Whither Ariba?
Ariba has great customers, a good product, and no effective competition. Why are they floundering?
Coining Money for Customers
Ariba has generated more value for its customers over the last three years than any other application company. Consider:
Exxon Mobil saved $1 billion. Tyco International plans to save $1 billion over the next 5 years. British Airways has announced savings of $200 million/year. Merck will get $1 billion over the next five years. Disney, AstraZeneca, General Dynamics. Target. The names go on and on.
So why isn't the Ariba of today, with its record of proven and fabulous successes,
the high flyer that it was in the days of Keith Krach, when it had no software,
no vision, no track record, and
what I would call a predatory attitude toward customers' pocketbooks?
The short answer is that nobody is giving them a percentage.
The long and more interesting answer explains why.
In the first article in this series, I argued that best-in-breed application
companies that focus
on delivering software cannot survive; the cost of doing business is too high and
it is impossible to defend themselves from the Big Two's best development tool,
Power Point. To survive, they have to focus on delivering value reliably. Since
this is something the Big Two can't do and don't want to do, it gives them
a defensible competitive position.
Most of the people responding to that first article argued that software companies are ill-equipped
to do this. "Maybe that's what they have to do," one observer said, "but they
don't know how to do it, they're not organized to do it, and most of the
people who work at those companies don't want to do it." And one of the examples
he mentioned was Ariba.
Hard Times at Ariba
To some extent, he is being unfair. If any application company has focused on delivering value reliably, it is Ariba. Since Bob Calderoni took over and told his troops, "I don't want to sell stuff that doesn't work," Ariba has built up a service organization, incented sales of software and services on the basis of margin, acquired companies that provided special services, like data cleansing, that were needed if implementations were going to work, and of course, bought FreeMarkets, the poster child for the new-model application company.
Unfortunately, this is my friend's point. They've been doing all this, and they are still floundering.
At the Ariba User Conference in Apirl, this was painfully visible.
The most worrisome thing was the dissension. Yes, Calderoni's optimism a few months after the FreeMarkets acquisition had turned out to be unjustified. Yes, profits were nil. But when you ask why, you want and expect the usual last-place manager wasn't our year guff. Instead, you got finger pointing. It was North American sales. It was weakness in the core FreeMarkets business. It was sales incentives. It was Dave McCormick, whose contract specified that he would get the top job at year end or a big payoff. It was Bob Calderoni, who didn't want to let go.
When everybody is blaming everybody else, I tend to think the problems are structural, not personal. (People like Keith Krach occasionally prove me wrong.) In this situation, the structural problem is that neither Ariba nor FreeMarkets has been able to convince the other of the soundness of their vision. And the reason, I think, is
that both visions were flawed.
But, rather than learn from each others' criticisms, both sides
just decided that the other guys were wrong. As my friend says,
"When it's a choice
between change or die, a software company will usually prefer to die."
Delivering Value Reliably
So what was the flaw in the vision of each? Well, let me focus
on Ariba, since they are the survivor. For Ariba,
it's the problem I mention above.
Ariba customers save fabulous amounts of money with the aid of Ariba. But nobody
wants to give them a percentage. Why is that?
For those of you who have not read my generally laudatory reviews of
Ariba over the last few years, some background may be needed. Ariba
provides software and services that do what Ariba calls "spend management."
The aim of an "end-to-end spend management solution" is to allow companies a) to
"get control" of their spend and b) make smarter buying decisions."
Spend management is a fallow area.
In many, if not most companies, the purchasing
department can say, with Othello, that they spend
"not wisely, but too well."
At these companies, purchasing is a backwater,
where people of little talent spend their time handling paperwork and making a
pain in the rear of themselves trying to prevent everybody else from spending
too much money on high-end hotels and pens.
In a very few companies, the opposite is true.
"Sourcing" (not "purchasing") is strategic. In these companies, the CPO hires
MBAs instead of part-timers and short-timers and makes
a systematic effort to institute processes and systems that will
enable companies to spend far more wisely and far less easily.
The rest lie somewhere in between.
If you want, you can think of the spend management market
as consisting of tranches, divided up according to the maturity
of spending organizations.
In the top tranche are the companies where spending is strategic;
at the bottom are the companies where the most important
tool in spend management is the fax machine.
At the core, Ariba's value proposition is that it helps
your organization move up a tranche or two.
For this value prop, their biggest competition is not the Big Two.
It is McKinsey or
AT Kearney. These consulting companies have been improving spend capability for a long time. They come in, analyze your spend,
point out areas where you're spending too much,
put you on a Ten Step Program, collect some big fees, tell you that
you've moved up a tranche,
and go away for five years,
until they're needed again.
Expensive? Yes. But reasonably reliable. They come in. You do what they say. You save money.
But it's a lot of money. And during the five years they're gone, you backslide quite a bit. So isn't there a better way?
Ten years or so, people thought that they might also be able
to get some improvement in spend maturity by putting in a classic
ERP system. Sometimes this proved to be just the ticket.
The CIO at IBM told me some years ago
that the primary benefit they got out of their
SAP installation was the savings in purchasing.
Just having a record of what they spent
all in one place enabled really substantial
savings.
But over the past ten years, people have realized that
a back-office system isn't enough. (Poster children for this
are Disney and ExxonMobil, both SAP customers, who have
chosen Ariba to make the changes they think they need in their
sourcing organizations.)
To get a system to do the sort of thing McKinsey does, but to do it
across the company's entire spend
(McKinsey will focus on the top ten or twenty percent) 365 days a year, you
need a system that will allow you to
do analysis and act on that analysis in an organized
and coordinated way: an end to end spend management
solution.
With that solution,
you can create the kind of strategic sourcing organization that
British Airways reports it has developed or that Merck is planning on developing.
Five years ago, when people were first figuring this out,
there were fifteen or so companies that claimed to have
spend management solutions. But today, all but
one has effectively fallen by the wayside.
So why aren't CPOs lined up in the parking lot waiting
to talk to Ariba salespeople, so that they, too, can
do what Exxon and Disney are doing?
The problem is that it's unclear what contribution
Ariba is actually making to these successes.Ariba
doesn't produce the change; it is an "enabler" of change or even a "critical enabler."
There are lots of
other enablers, too. If you look at the cases, it seems that the most
important
enabler is a very strong-minded purchasing
executive who drives his or her department forward with a bull-whip. The
second biggest appears to be a
major external driver--a reorganization, a catastrophic downturn
in business, an accounting scandal.
So when CPOs look at the Ariba customers' successes,
they may be envious, but they
don't necessarily believe that Ariba could give them the
same success that it gave Exxon. And that's the flaw in
Ariba's vision.
To be completely fair-minded, anybody who feels this way probably has a point.
You could argue that Ariba wasn't a
terribly important factor in some of these
fabulously successful implementations. For one thing, at some of them,
the software used was, shall we say, in its early stages.
Reporting tools were
"pretty surface-y" in the words of one Ariba executive, and other tools
were pretty much non-existent. If you stare hard at these,
you could argue that the software wasn't an enabler at all
and that they could have used SAP's far, far weaker SRM solution
just as effectively as Ariba's.
Is that argument right? I don't think so. But the
fact that the argument can still be made points to that
fundamental weakness in Ariba's current market position.
It's not clear to people that Ariba can reliably deliver value and
that the value delivered is due to Ariba.
Making Their Way
To give you an idea of how this problem plays out for Ariba, consider
some situations I ran into recently which I'll present as a single, composite company. This company, one I know pretty well, was
kicking the tires at Ariba and for good reason.
Their purchasing organization definitely needs help.
But they also have two different back-office systems
and enough money already committed to them in unused seats
that getting some SRM capability would be comparatively free.
Should they pay money for Ariba, do nothing, or try to deploy some
of those "free" seats. I don't know. I know this
company prety well, and I don't know. They don't know either.
Probably, one of the ERP vendors, who is flying platoons
over to their headquarters, has
no idea. But they're so thoroughly on top of the situation
that their lead salesman on the deal called me up a few weeks after
the conference and chewed me out good for a mildly favorable
comment I'd made about Ariba.
The answer would depend on their spend, their corporate goals,
the maturity of their
current purchasing organization, what I'll call "the route in" to
improving spend, and so on, and so on. But the IT organization
that is heavily involved in this deal is evaluating based on
functionality (not real functionality, but the Power Point
version), and the purchasing organization doesn't know enough
to take control of the decision.
Oddly enough, the situation is somewhat reminisicent of the old
ERP days, when buyers really didn't know anything about these systems
and companies called "analyst firms," provided advice. But now,
the total corruption of the analyst market (and their natural bias
toward IT) have has made it impossible for this company e
ven to find anybody
who can give them reasonable advice. (B2B Analysts is simply too
small.)
So what would you do if you were Ariba? Give up on this fight
and
hope you could get them when they were really ready? Go all-out for the
deal and hope you can do the right thing if you get it? Piddle
around, make a half-hearted showing, and waste resources?
There is no easy answer.
In the long run, if my argument is correct, they need
to build up a compelling and widely accepted case that the value
is available, but only from them, then go to the CFO with this case.
Today, they're not in a position to do this.
So what do you do in the meantime?
You fight a holding action and try to help companies like this one do
something in the area, with the eventual aim of getting them to embark
on a program of massive
self-improvement.
These companies will typically zero in on one, painful problem. "Contract management
is broken," they say. "So we need a contract management solution."
So, to the companies that say this,
Ariba offers a contract management solution. Of course, Ariba
is not the only application company beating down the doors.
Usually, when a company says this, a cat fight will develop
between the best-in-breed contract management providers, Ariba, and
the two enterprise providers.
These cat fights are difficult and unpleasant.
If you look at functionality
alone (in the actual products), the best-in-breed providers
win. If you look at Power Point, alone, the Big Two win, because
they can offer a single platform.
To win, Ariba has to make the complicated case that its contract
management solution will do best because it is
designed to integrate with an end-to-end spend management process.
To win this fight, Ariba must get the customer
to recognize that
integration with other parts of the process is valuable, but must also
get them to see why they don't need automatic integration
with their back office
solution. (The answer is that the back-office
systems aren't designed to use the information that's
in the contracts, so integrating the contract management
system with the back-office system has
roughly the same utility as integrating the phone system
and the electrical system in your house.)
If all the participants were high-minded Greek philosophers,
reason might well win out. But the selling environment
is one that the "red in tooth and
claw" capitalists exult in. The truth in advertising
and products liability laws don't seem to apply
to application companies, and it requires something close to genius to sort out the conflicting claims. Who wins thus seems to me to be mostly a matter of chance and salesmanship.
When Ariba wins--and it does win, their hope is that this will be the first of many and the one that costs the most. They'll use this win as a toehold from which to sell the full spend management solution.
If
Ariba can get the product in,
build a relationship, and work on that to sell them the rest,
it has a good chance.
Selling Toeholds
Writ large, that's Ariba's strategy now. Within spend management, there are
four or five reasonable "ways in" for companies. You can improve your
reporting and thus your analytics (though you will have terrible data quality
problems). You can improve your communication with your suppliers (though
if you do this wrong, it's sterile and pointless).
You can start doing auctions (though there are diminishing returns).
You can target segments of your spend and bring a more disciplined
approach to that segment. Or you can even do an e-procurement
(requisition) system.
For any of these ways in, the panoply of offerings from Ariba is now quite impressive. Now that they own FreeMarkets,
the range of options available to customers
who want auctions is terrific. With the data cleansing acquisitions
and the improvements in their analytics, the reporting story has
gotten much better. The services functionality is gaining more
plausibility (e.g., customers). And Ariba is making the toeholds
easier to stand in, because they're taking a tip from PeopleSoft and making
their product easier to install and maintain.
Ariba has even come up with a terrific new toehold.
It announced at its conference
that it was now allowing SAP and Oracle e-requisition customers
to communicate
with suppliers over the Ariba Supplier Network.
This last one is particulalry interesting to me because it's
a network effect play. It's nightmarishly expensive for a purchasing
organization or IT department to
create connectivity with its suppliers;
similarly, it's very difficult for suppliers to manage individual connectivity
with its customers. So it's better for both sides to have a single supplier
of connectivity--dare we call this an e-marketplace or a VAN? Almost
by default, Ariba has become that network.
And, starting this year, it is actually making money from it.
Since January or so, large suppliers are being charged a relatively nominal
sum for each connection it has established with a buyer over the Ariba Supplier
Network.
This Supplier Membership Program is a perfect new-model
business. It's available only from Ariba. It's sold on a subscription
basis. It provides compelling and immediate value. And it provides
a toehold for customers who may later want to leverage the network
to get better control over their spend. No wonder Ariba
wants to "let" users of
SAP Professional Buyer connect (for a small fee) to the ASN. I don't
know that they've actually sold any connections yet. But it appears
to me like a win for everybody.
(An aside. SAP now offers supplier connectivity for its Professional Buyer
customers through Perfect Commerce, and it pushes that hard. The
aforementioned salesperson was positively derisive about Ariba's
supplier network and had all the "facts" about his at his fingertips.)
So Ariba has a lot of toeholds. Auctions. Analytics.
Supplier networks. The worry is that these toeholds may not be enough.
It is a
legitimate worry. As one Ariba person told me, "If you look at the Fortune
2000, half of them are simply shut out from us..." presumably because
their decision makers don't wish to do anything but follow SAP's or
Oracle's lead. (A month later at the SAP conference, one of their
SRM executives said the same thing to me when he said, "Well of
course our cutomers are the laggards.") "...and we can't just sit
on our duffs hoping to pick up the rest.
We have to expand our markets."
They are doing this in two ways that I can see: improving their global
presence (something FreeMarkets helps them with a little bit) and trying to
move down to the mid-market. I think the first may have some merit; with
the second, while there may be some opportunities from FreeMarket's old
QuickSource product, it's a bit hard to see. It's not just the
old history and legacy problem.
It's a fact that the core value proposition works better for large
global companies.
What To Look For
So what are we to make of Ariba? Are they on the downward
spiral that people at SAP claim they're on?
Certainly, there are some serious worries:
- By any measure, the integration with FreeMarkets
is not working. Particularly worrisome is the fact that the
toehold strategy has not been productive there. Existing FreeMarkets customers
seem to have little interest in buying the Ariba
enterprise spend management suite.
- The company just can't seem to shed the baggage from the
past. It isn't just the lawsuits or the costs of excess space
leased at the top of the market (now resolved, lease
costs reflect the costs of space used). It was the brand. No one publishes
Q-ratings on software companies, but surely Ariba's is still negative,
far more negative than it should be.
- Though Ariba has clearly been moving towards a new business model,
what it has arrived at now doesn't have a lot of coherence. Above
all, they haven't yet cracked the code, as noted above, on showing
that they can deliver value uniquely and reliably.
Still, I'm a fan. Ariba's got a better mousetrap, they've
got no competition (for their core value proposition), and they've
got customers who have gotten benefits that some people would sacrifice
their first-born for. I think they can succeed wildly, and I'd like
to believe that they will.
What Ariba is hoping for is that either they or the market
will reach some kind of tipping point, where CEOs and CFOs will
say, "Hey, we've got to keep up with our competitors in the
sourcing area," and everyone flocks to Ariba.
In the meantime, they've got to establish themselves in
a more stable, even unassailable position. To do this, they're
going to have to do any or all of the following.
Marketing. Above all, they have to articulate the case
for the value they provide. Right now, when you look at the
Ariba customers who are doing fabulous things, it's very unclear
that you or I or the lamppost could do the same thing.
Not all the articulation has to be done at once. At the conference, some senior marketing people were talking
to me about an on-demand approach, something that with QuickSource
they already do. If they can take a page from Salesforce's book
and make On-Demand an excuse for making an end run around IT,
this could be very successful. It provides a clear and simple value (you don't have to deal with IT) that is completely reliable.
Sales. Make the toehold strategy work. Signs that this
is working would include more sales of Ariba software to FreeMarkets
customers, extension sales (more software sold to customers who
have bought a toehold), and more usage of toeholds like invoicing.
Renewal (Subscription) Business.
Bottom line, Ariba has to move more and more of its
business to selling expertise, software-assisted
expertise, and specialized software services
on a subscription basis. Thus, the single biggest indicator
to me that Ariba is succeeding would be the fact that
the renewal businesses are getting more and more solid.
To me, if Ariba grows in this area, it will show that they really understand and can take advantage of the opportunities in their chosen area. In sourcing, wisdom is scarce. Expertise (or even software-assisted services like ASN or data cleansing) are
valuable
for customers but impossible for even large customers to maintain on their own. Ariba is in a good position to provide these things at a relatively low cost, but with a very high cost of entry.
Right now, it's hard to tell what this renewal business looks like. Sales of the hosted FreeMarkets'
QuickSource and the Supplier Membership Program now amount (I would guess) to something
more than
10% of the business. If the percentage of revenue from these and other renewal services rises consistently, it will be encouraging.
Once you start looking at Ariba as a renewal business, then this percentage alone won't be enough. One will have to look
look at renewal rates, customer sat, etc.
Oddly enough, when I say renewal, I don't necessarily mean
hosting. To me, if Ariba becomes an On-Demand company, that will be because On-Demand makes sense as a sales strategy, not because they can make a lot of money from hosting.
One final indicator of success in the renewal business would be any signs that Ariba is able to get SAP Professional Buyer customers to integrate with the Ariba Supplier Network. Oddly enough, I don't
think it would be all that bad for SAP to encourage this; the plain
fact is that SAP can also profit from this integration, because it charges for connectivity too.
Financials. If Ariba can ever make a profit, show
that the business is growing, and generally show that it is established
in its niche and not slipping out of it, the reliability of its
value delivery would increase greatly.
Brand. Pound for pound,
Ariba probably did as much to sap investors and customers'
confidence in applications as any other software company. They're
still paying for it. This is one of those drains,
like the leases, that hang on long after the management left.
The leases have been dealt with. The negative Q-rating still hasn't been. When it is, that, too, will be a sign that Ariba has surmounted its problems
Extending the Market. As noted above, Ariba is now trying
to open up new markets for its spend management solution. Successes
in this area will also be a strong indicator that it has established itself as a new-model company.
Ariba's strategy now is a little scattergun. Personally, I see more hope in new geographies (leveraging some FreeMarkets
capabilities) and in on-demand auctioning (QuickSource) than I
do in moving to the mid-market. The full Ariba solution makes
the most sense for large companies not small ones.
Why Care
When you talk to Ariba customers at their user conference, one
thing you are struck by is how difficult it is for them to grasp
the core Ariba value proposition. I remember talking two years ago
to a team from a bank (not, eventually, a buyer) whose company was forcing them
to use a method for justifying the purchase that essentially negated
the practical business case.
So it was both pleasing and sobering to run into several companies at the
last user conference who were groping their way toward using the software to make real operational
improvements.
It wasn't just the Tycos and Mercks. I remember sitting in the back of one presentation room with one of the people who had designed the software that the presenters
had decided to buy. For that presenter, the question was
whether the operational approach they would have had to adopt
with Ariba really was justified. The simple answer was, "Yes." But
they had to go through a year of study and analysis before figuring
that out.
At the end, I looked at the developer and said, "Did they really have
to go through all that?" The developer replied, "Well, at least
they got there."
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