As the saying goes, “When America sneezes, the rest of the world catches a cold.” This quote used to be true of global economies. But, all it took was a Coronavirus disease (COVID-19) outbreak in China to prove that supply chains have become so dependent and intertwined, that when a region suddenly shuts down, it affects many industries, sectors, and ultimately, consumers.
Companies along the chain face various challenges, and it’s all fair game—better prepared, better equipped firms come out better off, while others may not survive a supply chain chock.
The market for supply chain management (SCM) solutions has picked up significantly. Enterprise adoption of SCM platforms has undergone significant disruption over the past decade, as core systems shift to the cloud. In fact, a Research and Markets analysis estimates the total addressable market for all SCM solutions to reach $22.7 billion by 2022.
Industry participants expect software-as-a-service (SaaS) and integrated cloud SCM solutions to play an increasing role. System integrators (SIs) can play a critical part by delivering services that help migrate large on-site data repositories to hybrid infrastructure, deliver automation of manual/paper-based tasks in the form of platform-as-a-service (PaaS) offerings and improve the client user experience and data quality.
Meanwhile, digital and data-driven technologies have significantly shaped changes in the SCM sector where SCM services firms and SIs rely on these to support their clients. Enterprises seek to use advanced technologies to support complex problems across the value chain. About four out of five supply chain executives view artificial intelligence (AI) and machine learning (ML) as most impactful technologies and about three out of four continue to invest in traceability and visibility with AI technologies.
Supply chain operations will continue to expand in scope and sophistication, which pressures advisory firms and SCM solutions to help increasingly complex clients with increasingly complex supply chain issues. The capture and analysis of data generated along the value chain remain critical components of SCM process design and management.
Public markets reward those firms with the ability to deliver data-driven SI services and drive adoption of technology-enabled supply chain management. The industry can expect these firms to become increasingly important to large enterprise customers. For instance, analysis shows that these firms have increased EBITDA multiples 18.5% on average over their legacy counterparts. Buyers have also noticed. Valuations for supply chain systems integrators outperformed those of traditional supply chain service firms.
Three indices of public companies in the SCM space behave quite differently, whether looking at consulting/digital transformation firms, software firms or logistic firms. The first two outperformed the S&P 500 in 2019 by 20% and 9%, respectively, while the logistic firms index grew only 5% (underperforming the S&P 500 by 24%).
According to another survey, 64% of supply chain executives consider big data analytics to be a disruptive technology within their space. However, only 17% of these executives report having already implemented analytics in one or more supply chain functions. The implication here is that the necessary foundation for supply chain analytics is still in its early stages of development at many companies.
SCM service and SIs stand to capture market share by addressing the future needs of their clientele while remaining adaptive to market conditions. However, they need take the lead along a number of initiatives: AI initiatives (by 2021, three out of five factory-level AI initiatives by large corporate clients will stall due to inadequate skill sets), proof-of-concept blockchain initiatives (by 2020, nine out of 10 blockchain initiatives by large corporate clients will be sought after), chatbot and virtual assistant (VA) initiatives (by 2021, one out of five inbound customer calls are expected to be handled by either a chatbot or virtual assistance) and warehouse automation initiatives (by 2021, one out of 10 warehouse workers in strong economies will be replaced with automation). Implementation and design of these automation processes and technologies will be done by value-add resellers (VARs) and SIs.
Some SCMs and buyers have expressed key elements in their decision making:
· Scale. The scale of the business is a critical consideration for investment teams across both strategic and financial buyers. Adequate scale adds credibility around the target’s business offering and creates comfort that the business proposition has been accepted by the market. Furthermore, private equity firms will look to the size of a business as an important factor in determining its candidacy for platform investments.
· Preferred status. In terms of procurement optimization, it is important for targets with a focus on platform implementations to maintain and emphasize their relationships with channel partners. In particular, management needs to carefully nurture these relationships with fast growing and extremely important players in the procure-to-pay marketplace. Targets illustrating their commitment to integration through partnerships resonate and act as proof of an effective company that is positioned for success.
· Management alignment. In crafting their proposals for investment, buyers often communicate their desire that management roll over a portion of their equity into the transaction. The intention is to create comfort that management objectives are aligned with the buyers and to ensure that key drivers of value remain properly incentivized to continue performing post transaction. This is especially common throughout processes with such “people-centric” businesses.
· Proven IP. Despite offering high margins and strong revenue visibility, new product solutions leveraging recently developed intellectual property will be scrutinized against their legacy solutions in terms of the overall product lifecycle. Buyers may at first see a solution as “highly interesting,” yet ultimately deem too risky given its limited scope and success to date. An extended operating history or successful case studies of recent and marquee “wins” are important and go a long way in proving that any solution has traction in the market.
· Business narrative. One of the key elements of running a successful M&A process has to do with contextualizing a company’s recent financial performance with what has been happening in the broader market (industry, sector, etc.) As such, an important aspect of early investor conversations is to make sure that the target’s underlying market dynamics are successfully communicated. Additionally, the target firm’s unique narrative, which oftentimes includes an important lesson as to how to properly scale, has proven to be crucial when overlaid with the financials to tell a more complete story of the overall business.
Ultimately, increased competition for deals should work in favor of quality outcomes for prospective sellers, but preparation and timing remain critical.
