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SAP acquired Ariba, what does it mean for the on-demand, procurement and SAP world?

When a colleague forwarded the news of SAP (finally) buying Ariba past midnight India time on Wednesday (http://www.bloomberg.com/news/2012-05-22/sap-agrees-to-buy-ariba.html ), my first response
was roughly on the lines of "better late to the dance than allow Oracle to steal your partner". That said, the "Ariba on the bid block" has been now a since-2006 story ever since Oracle kicked up some serious acquisition dust during the Peoplesoft, JD Edwards, Siebel years. With IBM acquiring Emptoris and folding it into the Smarter Commerce theme, all eyes in the procurement world was on Ariba.

Over the past few years, I've watched Ariba's stunning repositioning as a serious on-demand player (yes, cloud hadn't become so fashionanble in 2007-08) with a lot of admiration, though as an SI, this meant a steadily eroding revenue pie. I've always felt that this was one good management case study of charting out a strategy and staying true to it, in spite of quarter-on-quarter setbacks.

Supply Chain, as you know, is a collection of motley functions, with each having its own decision maker - demand forecasting, replenishment planning, sourcing & procurement, warehouse management, order management, transportation management...the works. In this vast realm of linked functions, over the last decade, we've only seen two functions being truly moved to the on-demand paradigm. The first has been Tranportation Management, with a myriad range of TMS providers, mostly in the range of $20-100 of revenue base effecting this change. The second? Sourcing & Procurement, primarily the indirect spend area.

Indirect spend as an enterprise function is interesting for multiple reasons. First off, this is more the domain of CFO's office than say a VP-Supply Chain, since it plays a role in the Sales & General Administration (SG&A) part of the P&L statement and not in the "Cost of Goods Sold - CoGS" line item. Effectively, you're taking cost out of the balance sheet, but not out of the core supply chain per se. Secondly, unlike more niche functions like Transportation which have low user bases, indirect spend (when truly implemented enterprise-wide) is usually one of the most widely used enterprise app in any organization, both in terms of transaction volumes and user bases.

The first point above meant that indirect spend is considered "non-strategic" enough to be moved to an "outside-the-firewall" mode. The second point puts in serious burdens around the whole nine yards of under-the-hood, non-functional requirements that go with such large user footprint - stuff around user experience design, application scalability, performance engineering, integration with other enterprise applications etc.

In this regard, Ariba's investments in this model including massive data centers over the years and the A few years back, SAP or anyone could've bought Ariba at probably less than a fifth of the price paid for the acquisition now, but its also a strong nod to the amount of value created by the Ariba management's dogged persistence on the new model of cloud paradigm.

While on-demand was catching on and this offered clients a chance to pay via alternative models of spend-based pricing, it also allowed Ariba a firm grip on all revenue streams, a far cry from the days it was selling licenses, taking annual maintenance contracts and providing some consulting support as needed by clients. By bunding hardware, software, consulting, integration, data management and everything else that goes with an implementation (while keeping customization to an absolute minimum), it was perfectly positioned to capitalize on its inherent strengths of a large user base, a market leading product and a solid understanding of how the domain works thanks to the Ariba marketplace offering.

In terms of product alignment with current SAP offerings, there are huge overlaps, the most glaring being the on-demand based Frictionless Commerce that was picked up by SAP a few years back for the upstream pieces of sourcing and contract management. Whether SAP SRM would be kept for on-premise clients and Ariba offered for on-demand is something that would be worth watching.

From a market standpoing, Ariba has been extremely strong in the pharma world, a vertical SAP is dominant apart from financial services, a vertical SAP would like to further strengthen. For all those who opted for SRM looking a one-neck-to-choke strategy, a smooth migration path to get onboarded into the Ariba world would warm it to many clients, so that could be an immediate opportunity. That said, indirect spend has a major user experience component, so one cannot miss out on the change management aspect that comes be default for such initiatives.

 

Comments

Really nice article Gopi. Always good to get your perspective in this domain.

I feel SAP bought Ariba only because of their on-demand solutions specially Ariba Network . SAP just didn’t have that capability. It will be interesting to know what they do to their SRM module.

Hi Gopi..SAP acquiring Ariba was not surprising because it was something that folks in the spend management community were expecting anyway..possible acquisitions in the future may be SAP acquiring Zycus which is another prominent spend management company. Other possible acquisitions may include Endeca and Bravosolutions.

Sunil
Founder
International Institute for Procurement and Market Research

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