Private-equity firm K1 Investment Management spent $125 million to recapitalize Certify, become its majority owner and go after expense management market leader Concur. K1 placed previous acquisitions Tallie, Nexonia and ExpenseWatch within parent Certify as wholly owned subsidiaries. Should the new entity maintain all four platforms as officials said it would, observers and competitors don’t see much change to market dynamics. But several sources questioned K1’s plan, from both operational and financial points of view.
The K1 portfolio addresses various niches. Certify claims to be a global player, suitable for companies of all sizes. It’s available in dozens of languages, supports scores of currencies and offers tax reclaim programs.
Canada-based Nexonia serves mostly smaller companies with expense and employee time tracking modules, as well as other spend management functions and ERP integration. Nexonia acquired ExpenseWatch in March 2016. Certify CEO Bob Neveu, who leads the overall entity, said ExpenseWatch is “a platform that has matured” and still counts “a number of customers.” Neveu said ExpenseWatch continues to take on new customers “when they have unique requirements that are specific to that platform.” But its website redirects visitors to Nexonia’s.
In December, Nexonia merged with Tallie, which has focused on accounting systems integration. Neveu cited its “easy, self-service” approach for small businesses.
The new entity will maintain branding and office locations for each of the four operations. It will invest in upgrades “to be protective” of the combined 7,500 corporate customers. “We won’t force a migration,” Neveu said during a phone interview. “We will never sunset a platform.”
In a followup email, Neveu wrote, “Each of our brands has a place in the market, which is evidenced by strong growth and positive customer experiences over the last several years. Our investment plans reflect increased resources and capabilities across product development, sales and marketing and customer success. We will continue to invest in each brand because we are stronger together.”
Recommendations by research firm Gartner seem to validate K1’s strategy of casting a wide net. “Select vendors based on their experience and capability of serving customers similar to you,” wrote Gartner analyst Chris Pang in a buyer guide published in May. “Place emphasis on out-of-the-box support for your organization’s country-specific and industry-specific requirements.”
According to Acquis Consulting managing partner David Kaufman, “It’s always an advantage when an expense player can speak intelligently about a specific vertical.” He likened that to TMCs, which usually serve many client types but sometimes establish expertise for certain industries.
This can be an advantage, if not a requirement.
“There is an opportunity for vertical markets; I don’t know that I’d run a whole business on it,” said Alan Rich, president of expense vendor Chrome River. The company focuses on law firms as clients and, more recently, higher education. But it’s got customers in many other sectors. “We find there is tremendous commonality,” Rich said.
Expensify founder and CEO David Barrett also downplayed the importance of segmenting the expense market by industry vertical. When Tallie or Nexonia beat out Expensify on client bids, he said, it tended to be because of reputation and connections rather than product differentiation.
Former Tallie CEO Chris Farrell left the company this spring. According to his LinkedIn profile, Neil Wainwright ended his tenure as Nexonia CEO in June 2016 and as a board member in October 2016.
Where Barrett and Rich parted ways was in their views of whether size matters. Barrett claimed Expensify has both smaller and larger customers than each of the four K1 brands. “It’s the same product that can address a wide range of needs in market,” he said.
Rich sees “a big difference between enterprise software and self-provisioning small business software.” An example of the former, he said, is a system with superior underlying core technology that can handle a multitude of languages, currencies and business rules.
During a Thursday morning phone interview, Gartner’s Pang said segmentation is more important in the enterprise market than for small businesses. “Specialization gives you a significant leg up as large enterprises look for extra capabilities — whether workflow, reporting, integration or just sheer industry functionality” like help complying with the Sunshine Act, he said.
For end users, it comes down to capabilities. “All the tools do slightly different things,” Kaufman said. “Even if 80 percent overlaps, that 20 percent to cross-sell could be significant.”
Pretty much everyone views basic expense reporting modules, corporate card integration, mileage tracking and a decent mobile experience with receipt capture as baseline features in any expense system. From there, K1’s brands “can leverage each other’s strengths,” Neveu said. “There are all kinds of opportunities to deliver service and value to customers. You can’t have blinders on and look at just travel. You need to solve the rest for accounts payable people” and other spend management functions.
According to Kaufman, the larger, successful providers differentiate by expanding the baseline functionality and integrating systems. Smaller players, he said, more likely need bells and whistles to make their marks.
“If [K1] wanted to focus on the strength of core functionality, there probably would be synergies from combining resources of the platforms and building that out,” he said. “But if they’re looking at bells and whistles, keeping them separate allows them to try other things and be more aggressive.”
But Kaufman doesn’t expect many changes in how companies view expense management system providers. “If the four organizations stay as separate brands and [are] not consolidated, it really doesn’t change anything,” he said. “No one cares that K1 owns them. Companies are just looking for the best solution.”
A few sources said that any time a competitor ups its game against Concur, that’s only a good thing for buyers.
KesselRun Corporate Travel Solutions vice president Krissy Herman speculated that maybe Certify and its new siblings would improve workflows and attend to complex audit rules. “I don’t see how they can maintain four separate product lines forever,” she said, “and it will take time to build out functionality to match Concur. But for multinationals, there is a lot of potential.”
Execs at Coupa, Chrome River, Databasics and Expensify each said the K1 combination would not affect their sales strategies.
Rich, who said he didn’t know the specifics of K1’s plan, said on the surface it appeared challenging to combine “into a cohesive business” all the products, people, technology and user interfaces.
“Within the world of those four companies, there might be some turmoil and some confusion and the kinds of problems that emerge with any kind of consolidation,” said Databasics CEO Alan Tyson. He suggested that the expense market “doesn’t segment cleanly at this point for a multi-product strategy.”
“It could be that this will be a distraction for all concerned,” Tyson added. “In the wider market, it is pretty much a non-event.”
Sum < Parts?
Private-equity firms usually seek returns by generating operational efficiencies. They often combine the products and services of acquired companies, shedding overlapping systems and processes.
Tyson said the “phenomenon” of expense system providers becoming investment vehicles isn’t about technology, customer service or even profits. “It’s about positioning yourself to be flipped,” he said.
Bryan Eaves is partner and consultant at Sourcing Business Solutions, and has had some experience purchasing and installing expense management software. Asked about K1’s plan to maintain all four platforms, he wrote by email that investment companies in such a position should consider three factors: Would combining them create long-term value for the company and its customers? Would merging brands give the combined one differentiation from competitors? What are customers saying?
“As a PE firm, you should consider that most customers don’t wish to purchase a separate software platform requiring implementation but will gladly accept additional features for small increases in cost if value exists,” according to Eaves.
Pang said cost-shaving is possible even when “keeping things separate and alive.” He cited enterprise software company Infor, which bought dozens of companies during the past 10 years. It kept many on their own P&L, while building an integration platform, overlaying common reporting and designing uniform support services and cloud-based back-end systems.
Kaufman pointed to a precedent from the advertising industry. Interpublic Group, he said, bought a bunch of ad agencies and let them compete. “They saw a profitable industry and wanted to own more pieces of it,” Kaufman said.
According to the Gartner guide, the $1 billion market for travel and expense management applications is experiencing double-digit growth.
Neveu said investment in the expense management category is all about growth. “It’s not about carving back for profitability,” he said. “It comes down to the amount of revenue driven by customers on the product lines. It is reasonable to have support teams supporting that revenue.” He added that “leadership teams” across the brands are “intact.” Eric White serves as president of Nexonia and Tallie.
Neveu also signaled additional acquisitions. Those could be more “pure-play” expense companies, he said, or “peripherals” to support a broader focus on spend management. A K1 statement noted “additional capital available for further acquisitions.”
Neveu said he expected all four brands to grab more market share in the meantime. The Certify-led crew will look to share some resources and develop centralized services. Asked about merging or keeping separate areas like finance and human resources, Neveu didn’t share any plans. How about coordinating corporate sales? Neveu said the entity will be “very thoughtful” about how to do that. “We don’t want to engineer a bunch of restrictions on sales teams,” he said, “but we need coordinated efforts.”
But he did say that a larger overall entity presents an opportunity to build more and deeper partnerships with other industry constituents — TMCs and booking tech providers, for example.
That’s an important consideration for organizations in the market for an expense system, especially global companies. Installing one can be time-consuming and often requires coordination with various departments. A little forethought can go a long way in preparing a subsequent online booking tool implementation. To create a working end-to-end T&E system, buyers need to ensure the expense component seamlessly and accurately brings in data feeds from multiple corporate card programs.