A Good Sign: Ariba’s Earnings Suggest That Deals are Getting Done (Part 3)

One of the topics of conversation that came up on Ariba's earnings call is one that many analysts have followed closely for some time -- Ariba's declining services revenue and overall services business (including the legacy FreeMarkets assets). Might Ariba finally be turning the corner on this formally declining business? On the call, Ariba executives noted, "Earlier this year, we said that services revenues have stabilized. In Q2 we saw a modest uptick and are now expecting another similar uptick in Q3." To the best of my knowledge, Ariba counts services in two key areas: software deployment and Spend Management / sourcing services (e.g., category sourcing, supply risk analyses, etc.). It's important to separate out these two areas for the purposes of overall discussion and analysis of their prospects for professional services.

For the purposes of channel relationship and management, Ariba still continues to alienate many of the large SI and BPO providers in relation to Emptoris and others who have done a better job greasing the services skids by enabling their partners to share in the implementation and deployment revenue (not to mention procurement and supply chain consulting and outsourcing revenue). I know for a fact that this has cost Ariba many at bats in the past -- and continues to cost them today. Still, I spoke to one CPO earlier this spring who preferred the Ariba approach to bundled deployment services in the area of Spend Management software. Considering one Ariba competitor that has a better relationship with folks like Accenture and IBM than Ariba does, this individual felt like Ariba's competition was bringing in a major SI who would unnecessarily add additional cost to the process. In contrast, the Ariba approach to the software area this company was looking at bundled Ariba services into the price.

At this stage, I believe Ariba's growth in services is characteristic of this examples, as well as a general rebound in the overall procurement services area. Simply put, starting in Q4 last year, companies began to open the floodgates again on professional-services driven cost reduction projects. But from a category sourcing and general operations cost reduction standpoint, I'd continue to wager that Ariba is recovering at a rate that is ahead of some, but trails many of the leaders in the sourcing and supply chain consulting market. Even though I know they have tried to extend olive branches to partners -- and potential partners -- these efforts have not had a material impact on many of their larger firm relationships. Indeed, many large SIs, consultants and BPO providers continue to leverage technology from other providers whenever they can, because they know that Ariba has a history of competing for revenue against their partners (even if this is the right thing for the customer, mind you).

In other quarterly news, Ariba noted on the call that "we remain very well capitalized with $223 million in cash on our balance sheet." But the critical phrase is what follows next in the transcript. To wit, this balance sheet gives us "strategic flexibility to exploit both organic and inorganic opportunities." In order for Ariba to be seen as a major contender on the M&A front, they'll need to ramp up their capabilities in this area, hiring an experienced corporate development executive with a long track record in M&A (which they currently don't have). The irony of this is that many of Ariba's smaller competitors have what I'd describe as better overall competencies in the M&A capability, ranging from up-front deal screening through to due diligence, and the most important part of any M&A transaction: operational integration. If we see Ariba add to its roster of executives a new SVP or EVP of Corporate Development -- a move I think is likely -- then we should all take it as a signal that the "inorganic growth" options described on the call remain a strong possibility as a core strategy vs. just opportunistic pursuits.

I'll save my detailed discussions on the growth of the network business for a post in the coming weeks because I don't believe you can separate out network growth and revenue from the augmentation of existing services and revenue streams that Ariba currently provides and derives from the network business. From a customer point of view, the growth of Ariba's network business should not necessarily just be looked at as a positive thing. Some of this growth may come from increased transaction costs either funded by your suppliers -- or you directly, as suppliers raise prices to cover additional transaction costs. Still, I do believe that Ariba may be able to deliver new types of solutions over the network that bring material benefit to both buying and supplying organizations. Perhaps at LIVE, which is coming up at the end of May, we'll learn more about what some of these might look like.

- Jason Busch

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