18 October 2013
THE EUROPEAN E-TENDERI NG
SOF TW ARE MARKET PLACE
EMPOWERING EU PROCUREMENT
This report describes the current state of the European e-tendering
software marketplace. Electronic tendering (or e-tendering) is a
process in which procurement administration is managed through
a dedicated software system or online platform. Advantages are
clear in terms of cost, process and transparency, and the EU is
moving towards mandating the use of e-tender management
(“eTM”) for all tenders above certain thresholds.
We believe that the provision of e-tendering software platforms will
form a lucrative growth market. Those who address this market
well (through a combination of process knowhow and lean, SaaSdelivered functionality) stand to benefit significantly as it evolves.
This note describes the procurement and e-tendering marketplace
within the EU setting, describes some of the existing providers of
software, and outlines some metrics relevant to structure and valuation
of such providers. Our findings are:
ANALYSTS
§
Tendering and procurement by public bodies is a vast activity
§
The procurement processes currently in place are typically outdated, paper-based and thus expensive and lacking transparency.
This can result in incorrect procurement decisions, legal challenges,
re-tendering and poor value for public sector money
§
Use of e-tendering software management platforms can offer far
more robust and transparent tender processes, run at lower cost and
with greater efficiency than traditional ways of managing
procurement (which can cost tens of thousands of euros per tender)
§
New EU Directives have been proposed by the Commission to make
essential phases of e-tendering mandatory across the EU. It is
anticipated that these will be ratified in the EU Parliament and
Council during late 2013 or early 2014
§
The European e-tendering marketplace is fragmented, with a few
providers active in multiple Member States, most more locally
focussed, and some with just a handful of customers in one country
§
We believe that the SaaS (Software as a Service) model fits well
with the eTM software marketplace, as there exist tens of thousands
of authorities across the EU which will all need systems, managed
and delivered in a low-cost manner – and without IT challenges and
long lead times
§
Finally, we provide some analysis of current valuations in the UK
tech sector, and conclude that recurring revenue, which generally
accompanies SaaS contracts, tends to provide the richest valuations
Gareth Evans
+44 (0)20 7349 5156
gevans@progressive-research.com
Ian Poulter
ipoulter@progressive-research.com
www.progressive-research.com
We believe that the European e-tendering market is likely to
experience material growth in coming years, driven partly by
regulation, and partly by organisations simply attempting to cut
costs and improve their work processes. Suppliers with the right
structure, the right operating model and the right positioning could
see material returns to shareholders over the medium term.
Commissioned by EU Supply, this document has not been prepared in accordance with requirements designed to
promote the independence of investment research. Please refer to important disclosures on the back cover.
18 October 2013
EXECUTIVE SUMMARY
European Union – procurement overview (page 4)
Procurement of goods and
services by European Union
public sector bodies is a
massive undertaking.
Public sector bodies across the European Union member states procure, annually,
services, goods and works with total values measured in the hundreds of billions of
euros; some estimates put the figure at €2.4trillion.
This vast purchasing programme is often carried out from relatively small, local
organisations, each of which may be responsible within a decentralised structure
for the procurement of certain categories of services and supply.
Despite the recent EU-wide focus on cost constraint within the public sector, and
the implementation of various austerity programmes, these procurement budgets
have changed (and will change) very little over the years. There therefore exists a
major incentive to do anything possible to improve the efficiency of the process by
driving out cost and streamlining logistics, and to bolster effectiveness by ensuring
the correct procurement decisions are made.
Even a small percentage
improvement in the value-for-money achieved would have a significant impact on
the European economies.
Traditional management of tenders as it stands – partial
delivery of available benefits (page 8)
The
processes
have
been improved by EU
regulation in the past, but
could benefit from further
process streamlining and
modernisation
Despite the massive sums at stake, many public sector procurement bodies are
managed in a sub-optimal way. This results in significant process costs being
incurred, often with errors in tender management resulting in legal challenges or retendering, and (arguably worst of all) bad procurement results. In the UK alone, we
can point to the ongoing debacle of the NHS Programme for IT, and the West
Coast Main Line tender processes as recent and live examples.
The EU Directives (17 and 18) of 2004 established a set of ground rules for the
operation of tender programmes above certain thresholds. Any procurement
captured by these Directives (or the individual Member States’ laws evolved to
comply with them) was required to be advertised and published to the Official
Journal, to ensure fair and clear notification and distribution to all potentially
interested suppliers of the availability of tender opportunities. While the 2004
Directives arguably have achieved significant savings for the EU through this
greater focus on fair and transparent “notification”, most tender processes in the
EU remain paper-based, manual and inefficient.
There are a number of areas of cost and effectiveness which remain to be
addressed :
2
§
Transmission of, and availability of documents in electronic form can save
significant costs in terms of logistics, printing and delivery
§
Electronic management of tender submission by economic operators,
evaluation and contract awards by authorities could streamline processes,
reduce incidence of bidders challenging the processes, and (perhaps most
importantly) reduce the risk of errors being made which result in incorrect or
suboptimal procurement choices being made.
§
Intelligent support for suppliers, and buyers, e.g. through libraries of standard
requirements, pre-populations of responses, warnings of mistakes, and logic to
control the process can both save time and prevent costly errors which would
cause rejection of otherwise qualified valuable bids
§
Transparent bidding in online reverse auctions renders significant savings, as
reported by a number of authorities, including the OGC.
18 October 2013
§
Use of structures, requirements and responses can help cutting cost in the
qualification and evaluation of responses where typically most time is spent.
§
Online tenders availability of tender documents, and online submissions of
responses is also expected to increase the number of bidders, including cross
border bidders, hence reducing direct cost.
The EU itself has published a number of documents recognising that the current
regulatory framework is antiquated and leaves significant scope for improvement in
a number of regards, while an increasing number of authorities themselves have
already adopted solutions to obtain the benefits available through them.
Further cost saving potential and regulation (page 17)
The European Parliament is scheduled, in December 2013, to consider proposals
to update the 2004 Directive, with the aim being to mandate the use of electronic
platforms for the management of essential phases of tender processes and the
delivery of relevant documents.
Such a change in legislation is likely to drive many procurement bodies to adopt eTender Management (eTM) systems, in order both to comply with new regulations,
and potentially to drive additional improvements in efficiency and effectiveness.
Previous drafts of the new Directives had suggested timelines involving Member
State legislation by June 2014. Central Purchasing Bodies were to use electronic
communication by this date, with all (smaller) procurement organisations doing so
by June 2016. These dates are very likely to slip in the revised Directives, but they
may give an indication of the “style” of enforcement and timings.
Commentary on the e-tendering software market (page 21)
In addition to commentary and summaries of the EU tendering market, this
document includes some analysis of the e-tendering software market, divided into
three separate sections as described below :
§
Players in the e-tendering market We highlight and discuss a number of the
major market participants, dividing them into “US beach-head”, “EU-wide” and
smaller groups active only in one or two countries
§
Optimal delivery model for players active in this market We suggest that
the e-tendering space is highly amenable to SaaS (Software as a Service)
delivery. Large groups of customers will require platforms compliant with both
EU-driven and local legislations, so systems require significant functionality with
a high degree of configurability
§
Valuation metrics relevant to software groups Our analysis highlights the
fact that, generally, software companies capable of delivering recurring
revenue-based business models, with long term revenue growth, achieve the
highest valuation metrics. This is as expected, given the high value of longterm profit streams which can be predicted with a degree of certainty.
Conclusion
For good reason, the EU appears to be about to mandate the next phase of
automation in the tendering processes utilised by thousands of public sector
procurement bodies. The market for European e-tendering management
software should therefore be on the cusp of material growth. Combining a
recurring revenue model with a SaaS delivery platform (which should
generate high and sustainable margins) could provide an extremely
compelling way to address these emerging opportunities.
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18 October 2013
EU PROCUREMENT MARKET BACKDROP
Public procurement is the process used by government institutions and public
sector organisations to buy supplies, services and public works. There are EU
Directives and national procedures within the Member States which enact those
Directives. There are many documents which evaluate the success or otherwise of
the existing Directives as part of ongoing monitoring. In addition, the reform
proposals for new Directives offer substantial information about the rationale for
updating legislation. The age of available data varies but most refer to 2010-12.
Market backdrop and drivers
When public spending goes wrong
There is a history of ‘slip-ups’ in the public procurement arena that have caused
outrage in many countries. Looking at the National Health Service (NHS) in the UK,
the example of the national programme for IT for the NHS is a recent one that
sticks in the mind. The project was started by the Labour Government and closed
down by the Coalition in 2011.
The National Programme for IT was established in 2002 to deliver the vision
outlined in “Delivering 21st Century IT Support for the NHS”. The vision behind
The National Programme for IT was to create an electronic patient record and to
use the ability of technology to connect all parts of the health economy to improve
patient care. The forecast cost was £11.4 billion (a reduction of £1.3bn from the
initial forecast of £12.7 billion) compared to an actual spend at the end of March
2011 of £6.46 billion.
In the Major Projects Authority (MPA) Programme Assessment Review of the
National Programme for IT which has been unclassified (albeit redacted) the MPA
noted some achievements from the £6.4 billion investment up to 31 March 2011.
Ultimately, though, its recommended action was:
“To dismember the programme and reconstitute it under new management and
organisation arrangements. The National Programme for IT as a concept relating to
the original investment decision should be terminated. Unless the work is
refocused it is hard to see how the perception can ever be shifted from the faults of
the past and allowed to progress effectively to support the delivery of effective
healthcare.”
Attempts at austerity
Public purse strings have been tightened across many countries since the financial
crisis and the UK and EU are no exceptions.
Remaining with the example of the NHS, in August 2013, the UK Government
announced that the NHS would appoint a “procurement champion” with experience
in the private sector to help it get value for money from its suppliers. The NHS in
England will also use a new price comparison website to enable health officials to
see what different trusts are paying for supplies and services. The Health minister
Dr Dan Poulter will also head a new committee tasked with driving down the NHS’s
£20 billion procurement bill which typically accounts for around 30% of the
operating costs of each hospital.
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18 October 2013
In its Procurement Development Programme publication, the Government noted
that “the more transparent we can make procurement performance, the more it will
drive behaviours to improve. More procurement information needs to be in the
public domain.”
The size of the procurement market in Europe means that it is vital to get public
spending right – to see it managed in an efficient manner.
The scale of EU procurement budgets
The last published EU Annual Public Procurement Implementation Review was for
-2012. In that document, for most Member States, the data collected relate to the
year 2010. Other Member States provided data for 2009. The statistics for the
European public procurement market are based on the OJ/TED database, desk
research undertaken by DG MARKT and the statistical reports from the Member
States. OJ TED (Tenders Electronic Daily) is the online version of the Supplement
to the Official Journal of the European Union, dedicated to European public
procurement.
The 2012 Review noted that government and utilities expenditure was a significant
and influential factor in the economy with around one fifth of EU GDP annually
spent on goods, works and services. Almost 20% was spent on purchases
exceeding the value thresholds set in the Public Procurement Directives and was
therefore governed by EU public procurement rules. According to Commission
estimates, the total value of invitations to tender for contracts above the thresholds
in 2010 was approximately EUR 447 billion or 3.7 % of EU GDP. The Member
States’ annual statistical returns reported that the contracts awarded in 2010 were
worth approximately EUR 340 billion. The differences are attributed to, inter alia,
the level of compliance with the statistical obligations, reporting styles, differences
in coverage of procurement in the utilities sectors and possible time-lags between
the two estimates. It is nevertheless remarkable that we may not even know with
sufficient accuracy the total value of contracts procured.
European Commission estimates for the value of tenders published in the
OJ/TED and the total value of procurement above the thresholds reported by
Member States in 2006-2010 [in EUR billion]
500
450
400
447
420
377
392
367
350
340
325
309
300
Commission's
estimates
Member States'
reports
274
250
235
200
2006
2007
2008
2009
2010
Source: EC Annual Public Procurement Implementation Review 2012
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18 October 2013
The Review says that, in 2010, approximately 36 % of the value of contract award
notices published in the OJ/TED was attributable to works contracts. 42 % was
spent on services and 22 % on goods.
European Commission estimates for the number and value of contract award notices
published in the OJ/TED in 2010, by type of contract [%]
50
45
40
35
30
25
20
15
10
5
0
Works
Supplies
Number
Services
Value
Source: EC Annual Public Procurement Implementation Review 2012
The typical (median) value
of a contract awarded in
line with the EU rules on
public procurement was
around EUR 345,000…
… with the average higher
at just over EUR 3 million
The EC data also show that the typical (median) value of a contract awarded in line
with the EU rules on public procurement was around EUR 345,000 in 2010
although the average was higher at just over EUR 3 million reflecting a number of
large contracts. Of the notices (again using EU data), around 90% were for
contracts governed by the Public Sector Directive with the remaining 10% falling
under the rules of the Utilities Directive. In terms of value, the numbers are 81%
and 19% respectively.
EU public procurement indicators
The EU also produces estimates of the total expenditure on works, goods and
services by the general government and utilities sectors, the value of calls for
tender published in the Official Journal for 2007-11, and the number of calls for
tender published in the Official Journal in 2007-11. The most recent was Public
Procurement Indicators 2011 published on 5 December 2012 to provide estimates
of three indicators of performance in public procurement within the EU.
These public procurement indicators are derived from information published in
OJEU through the Tenders Electronic Daily database (TED), from National
Accounts data provided by National Statistical Institutes to Eurostat and from
annual reports and other sources for some of the utilities sectors.
The numbers include estimates and extrapolation and the 2011 figures were not
complete in the publication with the value of the utility component simply reflecting
a repeat of the 2010 figures. Nonetheless, it gives a broad indicator of the level of
overall spending.
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18 October 2013
This table shows, for 2007 to 2011, an estimate of the total expenditure of the
public sector and utility service providers on public works, goods and services.
Estimate of total expenditure by general government and utilities on works, goods and services. [2010
utilities estimate re-used for 2011]
600
500
400
300
200
100
0
2007
2008
2009
2010
2011
Source: European Commission
Other indicators estimate the value of procurement for which tenders have been
published in TED. These figures are calculated by the services of the Commission
from the information published in the Official Journal and the TED database. We
show some of the findings in the table below along with the total expenditure
estimates which relate to the sum of the numbers in the chart above.
EUR 2.4 trillion of total
expenditure
on
public
procurement
European Commission 2012 public procurement indicators for 2007-11
Estimate of total expenditure
(EURbn)
Estimated value of tenders
published in TED (EURbn)
The estimated value of tenders
published in TED as % total
expenditure
2007
2008
2009
2010
2011
2179
2264
2346
2417
2406
367
392
420
447
425
16.9
17.3
17.9
18.5
17.7
Source: European Commission
Conclusion
It is clear that, on any measure, the EU public sector is a vast purchaser of
goods and services. Some of the procurement is above the established
thresholds and is subject to transparency imposed by the 2004 Directives,
but much procurement falls below these thresholds. Any opportunity to
improve the efficiency of operations, or the effectiveness of the decisionmaking is therefore capable of saving many billions of euros across the EU.
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18 October 2013
TENDERING PROCESSES AND ETENDERING
In the EU’s own words, the correct, efficient and effective application of public
procurement rules across the Union remains a constant challenge. Procurement is
a minefield of complexity and risk, and there is a perception that most tenders are
still awarded to local “favourites”, with little cross-border procurement and
presumably the loss of economies of scale that should be achieved.
This section of the note will discuss :
1. Types of procurement procedures in use within public bodies, together with
some example details to demonstrate the complexity involved
2. Costs of these procedures, using estimates of time employed in the different
aspects of managing the tender
3. How the challenges have been, and are being addressed (a combination of
infrastructure carrot to assist smooth processes, and legislative stick to ensure
adherence to minimum standards determined by the scale of tender)
4. The potential cost savings and other benefits still to be achieved by moving to a
full e-Tender Management (eTM) platform
1. Types of procurement procedures
The EU Directives and member state legislation provide a wide menu of
procedures and techniques for contracting authorities who are organising tenders.
The choice of tender methodology is determined partly by legislation, and partly by
the specific aspects of the tender itself and the market conditions, but only well
defined tender procedures may be used (above the EU thresholds), e.g. “open
procedure” (one round of requirements and full tender response all in one go),
“restricted procedure” (with two stages where the bidders first have to provide a
response to a set of requirements in a qualification stage, and only the qualifying
bidders are invited to the second stage for the full tender response), “negotiated” or
“competitive dialogue”. The level of advertising or “notification” required must also
be decided depending on type of contract.
Legislation already today (following the implementation of the 2004 Directives)
mandate that all tenders above the OJEU thresholds must be advertised on the
Official Journal of the European Union (OJEU) in accordance with defined rules.
Tenders below the appropriate thresholds may still be subject to local (national)
legal requirements, and national laws may still require publication on certain
national notices portals and journals if they meet lower regional scale criteria.
The aspects of the tender itself often drive the selection of tender procedures. For
example, if a tender is expected to require complex negotiation to ensure the best
value outcome, it may be wise to select a negotiated procedure, even if this may
take more time. In cases where this need may not exist, the authority may choose
to run either an open procedure or a restricted procedure, where the latter includes
an initial qualification stage (“tollgate”). This eliminates a number of non-qualifying
bidders early in the process, thereby reducing the amount of bidding work for
unsuccessful bidders and cutting the workload for the authority which avoids the
need to evaluate a large number of full tender responses.
Steps to restrict or qualify-out bidders can therefore save cost – but such steps in
themselves require a longer tender process, so such multi-step processes should
not be used when the number of likely bidders is relatively small.
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18 October 2013
Within each type procedure there are detailed rules, all serving the principles of
non-discrimination, transparency, predictability and aiming to reduce cost and
ensure fair open market competition.
The bar chart below highlights the numbers of each type of procedure as disclosed
by a European Commission survey. Open, restricted and negotiated processes
are clearly the most frequent, both by number and by value.
Contracting Authorities’ use of procedures (2006-2010)
100%
90%
Open
80%
Restricted
70%
60%
Negotiated without
publication
50%
Negotiated
40%
Accelerated resticted
30%
Accelerated negotiated
20%
10%
Competitive dialogue
0%
Number
Value
Source: European Commission
The flow charts below show the process for the two most commonly used
procedures; it is clear that processes are complex and involved, an environment
within which solid software-controlled structures can prove very valuable. Note that
this chart does not include all the detailed exceptions and workflows that may be
involved internally in the authority and the bidder organisations.
It is also noted that the Freedom of Information Act (and similar legislation across
EU) give bidders options to review competitor bids. Any failure of the authority to
comply with all the rules, especially any procedural mistakes, means that bidders
who are not awarded are well positioned to mount a challenge to the authority.
Without much risk, a losing bidder may claim against the authority, delaying the
process or requiring a re-tender. Transparency thus means even greater need for
process support to minimise the risks of mistakes throughout the whole tender
process, and correctly so for each procedure type.
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18 October 2013
Open Procedure and Restricted Procedure summary process flows
Open Procedure
OJEU Contract Notice
Time limit 52 days minimum.
36/22 days with PIN
Restricted Procedure
OJEU Contract Notice
Time limit 37 days minimum.
Accelerated 15 days
Expressions of interest/receipt of PreQualification Questionnaire (PQQ)
Expressions of interest/tenders
Unsuitable candidates excluded
Unsuitable candidates excluded
Scoring of PQQ, pre-selection of minimum of 5 qualifying
bidders, issue of Invitation to Tender
Evaluation of tenders and appointment of
preferred bidder
Time limit 40 days
36/22 days with PIN
Accelerated 10 days
Conduct standstill period 10/15 calendar
days
Evaluation of tenders and appointment of
preferred bidder
Conduct standstill period 10/15 calendar days
Issue Contract Award Notice
Issue Contract Award Notice
Source: European Commission, Dundas Wilson diagram wording
2. Costs of procurement – on average €28,000
The EU has published a document entitled “EU Public Procurement Legislation
– Delivering Results – Summary of Evaluation Report” which includes some
useful information about the cost of procurement :
§
The average cost of running each procedure above EU threshold was
approximately €28,000 (as per an EU evaluation).
§
The average cost of running a procedure of lower value ranges between 18 and
29% of the contract value.
§
The total cost to society of procuring the goods and services (i.e. the process of
acquiring them) covered by the Directives was estimated at around €5.26 billion
per year in 2009.
§
EU estimates put the additional cost of the compliance with the EU Directives
compared to national/below-threshold procurement at 0.2% of total contract
value for public purchasers, and a further 0.2% for suppliers – or approximately
€1.68 billion in 2009.
Among the specific objectives of the new Directive is the improvement of the costefficiency of EU public procurement rules and procedures. The same evaluation
had found that increased openness and transparency created by the procurement
Directives had increased competition and, consequently, produced cost savings.
They suggested that publication of a contract notice results in a saving of 1.2% and
that using an open procedure is associated with further 2.6 % savings.
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18 October 2013
Cost vs. Speed
The evaluation report noted that the typical time from the dispatch of an invitation
to tender to an award across all procedures was 108 days. However, the range
between the fastest and the slowest was around 180 days with a consequent
impact on the comparative efficiency and cost procurement procedures.
Although the time required for publication of contract notices is prescribed by EU
Directives and subject to limited flexibility, the time taken by contracting authorities
to award contract is subject to their control. The average time taken to evaluate
and award a contract is around 58 days but the range is huge: from 45 days for the
simplest lowest price contracts up to 245 days for complex competitive dialogue
procedures.
The restricted procedure takes on average 160 days compared to 53 days for the
open procedure.
As well as the overall time taken, there is a significant variation in the person-day
costs associated with carrying out the procedure between Member States. The
average is 38 days for the time invested by authorities and by the winning firm.
Again there is a significant difference of 71 days between the top and the bottom
performing countries.
The diagram below shows the relative amounts of time spent on a number of
different aspects of the tender management process. As one might expect, in a
small (low value) tender, proportionately more time is spent on specification and
notification, and less on the detailed qualification and evaluation.
Example relative time spent on elements of procurement processes
Share of Contracting
Authority time spent on
tendering (%)
100%
Specification
90%
80%
Notification
Access/Distribution
70%
60%
50%
Submission/
Qualification/Evaluation
40%
30%
20%
10%
Negotiation/Award
0%
High Value Tenders
Source: EU Supply, Progressive Equity Research
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Low Value Tenders
18 October 2013
3. Current attempts to optimise procurement :
facilitation and Directives aimed at transparency
The EU Commission is clearly aware of the vast amounts being spent through the
various member nations’ budgets, and various parts of the relevant organisations
have attempted, over the years, to both facilitate and force improvements.
Facilitation
The “facilitation” aspects relate to the availability of various platforms, promotion of
good practices and infrastructure upon which member states’ procurement bodies
can rely in the course of conducting their tenders.
Examples of facilitation include :
§
The Golden Book
§
e-TEG
§
PEPPOL and OpenPEPPOL
The Golden Book and e-TEG attempt to help organisations understand and plan
elements of e-procurement, and PEPPOL (together with OpenPEPPOL) is aimed
at ensuring interoperability between e-procurement platforms. Details of all three
can be found in Appendix 1.
Forcing to date, through the 2004 Directives
The EU has acted to “force” improvements in procurement mainly, to date, through
the 2004 Directives (described below) which are mainly to do with transparency
and electronic publication of the existence of a tender. The management of the
tender process itself, and all the associated documentation can still be a manual
and paper-based task.
Transparency & OJEU – the 2004 Directives
As noted in the UK Government’s Procurement Development Programme, greater
transparency is a key aspiration. EC notices for contracts above the thresholds are
published in the OJ/TED: either a contract notice (CN), which contains the
invitation to tender or a contract award notice (CAN).
The number of contract notices advertised continues to grow - around 2500 new
notices are advertised every week - and the number of contract award notices has
grown even faster as compliance with post-award publication requirements has
improved.
The current regulations require authorities to advertise public contracts in an open
and transparent manner and for them to be advertised in prescribed forms on the
Official Journal of the European Union (OJEU). Contracts below the prescribed EU
thresholds (see various points later in this document) may still require “adequate
advertising” to comply with more general requirements of EU law.
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18 October 2013
4. Potential benefits of e-Tender Management and
the new draft Directives
Certain benefits have undoubtedly resulted from the efforts above to ensure that
procurement bodies are both empowered to use electronic platforms when they
choose to, and required to at least properly advertise the existence of a tender
above certain value thresholds. Nevertheless, as shown below, the uptake of eProcurement has been limited.
e-Procurement (pre- and post-award) uptake limited to date
In 2010, less than 5% of total procurement budgets in the first mover Member
States was awarded (ordered) through electronic systems.
The European Commission publishes periodically an e-Procurement State of Play
Report of the Study on e-Procurement Measurement and Benchmarking.
According to the report published on 17 June 2013, the overall value of eProcurement in the EU in 2011 was estimated to be between €170 billion and €203
billion. Those numbers correspond to a level of take-up between 10.6% and 11.7%.
This take-up is the proportion of public procurement contracts that have been
processed electronically in the pre-award phases, at least through e-Submission,
as a proportion of the total public procurement contracts processed in the same
period (all procurement contracts, above and below the EU threshold). It includes
e-Auctions and the use of e-Ordering and e-Catalogues. These areas are shown
in red on the chart below.
The e-Procurement Process
e-Notification
e-Access
e-Submission
Pre-Award
e-Auction
e-Marketplace
e-Ordering
Post-Award
e-Invoicing
e-Payment
Source: European Commission, IDC
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18 October 2013
When evaluating the existing public procurement Directives, the EU has noted the
following points:
§
Of the 250,000 different contracting authorities and entities involved in public
procurement in the EU, only about 35,000 publish a notice in the OJEU (the
gazette record of the European Union) in any one year.
§
In 2009 over 150,000 invitations to tender above OJEU thresholds were
published (by the 35,000 authorities) in conformity with EU Directives. The
estimated value for these contracts was €420 billion.
§
Most of the smaller authorities may never make a purchase large enough to fall
within the scope of the Directives (or may incorrectly fail to aggregate
purchases within a category).
§
A significant amount of procurement is carried out by bodies which are neither
central nor local government administrations.
Different countries have take up the e-procurement banner to differing degrees, as
shown in the chart below. These figures include post-award use of e-procurement,
not just pre-award.
The UK represented 46% of the total estimated value of e-Procurement in Europe
in 2011, with Germany (23%) and Sweden (12%) representing the next largest
proportions. These figures are based on an e-procurement market at the low end
of the range described above.
However, the relative size of the economies masks the level of take-up within
individual Member States. Lithuania, Portugal and Sweden reported a take-up rate
of over 30%, closely followed by the UK.
e-Procurement value share by Member State, 2011, (minimum estimate)
Rest of
Europe, 9%
Sweden, 12%
UK, 46%
Portugal, 5%
Italy, 2%
Germany, 23%
France, 3%
Source: European Commission (pre- and post-award data)
14
18 October 2013
Push towards full e-Tender Management
Increasing the use of electronic procurement (e-Procurement) is of strategic
importance for achieving the smart and sustainable growth objective of the EU
2020 Strategy. Such procurement will :
§
Increase efficiency of procurement programmes through reduced cost, more
streamlined processes and lower incidence of error (and re-work)
§
Improve effectiveness of procurement, by encouraging the participation of more
bidders, and helping to ensure that relevant and material criteria are used to
determine the outcome
The EU, and a number of the more forward-thinking procurement organisations,
believe that significant further gains can be made if additional elements of the
process are automated.
The relevant draft Directives are described in the following section on regulation,
but in terms of the tender process, the diagram below shows the areas covered by
the new draft Directives :
E-tender management and the proposed new directives
Share of Contracting
Authority time spent on
tendering (%)
100%
Addressed by:
2004 Directive
Specification
90%
80%
Notification
Access/Distribution
70%
60%
50%
Submission/
Qualification/Evaluation
40%
!!
!!
!!
!!
Time spent
here…
…means
time saved
here
30%
20%
10%
Negotiation/Award
0%
High Value Tenders
Low Value Tenders
Source: Progressive Equity Research
15
New
Directives
eTender
Management
18 October 2013
Cost saving potential of full e-Tender Management
The diagram below depicts the potential cost savings available through the use of
e-Tender Management. Clearly, the figures are illustrative only, but the use of
automated and standardised systems for managing tenders should, logically,
reduce the time required to perform the various functions :
§
if bids are specified using standard forms, with pre-populated elements and reusing previous documentation, time is saved.
§
if all bids are received and acknowledged electronically and by an automated
process, human involvement is minimal compared to existing processes
involving
physical
documentation,
couriers,
email
or
telephone
acknowledgement and so on.
§
finally, if the tender management programme is used to ensure clear and welldefined structured specifications, it also stands to reason that significant time
can be saved in the qualification and award phases of the process.
Example time savings through the use of e-tender management
40
35
Specification
Man days
30
Notification
25
20
Access / Distribution
15
Submission/
Qualification/Evaluation
10
Negotiation/Award
5
0
Existing process
Source: EU Supply, Progressive Equity Research
16
eTM
18 October 2013
REGULATION AND EU DIRECTIVES
The previous sections have described the vast scale of the European member
states’ procurement machinery. We have highlighted the fact that, although
contracting authorities have been forced into broad notification of major contracts
(OJEU etc) and have been assisted with various platforms and infrastructure, little
has been done to force such organisations to adopt fuller e-Tender Management.
This is about to change.
This section describes :
1. The existing legislation; mainly two Directives from 2004 which have been
adopted into member state laws across the EU
2. The proposed “new Directives” and what they aim to achieve
3. The likely timelines associated with the new Directives
1. Existing legislation – the 2004 Directives (as amended)
The two relevant EU Directives of 2004 (2004/17/EC and 20004/18/EC)
commenced the coordination of the procurement procedures above EU thresholds
(see below). They dealt with ‘Contracting authorities’ which it defined as State,
regional or local authorities, bodies governed by public law, associations formed by
one or several such authorities or one or several of such bodies governed by public
law.
The initial Directives applied to contracts which had a value excluding value-added
tax (VAT) exceeding certain thresholds.
There have been a number of
amendments and changes to the Directives since 2004, mainly aimed at gradually
extending the scope of the tenders “caught” by the legislation, to extend the
proportion of tenders subject to the transparency and disclosure requirements.
The table below depicts the thresholds relevant for general (non-utilities, nonconstruction) service contracts.
European Commission 2012 application thresholds for public works, public
supply and public service contracts
EUR
Central Government authorities
Works contracts, works concessions contracts, subsidised
works contracts
All contracts concerning services listed in Annex II B, certain
telecommunications services and R&D services; all design
contests concerning these services and all subsidised
services
All contracts and design contests concerning services listed
in Annex II A except contracts and design contests
concerning certain telecommunications services and R&D
services
All supplies contracts awarded by contracting authorities not
operating in the field of defence
Concerning products
Supplies contracts awarded by
listed in Annex V
contracting authorities operating in
Concerning other
the field of defence
products
Sub-central contracting authorities
Works contracts, works concessions contracts, subsidised
works contracts
All service contracts, all design contests, subsidised service
contracts, all supplies contracts
Source: European Commission
17
5,000,000
200,000
130,000
130,000
130,000
200,000
5,000,000
200,000
18 October 2013
2. The new Directives on Public Procurement
In December 2011, the European Commission adopted its proposals on public
procurement. They are part of an overall programme of modernisation of public
procurement in the European Union. This includes the revision of 2004 Directives
and the adoption of a directive on concessions, which were only partially regulated
at European level.
§
All Contracting Authorities to provide electronic means of communication for
specified phases of procurement procedures (electronic notification of tender
opportunities and electronic availability of other documents).
§
Mandatory transmission of notices in electronic form, mandatory electronic
availability of procurement documents and switch to fully electronic
communication in all procurement procedures.
§
Streamlining of dynamic purchasing systems, e-auctions and e-catalogues and
introduction of e-CERTIS, a mandatory electronic clearing-house which lists
exhaustively the certificates and other proofs which Contracting Authorities may
request from suppliers.
§
Inter-operability between systems is encouraged to address the current
divergence in technologies.
The proposed Directives will run together as a group but here we look at the main
elements of the Directive on Public Procurement. It provides for
‘the mandatory transmission of notices in electronic form, the
mandatory electronic availability of the procurement documents and
imposes the switch to fully electronic communication, in particular esubmission, in all procurement procedures within a transition period of
two years’.
Source : 2011/0438 (COD); Proposal for a Directive of the European
Parliament and of The Council on public procurement, p.11
Procedures and techniques
Member State systems will provide two basic forms of procedure, open and
restricted procedure. They may, subject to certain conditions, use the competitive
procedure with negotiation, the competitive dialogue and/or the innovation
partnership.
Contracting authorities will have a set of six specific procurement techniques and
tools which have been improved and clarified to facilitate e-procurement:
§
framework agreements
§
dynamic purchasing systems
§
electronic auctions
§
electronic catalogues
§
central purchasing bodies
§
joint procurement
Time-limits for participations and submission of offers have been shortened,
allowing for quicker and more streamlined procurement, all enabled by the
electronic transfers of tender documents, signing, validation and submission/receipt
of tender responses.
18
18 October 2013
The proposal gives public purchasers the possibility to base their award decisions
on life-cycle costs of the products, services or works to be purchased.
Thresholds
The new Directive applies to procurements with a value exclusive of value-added
tax equal to or greater than the following thresholds. The figures here are for the
standard sector directive; different levels apply for certain other specified sectors:
§
EUR 5,000,000 for public works contracts
§
EUR 130,000 for public supply and service contracts awarded by central
government authorities (subject to specific restrictions on defence)
§
EUR 200,000 for public supply and service contracts awarded by sub-central
contracting authorities
§
EUR 500,000 for public contracts for social and other specific services
These are subject to review and revision every two years, and it could be expected
that thresholds over time will be taken to lower levels to ensure increasing
transparency and competition on a higher share of all public sector spend, currently
targeting “just” €450bn of the €2.4trillion.
Any lowering of the thresholds over time would give potentially higher degrees of
competition on public sector contracts, but would also generate more significant
workloads for procurement bodies. In this situation, the use of e-Tendering
platforms, which often incorporate functionality to streamline areas not even
covered by the Directives, would be the most logical way for procurement
organisations to proceed.
Governance
Member States will appoint a single independent body responsible for the oversight
and coordination of implementation activities.
Reform proposals for EU Directives on Public Procurement
New Directives
Proposal
Impact Study
COM(2011) 895: Proposal for a
Directive of the European
Parliament and of the Council
on procurement by entities
operating in the water, energy,
transport and postal services
sectors
SEC(2011) 1585 and
SEC(2011) 1586
COM(2011) 896: Proposal for a
Directive of the European
Parliament and of the Council
on public procurement
SEC(2011) 1585 and
SEC(2011) 1586
COM(2011) 897: Proposal for a
Directive of the European
Parliament and of the Council
on the award of concession
contracts
SEC(2011) 1588 and
SEC(2011) 1589
2004/17/EC coordinating the
procurement procedures of
entities in the water, energy,
transport and postal services
sectors
Source: European Commission
19
To replace
2004/18/EC on the
coordination of procedures for
the award of public works
contracts, public supply
contracts and public service
contracts
18 October 2013
3. What is the timing?
Timing of Directives : European Parliament plenary session
due in late 2013
In December 2011, the proposal for new Directives on public procurement was
published (as described in section 2 above), along with a proposal for a Directive
on concessions and an impact study. During 2012, the EU Council and the Internal
Market Committee of the EU Parliament negotiated the details of the proposed new
e-procurement Directives.
The European Parliament website shows that the measures have been debated in
Council on three occasions during 2012. The procedural history of the draft
Directives suggests that negotiations have been taking place, and the indicative
date for the plenary session is 9th December 2013.
Timing of requirement for Member States to implement
The specifics around deadlines by which Member States must have legislation in
place are not entirely clear. The previous draft of the legislation suggested a twophase approach, with Member States required to enact legislation, and Central
Purchasing Bodies required to make the full transition to electronic communication
by June 2014. Given the delays in legislation at the EU level, this timeline is now
not probably realistic.
The previous draft also included timings for a general obligation to use electronic
means of communication in all procurement procedures after a transition period of
two years (to have run from the June 2014 date). This two year transition process
may be unaffected by the delays in initial legislation.
It may therefore be reasonable to assume that the deadline for legislation and
Central Purchasing Bodies might slip to June 2015, with the two-year transition
phase then running to June 2017; this would be assuming progress of the
Directives through the European Parliament in relatively short order.
Clearly, if such Directives were enacted, Member States and their procurement
organisations would then have a clear and mandated timeline within which to move
to a fuller e-procurement system. This would be likely to drive a major uptake of
commercial e-Tendering Management software and platforms.
The next section describes a number of the relevant players in the e-Tendering
Management software landscape.
20
18 October 2013
MAJOR PLAYERS IN E-TENDERING
Global players with European operations
SAP Ariba
Ariba was founded in 1996 and was acquired by SAP for US$4.3 billion in October
2012. At the time of the acquisition, Ariba was the second largest cloud vendor and
ran the largest global trading network, driving more than $319 billion in commerce
transactions among more than 730,000 companies. It produced FY 2011 revenue
of $444 million, growing at 39% versus FY 2010. It had around 2,600 employees,
more than 1,100 buyer customers, mainly in the private sector, and 59,000 supplier
customers.
The aim of the acquisition was for SAP to deliver an end-to-end procurement
solution and become the leader in inter-enterprise cloud-based business networks.
Ariba combines cloud-based applications with the world's largest web-based
trading community (post-award). The group’s procurement software, worldwide
supplier network, and global support enables its customers to automate all or part
of their procure-to-pay process, regardless of backend ERP, purchasing, or spendgenerating systems. Ariba had earlier acquired Procuri, another sourcing solution
provider mainly targeting the private sector.
Ariba Commerce Cloud for Sellers enables a seller to use a consolidated company
profile across all of Ariba's cloud-based, e-commerce solutions. On a single
platform, it provides access to potential customers, free buyer-seller matching and
tools for participating in buyers’ sourcing events.
IBM Emptoris
The IBM acquisition of Emptoris was completed in May 2012. At the time of the
deal, Emptoris had more than 350 customers (mainly in the private sector) in 75
countries and it was based in Burlington, Massachusetts with offices in the US, the
UK, France, Germany, Australia, India, Brazil and China. Emptoris' client base
spanned industries including consumer products, financial services, healthcare
services, telecommunications, chemical/oil/gas, utilities, construction and industrial
manufacturing. Emptoris' spend management solutions complemented the existing
B2B integration and supply chain management capabilities that IBM had acquired
through the purchase of Sterling Commerce in 2010.
IBM Emptoris Strategic Supply Management solutions help companies increase
savings, improve supplier performance and mitigate risk through a suite of
solutions that connect disparate systems and teams to provide greater visibility into
and control over spend, contracts, service providers and supplier intelligence and
processes. The suite includes solutions for sourcing, contract management; spend
analysis, supplier lifecycle management, services procurement and telecom
expense management, which can be deployed individually or as a single platform.
21
18 October 2013
EU-wide
EU Supply
EU Supply is a Sweden-based e-commerce business that has an established,
multilingual e-procurement platform for e-sourcing, e-tendering and contract
management, tailored for the highly regulated European public sector market. The
platform is provided under a SaaS contract model, which allows the company to
maintain only one version of the platform at any time. The platform has been
designed to be configurable online to deliver compliance with different EU member
state legal requirements, and a bespoke solution to each client’s unique
requirements without any additional programming or separate hosting.
The system is available in 16 different languages and is already used by over
6,500 European public sector bodies. EU Supply is active in public sector eprocurement in the UK, Ireland, Denmark, Norway, The Netherlands, Sweden,
France, Lithuania, Portugal, Spain and Greece. The platform has National
Procurement System status in the UK, Ireland, Norway and Lithuania. Over
250,000 tenders have been managed on the Group’s CTM platform since 1999 and
there are over 250,000 supplier organisations currently registered. The software
handles more than 75,000 tenders per year, most of which it hosts end-to-end,
from specification to award.
Bravo
Founded in June 2000, BravoSolution has offices in Australia, Brazil, China,
France, Germany, Italy, Mexico, Spain, the Netherlands, the UAE, the UK and the
US. Its supply management solutions are delivered through software, professional
services and category expertise. It has 600 clients in 40 countries, across 18
industry sectors. The group boasts a staff of over 500 procurement professionals
in its 15 offices.
Bravo reports that there are over 300 supply management suites deployed for
international clients, and that over 500,000 supplier organizations are involved in
Supply Management processes conducted through BravoSolution technology.
Group turnover for the 2012 financial year was €62 million. The client base in the
UK includes a number of NHS bodies, DECC and DEFRA.
European Dynamics
European Dynamics is the creator of the Electronic Public Procurement System (ePPS) which is an open, secure, interoperable e-Procurement modular platform with
re-configurable code, addressing the full lifecycle of e-Procurement. European
Dynamics notes that e-PPS complies with both national and EU legislation on
public procurement. e-PPS is provided either as a Software as a Service or as a
stand-alone application installed at the customer’s premises.
European Dynamics’ portfolio of ICT contracts, covering a wide range, has a value
exceeding €200m. The annual turnover of the group in 2010-2011 was in the range
of €38m. The group aims to invest around 7% of turnover in R&D.
22
18 October 2013
Focus more on one/two countries
Due North
Due North is a UK-based provider of eSourcing and Contract Management
solutions which it reports are deployed by over 200 public, private and not for profit
organisations. It provides Spend Analysis, eSourcing, eAuction and Contract
Management solutions and eProcurement Portals.
Due North runs 20 eProcurement portals, which fully integrate with its ProContract
suite of Sourcing, Supplier and Contract Management solutions. The software has
over 85,000 registered suppliers and has published over 2,000 opportunity notices.
Due North's suite can be deployed on demand via a Software as a Service model
and on premises, in any combination needed to achieve procurement objectives. It
was created specifically to support the Public Sector procurement processes and is
deployed by over 130 Public Sector clients mainly in Local Authorities, but also
some NHS, Central Government, Housing Associations, Higher Education and
Emergency Services.
BiP
BiP was established in 1984 to facilitate business between the public and private
sectors. BiP provides a wide range of services, from event management to
procurement applications. In the pre-award space, it offers Tender Manager (a
business alert service), and since a few years ago, an e-Tendering solution “Delta
eSourcing” and other modules including Supplier Manager, Contract Manager,
Collaboration Manager, eAuctions and Buyer Portal. These services can be used
independently or combined to form an end-to-end procurement solution.
Delta eSourcing is used by over 535 public sector authorities across the UK and
has in excess of 100,000 suppliers registered. The group is based in Glasgow,
and although the lion’s share of clients listed are UK organisations, the platform
has been used by a number of procurement groups in other geographies.
In-tend
In-tend is a UK-based business, offering products to both buyers and
suppliers. The e-Tendering Organiser platform allows procurement bodies to
arrange small quotes (Request for Quotation or RFQ) right up to higher value
formal tendering (OJEU) with workflow and templates to help manage and
streamline the process. Electronic questionnaires allow auto-scoring of bids, and
the company also provides a range of dashboards and reporting tools. The
company also offers a Procurement Bureau, with a shared-services infrastructure
and availability of consulting staff to help procurement organisations manage and
execute tender programmes.
For suppliers, In-tend offers a tender notification service. The group is located in
Yorkshire, and appears to have a strong focus on UK clients, with a predominantly
public sector process in mind. The business is ISO 27001 and ISO 9001
compliant, and partners with (among others) ICM, a subsidiary of UK-quoted
Phoenix IT. In-tend Limited accounts to July 2012 show turnover of £1.3m.
23
18 October 2013
APPROPRIATE MODELS FOR COMPANIES IN
E-TENDERING SOFTWARE MARKET
Given the potential for a material and growing opportunity in the e-tendering
software space, we highlight below a number of considerations relevant to the
opportunity.
General software company choices
In particular, we would highlight that there are choices to be made with regard to
two major criteria, which are related but not absolutely intertwined. These are the
company’s revenue, and its operating and delivery structure.
Revenue model
This relates to the contractual structures under which the company operates;
revenue can be a large one-off “initial licence fee”, with a modest (typically c.20%)
ongoing maintenance charge, or “recurring revenue” annual or multi-year contract
deals with generally fixed annual prices. Recurring revenues are recognised
across the period of the contracts, adding significantly to visibility and (as we
describe below) the valuation attaching these revenues and profits.
Delivery, cost base and internal structure
Separate to the consideration about how to charge for its products, a company
must determine how to provide them. This decision, in modern technology
businesses, normally relates to where and how the software is hosted, and how it
is delivered.
Customer site installation A relatively high cost solution is to install a version (an
“instance”) of the software at the customer’s site – this is common in the financial
services world, where large banks have major data centres, are perfectly capable
of installing and managing software, and are rightly concerned about security.
Hosted single-tenanted A mid-tier solution is to host one “instance” of the
software for each customer, but at the provider’s data centre (or a third-party
hosting site). This can reduce cost in certain circumstances, and it allows for
flexibility in delivery, but it does not provide material cost savings over the atcustomer-site installation.
Hosted multi-tenanted The lowest-cost and arguably optimal solution is to run
just one “instance” of the code and database, but to allow multiple customers to
use this code base with logical separation built into the application’s security
model. The code is hosted and fully maintained by the software provider, and each
customer’s data is carefully segregated by logical separation. This can provide
significant savings in terms of both hardware (a smaller number of servers is
required), operating and database licences, security management, running costs
(less data centre space is used) and upkeep (by updating the single copy of the
code, the developer can instantly improve the experience for, or add functionality
to, all users).
24
18 October 2013
Note that both the single- and multi-tenanted delivery models can be described as
“Software as a Service”, but they carry quite different cost and margin implications.
Equally, note that the revenue model decision is quite separate from the delivery : it
is possible (although unusual) to install software at a customer site but charge a
recurring revenue fee. More typical is to charge multi-year recurring revenue fees
for hosted remote delivery (single- or multi-tenanted), and an initial licence fee
when software is installed at a customer site.
e-tendering market specifics
Applying this thinking to the e-tendering market, it is clear that the lowest-cost and
most flexible model (single instance, multi-tenanted) should be achieved if possible
to minimise cost and maximise addressable market.
Given the similarities between tendering programmes across Europe, on the basis
of the same principles from the EU Directives, there should be a high degree of
overlap between systems requirements in different markets, potentially making the
e-tendering space highly amenable to SaaS delivery with strong recurring revenues
(given the governmental nature of many of the clients)
Set against this are an array of highly different methods of implementing eTendering in different member states, due to local legislation and local
interpretation of best practice, as well as different procurement policies within
different types and sizes of organisation. Examples of such differences include the
following aspects, which are required in some countries, and not in others :
§
“Client side encryption” where bid data is encrypted and digitally signed locally
in an offline editor at the supplier’s site, then submitted by the bidder in
encrypted form, stored on the server side in this encrypted form, and only
unencrypted once the tender deadline has past
§
“Double envelopes” where certain elements of a bid are only “opened” once
other hurdles have been met – for example technical specifications are
considered first, and the commercial proposals are only examined for those
bids which meet the technical requirements and other non-price criteria
§
Digital signatures using qualified or advanced certificates, validation of
certificates, and use of third party time-stamping
§
Approvals flows, where certain authorised staff may be required to approve of
contract draft and other objects for the process to continue, such approvals
being serial or parallel or combinations of both, depending on contract type and
value
…
§
and many, many more aspects of a bid process which can be managed in
different ways.
In reality, a perfect code base to cater for every single eventuality is unlikely to be
feasible, as it would need to be so flexible and intricate that development would be
very expensive.
We would suggest, therefore, that the best approach might be a baseline code with
a degree of flexibility to allow for specific bespoke designs where individual
countries or specific customers require a higher degree of customisation
25
18 October 2013
Why the e-tendering market is so attractive :
We believe that there are therefore a number of good reasons that the e-tendering
market is attractive :
1.
There is EU-driven pressure (indeed legal requirement likely to be enacted
soon) for the market to rapidly evolve
2.
There are relatively few players with the right combination of entrenched
market share, scalable and referenceable software and flexibility of
approach to win large numbers of new mandates in large member state
market segments or multiple segments and/or member states
3.
The market is highly amenable to multi-tenanted SaaS delivery of platform,
given the similarity of requirements across a vast procurement customer
landscape in each member state market segment, and the likelihood that
any updates or changes will need to be rolled out across Europe
4.
There is potential to also provide a degree of tailoring/bespoke work for
“outlier” clients who are prepared to pay a premium to ensure local legal or
other requirements are met or more advanced features are included
5.
Public sector customers generally are very comfortable relying on each
others’ decisions, and provide references to each other; they are not
competing with each other – there are shared common goals of best
practice in tender management, and public bodies are often proud of their
achievements and more than happy to provide reference sites
We therefore conclude that the e-tendering software market is a highly attractive
space, with regulatory change likely to propel activity, and with a material niche
potentially available to mid-sized players.
26
18 October 2013
VALUATION DYNAMICS OF SOFTWARE
PROVIDERS
Software companies which are able to generate strong recurring revenues at good
margins tend to command premium multiples. This is unsurprising, as recurring
revenues should allow a good degree of comfort in prediction of future sales and
profits, which investors will value highly.
The inclusion of a Software as a Service (SaaS) “kicker” within a business does
not, in itself, add to the certainty or predictability of revenues, but it can make a
material difference to the margin achieved. SaaS providers can service large
numbers of customers, if the code base is developed intelligently, from limited
hardware installations. This provides a highly leveraged operating model, which
can generate very strong margins into the medium and long term.
EV/Sales analysis
Given the early-stage nature of a number of areas of technology, EV/Sales
analysis can be a useful metric. In situations where measures of profitability or
profit-related valuation metrics can be easily distorted as businesses incur startup
losses, or exhibit very low levels of profitability as they invest aggressively, the
EV/Sales measure gives a sense of the value attributed to a business relative to its
overall revenue.
Selected UK listed solution suppliers – recurring revenue versus EV/Sales valuation
8
AVEVA
Year 1 estimated EV/SALES (x)
7
Sage
6
RapidCloud
5
Fidessa
4
3
Ideagen
Craneware
Microgen
2
Kofax
K3
1
Access Intelligence
Sopheon
0
0
10
20
30
40
50
60
70
80
90
Last full year recurring revenue (%)
Source: Progressive Equity Research estimates, Bloomberg, FT.com, Yahoo Finance, LSE data
27
100
18 October 2013
EV/EBITDA analysis
The chart below repeats the previous analysis, comparing valuation multiple to
levels of recurring revenue, with a similar conclusion : companies with higher
degrees of recurring revenues tend to attract premium multiples.
The stocks towards the top and the right of the diagram exhibit either extremely
high levels of growth, or have already attained significant scale but are generating
industry-leading margins. Those lower and further toward the left have less
recurring revenue upon which they can rely, and tend to be exhibiting lower levels
of growth.
Selected UK listed solution suppliers – recurring revenue versus EV/EBITDA valuation
20
AVEVA
Year 1 estimated EV/EBITDA (x)
18
16
14
Craneware
12
RapidCloud
Kofax
10
Sage
Microgen
8
6
Ideagen
K3
Fidessa
Sopheon
4
2
0
0
10
20
30
40
50
60
70
80
90
100
Last full year recurring revenue (%)
Source: Progressive Equity Research estimates, Bloomberg, FT.com, Yahoo Finance, LSE data
Overall our conclusions on valuation dynamics are :
28
§
Companies with high levels of recurring revenue tend to attract premium
multiples, both on EV/Sales and EV/EBITDA metrics
§
Companies with good proportions of SaaS delivery have the potential to
generate high and sustainable margins. This manifests itself in what can
appear to be extremely high EV/EBITDA multiples, which can be justified
on the basis of predictable revenue growth and sustainable margin
structure
§
Not a single business with recurring revenue in excess of 75% in our
sample trades on an EV/Sales of below 3x
18 October 2013
THIS PAGE IS LEFT INTENTIONALLY BLANK
29
18 October 2013
APPENDIX 1
Golden Book – highlighting existing e-procurement best
practice
The Golden Book of e-procurement practices is a study, carried out by a
consultant, which analyses in depth 28 electronic platforms from 18 countries used
for public procurement in the EU. Taking into account, inter alia, the needs of
SMEs and cross-border suppliers when using an e- procurement platform, the
report presents good practices and those that should be avoided.
The EC notes that there are currently around 300 e-procurement systems in
Europe. The systems vary in performance, reliability and security. Some are
ranked as ‘excellent’ while other systems are not easily accessible to foreign users,
who may need to use country-specific tools to access them.
In addition, the amount of user interfaces makes it difficult for companies to
respond to calls for tenders run on multiple platforms. In that respect, eprocurement systems draw a poor comparison with e-commerce tools such as
airline booking websites.
As we have seen with the rationale for reforming the Directives, these are two
examples of the barriers which the EU e-procurement market is addressing: lack of
cross-border interoperability and interface complexity.
e-TEG – forward-looking recommendations
In addition to the Golden Book, there is a complementary project known as the eTendering expert group (e-TEG) which has developed a blueprint for an ideal preaward e-Procurement system.
It suggests that e-procurement platform managers and services providers should
consider converging towards the blueprint in the medium term to reach eprocurement procedures that are ‘streamlined, user-friendly, interoperable, SMEinclusive and widely accessible across borders’. e-TEG makes recommendations
to contracting authorities, policy makers or software developers.
The aim is to simplify the e-procurement process, particularly, as it notes, for SMEs
and cross-border suppliers. In combination, the two reports (The Golden Book and
the e-TEG report) assess the current state of e-procurement and provide
guidelines for future development.
The e-TEG’s report offers high level strategic advice and operational and technical
advice on how to design, choose, operate and use e-procurement systems. Any
decision to follow this guidance is purely voluntary at present.
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Encouraging inter-operability of systems: From PEPPOL to
OpenPEPPOL
The concerns over interoperability and the lack of cross-border tendering have
been the subject of specific action. The EC’s Pan-European Public Procurement
Online (PEPPOL) project reached a successful conclusion at the end of August
2012. It piloted the development and implementation of technology standards to
align business processes for electronic procurement across all governments within
Europe. Its aim was ‘to expand market connectivity and interoperability between eProcurement communities’. Given that one of the drivers for reform of the
procurements Directives was that procurement markets are more national than EUwide, common technology standards are an important part of the remedy.
PEPPOL does not compete with IT service and solution providers. It is an open
standardised platform and PEPPOL's infrastructure has been designed to
interconnect existing networks. Consequently, solution providers will form a key
part of cross-border connectivity while offering services and solutions to their
clients.
Following the PEPPOL projects completion, the OpenPEPPOL Association,
comprised of public and private members of the PEPPOL community, has taken
over responsibilities for PEPPOL specifications, services and promoting
implementation across Europe. Its purpose is to enable European businesses to
easily deal electronically with any European public sector buyers in their
procurement processes.
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