Ariba’s Q4 2011 Results — Do They Matter to Gauge Overall Market Growth Any More? (Part 4)

Please click here for Part 1, Part 2, and Part 3 of this series.

We've spent a good deal of time exploring Ariba's latest quarterly and yearly performance so far. We also attempted to dig under some of the numbers on a comparative basis to show that Ariba's growth does not appear to be keeping pace with broader market net new customer expansion in the areas of P2P and services procurement (sourcing, spend and contracting appear to be doing well for Ariba, especially because of their extremely aggressive pricing of late). Nor, however, is Ariba benefiting from the growth of new and growing markets like supply chain finance or dynamic discounting, where both bank and non-bank alternatives have had a really solid and optimistic set of quarters. In short, our analysis suggests that Ariba is stagnating or declining on a comparative new customer acquisition basis its most strategic areas and is largely using the growth of network fees and the acquisition on network revenue (Quadrem and B-Process) to cloud over actual organic growth based on new customer wins where it is likely to generate, based on its historic track record, supplier fees.

Overall, it's important to note that Ariba's picture is not bad given the solid renewal rates and Ariba's outstanding commercial execution in existing accounts and with new deals in which wins are based on price and brand rather than feature/function in most cases. Yet, we would suggest, given Ariba's lackluster new customer acquisition on a comparative P2P basis, it is important to now separate out their own organic growth expectations and trends from broader market adoption. We cite three broad reasons in forming this argument and thesis:

  1. The first rationale for not treating Ariba as a proxy for overall Spend Management market growth should focus on the fact that Ariba is no longer breaking out new customer acquisition in its quarterly earnings. This not only makes it difficult to judge Ariba's official growth in specific market segments, but to us, taken with specific competitive market observations and our observation of recent new customer selections, suggests the numbers are not trending in a direction that can stack up to key competitors in P2P, even without adjusting for commercial differences (e.g., size of commercial organization). Considering the comparative growth of Coupa, Ivalua, B-Pack and others in the P2P market (which are competing in select enterprise deals against Ariba when they get a foot in the door), Ariba is no longer a good proxy for new customer adoption and deployment within P2P. Especially as folks like Coupa begin to hire larger sales teams, Ariba's apparent comparative slowing of P2P wins will become even more pronounced.
  2. When Ariba wins in competitive situations for products like P2P and sourcing, it is our observation that they usually win on price rather than capability. As a best of breed vendor, this is a potentially dangerous shingle on which to build a commercial roof out from. As companies prioritize more advanced capabilities and as they mature and realize the lock-in that Ariba creates with their solutions (e.g., limited third-party integration, mandated supplier network usage) we do not believe this will reflect positively on up-sells or renewals relative to competitors, unless Ariba continues to drop prices, further. We also add to this that we have seen competitors increase prices in recent quarters (e.g., in P2P) while continuing to accelerate their own new customer acquisition rates, while Ariba's price trending appears to be flat to down -- another sign Ariba is not a proxy for the broader market.
  3. In new solution areas that are driving much of the higher APR growth in this market from both revenue and customer perspectives (e.g., supplier management, services procurement), Ariba is largely absent or only a secondary player. In terms of gauging the overall market, we must focus more on where the emerging growth is as much as the overall growth of a vendor that has historically been considered a broader market proxy yet whose numbers are too small to be important from a broader market trending and adoption standpoint in these new areas.

Ariba is a vendor to be reckoned with and should be a shortlist candidate for companies considering P2P solutions today (and potentially sourcing and contract management, especially those looking for something fast and cheap -- and I mean cheap given their recent pricing drops). Existing customers in these solution areas should also take note of this in renegotiating their deals with Ariba (given that many new customers are paying 20% of what folks paid for the same suite of tools, in certain situations, 12 or 18 months ago). But more important, in P2P, we continue to rank Ariba number one functionally in our own customer assessments within a comparative box, although from usability, integration and adoption perspectives, they have fallen behind the competitive mark -- in some cases, in major ways. Yet when it comes to gauging broader market adoption, Ariba represents a legacy yardstick by which to measure how customers are adopting and deploying Spend Management solutions today -- and tomorrow.

Jason Busch

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