The Alpe d'Huez
Ariba merges. Now what?
The Outlook
When two weak swimmers are caught out in deep water, their natural inclination
is to avert drowning by clinging to each other.
We all know it won't work, but that's what happens.
Are FMKT and ARBA like those two weak swimmers,
unable to make it on their own and, in desperation,
looking to the other for support?
The market seems to think so; ARBA stock post-merger is at 52-week lows.
I've been watching these companies for a long time now,
and I think the market is wrong. If the two companies are gasping for air, it's because
they're two fairly competitive bicyclists, who have to climb
the Alpe d'Huez (the hardest climb in the Tour de France), and
have decided to draft each other (save strength by riding in each other's wake).
I'm not saying they're going to make it. The Alpe d'Huez is a formidable
climb. But I am saying that the struggle is not pathetic, not silly,
not doomed. It's simply a big challenge, whose parameters are clear.
Here's what the new company has to do:
- Figure out a very large, but very confused market
- Make money with a business model and go-to-market model that
is sane, but never really been tried before.
- Convince the Street and the marketplace that this time,
this company actually provides a unique and
compelling value proposition.
Nothing new, here.
These were the challenges two years ago, too.
What is remarkable, though, is how much the situation has improved for Ariba
in the last two years and how much better positioned it is.
Let me go through each of these challenges in turn.
The Market
The core market for Ariba is the purchasing organizations at large companies, the people who manage the company's spend on raw materials, services, temporary
labor, supplies, etc. Historically, this group has not been a big
buyer of software; they were largely bypassed by the ERP
revolution and even by the e-procurement revolution.
Purchasing
organizations vary widely in effectiveness. A few work really well. They are organized
and centralized, with well-educated and knowledgeable buyers, who
understand what they're buying and can get excellent prices and very
high quality on everything. Others work really badly;
they do little more than operate fax machines.
The large, large majority do some things well, many things poorly, and operate at a level that is far below what they could achieve.
Most of them would like to improve, of course. Two years ago, the organizations that wanted a big improvement fast would not typically turn to a software company.
They might bring in a crackerjack VP of purchasing, or they might
hire Bain or
McKinsey (or IBM) to analyze their sourcing.
If they did turn to software, it was because
they had a specific problem that software might help with,
e.g., too much maverick spend (to be controlled by e-procurement), or
not enough price pressure on suppliers (to be managed with auctions).
One reason for their doubt was the shabby record of software installations, relative to the claims. But another reason was just plain common sense. The key in purchasing organizations is to buy smarter. Software by itself doesn't make anybody smarter. These organizations saw and I saw and you would see that at most, software would have to be a component of a larger effort. You can't just throw some simple-minded auction software at an organization. You have to figure out how the auction is going to be used within the context of your existing supplier relationships.
Software can give you accurate information
about your spend, help you coordinate efforts in strategic areas, provide
continuity in your sourcing process from strategy to compliance, or let you
use whiz-bang tools (auctions) to put pressure on suppliers. But
if your data is bad or you don't know what to do with it, your compliance
with contracts is poor, or your understanding of your suppliers is poor,
software won't matter.
You wouldn't hear this from the software companies or the analysts,
of course. But I did hear it two years ago from potential customers.
As always when
a software idea hasn't crossed the chasm, these were prudent buyers
who were cautious. They wanted proof and a clear path forward and an
understanding of how the total solution would be achieved. They didn't want
just a CD and a prayer.
Two years later, the view of what this software is and
how it can be used has changed, I believe.
Two things have happened. First, there are now some startling
proof points. Very large brand-name customers have changed their
sourcing processes substantially and saved big, big bucks. Second,
the market is coming to understand how software (or FMKT's
expert services--for my purposes, they are the same) can
be used effectively.
Of the two changes, the first (the big successes) is the more startling and the more
tangible. These stories have not gotten the attention I think
they deserve, so let me tell you about a few of them, briefly.
At the Ariba User Conference, I heard three.
The staggering one was
from ExxonMobil, which reported billions (I've been
asked not to repeat the actual number) in procurement savings post-merger,
a savings
that they say they could not have achieved without Ariba capabilities.
Billions.
Of course, you might expect that from a huge global company
that is going through a merger. But what about an airline? Airlines
are smaller, and they don't have a lot of money to throw around investing
in software. Well, at the conference, British
Airways got up and said they had saved 350 million pounds in 2003
and halved the size of their purchasing organization. Again,
software was a crucial component, though not the only one by any means.
I don't even understand numbers like that, not from a piece of software
that might cost $3-4 million. So I was kind of comforted by a third
story, which was a little more my speed. AstraZeneca got up
and said they'd saved a mere eight figures in the two years since
they'd bought the software. This was actually proportional to the
other two (the project was smaller), but it felt more reasonable.
To me, this report was even
more remarkable than the other two, for another reason.
Two years ago at the Ariba user conference, the buyer at AstraZeneca
had been trotted out to the analysts, because he was one of the first
buyers of sourcing. I thought at the time, "No way."
But he did what he said he would do. I have very rarely seen this.
Several of the prudent types at that conference two years
ago told me they weren't ready yet. This year, I saw them
again, and they were buying or about to buy. At this conference,
the badge list was pretty good: among many other household names,
I remember
Gulfstream, US Bank, Key Bank, First Union Bank,
du Pont, Chevron, Entergy,
Limited Brands, Best Buy, Hallmark Cards, First Dollar, Sony, HP,
Colgate, Unilever, Coors, Caterpillar,
Unisys, and Pitney Bowes.
I talked to one of those badges; the company was just about to bring its case
to the board; the conversation was all about how to make a plausible
business case when price savings can't be counted as a benefit. Another
was much farther from the finish line; he wanted to go back and evangelize.
Nobody, though, thought it was BS. They just wanted to figure out how to go forward.
Not that this was going to be easy. Nobody was ready to embark on a wholesale
renovation of their purchasing organization. In some cases, it
was very unclear what should be next.
But still, the shift in their sentiment was marked. They included a consideration
of software as a matter of course.
So, I can see a reader asking, why merge? If software solutions
are getting more acceptance, why did Ariba take on the burden of a merger?
Well, you have to look at the problem from the point of view of a
CPO. Improvement, he or she believes, is necessary and possible. But this
next step problem is a big one. Do I save money by putting
in a supplier portal and improving the efficiency of low-level workers, a CPO might ask,
or do I attack the high prices I've been paying for commodity steel?
Hint: most will go after steel.
Before the merger, the decision to go after steel
would have meant no sale for Ariba this year. Post-merger, Ariba
is still very much in the game. FMKT has experts in commodity steel
on demand, so to speak, just a phone call away. Before the merger,
if FMKT was hired and they had a lot of problems understanding the data,
they'd just whip out their spreadsheets and go to it. Now, they can say
to the CPO, "Part of your problem is visibility and compliance. If you want the help
we're giving you to have a lasting effect, you'd better deal with it. Now there's
this software product..."
And that, of course, is why FreeMarkets and Ariba merged. Between the two of
them, the theory runs, Ariba has the capacity to say, "Here I am," fairly
convincingly no matter what initiative is next for the purchasing organization. It
could be spend visibility or connectivity, or it could be a strategic focus
on a particular category of spend. Between the old Ariba's software and services
and the old Free Markets services and software, there is some offering
or other that can be brought to the customer.
Now, I admit, keeping track of every purchasing initiative in the
Fortune 1000 and being there
with the right pitch and the right solution is not easy. It might even be as hard as
the Alpe d'Huez. But the fact that it's now possible (post-merger)
and that the audience is now more receptive surely means that things have
improved over the last two years.
Summing up, here's Ariba's post-merger pitch. Most large companies
want to make substantial changes in their (non-labor) cost structure.
No matter how they go about this, they'll
need some combination of technology and expertise. Ariba
has the best and most complete offering of technology and expertise
in the market and thus offers the best route forward to change.
This is a reasonably compelling
pitch, as long as the notoriously skeptical and
cheap buyers can be convinced that it is true.
The odd thing is that within certain broad parameters,
it is true. So in theory, if Ariba can convince other
people besides me, they should make a boodle.
Complicated, difficult, but a boodle if it works.
If It Works
So what does the Ariba that actually climbs the Alpe
have to do? Well, it needs to be one company
that is focused on one thing, not the remnants of two fighting it out for control.
It has to have a solution offering that consistently delivers value. It has to
deploy a sales force that manages each customer appropriately. And, finally,
it has to make money. Nobody in purchasing is going to keep
long-term relationships with a company that persistently loses money.
Much of the Street unhappiness with Ariba has to do with a general
feeling that this Ariba isn't the company that can do all this. "Mergers
destroy value" is a good rule of thumb, and so far, we haven't seen much
that suggests this merger is anything but value-destroying.
For Ariba, the fact that there has been another big Bay Area software merger
recently doesn't help. Look at the energy, conviction, and sure-handedness
with which PeopleSoft built value, rather than destroyed value during the
first few months of its merger. Even they hit hard times, the reasoning runs.
What will happen with Ariba, whose CEO didn't even make any magazine covers?
Let's face it, some of this negative comparison is based on
pretty fluffy stuff. Craig Conway
is an assertive, forceful former quarterback type.
Bob Calderoni comes off as an Italian
from the Bronx, who like to watch the Yankees.
Conway says, forcefully, this is how it will work, here
is where the benefits will be. Calderoni
is less clear, definite, or forceful. Who would you believe?
It would be better to have facts, but that's just what we don't have much of.
Let me run through the little that has been announced and add to it a tiny
bit that I've been able to determine from my knowledge of the situation.
We know that there's every reason to expect friction as the two
organizations come together. In their heyday, FMKT and ARBA had strong, competing
visions of how purchasing organizations ought to be served and a take
no prisoners attitude toward sales. We also know that key people
from ARBA and FMKT left after the merger, sometimes not too happily.
We know something of that new organization. The CEO, EVP of
sales and service, CMO, and CFO come from ARBA, but the head of NA
sales and president come from FMKT. The FMKT
sales and consulting groups remain pretty much intact, so that former FMKT
customers pretty much work the way they always have.
Control of the product
goes to the ARBA people. Full Source, which is now described as a toolset
used primarily by the FMKT consultants, goes away.
Quick Source remains and is sold as an ASP. Marketing of Quick Source
has historically been pretty weak. (Roughly, it was the
poor man's alternative to Full Source.) I think Ariba ought to
start presenting Quick Source as the platform for an On Demand offering,
but no one at Ariba has given
any indication that this is planned.
The post-merger sales force now sells the entire Ariba set of products
and services, from Ariba Buyer to classic Free Markets events.
Everyone thus has a bigger menu of products to sell, but with not much
experience in a fairly large portion of the offering.
For the old FMKT salespeople, many
of whom are already on site at some large company, this gives them a chance to get
involved in product initiatives (like analysis, contracts, or e-procurement) where
before they had nothing to say.
For the old ARBA salespeople, this gives them new reasons to get in front
of a customer and more things to sell (e.g., events and services) that have
much shorter sales cycles that more immediate payoff.
Under the new sales regime, both sides are measured primarily by the margin
of the deal. How are incentives based on margin going to turn the big-deal
oriented ARBA salespeople into sellers of one-off events? How are former
FMKT salespeople going to manage the endlessly frustrating and
extended sales process that goes with the sale of large enterprise software?
I do not know.
It does seem sure that salespeople will
be irked that their incentive structure has changed mid-year. But it also
seems sure
that a few successes will take some of the sting out. One has
to remember that software sales people
are optimists and that very few really feel constrained by the fact that
they don't know much about what they're selling.
Which leaves us where? Well, to me, the new Ariba seems
a bit improvised (not surprisingly)
and more than a little vulnerable. But most of what has been done seems to me
reasonable. If you're going to try to create the kind of comprehensive, adaptable
offering that I described above, this is roughly how you have to go about it.
The Compelling Value Proposition
A hackneyed scene in many an old sailing yarn has the crew rebuilding
the ship after a fire or a battle while the ship is under way, sometimes while
a storm is raging or an enemy on the horizon.
This Ariba, too, doesn't get to rebuild the ship in drydock. There is
competition. There is a market that is changing daily and must be nurtured.
And, of course,
there is the need to make money. Before passing on Ariba's prospects
as a whole, let me say something about each of these.
Competition. It is conventional wisdom among analysts that a
best-in-breed player has a relatively short lead on the ERP packages
and that soon enough the ERP players will gain parity.
This makes perfect sense, but in several markets I've been following for
years, it just doesn't seem to be true. In supply chain management, I think
both the Manugistics and i2 offerings have actually gained ground on their competition
and are more highly differentiated in terms of value than they used to be.
The same seems to me to be true of Ariba. Even on the software side, Ariba's end-to-end
product offering seems to have drawn away from SAP's or PeopleSoft's (though
it's always hard to tell). As a solution, of course, Ariba is clearly superior, since
the company offers the services and expertise that are crucial in making the product work,
and no enterprise player offers anything comparable. (Yes, consulting partners
can make up for some of the gap and do, but only a few of them have both purchasing
expertise and implementation experience.)
There are a few other best-in-breed offerings. Perfect Commerce has an offering
that people take seriously, and the recent combination of VerticalNet and B2E may have
some appeal. But when you're thinking about a platform that is eventually
going to support
massive change at large companies, it's hard to see how their offerings or the ERP offerings are going to
compete.
The best-in-breed story changes, though,
when you start looking at individual initiatives. The market
is riddled with companies (like diCarta or Emptoris or Noosh)
that have a very good offering indeed for particular initiatives. When
the customer just wants a print solution, Ariba vs. Noosh
is a struggle for Ariba. With certain initiatives, moreover, the ERP players are
formidable competition.
PeopleSoft may not have a plausible end-to-end strategic sourcing solution,
but they do have a very respectable services offering and auction offering; in companies
that already have PeopleSoft, they are perfectly capable of beating out Ariba in these
areas.
Add to this the fact that the Ariba solution sometimes can fall quite far short.
The contract management offering, for instance, which I got a briefing
on recently, is very limited,
being primarily a boilerplate/compliance management package, not a contract
management package.
So the competition is serious and will remain serious.
For any individual initiative, Ariba doesn't necessarily have to win. And
especially when the salesforce does not
get the entire product offering, they may not win their fair share.
The Market. If you've followed even one of the deals that Ariba
has pursued in the last two years, you'll know how difficult it is to
create a market through education. Most software companies that try this
either fail to create the market or do actually create the market, but fail
in the process (like B2E).
Still, there are some very good things to be said about this market.
It's enormous. The benefits are huge. A lot of it is horizontal. And
it is, to a great extent, self-educating. People in purchasing work hard
at figuring out what is out there, what works, and what they can do differently.
The prevailing view of Ariba in the marketplace is not as favorable as mine.
When they hear the name, some people still think the old Ariba; some, remember,
were involved with failed implementations of Buyer and now have other jobs.
But I do think
that markets behave semi-rationally over time and that eventually, the
really good things about the Ariba offerings will become more generally visible.
Today, in other words, the market for Ariba is better than it was and the
Ariba's offerings are better than they were. But the market still requires
a lot of care and feeding.
Making Money. For years, it has been almost impossible to
understand this company's financials. For a long time, there was jillions in good
will on the books; then there was the SEC investigation; and still, there's
all those real estate obligations.
One little noticed thing about the pre-announcement call was very
encouraging to me. Management said that the negative cash
flow will be stopped and the company will be GAAP profitable in the first calendar
quarter of 2005. So there's a clear target, at long last. It's not as clear
as PeopleSoft's, of course, but at least it's there.
But of course this clarity puts even more pressure on the company.
Managing companies that are trying to catch up with costs, especially
during a merger, is no picnic. I believe that Ariba has tried to avoid
a cycle of layoffs by cutting deeply the first time. But did they cut
the right people or do the right things? I don't have any information.
So I fall back on generalities. On the one hand, I believe that the basic ideas for
what has been done are right and that the Bob Calderoni I've talked to once
or twice has a good grasp of his business and his market.
On the other hand, I recognize that only very good leadership and very good
decisions about a myriad of issues will allow the company to keep its promises.
The Outlook
When you're climbing the Alpe d'Huez, every meter is painful. (I do not
speak from personal experience.) Ariba has the means to
climb this figurative Alpe. They have the solution(s), the understanding of
the market, the value proposition, and the organization. But whether
they have the will and the spirit to overcome the pain, I simply do not know.
I do think the odds are good. The increasing acceptance by the
marketplace and the failure of the ERP companies to keep up have given
Ariba some room to maneuver. For the next year or two, they will be able to
go into almost any sourcing organization and say, more or less accurately,
"I can help you with that," whatever "that" is, "and when you're finished with
that, I can help you with the next thing."
We will know more in six months. If Ariba meets its numbers, picks up some
large sourcing software deals, and succeeds in cross-selling Free Markets
services, I'll suddenly look very smart. If, as is more likely, they
continue to succeed here and stumble there, I'll issue another equivocal, but
optimistic report.
See you in six months.
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