What’s With Ariba Selling Its Sourcing Services Team to Accenture?

My recent series about the merger of JDA Software and i2 Technologies raised the issue whether any independent software vendor (ISV) can at the same time be a successful professional service provider (even without considering a possible conflict with its service provider partners). Coincidentally or not, in early October Ariba sent a message to the market that its focus going forward will be on becoming a trading partner network provider with its on-demand software at the core to facilitate trading transactions.

What happened? Accenture acquired the sourcing services and business process outsourcing (BPO) business from Ariba for a reported US$51 million price tag (after scrutinizing Ariba’s Form 8K filing with the US SEC, it appears that the actual net purchase price was in the neighborhood of US$40 million). This transaction involved approximately 160 people operating in about 20 countries with notable category expertise, sourcing process expertise, and strategic sourcing execution expertise. 

Ariba will retain its sourcing and spend management software technology and intellectual property, as well as the global services resources directly tied to software implementations. In other words, this deal was about acquiring talent (know-how), whereby no technology was acquired. While the group of resources acquired is indisputably familiar with Ariba’s technology, there was nothing in the agreement stipulating that Accenture is mandated to use Ariba’s software for these clients, nor is there any exclusivity agreement between Accenture and Ariba.

As a result, Accenture pledges to leverage these knowledgeable resources to deliver best-in-class services that enable companies to enhance their strategic sourcing initiatives and the results that they deliver. For its part, Ariba will continue to innovate and extend its position as the leading provider of strategic sourcing technology who helps companies optimize their spend management performance.

Win-Win for Accenture and Its Customers?

Accenture made this acquisition to acquire the talent and customer access rights (about 11 percent of Ariba’s business) to grow its BPO business. In addition, Accenture was looking to extend its capabilities into the sourcing of direct materials and products, and this team from Ariba indeed has that experience.

In fact, I had a chance to attend Ariba’s seminar in 2006 in Boston where the company showcased its sourcing services and savvy stemming from its 2004 acquisition of FreeMarkets. I was truly impressed by the presenters’ knowledge of their respective sourcing categories, from commodities such as industrial metals, paper & packaging, plastics & rubber, and raw materials all the way to service procurement (e.g., transportation & logistics, relocations services, machining services, legal services, janitorial services, etc.).

Those folks knew their stuff, including the current and likely future trends and projections of the commodity’s availability and pricing so that customers can presciently apply their best procurement and sourcing strategy to hedge against any supply volatility and disruptions. These experts have been frequent contributors to Ariba’s acclaimed SupplyWatch quarterly publication.

This development could be good for large enterprise customers, especially those who were the customers of Ariba’s sourcing services team that is soon to be part of Accenture. These companies now have a choice of which sourcing software to use and which sourcing expert partners to use.

Namely, these corporations can now choose sourcing services from a best-of-breed service provider such as Accenture and a best-of-breed sourcing software company such as Emptoris, BravoSolution, or Iasta (and not necessarily Ariba automatically). This move might also be good for Ariba’s competitors because, as best-of-breed providers, they can now work with those companies that want a highly differentiated, tailorable application and are no longer captive to Ariba based on their sourcing services relationship.

What About Other Accenture Alliances?

Since I recently attended Emptoris’ Empower 2010 user conference and saw Accenture as a major partner and sponsor of the event, I logically wondered what this development might mean for Emptoris’ relationship with Accenture. Reportedly, Accenture shared this news in advance with Emptoris, and Accenture’s senior leadership is working very closely with Emptoris to communicate to their joint customers and prospects how this is not in conflict, and how in many cases it enhances Accenture’s relationship with Emptoris.

My take on this is that while Accenture is committed to its ISV relationships, the firm must also be committed to continued impartiality in the public eye in terms of recommending the best procurement and sourcing software. Accenture’s entire focus on the acquisition seemed to be around sourcing services capabilities and not the software per se.

Coming back to my attendance of Ariba’s event in 2006, my overwhelming impression was that Ariba should have been offering its sourcing services to non-Ariba software customers as well. When I asked that line of questions during my private conversations with Ariba’s staff at the time, I could see dismay and surprise in their eyes (and no answer whatsoever), as if I was suggesting something utterly heretical and out of the left field.

In many cases, this Ariba team of savvies doesn’t use any technology at all. Thus, Accenture must be flexible and impartial around what technology it offers, and it must work to implement the technology its customers want to use. This agnostic approach should put the firm on a par with IBM, ICG Commerce, Capgemini, and Infosys. For more thoughts, see Phil Fersht’s take on this acquisition as well as the Procurement Blog's entry.

Why Did Ariba Do This?

This news can be spun as both Ariba’s failure and success depending on who is interpreting it. It is indeed interesting that Ariba would buy FreeMarkets for nearly US$500 million in 2004, integrate it, and then do an about face. Perhaps the company hasn’t managed to fully take advantage of the acquired customer base and achieve the desired license growth (that other players might have seen in similar acquisitions)?

Ariba maintains that this was a strategic decision. The company has a Global Services Organization with over 400 category experts and spend management professionals. Ariba is retaining many of these spend management experts who are focused on adoption, implementation, and value enablement to continue its mission to help companies buy, sell, and manage cash more efficiently and effectively.

Cynics would question whether this is part one of a shedding-off of assets and whether separating out the product development function from the commercial end of the business will unlock value for customers. No doubt the margins are better in the software business than in consulting, which clearly drives higher public market valuations. Also, as a pure software provider, Ariba is certainly a more attractive target to the predators such as Oracle, SAP, or Infor.

But being a cynic, and after weighing up all the options, maybe poor utilization of expensive staff was the issue? There were indications that Ariba’s strategic consulting services business has been declining for years, and that the company wanted to exit this business. There was never true cultural integration between Ariba’s e-commerce and sourcing software proponents (“natives”) and FreeMarkets’ category experts (“newcomers” that were often software agnostic).

To be fair, Ariba needed FreeMarkets to reinvent its image after its early 2000’s faltering and near-death experience in the Internet marketplace platform space. Indeed, Ariba has since had a breath of a fresh air and a comeback as a spend management software and service provider. FreeMarkets has managed to change Ariba’s aura of being an expert only in the less exciting and complex indirect materials space (i.e., for buying paper clips, staplers, and other office supplies).

The development and growth of Ariba’s BPO services were seen as critical to the success of Ariba’s revised e-Commerce and sourcing marketplace strategy. But Jason Busch, a former FreeMarkets insider and the current spend management market expert, believes that all the FreeMarkets acquisition amounted to for Ariba was the gain of a Pittsburgh shared-services center and a few dozen mid-level customer-facing executives who helped drive customer success and revenue.

Because of the mandated quiet period, Ariba is not allowed to say much beyond what is in the press release and the abovementioned Form 8-K filed with the SEC. The company’s stated ambition is to become the leading platform for business-to-business (B2B) cloud commerce, and this latest news is consistent with the message that we all repeatedly heard at the Ariba LIVE 2010 conference.

In spite of their indisputable expertise, the strategic consulting services business has been declining for years at Ariba. This might have even been due to a flawed business model whereby software delivery and strategic consulting services from one company do not work. Further evidence can be seen not only in Ariba’s declining services revenues since buying FreeMarkets, but also in similar results after the AT Kearney and ebreviate merger.

According to Ariba, the divested business is running at US$40 million revenue at US$6.5m profit. So nicely profitable but flattish rather than growing and shrank somewhat in the 2009 recession.

Divesting this portion of its business and expanding its partner ecosystem to include world-class companies like Accenture will allow Ariba to focus on what it does best: developing and delivering network-based solutions that enable companies to lower costs, minimize risk, and optimize performance and cash flow. The transaction will also help the vendor in the execution of this strategy by providing additional cash to support and accelerate the growth of its business. As do its direct competitors (e.g., Emptoris), I expect that Ariba will continue to sell services tied specifically to implementation and adoption of its cloud commerce solutions.

Focusing on the Little Guy?

In addition, some may see this move by Ariba as an indicator that the company is tacitly exiting the large enterprise market and focusing on small and mid-sized businesses (SMBs), in higher volumes of transactions. I concur with Jason Busch that, ironically, Ariba's acquisition of the on-demand mid-market vendor Procuri in 2007 might have altered the company's DNA far more than the FreeMarkets acquisition ever did.

For last several years, Ariba has invested in a significant re-architecting of its core solution (as a multi-tenant cloud offering), becoming along the way one of the better examples of a traditional ISV fully migrated to the Cloud. Today, the firm essentially operates one code base between its on-premises and subscription-based cloud clients. More recently, Ariba has begun a refocusing of its strategy around what it is referring to as "collaborative business commerce."

Ironically, this position as a cloud commerce provider circles back to ill-fated marketplace positioning back in the Ariba (after acquiring Tradex) and Commerce One days. Yet there are some major differences between the negative connotations of hosting and dotcoms of the late 1990’s and the upbeat SaaS and cloud business models this time around.

Ariba is now focused on evolving from being a software company that happens to have a huge network of buyers and suppliers to having the Ariba Network, formerly Ariba Supply Network (ASN), at the core of its value proposition. While the company will no doubt continue to grow its solutions business, the focus on the ASN means that it may become increasingly agnostic to whether their customers use solutions from SAP, Emptoris, Basware, Oracle, or from wherever.

SMB customers are looking for low cost, simple to use, and easy to manage applications. This jives well with Ariba recently pushing pure vanilla, pre-configured implementations of its cloud-based (hosted) applications. This new path was certainly a catalyst for its decision to divest itself of its strategic consulting and BPO business.

Namely, smaller customers do not drive big revenue streams for strategic consulting services teams (i.e., the sourcing team that Ariba sold off to Accenture) so the vendor no longer needed the team. Ariba is thus getting back to its core competencies of developing and delivering spend management software (and solutions) rather than focusing on people-intensive services. Ariba also recently introduced its Start Solutions offering targeted at SMB customers.  

But while Ariba’s one-size-fits-all cloud approach might be suitable for some areas (e.g., managing working capital, streamlining the procure-to-pay [P2P] process), it might not necessarily be as approrpiate across the entire realm of spend management and sourcing. Time will only tell whether Ariba’s cloud customers can experience differentiated sourcing optimization capabilities in software as strong as CombineNet and Trade Extensions (not to mention the better known Emptoris, BravoSolution, and Iasta) for logistics, machining, and other complex spend categories.

To illustrate, will the mass "cloud" experience provide personalized line-item cost breakdowns tied to pricing indices in spend visibility for select spend categories (e.g., stampings, forgings, freight, AC motors, looms, etc.) to help each customer understand the exact implications of commodity price movements and surcharges based on total cost vs. just showing a general price trending chart? What about creating a social network (Ning of a sort) for companies sourcing similar categories that are non-strategic?

These considerations are also important for customers who have deployed (or are still deploying) on-premise Ariba solutions. Ariba has been placing all of its attention squarely on software as a service (SaaS) and cloud delivery. Rumor has it that Cloud Commerce comes at the expense of recent installs and upgrades of on-premises solutions that are not going as smoothly as one would expect (although Ariba cites success with the Release 9 upgrades in its last earnings release).

In addition, many companies do not yet feel comfortable having their highly confidential contracts data kept in a public cloud. I will try to clarify these issues with Ariba’s executives during the upcoming Ariba Commerce Summit event in Boston in November.

Good or Bad for Other Ariba Partners?

The acquisition of Ariba's sourcing service and BPO assets by Accenture may be viewed as a negative to other key Ariba partners such as IBM. Rumor has it that this spin-off move has been in the wings for some time and had not been offered to Ariba’s other major partners. So it makes you wonder if Ariba can effectively build out its partner network.

Ariba claims that this acquisition has actually accelerated discussions between Ariba and other partners. Other partners had viewed that business as competitive with their own in the past, and that barrier has not been removed. 

Is there the potential for a great deal of conflict in the partner base and customers feeling hostage to a single-minded proposition? As mentioned earlier, there is no any mandate or exclusivity in place with Ariba and Accenture. However, Accenture has also purchased a software license to use for these customers going forward. Ariba and Accenture are working on expanding the alliance to use Ariba across all their BPO customers.

Nonetheless, I believe that the disposal of the BPO business may in fact make Ariba more appealing to services providers. Namely, it will remove some of the conflict of interest inherent in software and services partnerships. Historically, partner conflict has been particularly evident in slow economic periods where software vendors typically respond to a reduction in product demand with a drive to make up for lost revenue with services (that eat into the revenues and bottom line of the partner base).

The larger question in the short term is how will customers take the news? Customers must ensure they are not impacted by changes in the account management group. For example, having to sub-contract their agreements to Accenture, how easy will it be for them to tap into Accenture services? What if the customer is not keen on scaling up to the full-blown BPO model that Accenture provides?

As per Jason Busch's report, some Ariba customers (and suppliers) are already disgruntled about the recently hiked ASN costs and this may heighten the cost-to-value issue. This may well spur them on to look at alternative models through specialist service providers.

Ariba claims that only a very small percentage of customers have incremental pricing changes, while the buyers did not see a price increase. To be pricise, Ariba has a two sided business model. The Supplier Membership Program (SMP) changes increased the cost to suppliers on the Network.

But fees on the buy-side were unchanged and actually have on average come down over the past several years. There are connectivity fees (per document charges) and services fees for enablement and connectivity implementation. Still, these events may also provide an opportunity for competitors to carve out a slice, especially in the mid-to-large market where Accenture is not as geared up to deliver (e.g., from PROACTIS' services approach that does not “boil the ocean”).

Separating the software company from services has happened at other places. History tells us that the ability for Ariba management to refocus on its new responsibilities will be key, especially in the face of customer and shareholder scrutiny.

We will have to stay tuned to see how the spin-off will pan out and how the respective value propositions will further be explored by both Ariba and Accenture. Your views, comments, opinions, and particular experiences with Ariba and Accenture in the realm of spend management and sourcing are as usual welcome in the meantime.
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