Ariba LIVE — An Update on the Core Business and Introducing the "Cloud" (Dispatch 2, Part 1)

Yesterday afternoon, I had the chance to sit in on Ariba's financial analyst briefing session, a three hour event that provided a high-level update on many aspects of Ariba's business, ranging from an overview of their new cloud strategy to the operating and gross margins of its different business lines. I spent much of the time tweeting my notes from the discussion (see @spendmatters for a full record), but so far, have not taken the time to step back and analyze the presentations in detail. I hope to share all of my notes in the next couple of days, but I'll begin my analysis in this post by sharing a few insights on the high level elements I gleaned from the discussion.

The central theme of the entire meeting was the "Ariba Commerce Cloud", a phrase I think you'll have as difficult a time getting out of your vernacular in the coming quarters as Michael Arrington has deleting obscenities from his own language when confronting the CEOs of large, public companies (incidentally, I'd love to see someone like Calderoni clobber the disrespectful bugger if he started an interview with such an outburst). But I digress. The cloud is not about the personal insecurities of a well known tech blogger, but rather a clever artifice from which Ariba is hanging its new vision, a strategy which, incidentally, is not all that much different than the past.

Nor is the vision different from Ariba's competition. Ariba's cloud messaging, in fact, sounds remarkably similar to Ketera's vision (however Ketera is a tiny company by comparison). To cut through the noise, Ariba's cloud -- much like Ketera's -- is all about enabling a marketplace vision like it's 1999 again, but this time with the enabling software, integration and, most important, liquidity to back up the grandiose vision. In this game, everything is about scale. History suggests that marketplace businesses (e.g., Amazon, eBay) end up being largely winner-take-all markets.

It's from this marketplace vantage point that Ariba is hanging it's three major buckets of solutions: Buy, Manage Cash and Sell (or what it describes more specifically as Spend Management, Collaborative Finance Management and Sales Acceleration Management). Underlying these solutions is a platform that combines analytics, security, performance management, integration and mobility as well as a community that unites peer collaboration with the "world's largest trading network, and a partner ecosystem". The ultimate vision is one that Bob Calderoni sums up as "consumerizing business commerce and making commerce better for business."

To help define the broader market opportunity for the Ariba Cloud, Bob mentioned that within the Global 2000, companies shared roughly $32.1 trillion in revenue. The same group had a total procurement spend of $11.9 billion, representing the buy-side half of some 18.1 transactions and 11.2 billion invoices. Within this group, the average company has approximately 134,500 trading partners yet still conducts roughly 80% of its transactions manually and fails to leverage anything but paper-based invoices for 85% of it's A/P environment. Moreover, companies lose roughly $650 billion a year in this trading context due to the "cost of lost sales due to ineffective collaboration". Adding up these market opportunities, Ariba sees an addressable market over four-times the size of what it originally set up to target with Spend Management software alone (in their words, a $4 billion opportunity). In addition, Ariba sees opportunity to carve out its own niche within B2B online marketing (a $10 billion opportunity), supply chain financing ($1.5 billion) and B2B integration ($3 billion).

Moreover, Ariba also has more to sell today on the buy-side from a product perspective than before, yet the average customer only owns (or rents) 20% of what they could potentially buy from Ariba. This is important once you begin to run the numbers on the level of spend or "spend capture adoption" that Ariba users put through the system. Customers with <2 years maturity with Ariba have a spend penetration of 10% while those with >5 years maturity have spend penetration. Why does this matter? The more spend customers put through the system, the more they pay Ariba (in general), the more suppliers pay Ariba, and the more, in theory, everyone saves (or gains) by doing so. Moreover, going forward, Ariba is seeking out new ways to get suppliers to pony-up additional cash to participate in this Commerce Cloud (for them, the silver lining is not free).

From a solution enhancement perspective, for sellers, Ariba is enhancing its capabilities around Discovery (think + Thomas + Alibaba) as well as its financing capabilities to facilitate early payment to suppliers. For buyers, Ariba is looking for ways to expand from its base of 1,000+ buying organizations to target the 10,000 global companies with revenue exceeding $1 billion. This involves a number of solution enhancements, products and services that I'll cover in additional detail in the coming days.

What's my quick take on The Ariba Cloud strategy? Simply put, the Cloud is a very easy place from which to hang Ariba's existing solutions and justify a larger market opportunity. Ariba Discovery, one of the centerpieces of the cloud, is completely unoriginal (it's a modification of the original and more recent business model), yet making it work requires just the type of liquidity that Ariba has the potential to offer if they can convince the majority of their buying organizations to put down Thomas, Global Spec and others when they're searching for new suppliers (I've never met a large company that uses Alibaba in the West so I don't consider them Discovery competition).

Stay tuned for further news and analysis of Ariba's direction. We promise to stay grounded and not view this evolving strategy from cloud nine.

- Jason Busch

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