Inside Ariba: A vendor dossier

From e-marketplaces to spend management, the irony is that now this B2B trailblazer has to manage to get customers to spend. Sonya Rabbitte sidles up.

Bob Calderoni is a man with a vision. Thick set and broad shouldered the man looks like he takes no prisoners. Think Tony Soprano meets the A-list corporate exec and you get an idea of the Italian-American panache oozing from Ariba's latest CEO.

When he speaks there is little marketing spiel, nor is he a charismatic wordsmith. Calderoni is an accountant by profession. He tells it like it is.

Among senior Ariba executives there seems to be an air of renewed confidence in the company's leadership. It's just as well really for investors. If Calderoni has the potential to get it right, his predecessors got it terribly wrong.

Eighteen months ago, under the guidance of Keith Krach, Ariba became the first B2B vendor to reach breakeven.

Customers were spending extravagantly on e-marketplaces and Ariba's revenues were rising fast and furiously.

A global B2B alliance with IBM and i2, and a founding role in the UDDI initiative, put the company in a strong position.

Spurred on by successes such as Transora - the giant consumer goods exchange backed by the likes of Unilever, Nestle and Coca Cola - a hiring frenzy began and revenue forecasts were ramped up.

Fast-forward 12 months and Ariba was a company in trouble. CEO number two, Larry Mueller, was in command. An over-hyped and - at $2.55bn - vastly over-valued merger with Agile, aimed at padding out Ariba's indirect e-procurement product, was on the rocks, and the company was steadily losing money.

However, the big problem as far as senior Ariba executives were concerned was not the failed merger, nor the mounting losses, but the man overseeing them. Larry Mueller was a great salesman but he lacked the long-term vision and delegation skills required of a CEO.

It was simple: e-marketplaces weren't selling but, according to one Ariba manager, Mueller's sales background had taught him to hang on to the key account at all costs.

When Ariba eventually repositioned itself as a provider of enterprise spend management (ESM, if you must) software under the guidance of Calderoni, the general feeling among staff at Ariba's Sunnyvale HQ was good riddance - no one ever understood all that e-marketplace malarkey anyway.

Calderoni readily admits Ariba made a mistake with its narrow focus. "We were a one product e-procurement company, and it was fair criticism," he said.

Take a look at Ariba's customer and revenue figures and evidence of the change can be seen. Ariba says it has 650 live customers. A year ago about 200 were involved in e-marketplaces. Today that number is "significantly" down, according to chief marketing officer Michael Schmitt.

While e-marketplaces still account for 20 per cent of revenue in Europe, it was close to 100 per cent during the B2B heyday.

But revenue from sourcing - a strategic factor in the new spend management product suite - is on the rise. In the last quarter it accounted for 30 per cent of revenue, up from just five per cent half a year ago.

Calderoni has forecast pro forma profitability for June. Pro forma net loss in the last quarter (Q1 2002) narrowed to just over $6.9m, almost half the $14m pro forma net loss clocked up in the same quarter in 2001.

Revenue was stable at $55m and operating costs were $65m. In Q4 2000, when Ariba hit break even at the height of its success, revenue was $134m. But operating costs were also spiralling to stand at $150m.

Even while the doomed Agile merger talks were under way Ariba was looking for ways to stem its plummeting e-marketplace revenue.

CMO Michael Schmitt claims Ariba knew it had to change, even at that stage. Analysts were good at criticising the company for what it didn't have - direct procurement capabilities - so Ariba decided to hinge change on the assets it did have - its customers

"The assets we had at the time were 300 customers running Buyer. Answers tend to be in customers. Why did they buy you in the first place? We took an inventory of what was going on. Customers were saying they were out of control, they knew they had to manage spend, but they wanted someone to give them the tools to do it," said Schmitt.

Tim Cooper-Jones, European e-procurement manager with Unilever, began implementing Ariba's Buyer tool across one division of Unilever's European business in April 2001 and has gradually been rolling it out to different business divisions and regions since.

But all is not rosy. As Ariba transforms itself into a spend management company, Cooper-Jones has reservations about the new offering.

While Ariba Buyer has successfully transformed the way Unilever purchases refrigerators for its Walls ice cream brand, and processes orders from retailers for supplies of Lipton ice tea, Cooper-Jones is not confident that even a revamped Ariba can meet Unilever's more complex demands.

"We haven't decided to use Ariba in all environments. My concern is that there are aspects of contract and sourcing [two of the features in the spend management suite] I'd like to see in buyer. Buyer should be able to cope with purchasing things like electricity."

"We want a more complex model that can deal with the contracts we already have for MRO and power," he said.

Ariba's inability to deal with complex orders was a problem that haunted it in the old days. While new features such as contract management, sourcing and workflow should fill in the gaps, the success of spend management is - somewhat ironically - dependent on customers' willingness to spend on the new software.

It is no secret that June's profitability forecast has more to with last year's strict cost cutting measures and redundancies than improved sales. Reaching pro forma profit because sales and revenues are up and customers are spending will be Ariba's real achievement. Calderoni seems confident he can do it.

For a full Ariba factfile, see:
http://www.silicon.com/a52117

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