Tracking Ariba's Third Quarter Fiscal 2010 Earnings Report: Three Perspectives (Part 2)

In the first post in this series, I summarized and provided perspective on Ariba's solid recent quarter. But the numbers only tell a small portion of the overall picture of where the customer and competitive market is really heading in this sector. In many ways, the quarter itself is actually a trailing indicator of how Ariba is doing. So what does Ariba's future hold in a competitive context, you ask? For one, it's pretty clear that Ariba is focusing on volume as its number one item. Everyone -- customers and suppliers included -- is becoming a "number." I hear this again and again from customers and prospects that the level of executive interest and focus in nurturing their requirements and expectations is becoming less and less personal. Moreover, Ariba lacks the type of customer-supported advisory group following that enabled PeopleSoft and others to create a cult user community.

However, there are benefits to the volume game. For one, I'm astounded by the price points I see from Ariba in certain competitive deals. I sometimes get asked when Ariba goes to the price wall in competitive situations: "Are they serious and can they bring it in at this price?" The answer, for the most part, is that it depends on what products people are buying. For sourcing, spend analysis, contract management, supplier management, etc. it's pretty cut and dry with what you pay and what you get -- and what Ariba's ability is to up-charge you (or not) for additional usage. But for P2P, it's not quite as cut and dry, especially given unknowns around some aspects of configuration, implementation, systems integration (cloud or otherwise), supplier enablement (especially situations which don't fit the norm) and, of course, future supplier fees. If a price quote feels too good to be true and it's in the P2P area, it's worth hiring an outside Ariba expert -- either a boutique implementation firm or a larger SI -- to really get a handle on the total costs of a P2P implementation over a 3-5 year period, SaaS or otherwise.

Aside from pricing, it's worth noting that from a customer perspective, Ariba continues to be the most polarizing company in the sector with customers and prospects (in Ariba's defense, both SAP and D&B come close here as well, yet Ariba takes the cloudy spend cake for creating pro/anti camps). Within Ariba management, there used to be an unofficial litmus test among whether or not you respected one key member of the executive team who was to say the least, polarizing. Many Ariba legacy customers sometimes now have an Ariba litmus test today as well. But in a different context -- specifically, when they evaluate other providers and advisers to better understand whether they're biased towards or against Ariba's approaches (i.e., the cloud). For this group, the latter is the right answer if you want to work with them.

Some customers and prospects still love Ariba, mind you. For this group, it's usually a price thing, on a total cost basis, when it comes to calculating what they'd have to pay an IBM (or another consultancy or SI), third-party software/content providers and others to implement a solution in full. They like how Ariba bundles and especially how they deliver services themselves. This brings up another subject with Ariba that is anything but polarizing -- channels. Ariba may be making superficial amends to improve channel relationships, but my own checks suggest that many current and potential partners (including SIs, consultancies and BPOs) still show a strong distrust of working with Ariba. This is based on Ariba's past fee-hoarding behavior and the fact that the channel organization is so closely linked to the top of the company on multiple fronts where the fee-hoarding mentality originated. In my view, many of Ariba's software competitors are doing a much stronger job of late partnering amongst themselves and with services providers, costing Ariba current and future business in the process.

Regarding Ariba's overall growth in the market, I'd say they've performed in the middle of the pack. It's hard to do apples-to-apples comparisons with providers selling a greater percentage of new installed enterprise software, but overall, Ariba's performance relative to the overall software spending going on in the sector is OK -- not great, not bad. I also think new customer acquisition in the current quarter may not be as strong based on first hand observations these past few weeks (this goes for other vendors in the sector as well, mind you). Services wise, however, Ariba largely lost out on the boom in both cost reduction (e.g., strategic sourcing) and working capital improvement (A/P, discounting / payment term standardization, lean, etc.) consulting projects in the past nine months. Services growth, while stable, is well under market in this sector, at least by my anecdotal observations looking at their key competitors.

A final point to make regarding Ariba's competitive standing is probably the most important of all as a future indicator of where and how they will play in the market. Ariba has reached a very different place with prospective -- and many existing -- customers given their transition from being regarded as the premium provider in the market to one that competes largely on price, value and breadth rather than absolute capability or usability. Especially in sourcing and spend analysis deals, prospective users often do not consider Ariba to be a premium option over others. And within P2P -- even Cloud-based P2P -- Ariba is only holding its own given its massive sales reach over others. Consider how that they announced "21 new P2P deal signings" in the quarter and compare this with their tiny neighbor to the North, Coupa, who I know signed "12 significant transactions in the quarter" and an overall number of eProcurement deals in the same ballpark as Ariba. And they did it with 10% of Ariba's salesforce.

Jason Busch

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