SAP Buys Ariba – Huh?

The big news in the ePurchasing software market yesterday was SAP’s acquisition of Ariba. This blockbuster deal will extend SAP’s position as the largest software vendor in the ePurchasing market. It also brings into the SAP fold one of the most innovative companies in this market – a company that has a fair claim to having begun the whole market in the late 1990s.

Still, as my title suggests, I’m not convinced that this acquisition makes strategic sense. I think there’s a real risk that this turns out to be a deal where one plus one equals 1.75, not two, let alone a multiple of two. Reason one: the tremendous duplication of products between the two firms, and thus the problems of product rationalization and internal competition. Reason two: the Ariba Network, which is the main rationale for the acquisition, is based on an idiosyncratic pricing model that in my view is unsustainable at current rates and thus will not generate the kinds of revenues that SAP is expecting.

Let me first state the case for why this could be a good deal:

  • SAP has a goal of significantly increasing the portion of its revenues that come from SaaS subscriptions, so adding a projected $342 million in subscriptions revenues in 2012 (on an annual basis – SAP’s share for the year will be about half that) helps SAP reach its target of $2 billion in SaaS revenues.
  • Ariba has correctly recognized the economic value in operating a supplier network that stands between corporate buyers and suppliers and facilitates their transactions. SAP’s acquisition of Ariba now gives it control of and revenues from the largest of these supplier networks.
  • By keeping Ariba as a standalone company (branded as Ariba, an SAP company) and handing SAP’s own cloud-related ePurchasing products, SAP has finessed one of the failure points in an acquisition, namely the squashing of the acquired company’s entrepreneurial spirit in the larger company’s bureaucratic culture.
  • By making the Ariba Network available to thousands of SAP SRM clients, the acquisition will add additional volume and revenues to the supplier network. It will also eliminate a potential vulnerability that has existed for Ariba, namely the relatively small (several hundred) and slowly growing number of corporate buyers on that network and thus the potential for suppliers to ask why they are dealing with a network that reaches so few of their customers. 
  • The combination of Ariba and SAP has the potential to add new products and services that they can sell to both buyers (e.g., supply chain planning and coordination) and suppliers (e.g., CRM and eCommerce services) on the Ariba Network.

But here are the reasons it’s not such a great deal:

  • Ariba and SAP products (again, excluding the supplier network) are mostly duplicates in terms of functionality. Our Forrester Wave™ evaluations show that Ariba is still slightly superior to SAP in eProcurement, eSourcing, services procurement, and contract life-cycle management (CLM), and my assessment is that Ariba is slightly ahead in spend analysis but behind SAP in supplier risk and performance management (SRPM). Like Ariba’s products, SAP’s strategic sourcing, spend analysis, SRPM, and CLM products (mostly based on acquired products from Frictionless and Analytics, Inc.) are available as SaaS products as well on-premises products. The only unique products that Ariba brings are its eInvoicing product (SAP has been reselling OpenText) and its SaaS version of eProcurement and services procurement. So, there’s not much prospect of SAP being able to sell Ariba products into market segments that Ariba hasn’t reached, or vice versa. 
  • Rationalization of the duplicate product portfolios will present a challenge that may hurt Ariba’s product sales. The press release announcing the acquisition did state that “upon completion of the transaction, it is planned to consolidate all cloud-related supplier assets of SAP under Ariba.” That implies that Ariba will end up with responsibility for both its and SAP’s eSourcing, CLM, spend analysis, and SRPM products as well as Ariba’s SaaS eProcurement and eInvoicing products. I would certainly expect Ariba in this case to support both product lines indefinitely while working to build over time products that combine the best elements of each product line, as it has done in prior acquisitions. Still, the SAP sales force will tend to favor the SAP products with which they are familiar over Ariba’s, while Ariba’s sales of its own products may be hurt by perceptions that SAP will ultimately favor its products over Ariba’s. In the transition, Ariba’s (or alternatively SAP’s) product sales are likely to slow as prospective clients worry about which product will ultimately prevail in the rationalization of the product lines. 
  • SAP’s retention of its on-premises SRM products creates potential for sales and marketing conflicts with on-demand products of Ariba. I have assumed based on the statement above about transferring SAP’s cloud-based supplier assets to Ariba that the SAP products such as strategic sourcing, CLM, spend analysis, and SRPM products that have both cloud and on-premises deployments will move over in total to Ariba. But that could be wrong. If so, that’s a major source of internal conflict. But even if that is the case, the on-premises SAP products such as SRM will compete for sales and marketing attention with on-demand products managed by Ariba.
  • One of Ariba’s growth opportunities had been to form partnerships with other ERP vendors such as Infor for them to private-label Ariba products and sell those to their client base. That opportunity is now highly unlikely given the SAP acquisition.
  • So, at the end of the day, the value of the deal for SAP clearly lies in the Ariba Network, and potential for SAP to expand the reach and revenues of that network. In principle, when SAP adds access to Ariba Network as a SKU in its sales catalog, that should increase the number of buying organizations on the Network and thereby increase its attractiveness to suppliers. However, there are two big ifs to this scenario.
    1. SAP has already had a SKU for allowing SRM clients to access the Hubwoo supplier network, yet Hubwoo’s financial results have not shown a noticeable increase in its revenues from that relationship. So, it is still unproven that SAP’s sales force can sell access to a supplier network to its installed base.
    2. Ariba’s pricing model for the supplier network remains a problem for both buyers and suppliers. That pricing model – which levies a 0.1% fee on the value of business transactions between a buyer and a supplier once thresholds of transaction volume and value have been reached (with a cap of $10,000 per year) – means that Ariba generates most of its network revenue from a relatively small number of suppliers with either high volumes or high value of sales to specific buyers. Some suppliers that have large-ticket sales (say, a sale of $20,000 or $100,000) may end up paying per-transaction fees that run into the hundreds of dollars. These suppliers complain to their buyer customers, who then get concerned about Ariba’s pricing model. Meanwhile, Basware, Transcepta, and other supplier networks offer lower-cost alternatives for suppliers. My view has been that Ariba needs to change its pricing model for the Ariba network to make it more equitable between buyers and suppliers. But that would mean reducing supplier network revenues.  
  • Ariba has been preparing for a change in pricing model by developing alternative revenue sources from the Ariba Network, such as Ariba Discovery. And adding SAP’s Supplier Infonet offering will be a potentially significant additional revenue source. But it will take time for these revenue sources to be large enough (with the help of higher transaction volume) to offset the revenue loss from a lower pricing model for connectivity to the Ariba Network. So, my bet is that the Ariba Network revenue will not post the kind of revenue growth that it has done in recent years.

Bottom line: I think revenues from sales of Ariba’s non-network products (or from SAP’s products) will suffer as a result of the SAP acquisition, while revenues from the Ariba Network will not grow as much as SAP expects. At best, the deal will be a one-plus-one arrangement in which the combined revenues of the two businesses will be the same as if they had remained separate. At worst, the loss of product revenues due to integration of two competing product lines and potential organizational conflicts between the legacy SAP SRM business and the new Ariba business and the slower-than-expected growth in network revenues because of resistance to Ariba’s pricing model will mean less revenues for the combination than if they had remained separate. 

Comments

Excellent analysis.

Excellent analysis.

nice post!