Insight # 53 : Getting to the Future

The Art of the Play: An Interview with Oxygen Finance's Mark Hoffman

By Dian Schaffhauser

Mark HoffmanSerial entrepreneur Mark Hoffman is on the move again. The co-founder and former CEO of Commerce One and Sybase and former CEO of Everdream has settled into the role of Group CEO for Oxygen Finance, a start-up with headquarters London. Where Hoffman goes, money follows. This San Francisco transplant sold Everdream to Dell in 2007; he sold Sybase to SAP in 2010 for $5.8 billion. This time, however, the "play," as he calls it, is helping companies generate actual revenue on their accounts payables.

The basic idea is this: Oxygen's Early Payment program lets buyers accelerate payment to their suppliers in exchange for a rebate, which is deducted from the supplier invoice as the point of payment and returned to the buying organization. Big organizations that do a mammoth amount of purchasing are seeing the advantages of this model. For example, Oxygen has been asked by one of the biggest NHS Trusts to examine its spend on everything from medical equipment to patient transport. As a result, the "early payment" program put into place is expected to deliver £3.5 million back to the organization over the contract period.

In this interview, Hoffman shares the Oxygen Finance philosophy, reveals where the company is headed in the near future, and explains why he just can't seem to stop working.


Pcubed: The Oxygen philosophy is "spend is the organization's greatest untapped asset." How does spending become an income stream?

Mark Hoffman:The whole idea is, you owe your supplier money, which is normally considered a liability and [you] haul the asset out of that. Historically, the way you do that is to negotiate what is known as a discount with that supplier for early payment. People would say, "We'll pay you net-10 for a one and a half percent discount." Sounds good. but it's rarely taken, because people can't really pay in 10 days. So the discount never gets taken even though it may have been negotiated.

David Brown, [Oxygen Finance's founder,] really thought about that. You can take the discount and turn it into a rebate instead, so the buyer would pay full price for whatever he was buying, and the supplier would rebate back to him the one and a half percent discount. It's a little bit of a twist. But if you have a rebate, then a rebate gets classified as income.

What we do is go into a buyer and say, "I can bring you new income, and I can bring you cash, and I will do that on a free basis - a contingent basis." We take a slice of that money that is being rebated back to the buyer.

That's really the play that we have. It's a simple concept. But it's fairly complex to do for a variety of reasons. As it turns out, we're not just a tech company selling software to somebody. We do R&D in the tech area and provide software, in a SaaS model. We do financial R&D, and create financial instruments that help people do what's going on here. If you pay somebody in 10 days, and you've been paying them in 60 days, you have to finance that spread. That means you have to bring money into the equation. That can come from the buyer or it can come from a third party, such as a bank.

The third component is the system integration piece, which is where [companies such as] Pcubed comes in. There's a lot of friction in the buyer/supplier process. A lot of invoices are still done on paper. You want to automate it and turn it into e-invoicing. You have to better automate the purchasing department itself, so the approval of the invoice happens quicker. You have to bring people in to negotiate the discount between the buyers and suppliers. We'll bring in tools [and partners] to make that faster, easier, and better.

The nice thing about it is that now that this is income, the CFO is a lot more interested in tracking that money when it was just a discount. He wants to make sure that cash gets allocated to the correct project, so he pays a more attention to it. So it has a lot of secondary benefits that are really good for the buyer and the supplier. The supplier gets early money faster than he ever would, and the buyer gets cash back into corporate that they weren't getting before.

Can you spell out the advantages of that kickback being a rebate vs. a discount?

You can't take the discount as income. It's just an offset. Instead of paying his supplier 100 percent, he pays his supplier 98 percent of what the cost of the product is. But if it's a rebate, it's money coming back from the supplier as a rebate, and it can be recognized as income.

Then your company just takes its cut directly.

We take a slice of that rebate.

A lot of people think they can do it themselves. But let's look at reality. Very few companies are able to set up and manage even a discount system. So a lot of discounts don't get taken for a variety of reasons. You can have volume discounts. You can have discounts on products that may or may not get processed by the treasury department, because now payments are handled by a separate organization. Or maybe the personnel department bought it, and the treasury department is paying. So you start to look at that across these organizations. It becomes very complex and often these discounts are not taken at all. Sometimes they're not even negotiated.

Once you come back and set up the system, the personnel department can pretty much maintain it, but they can't get it to that state. And they need something to run it on, by the way. That becomes us.

What kind of cash are you talking about?

We say the minimum we'd like to do is 250 million dollars of spend. We've got some things that are way over - billions in spend. When you're talking about one and a half percent of 10 billion, it's an interesting number. [Ed.'s note: $150,000,000 worth of "interesting," to be precise.]

Is the company still raising funding?

The company has actually raised a lot of money. We've raised £13 million to date. That's a lot of money. We've done it all through friends of the family - some pretty sophisticated friends, by the way. So we're still raising money.

This is a very, very big play. Just to give you an idea. I'll tease you with this a bit. We have a pipeline that is about $1 trillion of spend. We won't address all of that, but still... [Ed.'s note: We'll do the math for you. That could represent $15 billion in rebates for those Oxygen Finance customers.]

What are you generating back in revenues?

The minimum deal is a 50-50 split of that, but that ratio could change. So we might be delivering 70 percent of that spend back to the buyer and 30 percent to us, which we have to split across a bunch of different partners.

So your partners are also doing a contingent fee kind of deal?

Yes. The reason they do that is it's reoccurring money. It happens over a monthly basis, based on performance. Our contracts are four to five years long. Normally you might do this job and make $500,000 or $800,000 or whatever the number is, and it's a one-time shot. Here you've got a piece to share and maybe over a longer period of time, you're just going to make more money.

How long does it take to get this solution put into place?

It can take 12 to 18 months.

Why so long?

You have to negotiate. You might have 10,000, 12,000 suppliers out there. Ten percent of those suppliers are the big guys, and they do probably 80 percent of the spend. Then you have this longer tail of suppliers that you still want to go after, because the tails can be pretty big in a big company. At British Telecom, the tail is one and a half billion dollars. You want to go after those guys. We come into a company. We segment that spend very carefully to understand the tier-one suppliers, second-tier suppliers, third-tier supplies.

But you also have to be careful of that. You could have a really big company that you're buying a little bit from, which means you want to treat that really big company carefully. You don't want to send them a little email that says, "We have this program, and we're going to take one and a half percent spend from you." The big companies you want to talk to directly.

Some of these small guys may be doing $10,000 or $20,000 with the buyers, and you can't meet them face to face. And you can't even talk to them on the phone and make it economical to do that. You have to do that education via emails.

For the little companies we built a product called Pure Oxygen that allows us to track and market to those companies on an automated basis. Because we're acting for the buyer, we'll create emails that go out to these smaller suppliers and say, "We've put together a platinum program for suppliers that will give you direct access to buyers and phone numbers and direct places to send your invoices. And by the way we also want to accelerate our payments to you and pay you within 10 days. But for that we want to ask you for a one and a half percent discount. If you don't want to do this, you have to opt out of the program..."

Going after the smaller companies is really an automated marketing program that has to be run and monitored and controlled.

Is the discount the whole basis of the company?

We have some follow-on products that are coming along. We have a product [Benefits Capture] that's being released around September 20 that turns purchasing discounts into rebates. Say a purchasing guy is talking to a buyer: "If I buy a thousand of these things, will give me a five percent discount?" We can take that discount and turn it into a rebate and have the benefit of that becoming income for the buyers.

Rebates aren't new, but it's mostly in things like the retail industry and a few other industries. They're very hard to do; they take a lot of effort to calculate. If you do a rebate here in the [United Kingdom], you have to deal with the VAT taxes. In the [United States] you have to deal with federal taxes, state taxes, county taxes, city taxes.

If you're doing it "by hand," and you're a billion dollar or $10 billion company, or even smaller, it becomes very complex. These guys are getting thousands and thousands of invoices. What we do is bring this enterprise rebate automation equation to the picture, and we do the calculations for them.

The initial stuff is taken out of the ERP to do these calculations, and then it's put back into the ERP with the calculations, so it's processed and the system of record is still the ERP of the company. We're not trying to displace an ERP. We're trying to fill this quasi-financial technology hole in the system.

We also have a supplier portal that we're coming out. A supplier portal is just a place for buyers and suppliers to have some communication, where a supplier can say, "I want to check on the status of my invoice, and how many invoices I have in there. What's going on?" He'll be able to look at that online.

This is our first release of the supplier portal. Our goal is that it becomes a real point of interaction between the buyers and suppliers - a communication point. I want to [the point] where the supplier can say, "I'm getting to the end of my quarter. I'm really overstocked in these products. And I want to offer out an additional five percent discount to the buyers." Today, that is very hard to do. We want it to a point where the supplier could come and just change his discount online to five percent and be able to communicate that back both to the buyers and the original requisitioner of the product.

This sounds like a Groupon for the enterprise, mixed in with Commerce One.

It does have some flavor like that.

Previously, you've referred to this whole endeavor as "unfinished business" from Commerce One. Was this where Commerce One expected to head, if the dot-com bust hadn't occurred?

It does have a lot of aspects.

It's easier to code, just given all the developments that have gone on. Things like XML are at a much more advanced stage than when Commerce One was there. [Commerce One was acquired by Perfect Commerce in 2006.]

And the other products that we're talking about - the supplier portal and all of those - they're easier and faster to build than they were back in the Commerce One timeframe.

Another example: I'm building an analytics product that can sit on top of all of this and monitor it and make sure that things are happening on time and be able to look at the processes going on - invoice approval and approvers and all of these things that happen in these corporations and be able to see and do things automatically on that side of the equation.

The CFO is suddenly being put into a position where he or she could generate revenue for the company.

Exactly. Our message is pretty simple. I'm going to bring you income. I'm going to bring you cash, and I'm going to do it for free. The CFO understands the financial play that all of that involves.

Why not settle back and do something other than work?

Hey, I could live for another 40 years, you know. I like golf, but I don't want to play golf every day. There are just a lot of things to do that are so exciting. And I still like technology. I really like the idea of tying technology to financial because that's something different. And being in London is different. Everything I've done I've tried to do where something is unique. I don't want to repeat. I get asked all the time if I want to go these boards for new database companies. No. Did that for 11 years.

You made the move to London from San Francisco. What do you miss and what you really enjoy?

I definitely miss my family. I moved over here in November. My youngest daughter was graduating from high school. So my wife was back there more. Now my wife is coming back and forth more often, and I can go back and forth more often. London is not a bad place to go back and forth to. I just had dinner on Monday at the House of Lords. It's not the average place to have dinner.

For further information on this article and Pcubed please contact Carl Dalby, Head of Business Development, at carl.dalby@pcubed.com.