Ariba Tests the Atmosphere
In any number of science fiction novels, the People of the Old
World take off as their planet crumbles. During the long flight, the
old leaders are killed off, and the People are transformed. Finally,
they land on a New World where, miraculously, the air is JUST LIKE
the Old World's. The People emerge into the fresh air and...
I felt as if I were living one of these novels at the Ariba conference
this week. The old E-procurement planet is a cinder and now, under
a new leadership, Ariba has landed on Spend Management. You know
what? Preliminary O-2 tests suggest that the People might be able to live there.
Facts: Slightly less than 1300 attendees at Ariba Live, of which 175 are employees
(of a total 814!)and another 200 (est.) are partners. $269 million
in cash, $57 million in revenue, cash flow neutral, with $166 million in deferred
revenue, every reason to believe that the flat guidance will be
right for at least the next two quarters.
Customer facts. Home Depot and Fedex declared victory in fairly
large e-procurement installations. A large deal (think at least
$4 million) with Astra-Zeneca for a world-wide full suite implementation
was announced at the conference.
B2B Analysts has been studying the strategic sourcing market for the last
three months, and on the whole, we like the prospects for it. It's
easy to view Ariba's earlier announcements about Spend Management
as a last desperate bid for life, but this is a mistake.
For a full review of the 44 sourcing vendors, see our report, but
here are the highlights. First, procurement organizations are badly
in need of improvement and underserved by technology, just as sales
forces were back when Tom Siebel invented CRM.
Second, the value potential is enormous. Better procurement operations
can produce real price reductions, real process improvements, and
real improvements in time to market (which can yield a big competitive
edge).
Third, you don't win with technology in this market, because pure
automation isn't the big win. You do win by combining IP with technology,
because the aim is to make people buy smarter.
The clear leader in this space is Free Markets. Among the technology
companies, it's probably B2E Markets, Ebreviate, and Ariba, with
i2 very strong in certain niches. The ERP vendors haven't figured
the space out and are not a presence. The need for IP is a very big
barrier to entry.
For Ariba, being among the leaders in a real space is not a bad thing, almost
certainly better than being the clear leader in a space created
by hype.
Is there interest among customers in the space? Here are some notes
that suggest that there is.
- Sarmento Silva of Astra-Zeneca (the huge new deal) said, "The
cost of the software is not important. We can justify that with
one event."
- A Fedex representative said she is already rolling out Ariba's
reverse auction capability Fedex-wide.
- Saks is using reverse auction to source sweaters.
- The Limited (an SAP shop) was there looking in force (as was
Target and the Gap). The Limited representative said that they
were not seriously considering SAP in force.
- Several buyers said that these were not IT projects and that
the budget came out of "operations" or "purchasing"
budgets, not out of IT.
The first and the last comments are what make me think we're in
SF dreamland. If these people are typical, then this is a new market,
where painful proofs of ROI are unncessary, buyers are easygoing
about cost, and the money doesn't come out of IT budgets. If they're
typical, then let's all go break out the ambrosia.
The downside.
- The product is thin or missing in many areas. It is a full suite
product in sourcing, but only barely.
- This is a new market in a skeptical environment. All the players must
invest in education, hurting earnings and slowing revenue growth until the time
(if that time ever comes) when these apps cross the chasm.
- Purchasing people are a nightmare to sell to. Many are perfectly comfortable
with their heretofore minor, paper-pushing role. And all of them really enjoy beating
up suppliers.
More facts and figures (some are estimates). Ariba has four (more or less)add-on products
that it will sell for roughly one-half the $1.5 million it charges for Buyer. It has
(according to partners) 350 Buyer customers, of which 100+ are wallowing, which leaves
200 to buy the new sourcing products or the invoicing add-on product.
Ariba's benchmarking program has 106 customers who are sharing notes on costs and spend
of (mostly) indirect materials. This customer base is clearly the most likely to buy
the spend management products.
All these numbers suggest that there is a reliable base for Ariba revenues, but they do
not suggest anything more than stability this year. But if Ariba can use this year to
finish the products,
reorient the sales force, and position customer budgets for next year, next year
could return them to interesting growth rates.
The organization seems to have improved under President Bob Calderoni. He is not impressive
as a speaker, but in person, he is much better. He shows a passion for a) purchasing and b) cost control that
are needed. Clearly, under his management and that of Eileen McPartland (formerly Basho),
bench strength has improved. I've dealt with a lot of the management team now and
talked to many product managers. All in all, the competence level is pretty high.
No question, this organization is still in recovery, but it seems to have stabilized.
Ariba will soon be offering more services and trying to compete more directly
with Free Markets. They recognize correctly that they
need to provide customers with more expertise in purchasing.
Properly done, this should be margin-neutral (or even positive), since they'll be
developing highly
leveragable IP and expertise, rather than just sending out more bodies on a
time and materials basis.
Bottom line: risk/reward looks fairly good. It will be easy to blow it, but
there is at least a story on how this company could come back well.
Please send feedback if possible on the quality/length of this piece. We've given
Free Markets and Ariba a lot of space recently. It would be nice to know if you'd
like it shorter and sweeter.
See also our other recent Short Takes.
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