Ariba: Caught in the Trough
Dave Stephens has the scoop on another lackluster revenue quarter from Ariba. Clearly, Ariba remains caught in the On Demand revenue trough as it transitions traditional software license sales to recurring subscription revenue. The challenge on the revenue side of the software business makes sense to me. And I won't beat them up for it because I believe they are acquiring new customers and making significant inroads selling new solutions to existing ones. Moreover, On Demand is the right long-term business model. But I remain surprised that Ariba is not making up the revenue transition gap on the services front. Supply chain and procurement consulting -- much of it outside of category- and event-based sourcing -- is booming of late and Ariba has a golden opportunity here given their installed base and the need for solution based approaches to solving Spend Management challenges.
Many of the boutique firms -- not to mention the larger more established players -- are having banner years within the Spend Management services arena. And I've not even mentioned the rise of procurement outsourcing in this growth equation (where IBM and Accenture are both having good years). You can bet that Ariba's services and consulting opportunity will be on my list of questions as I head to Pittsburgh later this week for their industry analyst day. I plan to ask some tough questions, but I'll also be looking around the room to see if the other attendees really get the services and process side of Spend Management before I take off the gloves. (They should given that clients are paying them to understand it and services and content are so critical to Spend Management, but in my experience, few industry analysts really understand anything but the technology itself.)
- Jason Busch
Many of the boutique firms -- not to mention the larger more established players -- are having banner years within the Spend Management services arena. And I've not even mentioned the rise of procurement outsourcing in this growth equation (where IBM and Accenture are both having good years). You can bet that Ariba's services and consulting opportunity will be on my list of questions as I head to Pittsburgh later this week for their industry analyst day. I plan to ask some tough questions, but I'll also be looking around the room to see if the other attendees really get the services and process side of Spend Management before I take off the gloves. (They should given that clients are paying them to understand it and services and content are so critical to Spend Management, but in my experience, few industry analysts really understand anything but the technology itself.)
- Jason Busch
Looking at results within this sector over the last 2 years for companies such as Ariba, Verticalnet and many others, it's apparent that their switch to on demand has no transitioned as promised from a revenue side. Perhaps the competition within this sector is erroding the margins. Companies like Verticalnet often will release pr demonstrating saving millions for their clients (see, Delta) and yet they themselves are losing money at a sickening pace. I would assume we will see some consolidation, what are your thoughts.
Investor - I'm thinking that one of the challenges to spend management vendors have with regard to delivering profitability is control of the variable cost services required to deliver of their solutions (data cleansing, catalogs, supplier enablement, process management, etc.). There has been little innovation with regard to utilizing technology to automate (and thus fix the costs) of these tasks. As proof, think of how catalogs are built, EDI deployed, auctions managed today by many of the most visible vendors (Ariba, Procuri, VerticalNet, etc.)...it really is no different than how they did in 3, 5 or in the case of catalogs, 10 years ago (punchout, ETL)!
1) Margins: yes, they are falling like the leaves outside our office. Good for everyone in the long term, bad for some in the short term.
2) On demand/hosted solutions: good for some apps, not for others. How many times do we need to learn this lesson? 1976: not every application is appropriate for CICS. 2006: not every application is appropriate for on-demand web hosting.
3) Innovation: comes from small vendors, not large ones. True of any vertical.
Increasingly the answer for public companies that can't get out of the doldrums is to take them private, tear out the infrastructure that was created to support the growth that didn't happen, and restructure the company for long term revenue growth and profitability. A friend of mine has been busy doing this with small-to-medium-sized software companies for several years now, with remarkable results. It is amazing how many software companies are incredibly profitable if you cut them back to lean, mean fighting machines, focus on your customers, and manage for sustainable growth, rather than shooting for an improbable "hockey stick."
Look at Salesforce.com to see an on-demand model that is working because customers want it. Subscription revenue is up 64% YOY and 13% quarter over quarter. Deferred revenue is up 73% YOY and 11% quarter over quarter.
Jason, be careful when you make blanket comments like On Demand is the right business model. Maybe it is the only one that Ariba can try to fool the market with.
Ariba's results are nothing short of disasterous for the supposed market leader. Ariba is continually losing marquee clients to the "ERP" world, which despite Jason's continued bashing, actually has very robust procurement functionality.
Take in point Jason's glossy review of Ketera's "consumerized" web interface....Oracle actually introduced this concept to it's procurement and exchange products back in 2000 or 2001....5/6 years before Ketera's attempt. You might argue the point on execution (unlikely however), but the fact is Ketera is a functional & user interface follower not a leader.
Ariba is dying on the vine and they'll be extremely lucky if Oracle makes a huge mistake and acquires them....
I have always maintained strong editorial independence and continue to do so. Regarding Ariba, I have praised them (e.g., content and domain knowledge) and slammed them (e.g., executive compensation) over issues as appropriate. In addition, you fail to point out my criticism of Ariba's services revenue which should be much higher. Yes, I agree, the ERP providers are coming up to speed on the eProcurement -- and now the sourcing -- sides of the platform, but not the rest of the Spend Management process and content equation in my book. But as always, I'm open to being convinced otherwise (but certainly not by $$$), but by proof and references.
I know Jason is not biased towards Ariba because it's not in his best interest to be! He could have a field day ripping Ariba on all the things it is and it does: overly-conservative CEO, diminished role as an innovator, potentially flawed strategy of >5 businesses in one (btf apps, on-demand apps, BPO, trading network, consulting, etc.), weak coordination across its business units, etc. Yet, it doesn't help anyone to merely be provocative.
Equally, we should defend anyone's right to their opinions, and sometimes authors deserve to get dinged a little: Jason's coverage of Emptoris conference coverage, AMRs ranked of VerticalNet as #1 (not as bad as Forrester treatment of Frictionless or IDCs top ranking of FreeMarkets though!), etc. Yet, rants from other software vendors' senior/marketing executives hidden behind anonymous identities is merely mud-slinging (should BS be AS?), and while yours truly does not work for a software or consulting vendor and has to protect his secret identity for other reasons, I would encourage the same full disclosure as is expected/demand from Jason from the others. Kudos to Tim, Don, Gary, Paul, Eric, and all those who've come out of the virtual closet to opine. I wish I could do the same - sigh! oh well, a fool's errand is this blogging. back to the castle dungeon.
P
In addition, just because the old FMKT capability was multi-tenant does mean the new Ariba functionality is multi-tenant (and I'm not claiming it is or isn't). Retrofiting existing applications to multi-tentant can be extremely challenging - an area many application vendors have struggled with.
Bob's comments re: lacking full functionality are typical of what I've seen in many major teechnology/architecture shifts. The software vendor may decide that it's important to deliver a subset of "legacy" functionality in the new offering. Usually, this is a wise approach by the provider because it's extremely difficult to get it all correct in one shot (and any attempt would create major delays in the new offering). The result is a new solution, with a subset of functionality that is sufficient for a subset of customers...but others need to wait until the new offering catches up to the legacy application.
BTW, the main eprocurement guru at Oracle when they worked with TPN Register was named Kevin Miller...is that you, Kev?
If it is, Spend Matters readers might be interested to know that the Kevin Miller from Oracle, not some guy/girl at Ariba, actually invented punchout as we know it today. It was his idea to apply XML to the OBI spec, which is all punchout is. TPN and Oracle then used it to connect the TPN Marketplace to Oracle's iProcure application.