Friday Rant: Getting More From Ariba's Underlying Assets (Part 2)

In the first part of this post, I explored the concept of breaking up Ariba to create greater value for shareholders, customers and partners. Even though it's highly unlikely that this scenario would ever happen, exploring this possibility can help show a path to how best to structure an organization to deliver long-term value, maximizing not only sales of existing capabilities and solutions, but helping chart out the next generation of product, services and information products by getting closer to customers. To enable this, if I were back at FreeMarkets and tasked with the type of Board-level strategy projects that I occasionally got to do -- incidentally, I don't believe the current environment at Ariba would allow for such an exercise versus, for all its faults, the more analytically rigorous, dissent welcoming and always questioning environment at my former employer -- I'd focus on creating three separate, distinct and occasionally competing P&Ls with the goal of spinning these out over time.

The first P&L I would create would be clear -- let's call it, for lack of a more encompassing term that captures working capital management and finance enablement, SaaS Spend Management software (we all know what happens to users, marketers and everyone else who gets their head stuck in the Spend Management cloud, so I can't label it that). This group would look very similar to what it does today, although would have greater autonomy to do acquisitions, partnerships, not to mention more rapid solution development (e.g., not waiting to release a sourcing optimization capability that key competitors had years ago).

Because this group would stand alone, innovation, rather than just fast following and aggressive price points -- which would be a given -- would be paramount, and such a move could reestablish Ariba once again as the engineering-oriented company it once was. But the real benefit of creating a separate and distinct software organization is that under new leadership -- or at least leadership that was not also overseeing a services P&L -- it could once again establish almost immediately credibility with a broad array of channel partners (e.g., SIs, consultancies, resellers, BPOs) to drive a level of business that it has been missing out on.

By my own calculations, potential Ariba partners -- some of which are partnered with Ariba, but often quietly recommend other solutions because of the fear Ariba will take services revenue away -- recommend competitive solutions well over 50% of the time today. These are deals Ariba is losing to folks like Emptoris, SAP, Coupa, Iasta, BravoSolution, Oracle and many others that they could -- and arguably should, in many cases -- be winning. In other words, by my estimates, there is nine-figures of business Ariba is punting on every year at the moment, much of which it does not have any chance at winning under its current P&L and management structure, because of how it has historically scorched the channel earth with competing services and a history of channel conflict.

The second P&L and ultimately, company, I would create would be focused entirely on services and content. Given how Ariba has not fully taken advantage of much of the original FreeMarkets services customer base which it could have parlayed into new revenue streams at a time when many competitors have seen double-digit services growth year over year, it's clear that opportunity still knocks in this space and the challenge for Ariba when it comes to maintaining -- let alone building -- a services P&L has been one of execution. With the assets of the Ariba GSO (formerly FreeMarkets) delivery organization combined with other productized services lines and more custom oriented work -- and the freedom to deliver objective advice on systems and process architecture separate from Ariba software -- I believe this group could rapidly become more competitive.

Moreover, it could gain significant traction if it brought in a new group of senior management (partners) with sufficient upside and DNA that was separate from the software implementation focused services orientation of the original Arthur Andersen team that came over to form the basis of the current practice. This P&L would also take over the Ariba content business (e.g., supplier intelligence, supply markets intelligence) and would be tasked with building a more competitive content delivery model to compete with the likes of Beroe, Smart Cube, etc. with intelligence embedded in other potential third-party software solutions as well. Of course the group could license this content to the Ariba software practice as well, providing seamless delivery in a solutions context as well.

The third and final P&L/company I would create would focus entirely on building a network business that, while potentially having tighter linkages into Ariba solutions than other competitors, would have to stand-alone from a value perspective. The non-software or network aspects of working capital management and supply chain finance capabilities would be a great fit here, and the network could serve as an aggregator or OEM, if you will, to plug in related business models (e.g., Receivables Exchange, Pollenware, Oxygen) and create a roll-up of best of breed capabilities that truly exist in between organizations in a network context without pulling the cloud, if you will, over customer's eyes. And it might even opt to make strategic buys of incumbent EDI players, picking up undervalued assets along the way.

From a pragmatic standpoint, spinning off the network would go a long way to placating the fact that many current Ariba customers feel held hostage by rising supplier network fees -- which they believe they will eventually end up paying for. Even if these price increases represent a fair value, by delivering an independent network offering, Ariba software customers would feel like they had greater choice in separating out network decisions from software ones (which is precisely the way I believe the market will move in, whether Ariba decides to play along or not, as competing, fixed-price services from Basware, OB10, Hubwoo, Quadrem, Oracle, Perfect, Ketera and others capitalize on the discontent among Ariba customers owing to the price hikes).

I personally believe that Ariba has the potential to deliver significantly more customer value -- and to generate significantly higher subsequent revenue -- by taking a hard look at what it does great already versus where it could improve, focusing especially on where it has alienated aspects of its installed base and potential market, not to mention the ever influential channel who -- fairly or not -- often remains fundamentally distrustful of current management. I suspect that Ariba won't be around independently long enough to evaluate the possibilities of doing what I've suggested in this post, at least as long as the current leadership is in place who I'm guessing would dismiss such a strategy as spend heresy, but in the back of my head, I suspect the basic ideas in these two posts could very well serve as the first draft of a road map for a potential suitor to get even more from the existing assets, many of which are finally delivering profitable growth today.

Jason Busch

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