion — and freedom to spend it — than it has at present.
Concur's management may also be keeping a watchful eye on the wider economy, because travel spend is highly sensitive to fluctuations in the business cycle. After two years of creating a platform for expansion while benefitting from a rising economy, this may be one of those times when it would be smart to sell while all those effects are still priced in.
Disclosure: SAP and salesforce.com are diginomica premier partners and Coupa is a partner. Salesforce.com is currently a consulting client of the author.
Image credits: Passport © mizar_21984 - Fotolia.com; diagram by @philww