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Mount Olympus

The Judgement of Paris

We're using the end of 2002 and beginning of 2003 to take a look at some out-of-favor areas that we like. In this issue, we return to sourcing, looking at a perennial power (FreeMarkets), a company with endless bad news (Ariba), and an up-and-comer (Emptoris). If you could shake off the history, my choice among the three would be Ariba, but this might not be everyone's take on it.

The Sourcing Shakeout

In the summer of 2002, we released a report on e-sourcing that covered 43 vendors. We found a crowded space and a confused one.

The 43 solution offerings came from every direction. There was software; there were services; there were outsourced services. There was specialty software by spend category. There was specialty software by function and by industry. And (surprise, surprise) there was plenty of Power Point software from the ERP vendors.

In another time and place, the existence of so many applications might be thought of as a response to customer demand. But when we talked to customers, they told us a different story.

Customers didn't want choice. They didn't want highly specialized applications. They wanted a single solution: a single relationship, a single piece of software, or a single approach, one that would save them money this year, but also improve the overall maturity of their sourcing processes.

Alas, the best the vendors could do at the time was respond with messaging. Frictionless said it had an end-to-end solution. B2eMarkets said it had a strategy solution. Ebreviate said it had a full-service solution. Perfect said it had a Perfect solution. And, of course, PeopleSoft said that it had everything.

The hope, obviously, was that what happens elsewhere would happen here. Early adopters would take a flier on inadequate solutions and provide the funds to build out what was actually needed.

This just didn't happen. Why? I think the gaps were so large that even software buyers (not a notably perspicacious group) couldn't see any way around them. Since no total solution was in the offing, they decided to go to something with an immediate return, namely FreeMarkets.

The Elusive Total Solution

To understand this market at all, you need to understand this reaction. In my view, it is not as if people preferred FreeMarkets or thought it was a good alternative. It is that they saw too many gaps in more technology-oriented proposals.

It is important to understand why those gaps were so big and so obvious.

The essential fact about purchasing departments is that they buy everything a company buys. Everything. Legal services. Toilet paper. Electricity. Floor tile. Airline tickets. Fork lifts. If you're a purchasing department and are going to go to the effort of buying and installing a software solution, you're going to want something that helps you buy all this stuff. But most of the software out there is pretty clearly oriented toward a particular buying process, one that just plain isn't useful for a lot of these other things. If you're buying legal services or real estate, for instance, you're probably not going to go to the corporate catalog and punch out to legal.com or realestate.com. If you're buying airline tickets or implementation services or cafeteria management, you're not going to think that auction software is just the ticket.

The leaders last summer were essentially unable to convince their customers that they could help them buy everything. Today, this has left the software vendors in a bit of a pickle. Frictionless is losing staff, B2e (in the words of one observer close to the company) is in M&A mode, eBreviate has been offered around (with no obvious takers), and PeopleSoft has moved to Plan B, which is redefine the market.

The software companies might still have gotten some traction if there hadn't been another problem. Even when their solution had some real promise—had the right buying models and some other needed bells and whistles—it was still going to be hard to bring it into a company. To make such a solution work, you also need expertise, expertise not just in using the solution, but also expertise in the spend categories where the solution is put to work. But most of these companies had said, "We're a software company. You don't get expertise from us."

For the expertise, they said, you can go to our consulting partners or get it from your own organization. For the very few buyers who already have lots of expertise, that was great. But for most buyers, the buy was getting too complicated. It was simpler to turn back toward FreeMarkets.

It's also important to understand what FreeMarkets was offering that the others weren't.

Let me repeat. FreeMarkets was not providing the total solution that people wanted. They're fundamentally in the business of selling hosted auction events, and that is by definition piecemeal. What differentiates them is that FreeMarkets is a one-stop shop for these events. They provide all the services and (more important) all the expertise that you need. When you use them for an event—as opposed to running an auction event yourself using auction software—they help you determine whether an auction will work, how it should be structured, and what the goals should be. They even recruit and train suppliers.

So, from a customer point of view, even though FreeMarkets doesn't cover every spend category or process, it was and is preferable because when you do go to them, the event is held right. Not that they were exulting over this; FreeMarkets is expensive. An event might well cost roughly 50% of the savings, and FreeMarkets isn't exactly shy about estimating savings.

So Who Has Traction Now?

In the last six months, the allure of a total solution has not dimmed. But there are still very few alternatives to FreeMarkets.

Of the 43 companies, many have just lost the race. They couldn't persuade enough people, customers or VCs, to fund development of the products they claimed to have already. Six or so of the 43 are out of business or acquired. As noted above, most of the rest are laying low. But there seem to be two exceptions: Emptoris and Ariba. Emptoris has a new and much improved version out and some strong commitments from brand-name customers. And Ariba seems to be in every deal. In the words of one rueful competitor, "Ariba has deep pockets, and while their product isn't all the way there, it's come far enough."

The competitor is particularly struck by the new software that Ariba has been developing for the last 9 months under the rather inviting rubric, Project Venus. (Inviting, that is, to those of us who have a weakness for cheap witticisms.)

So now, the hapless consumer seems to have three, quite different choices about where to go. Since one of those choices is Project Venus, I guess I'll have to call the problem for the consumer the Judgement of Paris.

Paris, you may remember, was the son of the King of Troy. He was asked to decide which Greek goddess was the most fair: Hera the powerful, Athena the wise, or Aphrodite (Venus) the beautiful. By analogy, customers are now asked to choose between the powerful (Emptoris), the wise (FreeMarkets and the consulting companies like Kearney), and the beautiful (Ariba's Project Venus).

The Powerful

To see what the first choice looked like, we visited Emptoris and saw a demo. Originally a vendor of a pure auction/evaluation tool, Emptoris is now going to market as a full suite vendor, with a particular focus on long, complex sourcing projects. Their name clients are Glaxo and Motorola. Several other well-known companies (like Avon) use them through ICG Commerce. (Emptoris is the engine that ICG Commerce uses for hosted events.)

The product clearly would appeal most to companies that want to manage a long sourcing process for a complex set of (often direct) goods. The old RFP/auction engine is now embedded in what you might describe as a multi-participant, multi-stakeholder project tool. This allows managers to create a process specific to a buying opportunity and get a degree of involvement from many people without impeding the process. A group can be asked, for instance, to evaluate vendors, and the evaluation is simply fed into the total scoring. Or, a vendor can be shown where it is falling down and be asked to modify a bid.

This kind of capability is pretty good, relative to, say, an ERP vendor with an auction tool. The ERP vendor simply doesn't provide the process management or project management you need in order to get full-scale auction management. In an ERP system, you can create an RFP/bid, distribute it, and score it, but you can't manage the process with any delicacy.

With Emptoris, on the other hand, there are workflow, project, and RFP toolsets, all in the same system. With these, you can model the processes that companies like Motorola or Glaxo actually use when they buy. (Clearly, this is why ICG Commerce finds them valuable; ICG runs outsourced procurement projects, and they can use their internal experts to tailor Emptoris to their customers' needs.)

Unfortunately, for companies like Motorola or Glaxo, the ultimate value proposition for this is still questionable. You can use this toolset to create a full sourcing platform, but brother, you're going to work at it. Somebody at your shop is going to have to convert the workflow tools into processes for each separate sourcing process. I get worried when I think about doing that for the forklift buy, then for the airline ticket buy, then for the legal services buy, across countries and continents and divisions. It's a lot of investment, just in infrastructure.

Concerns like this make me think that the only companies that will like Emptoris are the ones who have decided that they can afford to commit substantial resources to the project. In my view, there aren't too many of them.

The Emptoris plan might be to get a limited number of committed customers, then sell less capable, less committed customers based on the rave reviews of the initial buyers. But will those reviews be forthcoming from these customers when much of the value add came from them? Will they think it's worth what they paid for it?

The Wise

For the wise, the choice is simplicity and a clear return on investment. Go to FreeMarkets (or ICG Commerce or Logistics.com), pay their rather high fees, but get a better deal than you'd be able to get on your own.

Go, in other words, to these companies for the expertise and the process management that you can't get yourself.

From a customer point of view, there's nothing wrong with this, but there's a strong desire not to do it forever. For one thing, you still can't use it for everything. For another thing, it sells your own efforts short. Why can't we do this ourselves, at least some day? It isn't, as we say, the total solution, one that lifts our organization's effectiveness permanently.

Of course, this complaint about high-cost expertise is not new. People have been going to Kearney or the boutique consulting firms for years for even more expensive expertise. They keep on saying they would like to bring expertise in house, but they don't. And relative to Kearney's cost, FreeMarkets is providing expertise at quite a low price.

They can do this at a lower cost than Kearney because of two potential economies: one, they are focused on events, not strategy consulting. And two, their experts are supported by software.

Mind you, it's still expensive, so expensive that you have to wonder about the business model. FreeMarkets supports literally hundreds of spend categories, has "trained" thousands of suppliers across the globe and hires or has access to thousands of category experts.

Is this enough investment in expertise for FreeMarkets to be a reliable source of expertise in any area a company might want? It's unclear. Even with this investment in expertise, can the company be self-sustaining and highly profitable? It's unclear. The cost basis is really high. You have all these experts sitting around, and they have to be used.

FreeMarkets has tried to solve this problem by keeping their rates high. According to many customers, too high.

The Beautiful

The problem with beauty, people tell me, is that it is only skin deep. This has indeed been a problem with Ariba applications. The products do, but they don't do too much.

The new set of products is still a little surface-y, but it is not too bad. Crucially, it is end-to-end (with workflow, project management, etc.) Project Venus allows you to manage activity by spend category, and it integrates analysis, strategy, buying, and contracting in a relatively straightforward way. There is a rather thoughtful workflow package and more than a little attention paid to knowledge management—all pluses. It may not have the toolset that Emptoris has (I think they're roughly comparable, but can see why Emptoris is attractive). But it has at least crossed over the hurdle that the ERP companies are balking at.

The end-to-end management may not be perfect, it is done with some care and some effectiveness. Unlike Emptoris, which emphasized its toolset, Ariba emphasizes good looks and (hence?) usability. Demos are full of nice-looking dashboards, practical-seeming work lists, and good communication features.

Underneath, there are also some interesting wrinkles, such as some serious support for direct (BOM) spend and a somewhat mature optimization engine attached to the RFP evaluation tool.

Still, it isn't so good that by itself it would inspire rueful comments from the competition. What I think really gives it some potential is Ariba also trying to provide the service and the expertise that this space evidently requires.

To begin with, they've decided to build up their service capabilities. They've hired a director of consulting services from the consulting industry and made it clear to buyers that significant amounts of services and some expertise are part of the package.

Leading with a lot of service is unusual and somewhat risky, of course. Software companies are always told not to get into the service business. And clearly there are some worries about Ariba. The fact that Eileen Basho, a really good services person who came from Andersen left Ariba just as they were beginning to ramp up the service business has to be worrisome. But to me, the logic of thing is inescapable. For sourcing, services and expertise are part and parcel of delivering a total solution. To set up the right processes, templates, stakeholders, and strategy for any spend category, you can't just throw in some off-the-shelf software. Either you don't manage the category, or you do some implementation, which means services.

The other element in the mix is that Ariba is trying to develop knowledge capital. I wouldn't call this a bet-the-company initiative, but the ideas are interesting. One idea is a "category sourcing kit," a set of processes, templates, strategies, and data that Ariba develops, which can be used by a company as a starting point for its own spend strategies. Another idea that already seems to have legs is to allow companies access to cleansed total spend information gathered through the Ariba Supplier Network. Yet another is fairly robust capabilities in Knowledge Management, so that experience with one spend event or supplier can be fed back into the choices.

Of these, only the kits are a revenue source. The kits will be created by development (I've talked to one developer, but haven't reviewed them), but added to and maintained by the services group. Interestingly, if they are done right, they become a subscription service and one with significant potential for Ariba. There are lots of spend categories and lots of industries; if users simply download new versions once a year, like TaxWare, the revenue opportunity is not trivial.

The Competitive Outlook

So which goddess do you choose, Mr. Paris?

According to the legend, all was not pure and aboveboard when Mr. Paris was picking his goddess. There were bribes. Hera promised power, Athena wisdom, and Venus promised a woman named Helen, who then lived in Sparta.

In this market, too, success may well depend on the quality (and plausibility) of the promises.

A lot of these promises will turn on a notion that is common in the procurement world: maturity. The more mature an organization, the better organized, the more strategic, and the more effective.

The promise of a company like Emptoris is that they will bring a reasonably mature organization to the highest level of maturity. A FreeMarkets, on the other hand, promises a less mature organization that it can be more effective today, but without much long-term gain in maturity. Ariba promises a somewhat wider range of more mature organizations that with time, their maturity will improve. Different promises really and in one sense, therefore, a market with room for all three.

But I think the Ariba promise has the greatest likelihood of hitting home with the average prospect (just as Venus's did). Unfortunately, with that prospect, there are some other issues.

Beauties in vain their pretty eyes do roll...(A. Pope)

You see, however attractive the Ariba offering, it just hasn't grabbed the market the way Helen of Troy did. We are sending this out in advance of Ariba's earnings announcement, but frankly, we don't expect that the announcement will reflect any big jump in demand.

At Ariba Live! in April, I saw or talked to several teams of big-name retail and CPG customers who were pretty serious prospects. But in November, when Ariba announced Project Venus, not one of them was on the podium.

I've talked to a number of people not at Ariba, but in a position to know about Ariba deals, and they confirm my worry. Deals for this new software have been tough to get. Better sellers have been new modules (like Invoice) that are extensions to Ariba Buyer.

Not that sales are zero. Ariba has been pretty good at maintaining a steady state of $50-$55 million a quarter, and I expect nothing different for the still-delayed Q4 '02 or Q1 '03. These numbers are big enough to sustain the company while the new product gained acceptance, even if acceptance was slow.

But we still haven't seen any jump. Is this due to the general slowdown in IT spending? Yes and no. Buyers for this kind of software are purchasing people or the CFO, not the CIO. These people are more likely to be slowed by skepticism than by lack of IT budget. At the same time, being purchasing people, they hate spending money, and they're always looking for a good deal.

So what's slowing things? Well, there's always the fact that Ariba is Ariba. I myself think that the company has moved well beyond what it was in the Keith Krach-Larry Mueller days. But you'd scarcely know it from the announcements. The earnings announcement is still delayed as Ariba figures out what to do with one of the Krach-Mueller shenanigans. (And, inevitably, there have been shareholder suits.) The balance sheet/income statement is still so encumbered with losses and faux good will from those days that it is impossible to understand the actual operations. Analysts don't like this, and at some point, neither do buyers.

There is one ray of light in all this. The idea that a best-in-breed is right has clearly established itself in the space. For a while, it appeared that the ERP vendors would rapidly catch up to the niche vendors. All announced SRM initiatives and e-auction software last year. But all have been a day late and a dollar short. SAP has been particularly disappointing, unable to exploit several natural advantages. But neither PeopleSoft nor Oracle (probably the best product of the lot) have done any better. In the process, a "wait for our ERP vendor" strategy has begun to look pretty bad, and these days CIOs have as little tolerance for looking bad as they do for spending money.

Ultimately, I'd like to agree with Pope, who continues the line above with "Charms strike the sight, but merit wins the soul." At Ariba, I've seen the software, gone over the issues with developers, and talked to the customers, and I think the merit is there. So I'd give the golden apple to Venus. But in doing so I might just prove once again what everyone knows already, that I'm no son of kings, no slayer of Achilles.

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