Tracking Ariba's Third Quarter Fiscal 2010 Earnings Report: Three Perspectives (Part 3)

In the first two posts in this series looking at Ariba's most recent financial results (Part 1 and Part 2), I explored a combination of reported metrics and observations that contributed to the quarter. In this final post, looking at Ariba's performance, I'll turn my attention to exploring Ariba in the context of how prospects and customers are making decisions, and how Ariba factors into any decisions in the Spend Management technology market. I think it's most important to first consider customers in the context of Ariba's overall strategy today. After all, there's a bit of game theory involved here -- it's not quite a zero sum game, either -- and if you can use Ariba's strategy to your advantage, all the better, especially if you win in the process by getting the best possible solution for your organization at the best total cost (not just price, mind you).

In my view, Ariba's emerging strategy is simple, even though they don't articulate it to the market this way: acquire buy-side customers at acceptable to acceptable SaaS margins and get to the 90%+ gross margin level by, in the future, taxing the heck out of suppliers to participate in the "commerce cloud". Now, taxes aren't necessarily a bad thing, mind you, if you get something for them. Taxes in the form of Ariba Discovery fees to win new business starting in 2011, for example, might be something suppliers would love to pay (and Ariba Sourcing customers will be all the happier to identify new qualified sources of supply). Yet I believe network taxes are something that, for larger suppliers meeting the new, lower thresholds and paying higher network fees, will end getting billed back to Ariba buy-side customers who will ultimately end up paying for the increase one way or the other (if you're curious as to why and want to dig into exhaustive detail into the coming price increase -- including a supplier perspective on the subject -- click on the previous link and download our analysis of the subject).

For this reason, the Ariba cost calculation for P2P is no longer simple. And the customers and prospects that I directly hear stories from -- both directly and indirectly through channels -- are quickly rising up against the cost opaqueness. After all, it's hard to pull anything over the head of procurement people who always feel like they're getting screwed even in a good deal. And when a supplier like Ariba tries to play a shell game on reducing the upfront pricing but charging suppliers on the back-end, it's pretty clear that the spend bull*hit detector is bound to go off at some point for any skeptical procurement person -- whether it's a false alarm or real.

I think this is one of the reasons Ariba is seeing a lot of competition in many deals I encounter and why, for example, Coupa signed in the same ballpark the number of P2P deals that Ariba did last quarter (although many were with SMB customers, mind you). But if you look at spend analysis, sourcing, contract management, supplier management, invoice automation and working capital/discounting/supply chain finance, you'll see a similar trend that Ariba is doing well, but they by no means dominate the market and in the best of cases, win no more than 30% of overall new deals in a given area they compete in.

For this reason, I can't help but want to raise my hand and ask a clarifying question when I hear Bob Calderoni note on the financial earnings call that Ariba's "small niche competitors" do not have "any size at all" and that "over the last eight years, we've seen a number of these companies come and go," providing no sustained competition. In reality, many of these "small niche competitors" are outpacing Ariba from a software/SaaS growth perspective and winning a fair share of deals against them, competively. Moreover, there's a coming sales- and pricing-driven assault on Ariba from one ERP provider who has "had enough," as one person close to the situation told me recently. Given this, if Ariba is truly dismissing the competition now versus what they're positioning for with the street -- which is a possibility, for sure -- I think they'll be in for an even greater competitive surprise in the coming quarters, as customers continue to evaluate different options and more aggressive price points from multiple angles.

Jason Busch

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