A closer look at SAP's $4.3 billion acquisition of procurement application and transaction network vendor Ariba reveals that the value is in Ariba's transaction network that its customers and partners use to complete purchases, not because Ariba's applications are cloud-delivered. But Oracle still has reason to worry about this deal.
When SAP America announced on May 22 its plans to acquire Ariba for $4.3 billion, much was made about how SAP, whose business was originally built around on-premise software, was making another cloud-computing play. But the real significance is in the software Ariba distributes and the network it operates to complete procurement transactions, analysts say.
Ariba operates in two key areas, said Jason Busch, managing director at Azul Systems, which researches the procurement space. The first is an array of cloud-delivered applications to manage the procurement process in a company, automating such tasks as e-procurement, electronic invoicing, spend analysis, contract management and supplier management. The second part of the business is a transaction network between buyers and sellers where procurement purchases are actually made, Busch said.
Simply put, the procurement apps are the shopping process of comparing products, negotiating terms and deciding what to buy, while the transaction network is the check-out counter.
That Ariba's apps are delivered via the cloud is almost beside the point, he said. SAP offers some procurement management apps but does not control the transactions.
"With this deal, SAP will have the dominant market share for both the application and the transaction flow and this is for indirect procurement," Bush noted.
Indirect procurement is of products and services a company buys to run its business, such as office supplies, IT, telephones, payroll services or a coffee maker for the break room. Direct procurement is of materials or components a company buys to make the products it sells. For a company making laptops, those would be hard drives, processors, memory, the screen and the case, etc. Ariba is not in the direct procurement process business, he noted.
But SAP, combined with Ariba, creates a formidable foe for Oracle, one of SAP's toughest competitors, says Andrew Bartolini, chief research officer for Ardent Partners, another supply chain management-focused research firm.
The top three firms in the procurement applications space, in order, are SAP, Oracle and Ariba, said Bartolini. However, in most competitive bidding situations, it's usually a standoff between SAP and Ariba or Oracle and Ariba. The three companies seldom compete for the same customer.
"So with the acquisition, SAP is taking out its top competitor and buying Oracle's top competitor in the space," said Bartolini.
Oracle has a deep bench of procurement management solutions in its Fusion portfolio, its Oracle eBusiness Suite and with procurement products from the acquisitions of PeopleSoft and JD Edwards over past decade, said Azul Partners' Busch. While it has the Oracle Supplier Network for the transaction part of procurement process, its volume is small compared to Ariba's network, although Oracle does partner with Transcepta, another transaction network business.
"Oracle will have to come up with a better answer, not for the applications, but that connectivity layer that exists between buyers and suppliers," Busch said. "I would expect Oracle to make a play around connectivity."
Oracle and SAP have made a number of acquisitions each in recent months to build up their cloud-delivery of business applications. SAP announced at its SAP Sapphire conference last week in Orlando, Fla., that it would be building up cloud-capabilities on four key pillars: people, customers, money and suppliersâreferring to human resources, customer relationship management, finance and supply chain management.
The Ariba acquisition bolsters the supplier pillar, while SAP's February acquisition of a company called SuccessFactors has bolstered the people, or human resources, pillar, said Ardent Partners' Bartolini. At about the same time, Oracle acquired Taleo Corp., a human resources application provider it picked up for $1.9 billion. Not to be left out of the game, IBM in December also made an acquisition in the supply chain management space of Emptoris for an undisclosed sum.
Supply chain procurement management is an increasingly active area in IT software as companies continue to try to squeeze costs to maximize profit in a sluggish economy, said Paul Martyn, vice president of supply strategy at BravoSolution, a procurement advisory and services firm that competes with Ariba.
As the economy recovers from the Great Recession, Martyn said, austerity has become more important for a company's success, but can also provide value in a strong economy.
"What companies have discovered is that regardless of the macroeconomic environment, that a commitment and a vigilance to provide supply management excellence will be rewarded in upcycles and downcycles both," he said.