A Look Under the Sourcing Covers: Accenture Picks Up Ariba's Sourcing Services Assets (Part 2)

In the first post in this series covering Accenture's acquisition of Ariba's sourcing services business (i.e., the legacy FreeMarkets asset), I took an Accenture point of view. In this post, I'll look at the deal through the eyes of Ariba, examining what it means for the future of the company. If you're curious to learn about the basics of the deal and how Ariba positioned it internally and to financial analysts, you can also read our initial take on the topic as well. In our view, for those close to Ariba's inner circle, this deal should not come as much of as a surprise as it might seem to those on the outside (even those who think they're close to the company) if you consider:

  • Ariba largely failed to integrate FreeMarkets DNA into its organization. In fact, the Pittsburgh, PA operation, where the original "sourcing factory" and many category experts resided, became the unofficial third office of Ariba, well behind Sunnyvalle, CA and Alpharetta, GA in pecking order (Alpharetta, an office which Kevin Costello built around his base of operations, is where all of the important shots are being called these days)
  • Ariba's greatest chance for sale to an SAP, Oracle or IBM is to have a clean, simple asset. Ideally a SaaS asset. The services business, while very valuable from an IP standpoint, would have complicated any potential transaction (while also pulling down overall valuation multiples)
  • Ariba's top executives never really grasped how sourcing and procurement operations work in the field (with the exception of Kent Parker and a number of other FreeMarkets leaders, nearly all of whom left within a few years of the original deal closing); the core make-up of the current customer leadership organization, built around Kevin Costello's team, came out of a technology/marketplace background and not a procurement/operations one

Given this, I'll take a contrarian argument relative to what many have suggested to me yesterday, and posit that this deal is actually a good thing for Ariba and Ariba's customers. Think about the following points:

  • Ariba can now focus on doing one thing right -- software (SaaS software to be specific). Granted, this will require continuing to rebuild a product engineering and management organization process that looks very different than it did a few years ago, but I personally believe focus is the right thing for customers looking to Ariba for product innovation (which they've sorely lacked in recent years)
  • Since Ariba had essentially wasted the asset of my former employer, FreeMarkets, into a barely recognizable form, it's a good thing that it will fall into someone else's able hands, like Accenture, which could actually do something remarkable with it instead of keeping a deteriorating business around without giving it the attention it required (the low valuation given to the business further suggests that Accenture looked upon it as an asset with its own set of complicating issues)
  • The relationship with Accenture will no doubt go beyond simply referring services business, and the reassignment or subbing of contracts, their way. This gives Ariba a key partner to build a channel ecosystem out of from both a consultancy and BPO perspective. No doubt, Accenture will now look to send business to Ariba as well, just as they have done with Emptoris in the past (and will most likely continue to do so in certain areas)
  • Ariba's direction with its supplier network business had less and less in common with FreeMarket's sourcing roots. Targeting working capital management, discounting, invoice automation and related areas is a closer fit with A/P and finance organizations than it is with many in procurement

I got a few e-mails yesterday pointing out that my recent prediction earlier this year regarding Ariba's spinning out or divesting of its services business proved correct. What else does the Spend Matters crystal ball say? Look for Ariba to make a few key software acquisitions in the coming quarters (it's important to note, though, that the timing of this deal had nothing to do with waiting to acquire other vendors -- Ariba had wanted to do the Fieldglass deal (see previous coverage here and here), but dropped out of the bidding, according to our sources). Further out, the magic spend eight ball also suggests to look for Ariba to be acquired, barring any massive changes in the underlying market conditions or fundamentals, no later than the end of 2011. My guess is the longer they wait, the lower the perceived value, by a potential acquirer, of the underlying assets, unless they can innovate in new ways on the product side.

Jason Busch

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