Ariba's Quarter: Digging for Insight in the Numbers and Earnings Call (Part 2)

Please click here for the first post in this series.

On its most recent quarterly conference call with investors, Ariba shared the most public insight into the dimensions of its new partnering face that we've seen articulated to date. Of course there are always multiple elements to successful partnering, and oftentimes the worlds of vision and strategy end up being detached from successful execution. Still, Ariba clearly has a solid working vision here in engaging the broader software and services ecosystem that touches on procurement, financials and related areas. On the earnings call, Bob Calderoni provides a glimpse at the thinking that is driving the partnering model inside Ariba (transcript courtesy of Seeking Alpha):

Our partner approach...really [has] 2 dimensions to it. On one hand, our initial partnerships were with the BPO providers to get our platform, our software platform to become the standard platform that BPO providers would use in their business. And in a lot of ways, we see finance or procurement BPO providers being a very, very large accounts payable department. So we want to get our invoicing applications and our P2P applications into that. And that's going to drive all that spend there managing out to the network...

More recently [the other dimension]...we're looking to strike alliances with other software vendors that have access to a lot of customers and a lot of customers spend that we would never get at largely because they tend to be smaller businesses...We did a partnership with Netsuite. And more recently we just did a partnership with Microsoft Dynamics...This is an opportunity to connect our network to their customers...Now all of those partnerships are relatively new, so there's not a lot to point to on that just yet. Obviously, the Microsoft one is brand new, but we think over the next year or two, that's going to present a real good opportunity for us.

Ariba has also partnered -- rather successfully, judging from the praise we've heard from those they've worked with -- with a number of boutique consultancies as well. It's rare in the world of procurement and supply chain that software vendors do a very good job at tossing business to services partners outside of systems implementations. What usually happens is that with any type of process or strategy based work that has an ultimate automation tie-in as an outcome, vendors tend to quietly hoard this type of work. This is, in fact, exactly what Ariba did for many years following their comeback from a near B2B death experience. But recently Ariba has changed, actually tossing business to a range of niche partners. We have spoken to a number of these firms who have been quite excited about the level of engagement and business that Ariba has introduced them to. This is clearly a third-dimension to the partnering approach that Ariba did not mention on this particular earnings call.

In terms of working with the BPOs, Ariba mentioned its relationships with Genpact, IBM, and Accenture. It's been our experience in working with and getting to know a number of BPOs that they see Ariba as a commodity that provides them with little P2P differentiation. It's one choice, for sure, but does not present the opportunity to build a differentiated P2P platform as a service (PaaS) strategy. We suspect the majority of BPOs will certainly affiliate with Ariba, but non-exclusively. And those that decide to go deep with P2P and differentiate in the area are likely to do less and less with Ariba -- at least less with Ariba their only P2P enabler -- in the future, given Ariba's current suite of offerings (which of course could change).

Looking at another area of Ariba's partnering strategy, in engaging with new resellers of network access -- really, simply integrating with these providers' software and gaining access to their customer base -- like Microsoft, Ariba is quite astutely focusing as much on the sell-side as the buy-side. By interfacing directly with customer systems on the financials, CRM, and the payables side, it is hoping to onboard and more closely link an increasing number of small and middle market companies into the Ariba Supplier Network (this thinking is also reflected in their one-off re-platforming of a variant of their contract management solution on Force.com).

This partnership approach on the sell-side has merit. In the battle to get more suppliers transacting -- and ultimately even using the network for their own buying, in a multi-tier manner -- Ariba is one step ahead of rivals including SAP/Crossgate, Oracle/Transcepta, OB10, TradeShift, Taulia and others. These providers are still focused on signing up buying organizations which will then compel their supply base to get onboarded and using the system (with a combination of carrots and sticks, in most cases).

From a competitive perspective, Ariba believes that if it can build critical mass on the network, become the industry standard, and make transacting volume sticky, it will increasingly be able to dictate the level of tolls that suppliers pay for basic connectivity (e.g., sending an invoice) as a percentage of total spend in contrast to other providers who charge a flat rate per document or related, non-transaction dollar-volume driven models. As Bob Calderoni suggested on the call, "I've always felt there's an opportunity to get a better yield than we currently do out of the network. I think today we have an effective yield of only about 5 basis points. Our pricing is 15 basis points, but it's free for some suppliers up to a certain level. So we got a net yield today of about 5, maybe a little bit more than 5 basis points."

Might Ariba raise prices again for suppliers on the network? They're leaving the option open. Stay tuned as we conclude our look at Ariba's quarter digging into Ariba's network pricing strategy and our view of their perceived pricing power.

- Jason Busch

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