This Supply Chain Matters commentary is a follow-up to our earlier breaking news commentary reflecting on the SAP announcement that its SAP America, Inc. subsidiary has entered into an agreement to acquire procurement technology and cloud vendor Ariba for an estimated value of $4.5 billion.
Where, oh where, should we begin since this is the sort of announcement that drives the juices of industry analysts and pundits such as yours truly. Plus, this commentary will not cost you a premium subscription or a metered token in speaking with your trusted analyst.
Back in December, at the time that IBM announced its acquisition of Ariba competitor Emptoris, Supply Chain Matters declared that the source to pay procurement technology market was about to become much more dynamic. Our hidden question was obviously who would eventually acquire Ariba? How true those statements turned out to be five months later.
SAP was willing to pay $4.5 billion, a 20 percent premium over Ariba’s closing stock price on Monday, for a technology vendor that garnered nearly $444 million in revenues in its 2011 fiscal year, but achieved a net loss of $3 million on that revenue base. Ariba’s latest Q2 results reflected a more improved picture with nearly $132 million in quarterly total revenues and operating income of $4.2 million. Once again, as was the case with recent acquisitions, SAP views upside potential and broader vision, beyond the current financials.
Pending stockholder and regulatory approvals and the closing of the transaction, which is expected by August of this year, Ariba will remain independent and will be eventually named Ariba, an SAP Company. That is a smart decision, one that IBM and Oracle have opted in their previous acquisitions of specialty supply chain technology vendors.
During the press / analyst /investor briefing regarding this acquisition, both SAP Co-CEO’s described the Ariba acquisition as a game changing opportunity for SAP. Co-CEO Bill McDermott shared the internal SAP code word regarding the acquisition, which was “angel”, perhaps a very telling moniker of expectations. Ariba claims to have the largest network buyer-seller network consisting of 730,000 customers, which is anticipated to grow to one million this year. There lies the nugget, The Ariba Business Network. The revenue opportunity was described as the potential for $2 billion in cloud based revenues by 2015. SAP statements indicate that Ariba customers currently only make up a small fraction of SAP’s 190,000 customer base, and thus, there is a perceived huge potential to upsell P2P and B2B collaborative commerce cloud services. The process itself involves both indirect procurement, which umbrella’s a company’s services, general supplies or temporary labor, and direct procurement, which involves all the various parts components that make-up a final product. Both areas provide proven savings benefits, but it is the latter, the direct side, that leads to more compelling bottom-line savings.
In our view, this marriage implies a lot of joint work over the coming months, especially in addressing functionality overlaps among current SAP and Ariba based applications. Also keep in perspective that buyers and suppliers on the Ariba network also exist on other B2B networks as well, particularly in the indirect area.
SAP has also stated in filing materials that is does not anticipate any major workforce changes involving Ariba employees. The existing management team will continue to lead Ariba and the company will report into the office of SAP’s Co-CEO’s. Current Chairmen and CEO Bob Calderoni, will be nominated to be a member of the SAP Global Managing Board, subject to the approval of the SAP Supervisory Board.
Once this acquisition is consummated, a lot of work remains. We briefly highlight the following:
- As noted above, there are significant areas of duplicated functionality which will need to be rationalized. The appointment of Bob Calderoni to the Global Managing Board to manage the B2B leg of SAP’s Cloud strategies could lead to some uncertainty to the efforts of SAP’s newly appointed senior executive charged with Cloud strategy, Lars Dalgaard to synergize the multiple tenets of SAP’s evolving cloud strategy. We trust that Calderoni will place his immediate priority on helping to rationalize areas of duplication in functionality, services and staffing assignments.
- SAP speaks to the potential of launching the SAP direct sales teams to upsell Ariba, but that implies some form of an alignment strategy with the existing Ariba direct sales team. SAP would be wise to take a cue from other vendors such as Oracle, that fostered specialty sales teams from the acquired company to shepherd the process from pre-sales customer value education to closing.
- Pricing will be an area of definite concern for combined customers. Ariba’s network fees have been on the increase and have motivated some previous customers to seek other alternatives, including either business process outsourcing or use of another vendor’s technology. SAP also has a history for taking a healthy share of partner revenues, leaving little room for price discounting.
- Existing system integration and consulting partners aligned with either vendor will perceive some impact as a result of the combining of these two entities. We indicated in our initial commentary the potential impact to SAP procurement and SRM partners Hubwoo and Crossgate who each filled-in existing gaps, but may find current services may be either diluted or enhanced with the addition of Ariba. Existing Ariba partners such as Accenture, Infosys, Hubspan or Wipro will in turn have to assess if their business development strategies become buffered or enhanced by SAP’s longer-term strategy in this area. Accenture acquired the procurement managed services arm of Ariba in October of 2010.
- Product marketing will be another significant hurdle, one that current SAP teams are having difficulty overcoming with the plethora of cross-purpose strategies related to business process, technology solution or industry marketing alignment and inconsistent messaging and product roadmap articulation for customers.
Overall Supply Chain Matters views this latest SAP acquisition as game changing, but in a different context. The objective is in responding to the increased attractiveness of cloud computing alternatives surrounding end-to-end supply chain processes as businesses continue to feel pressures for added efficiency and cost control. The major enterprise vendors such as SAP and others are utilizing acquisitions to fill the gaps for reaping the revenue benefits of cloud computing attractiveness among IT and business teams. Their goal is information integration across end-to-end value chain networks, which should umbrella Buy, Sell, Manage and Service process capabilities and differentiation. The foundation needs to include technology enablement of continuous and faster decision-making, supported by robust intelligence and predictive capabilities. Manufacturers, retailers and service providers should understand that their objective is cross-functional in dimension, beyond procurement processes, involving the end-to-end aspects of supply management and profitable demand fulfillment. Stay above the current noise levels and pending battle lines of the enterprise vendors and look toward opportunities. The wars among which has the better cloud computing offering are just beginning with bigger, more large-scale skirmishes to follow, with even more big money appropriated for mind share. In the end, each of these vendors will need to fulfill your needs and buying choices.
The SAP and Ariba marriage, when consummated, will take some time to come together. That stated, the potential rewards for added supply chain capabilities and efficiencies are within the realm of possibility if SAP accomplishes the serious work at hand, not only on the Buy side, but other supply chain areas as well.
In light of this perspective, we advise existing SAP and Ariba procurement and network customers to stand pat and not do anything until the dust settles and definitive commitments, recognizable integration and direction come from SAP. Continue to focus on short and longer-term process objectives and desired business outcomes, and exercise a technology buying decision only if your need turns out to be time critical. Keep in mind that SAP has some considerable homework to accomplish before the final exam, and that may be many months away.
This will definitely not be the final commentary related to the marriage of SAP and Ariba.
©2012 The Ferrari Consulting and Research Group LLC and Supply Chain Matters. All rights reserved.