Friday Rant: Ariba's Business Strategy Amounts to Supplier Wealth Redistribution For Large Vendors

Earlier this week, Spend Matters broke the news that Ariba was raising supplier network fees this fall. We also covered the news and provided analysis in much more detail in a free, downloadable research brief. But the purpose of this Friday Rant is not to rehash the fee increase. Rather, I'd like to share some underlying perspective on what this change means and why Ariba did it (beyond the obvious reasons surrounding driving additional revenue and margin).

In short, I view Ariba's network strategy as perfectly in line with the underlying theme of the Democratic sweep of the 2008 elections -- stay with me here from a minute. Under the surface, whether you cared about "change" or not at the time, and whether you loved or despised Bush, Obama's victory in 2008 and the resulting congressional Republican route was a not-so-subtle vote in favor of policies that redistribute wealth from companies and fortunate individuals to the rest of society. This has been the theme of the Democratic party well back into the 1930s, especially with the start of "progressive" tax policies that institute a penalty on the people and organizations that outperform the norm.

I'm not here to debate the merits of progressive taxation, but I do believe there are some interesting parallels. Just as Democrats will have a stronger hold on government in the future if they can implement policies that make their traditional financial lobbies (e.g., unions, trial lawyers) more powerful and richer as a byproduct of their wealth redistribution policies and legislation, Ariba and Ariba's customers stand to benefit far more from smaller suppliers succeeding in winning business and profiting from the Ariba network more than the larger ones that form the bulk of Ariba's network revenue, if not overall volume, today. Think about it for a minute and hold your partisan breath.

Large suppliers have everything to lose in an environment where there is greater transparency. Office products is a great example. In the past, office products companies made a fortune by over-charging customers through invoice inaccuracies and SKU-changes, even after strategic sourcing exercises that supposedly gave them a 10-15% haircut. Ariba's network not only evens out the playing field for buyers in this case by providing greater transparency, visibility and invoice/PO matching capability -- it also provides smaller suppliers with the chance to win new business. Moreover, it charges the largest suppliers the most in the process (e.g., folks like Dell, Staples and others could easily find themselves paying Ariba millions of dollars per year as Ariba's buyer base increases).

Under this model, small suppliers will win business off the backs of the larger suppliers paying the bulk of the network fees, yet do not require the same type of marketing, working capital solutions and related benefits that smaller suppliers will be able to derive from the network (the network and P2P capabilities will also reduce their ability to overcharge, as well). Still, they're paying the same transaction percentages! Now, Ariba's counter argument to this is that the network presents a level playing field to all parties by providing essentially a flat-tax approach to network volume. I take issue with this claim, given the fact that large suppliers are paying on a dollar volume-basis for a service that they could easily get on a per-transaction basis from other network providers if they were driving the connectivity decisions themselves (especially considering that they don't need all of the value-added capabilities of the Ariba network like small suppliers, given their low cost of capital and fortress balance sheets).

Consider that Ariba's most successful SMB network suppliers have been able to grow their business well over 10% a year by leveraging the network to reach new buying organizations. Yet these companies are paying less than $10K per year for the privilege of reaching new customers, compared with large companies who could find themselves paying the same amount based on a couple dozen POs and invoices to customers they're already doing business with. In addition, toss in Ariba Discovery, another tool to help buyers identify new suppliers (often at the expense of incumbents) at what we can assume will be low price points for suppliers and you see that Ariba's future business model is built around redistributing spend wealth. Small suppliers who know how to market and leverage Ariba win big -- really big -- for a fraction of the cost of advertising on Google or elsewhere based on the subsidy that large suppliers are fronting.

Heck, this is probably the best news for buying organizations in decades; they stand to heavily benefit from this symbiotic relationship with Ariba, given incentive alignment. But I believe that larger suppliers could easily rebel. Ultimately, I think systems like this are bound to hit stumbling blocs -- pun intended -- just as Soviet communism and other large-scale wealth redistribution exercises never quite worked in the end. Many of the best Russian businessmen (and women) / scientists ultimately voted with their feet and left the country -- if they could -- that was taking advantage of them. And I believe larger suppliers will attempt to do the same thing with Ariba, given the redistribution of wealth exercise that will accelerate its pace starting this September.

The free market can be a powerful thing. Even though I have come to believe upon deep reflection and examination this week that Ariba's long-term network and overall business strategy is actually the right one for buyers because it will create greater competition in the marketplace by empowering SMB suppliers and leveling the playing field (even if buying organizations end up paying part or all of the bill for their suppliers), it's also clear to me that large suppliers aren't going to wag their tails and roll over for a treat once it hits them that Ariba is really pursuing a wealth redistribution -- or balancing, if you will -- exercise at both their near- and longer-term expense.

Jason Busch

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