There was a somewhat surprising announcement this week. Accenture entered into an agreement to acquire the strategic sourcing and business process outsourcing (BPO) services assets of Ariba, Inc. For readers not totally familiar with the history of Ariba, the acquired group is essentially the services aspects brought over from Ariba’s acquisition of FreeMarkets several years ago.
Our initial reaction is that this event should cause procurement executives as well as procurement technology selection teams to revisit existing assumptions regarding leveraged use of strategic sourcing technology and coupled services to deliver aggressive cost savings for the business. It is also another evidence point that software companies have difficulty incorporating conflicting software and services business objectives.
First, we should summarize the details of this event. According to the press release, the terms of the agreement call for Accenture to take ownership of Ariba’s category, commodity sourcing and strategic sourcing process execution resources which amounts to approximately 160 people. The stated purchase price is $51 million, $12 million of which is subject to escrow based on assignment and subsequent performance of certain of these assets. Ariba itself will retain its in-house Global Services software implementation resources dedicated to assisting clients in both the actual implementation of Ariba software as well as gaining additional benefits in leveraged use of the software. This deal is anticipated to close in the quarter ending in December, which is an indicator that parties want to move fast.
My observation of the procurement BPO area over the years has been that firms decide on embarking on this path either because they have determined that strategic sourcing of materials or services is a core competency that is better outsourced to experts, or that aggressive savings goals are such that an interim outsourcing arrangement affords a better opportunity in achieving this goal in a shorter period of time. The latter strategy proved beneficial to Ariba, since it was able to offer customers both the software technology, as well as services options. However, certain customers who increased their learning in the use of the software, or conducting of major sourcing events moved away from an external dependence. That had some impact to Ariba’s services revenue performance over these past periods. Some customers also felt that Ariba’s business model was too tied to services revenues and chose instead to shop the market for other vendor alternatives at time of renewal.
Services customers will probably now have a clearer landscape to consider in either a software or services decision, since the overlap is about to be corrected. I do have to believe, however, that in the short-term, Ariba prospects who desire dedicated sourcing services are going to be immediately shunted over to Accenture in order to make the escrow and performance goals of the acquisition successful.
Existing commodity and strategic sourcing services customers of Ariba gain a new provider, one that has Procurement BPO as a core competency. I have also always been impressed by the capabilities of the direct sourcing services team both in their creation at FreeMarkets and their continuation with Ariba. Accenture will inherit a dedicated group of professionals. The implication however is that come contract renewal time, exiting Ariba services customers may find that there will be different aspects to consider under the umbrella of Accenture. Accenture, with this new infusion of Ariba sourcing expertise, will no doubt extend its existing BPO capabilities into deeper expertise in the sourcing of direct materials. That coupled with existing expertise in indirect materials and services sourcing, provide Accenture the opportunity to present clients with a one-stop BPO services alternative. Outsourced procurement services are a key strategic decision that impacts the business over a multiple year time window. That decision will now become clearer in the context of Accenture or other specialized BPO providers.
The other implication for Accenture revolves around the fact that it also provides software referrals to other software providers such as Emptoris or SAP, and it will have to re-double its efforts to insure potential clients that it can still provide objectivity in the choice of software, coupled with services.
Finally, existing Ariba software customers should view this announcement as a strategic decision made by Ariba’s senior management to focus more on Ariba’s previous core competencies, that being the software side of the company’s business, either on-premise or on-demand focused. The cash infusion from the acquisition will no doubt be applied to strengthening one or both of these segments. The open question however is whether Ariba will now turn its attention towards a broader small and medium business market penetration, leveraging its on-demand software offering for sourcing and procurement technology needs. It may also be an indication that Ariba will up its diversification into more industry verticals, as well as compete more aggressively with existing ERP and best-of-breed technology players.
More implications of this announcement will certainly unfold in the coming weeks and procurement leaders need to be observant as to whether these implications will have impact on their ongoing efforts in integrating software automation with augmented services.