Part 2: Analyzing Ariba's Quarter — Customers and the Competition

In the first post in this mini-series analyzing Ariba's most recent quarterly performance, I looked at general business trends while also focusing a magnifying glass on Ariba's services line items. In this post, I'll continue my analysis of Ariba's quarter, looking specifically at customers and the competition. Ariba made some pretty insightful statements during its earnings call, a number of which deserve further analysis both to understand how Ariba is performing in the market and to better unearth what their customers are most interested in investing in at the moment.

From an industry perspective, Ariba suggested on the call that they are thriving right now in the financial services and CPG/retail sectors. In other markets, the manufacturing and pharmaceutical sectors have been "middle of the pack" while auto and energy were towards the bottom from an industry vertical point of view. Regarding overall industry traction, while things look fairly good, my quick take is that Ariba has at least partially missed the boat in pharmaceutical given the number of consulting projects going on in the sector at the moment and also the potential for delayed ERP upgrade and SRM migration cycles. Bottom-line: pharma is one place Ariba is missing out at the moment.

The fact that automotive is performing at the bottom is no surprise and Ariba should refocus elsewhere. However, the energy sector's underperforming relative to the rest also feels to me like an under ability to execute relative to the competition versus an overall industry dynamic or slowdown. Among other notable customer wins in the quarter, Ariba claimed Facebook, First National Bank and the National Bank of Canada as new customers on the call.

What's even more insightful than specific customer wins and industry traction in particular was that Ariba claimed 75% of its new software bookings came from existing customers. In other words, the up-sell strategy is working which is validation that the on-demand model of "landing a new account" with a specific solution and then "proving value and expanding" is "on track". This marks a continued migration of the Ariba business model away from large single wins to steady growth based upon gaining an entrance point into an organization and building from there.

But as I discussed in the first part of this series on Ariba's quarter, this is not a strategy that works for selling professional services at the level which Ariba needs to be focused. Moroever, it's also resulting in new skill requirements and a reduction of unnecessary costs. On the earning call, Bob confirmed a recent restructuring involving 45 employees "across the globe" and "across functions". Whether or not it's true, I've heard the services organization was disproportionately hit from some people who left, which would make sense given that services revenue did not come in where some were forecasting.

From a competitive perspective, Ariba continues to come out swinging in regards to SAP, the company it appears to view as its primary competition going forward (Ariba employees have been very dismissive of late over Emptoris, even before Avner's recent departure). On the call, Bob cited the case of Swisslog, a company with an SAP back-end that initially chose Ariba for an inexpensive sourcing toolkit and later upgraded to its "full upstream" suite (which I suspect includes spend visibility and the more robust enterprise sourcing solution). These wins were competitive with "an ERP provider" whose name I suppose you can guess.

In addition, Ariba also claimed "nearly a dozen takeaways or head-to-head wins against SAP" in the quarter overall. Having looked at a number of deals in the field beginning to shape themselves at the moment, I can say with near certainty that Ariba is benefiting from delayed ERP upgrade cycles as well as SAP's inability to get its act together on the sales front in many customer situations. But whether this holds true into 2010 is questionable (as is whether or not enhanced SAP spend visibility, e-sourcing, SRM -- including on-demand variants -- and supply risk management offerings begin to give Ariba a run for its competitive money). Moreover, SAP is cultivating a partner ecosystem in the space versus Ariba's partnership approach that one partner told me was "all take and no give" from a relationship perspective.

Overall, I read these numbers and trends as a sign of Ariba's general health in the marketplace. Where they're coming up short (e.g., certain verticals, consulting, etc.) is more a factor of a failure to execute than an underlying flaw in the solutions or the business model. If I were Bob and his team right now, I'd focus a majority of my organic (i.e., internal) efforts on rebuilding a consulting and advisory model that is more competitive in the marketplace and that could drive growth versus weighing down what was an otherwise very solid quarter given the overall market conditions.

Jason Busch

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