A Retrospective Essay — Looking Back on Ariba’s Transformation

Like many close to the market, I've watched Ariba's transformation over the years with a combination of criticism and respect. I've long believed that the transition to a business model funded in large part by increasing supplier fees would obfuscate the true cost structure of doing business with particular vendors, not to mention the potential ill will and tension it might create between trading partners. Moreover, I've also been critical of how Ariba transitioned to becoming a SaaS/cloud company, opting to leverage the core of its Buyer architecture rather than starting anew with a system which would enable them to innovative more quickly, deploy more rapidly and integrate more easily with various customer systems (the last point they've gone a good way to solving).

I've also had my issues with the varying degrees of depth of Ariba's products. On the one hand, P2P has been a strong point for them on a functional basis. And the network itself combined both clever execution and the timed usurping of a previous Commerce One vision that was simply too early for its time when Mark Hoffman and company (see here, here, here, and here for a recent discussion we had with Mark) attempted to pioneer it.

In the areas of decision support and vendor management, I believe Ariba should have invested earlier in developing its sourcing platform and supplier management capabilities (the latter tied more closely to the network and their uniquely good back-office onboarding team and capabilities), among other areas. That's enough of my critique -- for today at least.

Some of these points are quibbles. Others are more substantial. But regardless of my view in the product areas, it's clear Ariba did a tremendous number of things right in building a company that will soon become part of SAP if the proposed deal closes. For one, Ariba pulled a truly unique maneuver in leveraging and then getting out of the professional services business. Kevin Costello was originally brought in from an imploding Arthur Andersen to focus Ariba on driving professional services revenue, a move that in large part stabilized -- if not saved -- the company in the wake of the B2B implosion (even if it did create channel conflict and concerns until recently). Moreover, the FreeMarkets deal helped contribute to a broader services and expert-driven procurement vision, even if the execution never quite happened as some envisioned.

But just as cleverly as Ariba made the push to services to save the company, they made the push away as well to execute on what would become a clearer vision that would ultimately drive strong shareholder returns. Selling the shared services sourcing group to Accenture (see the highlights of our coverage of that deal here and here) at what appeared to be a very reasonable if not low valuation was a stroke of genius in cleaning up the company to maximize the SaaS/network valuation -- not to mention helping to extend a partnership arm to others in the services ecosystem rather than hoarding consulting/sourcing revenue for itself.

All of these clever moves in retrospect were small compared with the move to SaaS. Ariba turned the corner on SaaS -- we're talking the business model here, not specifically the architecture, cloud deployment philosophy, etc. -- at precisely the right time. Moreover, Ariba got the business model right (from a revenue and valuation perspective) by forcing the lock-in of SaaS P2P customer to the network, which would drive its appeal and valuation to investors -- and ultimately SAP. Say what you will whether this business model is the right one or not for buyers and suppliers (I have issues with it), but investors ended up gobbling it up. And this was prescient, as was driving network revenue by signing the Quadrem deal (even if the integration of the organizations created some tension internally) and the acquisition of B-Process in France. Both deals were also extremely prescient exercises in the arbitrage of revenues, which tremendously benefited shareholders in the end, especially the former.

Following the IBM/Emptoris deal, the time had come for Ariba to sell-out. In the eProcurement space, it was increasingly facing competition from folks like Coupa, which had flanked it on usability and a cloud-based operating model that enabled more rapid deployments, benchmarking and other benefits compared with the Ariba SaaS approach. Moreover, general saturation had begun to settle in certain market segments. What's clear from many sources we've spoken to off-the-record is that the timing of Ariba's exit given recent commercial activity trending and forward-looking opportunities could not have been better. Read into that as you may, but I sincerely believe that the exit timing to maximize valuation was an absolute coup.

More important for customers and prospects, the combination of SAP's installed base (procurement, ERP, etc.) and SAP's underlying technology innovations including HANA and mobile (not to mention their ability to rapidly prototype and release new products like Supplier InfoNet) combined with Ariba's network foundation and customer list (including many SAP customers who were on the fence about what to do going forward) could truly bring a new generation of products to this market if the engineers and product managers (not the commercial types) call the shots in the post-merger integration phase.

My personal view is that Ariba is exiting on a high point -- probably the highest place they could exit for a number of reasons. For this, I truly take my hat off and applaud a team for navigating exceptionally turbulent waters, arbitraging assets (and knowing when to write certain assets off) and evolving a business models while at the same time uncannily timing the market -- on multiple occasions. What a juggling act, and what a combination of moves that all worked and came together, in the end.

After the deal will come the hard work. I sincerely hope these activities will not just include typical post-merger integration and product rationalization, but something more -- for the sake of customers, prospects and the broader market. This should include a potential re-architecture of both Ariba P2P and SAP SRM to truly take advantage of the cloud, improve flexibility, enable a greater spend capture philosophy (inclusive of direct and services spend) and drive much more rapid deployments. At the same time, I also hope that both organizations assess the current network assets and rethink what is possible versus simply extending what Ariba has today.

Regardless of what is to come, we should applaud Ariba for maximizing shareholder returns over a truly transformational decade. What an exit.

- Jason Busch

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Voices (2)

  1. H.:

    Well said. I agree with your point of view – Ariba was right to wait until now to sell out. As much as I have disagreed with the product direction over the last few years, I have to give them kudos for executing on the business and commercial side of things.

    Their move to SaaS was textbook in my mind. Going SaaS is not a technology shift – it’s a business shift, and they understood that. We all thought they were crazy to go to a subscription model on their on-premise software back in 2003-2004, but it was a step in the bigger picture of going cloud. SAP should look closely at what Ariba did here.

    Of course their solution platform is completely hindered by its on-premise baggage, but you can’t argue with $45/share. If they had completely rewritten things the right way, would the time-to-market be right or would they have been too late? You could say that they could have rewritten P2P quickly with current tools, but that’s an academic discussion now.

    The only thing now for the rest of the market – who will step up and take the leadership of best-of-breed? Or is this a telling sign that the market has matured beyond the ability for the market to support a "procurement suite" stand-alone company. Ariba was always in the middle, not agile and focused to be best-of-breed but not quite a suite like SAP and Oracle. It was a fragile position at best.

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