Friday Rant: SAP -- Pull the Trigger on Ariba
Over the past five years, there have probably been half a dozen times when SAP or Oracle has been rumored to be in serious talks to buy Ariba. For a lot of relatively superficial deal reasons, an Ariba deal could make sense for both organizations -- Ariba represents one of the largest remaining business application vendors (Oracle has acquired most of them already), they've made the switch to a recurring revenue model, they present a solid, global installed base and they continue to take away potential revenue from both platform vendors in deals. Sure, you might argue that the Ariba global services organization (GSO), the former FreeMarkets sourcing team, might be a bit of the odd man out inside an enterprise software giant, but both SAP and Oracle also realize the need for supporting on-demand services in a SaaS context not to mention the need to pluck revenue away from the SIs and ops consultants in any way they can in the downturn.
But now more than ever, an SAP / Ariba deal makes a lot of sense from a solution perspective (I won't get into the financial component of such a transaction in this post). I know SAP is notoriously slow on the deal trigger relative to its US-based competitor, but if they had to make an acquisition happen, I'm sure they could push it through the corporate Bundestag just as fast as Nancy Pelosi can fly halfway around the world -- or to visit her constituents -- on a taxpayer-funded G5 (don’t get me started or diverted on that subject). But seriously, there are a number of reasons that I believe are gelling together for SAP to finally get serious and do something regarding Ariba. Consider both SAP's recent past behavior as well as their current challenges as I shape this argument.
First, the long awaited SRM 7.0 release is still, well, long awaited. SAP has been extremely quiet with the media, analysts and bloggers in talking about it. But I know for a fact that the final product is not exactly featuring all of the components they originally envisioned. Moreover, it would appear from a handful of sources that SAP has not even recommended companies hold off purchases of SRM 5.0 at the moment to wait for the availability of SRM 7.0. Perhaps that says something about their confidence in the new release right there. Moreover, it's become increasingly clear in my view that SAP has fallen behind parity with Oracle in all of its procurement-related applications once R12.1 comes to market, except for spend visibility (and potentially elements of contract management). Taking out Ariba would address all of these areas and then some -- and finally give them a core procurement application they can confidentially take to their customers.
But there is more than just a bail-out-the-e-Procurement-ship rationale for the deal. Both SAP and Oracle have largely ceded the downstream electronic invoice presentment and payment (EIPP) and supply finance markets to dozens of other competitors, including Ariba. Ariba would not only give them a solution in this area, it would allow them to deliver a full suite of network-based capabilities, something Oracle has always seemed to grasp a bit better than their German peer (though they, too, have not fully executed on the vision for network-based enablement and solutions). Along similar lines, Ariba would give SAP an answer in the supplier enablement, content search and catalog/content management arenas -- three distinct areas where SAP customers continue to turn to third parties (e.g., Perfect Commerce, Vinimaya, jCatalog, etc.) despite the ability of their own MDM application.
Finally, I believe the rationale for SAP to finally pull the trigger on an Ariba deal is timing. If this downturn lasts more than another quarter or two, SAP's other business application and core ERP areas will likely see tough times ahead, potentially pulling down the entire organization with it. Procurement and cost reduction is selling today. It's the one bright spot -- maybe not a spot that's gleaming, but still a bright spot, relatively speaking -- in the entire business applications arena. In addition, SAP has already proven to its management team that they are able to buy and integrate point solutions (e.g., Frictionless and Analytics, Inc.) in the SRM and procurement areas. Ariba would not just be the icing on the cake on top of these deals. It would be the cake itself.
Disclosures: I do not hold any direct or indirect investments in either SAP or Ariba. Both SAP and Ariba are clients of my firm, Azul Partners, and Ariba is an Associate Sponsor of Spend Matters.
- Jason Busch
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"and finally give them a core procurement application they can confidentially take to their customers. "
Seriously, I think that's probably the biggest problem SAP has with this type of strategic move. IMHO SAP's acquisitions to date are viewed internally as marketing plays and short-term market pacifiers. Disposable band-aids that are not destined to become core, but provide short term relief while the home-grown solutions get more time to be completed.
An Ariba acquisition is a completely different story. You've got a large installed base, and superior capabilities. The right answer would be to move to the Ariba infrastructure, but within SAP this is typically viewed as "crazy talk", because of the ubber-integrated vision.
Unlike Oracle, SAP does not have a corp-dev vision or strategy that can leverage this type of a move. So most likely they would end up with two redundant offerings and a confused path forward. It would be no different from the current Frictionless vs. SRM conandrum, where they take one solution to the market "confidently", while the other [better] solution is promoted "confidentially."
But the rub does come in when you look at the financial side of such a deal. It is hardly accretive because growth actually slows down due to the go-to-market confusion, not to mention a large R&D costs that are incurred during transition. It is hard to "hide" a non-accretive $60M acquisition of frictionless, but it is much harder to do so with an Ariba size acquistion. So to make the numbers "pencil" SAP needs to make a low-ball offer - which Ariba would have no interest in taking right now. The strategy worked for Oracle because Siebel and PeopleSoft were distressed properties, with little prospects for future growth...
I'm not saying it's a bad idea Jason, just that the market conditions, combined with the corp-dev stance within SAP, and the historical NIH bias would make this a very hard deal to pull off.
Meant to say --- It is not hard to "hide" a non-accretive $60M acquisition of frictionless, and easy to write it off as "strategic", but it is much harder to do so with an Ariba size acquisition.
I think you have a good understanding of the SAP machine, but don't discount the new blood they've brought into the organization of late. Cultural changes might allow business changes -- especially if Oracle outperforms them in the market as they appear to be doing from a quarterly performance standpoint. As Bruce Richardson likes to say: "All things are possible".
It just so happens that I released a white paper on Friday on a closely related theme that has garnered some interesting activity - here's the link to get the paper: http://procureinsights.wordpress.com/2009/03/20/ri...
Titled "Riding the Crest of a New Wave: How the Original SaaS Companies Have Gained the Upper Hand," it touches on the very issue of how the traditional giants are positioned to handle the challenges of a dramatically changing market.
This is the situation we have been in recently when upgrading from SRM3.0. SRM7.0 was not even mentioned to us as a viable alternative in the timescales we were working with (given SRM3.0 is out of support now). SAP's own consultants who came in to do a pre-upgrade review were very coy about the likely general availability of SRM7.0 being any time soon.
SAP buying Ariba might make my life a bit easier though as currently we have solutions from both...
Not sure which side of the Atlantic (or the Pacific) you're on, but I'm hearing similar things in the US at least from multiple sources -- both a current customer and a potential one. In my view, SAP is at serious risk of losing potential SRM customers (and even current ones) if they don't agree on a story and stick with it around SRM 7.0. Or acquire Ariba :-)
I think the downsides of your scenario, in terms of reduced choice for prospective buyers, would outweigh the advantages.
By all reliable sources the SAP procurement portfolio continues to dominate the market. As Goodman mentions above the SRM 7.0 product was hot at the Insider show.
Duncan, this could be the start of a good debate. I will take the ball in my court and respond later this week. Thanks for the thoughts as well, BTW.
That's true. There are a lot of shelves filled with SAP SRM CDs thrown into enterprise-wide deals that still have shiny plastic wrap on them.
Even as IBM is reportedly in talks to acquire Sun Microsystems, it is looking increasingly like IBM is set to announce another round of layoffs. Layoffs are expected in the IBM Global Business Services group and the Global Technology Services group, among possible others.
Link to article in its entirety: http://www.eweek.com/c/a/IT-Infrastructure/More-IB...
Amazing . . . and certainly a testimony to the comments made in the March 26 PI Window on Business Blog Talk Radio Show (http://procureinsights.wordpress.com/2009/03/26/pi...).
Specifically the reference that the M&A machinations of organizations such as IBM, Oracle, SAP and Hewlett-Packard being tantamount to “Nero playing the fiddle while Rome was burning.”
With an 85 percent rate of initiative failure, attempting to rejig the traditional models under which these organizations operate demonstrates how increasingly out of touch they are becoming with the realities of the new paradigm of customer-centric SaaS and On-Demand business models.
Even as IBM is reportedly in talks to acquire Sun Microsystems, it is looking increasingly like IBM is set to announce another round of layoffs. Layoffs are expected in the IBM Global Business Services group and the Global Technology Services group, among possible others.
Link to article in its entirety: http://www.eweek.com/c/a/IT-Infrastructure/More-IB...
Amazing . . . and certainly a testimony to the comments made in the March 26 PI Window on Business Blog Talk Radio Show (http://procureinsights.wordpress.com/2009/03/26/pi...).
Specifically the reference that the M&A machinations of organizations such as IBM, Oracle, SAP and Hewlett-Packard being tantamount to “Nero playing the fiddle while Rome was burning.”
With an 85 percent rate of initiative failure attempting to rejig the traditional models under which these organizations operate demonstrates how increasingly out of touch they are becoming with the realities of the new paradigm of customer-centric SaaS and On-Demand business models.