Ariba's Earnings – What Stands Out (Part 2)

If Ariba remains independent ten years from now (which I do not anticipate, mind you), I suspect the biggest surprise in its revenue model by 2020 will be that suppliers will account for close to 50% of its business. Granted, Ariba's supplier revenue represents only a few percentage points today, but its strategy with its new Discovery program, combined with a growth in supplier network revenue, suggests that suppliers will increasingly pay to play (so to speak) in the coming years. Ariba's Discovery program is essentially a lightweight open RFQ/sourcing model that is free to buyers and suppliers today, but will clearly charge suppliers in the future. This is not a bad thing. There's a lot of precedent for it:, Alibaba, ThomasNet, and others all have business models based on suppliers paying for market access. Regarding Ariba Discovery, Bob Calderoni shared on Ariba's recent earnings call that the offering is still "early stage" but that Ariba is seeing a "good trend in terms of the number of postings and listings that are happening out there." Bob also suggested that while "[Ariba is] not generating any significant revenue" from it to date, we can expect changes in the second half of this year. Moreover, it's an area in which, according to Bob, Ariba is now investing.

I've personally examined this type of business model in depth, and I can tell you that it's inherently different from selling software to buying organizations, or operating a transactional supplier network. Ariba will need to hire an entirely new, less-compensated sales organization (based on a telephone-sales model) if it follows in the footsteps of others who've gone down a similar path. There are many challenges and pitfalls to this model that Ariba will discover -- no pun intended -- as it goes in this direction and attempts to monetize the commerce on its system; rather than share them here, I'll reserve comment for when Ariba actually ramps up this effort. Personally, I think it's an entirely different business, and I'm not sure whether Ariba's current DNA will be successful in supporting it from a commercial standpoint (building the software is the easy part).

In other quarterly-earnings news, Ariba has been relatively slow to convert CD licensees to SaaS customers. In this regard, they noted on the earnings call that "there are occasionally some CD conversions. There aren't very many of them. I think the conversions we've had cumulative to date is certainly a number in the 10 range so there are a couple of those, not very much of that." Part of this stems from the fact that Ariba still has challenges supporting complex, highly customized (and highly integrated) back-end environments in a SaaS manner for P2P. The situation is improving from an integration standpoint, but companies running multiple ERP systems (and/or instances) with $5-$10 billion or more in revenue would be well advised to make sure Ariba can support their P2P requirements in a SaaS-deployment model.

This is an important but overlooked question to ask when it comes to Ariba's performance in the coming years. Bob suggested on the call that Ariba still has "275 to 300" CD customers using its solutions (and thus paying maintenance and support, except in unique circumstances). From a P2P standpoint, many of Ariba's legacy CD Buyer customers represent potential defections not just to Oracle or SAP behind the firewall, but ERP-hosted eProcurement as well, which does not require a back-end forklift upgrade like behind-the-firewall solutions. Moreover, Coupa and other SaaS-based P2P providers have ambitions to move at least slightly further upmarket and they, along with others such as SciQuest and Basware (especially on the downstream invoicing side), theaten Ariba's retention of legacy Buyer customers as well.

To close my analysis for the quarter, in evaluating Ariba's potential for 2011 and beyond, I'd focus on the following areas in the earnings calls to come (in addition to standard measures such as backlog, number of deals, net new customer wins, etc.):

  • CD upgrades and SaaS conversions. Trending upwards from previous levels will be a good sign.
  • Growth of channel, SI, and outsourcing-partner revenue (again, an upward trend or mention on the call will be a good sign, and an absence of discussion of these areas will not).
  • Stabilization and growth of Ariba's services business (and On-Demand services and content revenue as well, versus traditional project-based consulting revenue).
  • Net supplier losses on the Ariba network. The numbers to watch here are not just volume trends or the total number of suppliers transacting, but also the number of suppliers that previously transacted with customers, and who are now being taken off the network. (Ariba might not disclose this, but this will be essential to watch).
  • Services-procurement focus (and potential acquisitions). In Spend Matters' view, acquisitions in this area would be highly valuable from a customer perspective (deals do need to work for the street as well, but putting on a customer hat, Ariba really should be the go-to source for services procurement. An acquisition like a Fieldglass would be an ideal move here to meet emerging customer requirements as well as to build significant inroads in the MSP partner ecosystem).
  • Hiring a strong SVP or EVP of Corporate Development. Ariba needs to pursue smart consolidation plays as it heads into an M&A market that is heating up in 2010. Central to this will be a key senior hire with significant transactional and operational experience. Ariba currently lacks a corporate development team with enough bandwidth and experience to support what will be required in the emerging deal environment; in contrast, Emptoris, which has the support of its owner Marlin Equity, is in a better position to source, screen, negotiate, integrate, and operationalize deals.
  • Net new customer SaaS deals (especially P2P). Ariba is sticky once it gets into customers, especially in a P2P context. New customer wins, especially P2P, will provide a great growth platform for Ariba longer-term. Spend visibility and supplier management deals will also provide a great opportunity for Ariba to leverage initial relationships into broader suite and services relationships. The more of these Ariba wins, the better their future outlook in penetrating existing accounts.

Jason Busch

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