1072RA SAP Adds Ariba to Its Cloud-driven Master Architecture

What is Happening? Less than a week after laying out and demonstrating commitment to its comprehensive, Cloud-centric business and technology strategy at its Sapphire user event, SAP AG announced that it has agreed to buy collaborative commerce platform provider Ariba Inc. for $4.3 billion – about $45 per share of Ariba’s outstanding stock.

According to the company, Ariba's global trading platform connects and automates more than $319 billion in commercial transactions between some 730,000 companies. Ariba reported $444 million revenue for fiscal 2011, a 39 percent increase over fiscal 2010. Estimates from leading Wall Street analysts such as Jason Maynard of Wells Fargo Securities pegged fiscal 2012 and 2013 revenues at $532 million and $608 million respectively, prior to the announcement. This implies that SAP is paying approximately 8x estimated forward fiscal 2012 revenue for Ariba. In comparison, SAP paid approximately 7.5x estimated forward fiscal 2012 revenue for SuccessFactors.

SAP has stated that Ariba's board of directors has unanimously approved the acquisition, which SAP will fund using a combination of cash on hand and a 2.4 billion-euro/ $3.06 billion commercial term loan program.

Why is it Happening?

Global Cloud business application adoption growth. Cloud solutions are steadily growing to the point where the entire enterprise ecosystem of providers and buyers can see the hand writing on the wall. As we have previously stated, Saugatuck believes that by 2016, 75 percent or more of NEW enterprise IT spend will be Cloud-based or Hybrid. This is an additional huge indicator of SAP’s seriousness regarding Cloud as core to its business.
Cloud first. As noted last week in two complimentary Lens 360 blog posts (Sapphire 2012: SAP Betting the Ranch on the Cloud, and Sapphire 2012: Six Key Takeaways), SAP needs Cloud to succeed. Buying one of the top two Cloud providers (in terms of revenue) helps SAP help itself.
Excellent fit with SAP’s emerging “Suppliers” Cloud business management portfolio strategy. SAP is building out four core lines of business software as part of its core Cloud positioning: Customers (CRM), People (HCM), Money (Financial) and Suppliers (Procurement/Network). Buying SuccessFactors brings SAP a leading Cloud provider in the People category; buying Ariba brings them a leading provider in the Supplier category. SAP has a long heritage in the Money category, and will continue to flesh out its offerings in the Customer category.
Reaffirmation of loosely-coupled architecture as core to its future. As we noted in the blog posts above, the move toward “an API-driven and loosely-coupled architecture . . . [is now] . . . central to its approach, with a focus on the value that the solution brings to customers, “not the underlying platform SDK (as SAP has many).” In this scenario, SAP believes that “what is critical is that [it] delivers a consistent (consumer-grade) user interface and user experience.”
External focus / excellent fit with SAP’s nascent “business network” positioning. Interactive, intertwined business transactions, interactions and relationships between enterprises are key to SAP’s vision of the future of business processes and operations – and business IT’s role. If SAP can extend and expand its management role and presence beyond enterprise walls into and through other enterprises, this will significantly grow company revenues and power.
Competitive pressures. While Oracle Corp. is widely regarded by some as being anti-Cloud, the reality is that the firm has made massive investments in developing, architecting, and migrating Cloud-based offerings for its total portfolio. Despite market and media perceptions otherwise, Oracle leadership knows that Cloud is key to the long-term IT and business future. Although Oracle is only now beginning to come to market with the breadth and depth of Cloud-focused business that IBM and SAP already exhibit (and, to a lesser extent, Microsoft and HP), Oracle does have cash, revenue streams, developer ecosystems, and a partner ecosystem to make Cloud happen to the extent it sees the need. However, the Ariba acquisition again outflanks Oracle, and throws a long shadow over Infor’s evolved business strategy – and will make it that much harder for NetSuite to move up market into the large enterprise segment.

Market Impact—What is not well understood industry-wide is the massive transition that Ariba has already gone through over the past ten years, both in terms of shifting its business / financial, technology, operational and organizational model to fully embrace the Cloud, as well as its transition from its historic procurement roots to focusing on the “network” and collaborative commerce as core to its future. In these regards, the evolved Ariba maps well to where SAP wants to take the business, especially its goal of growing its role and presence beyond and between enterprises – as inter-enterprise commerce becomes increasingly central to its success going forward.

We found the announcement a bit puzzling, however, after the bold announcements last week at Sapphire that included the creation of a new Cloud business unit where we understood all of its Cloud assets would reside. The announcement seems to be an about-face in this regard, as Ariba will be operated independently, as “Ariba, an SAP company”, and not rolled in under the new unit led by Lars Dalgaard, who recently was elevated to SAPs Supervisory Board. In fact, SAP will nominate Ariba CEO Bob Calderoni to the SAP Global Managing Board, which is only slightly less prestigious than its overall Supervisory Board.

How this plays out longer term is yet to be determined, but we do see value in continuing to leverage the Ariba name as it still has a significant amount of brand equity surrounding it – and more importantly, brand permission with procurement and spend management-focused buyers. What is clear is that there will be even more internal turmoil within SAP as it sorts through all of the organizational dynamics of these bold changes. This applies externally as well, as it concerns myriad client and partner relationships.

From an engineering perspective, SAP should be able to help Ariba evolve its first-generation Cloud architecture and supporting / enabling technology foundation – as it leverages the range of in-memory, social and mobile capabilities being worked up in the SAP labs. Our guess is that over time the back-end of Ariba may get re-engineered with SAPs next-gen in-memory database and communications capabilities – so long as the next rev can deliver equal or superior performance over what is delivered to its network today.

This is another bold move to the Cloud by SAP, and will likely only accelerate the fast-moving train to a new, Cloud-enabled Master Architecture that enterprise IT has been on – both in terms of provider moves and customer transitions (1054RA, The Emerging Master IT Architecture – Client / Server Gives Way to CMSA, 12Apri2012).

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Bill McNee

Mr. McNee is the President and CEO of Saugatuck Technology, a subscription research and advisory firm focused on emerging industry trends and disruptive technologies driving change in enterprise IT. Over the past few years, Mr. McNee has helped spearhead the firm's research into evolving business models as a result of the shift to software-as-a-service (SaaS) and Cloud Computing. More recently, he has been actively involved in launching the firm’s CIO-targeted Cloud migration / leadership practice.

Prior to founding the firm in 1999, Mr. McNee spent eleven years with Gartner, Inc., most recently as Group Vice President and Research Fellow, responsible for guiding the firm's overall research strategy. A recognized expert in enterprise software and related business / IT services, Mr. McNee spent five years leading Gartner's Business / IT Management practice as its Director of Research, focusing on CIO governance, IT sourcing models and e-commerce management strategies. Prior to this role, he was a lead analyst focusing on enterprise business applications, and asset management strategies. Prior to Gartner, Mr. McNee held strategic planning, financial management and marketing positions at CBS, HBO, Comshare and the Institute for Social Research.

A frequent speaker at industry conferences, Mr. McNee has published hundreds of articles and consulted with thousands of business and IT executives, and vendor clients around the globe.

Mr. McNee is a University of Michigan alumnus, and has completed graduate work in economics at New York University. Since 2001, he has been a Board or Advisory Board member for the Westport Public Library.

Follow Mr. McNee on Twitter at @billmcnee.

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