Acquisitions fuel the Ariba vision

Emma Nash in Venice When software supplier Ariba was formed seven years ago it hoped to revolutionise the world with its electronic marketplaces. In 2001 it tried to buy rival Agile Software for $2.55bn - but the deal fell through as Ariba haemorrhaged cash and lost several chief executives.

When Bob Calderoni was appointed chief executive two years ago, he focused the company on online purchasing - or 'spend management' - to help customers gain control of their procurement cycle.

Ariba is still predicting an imminent surge in the technology and believes its planned acquisitions of rival Freemarkets, and business process automation firm Alliente, will help achieve its vision.

Computing met Calderoni in Venice for an update on the company's plans.

What was the motivation to acquire Freemarkets and how will it impact on Ariba?

We have been building the technology assets and expertise so we can offer a spend management strategy and products, and Freemarkets is a company that has top catalogue expertise and we saw it as an opportunity to expand this capability. We always said we would be a solutions company and in order to sell spend management you need technology, consulting and category expertise. We now have all these assets. How we deliver these capabilities and solutions is going to vary on a customer-by-customer basis. Providing services will allow us to do elements of procurement that our customers do not have expertise in.

How will the company change when the acquisition completes, and how will customers be affected?

What it will do is accelerate this growth and expertise. We've already built a several hundred person organisation that has lots of experts. Freemarkets gives us more of it. Freemarkets has a great list of customers and feedback has been terrific. In the past customers would look at it and say, 'Ariba has great technology, Freemarkets has great catalogue expertise,' and they have seen it as an either or. Now customers can do both.

Freemarkets is about the same size as Ariba. The combined company will be about 1850 people. There will be some rationalisation since there's some redundant positions. We haven't gone public on details on that, but we get much larger in Europe. When we combine we will have more than 350 people in Europe. We've got over $250m in cash, no debt and also a combined market capitalisation of $1.2bn plus, and we have financial resources to implement our strategy.

Will there be more acquisitions?

We have an acquisition strategy in place. They will continue to play part of our strategy but we don't see technology acquisitions playing a big part. Where I see acquisitions playing a part is in a similar way to Freemarkets or Alliente, providing a capability or customers. It could be a service capability where we can sell broader spend management solutions.

You are still talking about enterprise spend management as a future market. Why is the sector taking so long to develop?

For any new business initiative, the market development takes three or four years. We are two years old in a seven year old body. We've made huge progress with customers and we're developing it faster than other markets. Let's lead the way and then others follow. What we have been doing over the last two years is working with organisations that have bought into enterprise spend management (ESM) and this will lead the way for others to follow. We feel the market is developing as fast, or faster, as bigger markets have in the past. We think it's a great market and we are in the early stages and we are way in the lead. To us it's only a matter of time.

What are your ultimate goals for the company?

If you look at the category leaders and the markets that have developed in the past, the human resources (HR) market was developed by PeopleSoft and it got to be $2bn, customer relationship management (CRM) was developed by Siebel and they got to be a $2bn company. ESM offers greater returns than either HR or CRM, or enterprise resource planning for that matter. Our solution provides far greater returns than any of these. It's clear we will be the leaders of this market and we see ourselves on the way to being a several billion dollar company. With Freemarkets we have combined revenues of $350m. And we're only two years into this thing.

What are your plans for the next two years?

There's been more change in the procurement function in the last two years than the previous 15 years. And there will be more change still. A lot of procurement companies are dabbling around the spend management space. They're making pilot projects and kicking the tyres, and gaining momentum now.

In the next two years I think there will be a remarkable increase in companies thinking about this more strategically. I think that will be a catalyst for a huge amount of change. The back of the pack will start moving towards this.

If you're a chief procurement officer you need to adjust if you want to be at the front of the herd and not the back. The herd is moving as companies start to think more strategically. And if they don't adjust, they'll be left behind.

What is needed to kick-start the market?

The frontier will arrive when spend management becomes a chief executive initiative. Companies are looking at where they will improve business from a productivity and profitability point of view. And because of the climate we are now in, there's a need for further improvement. Companies see and believe spend management can be the next frontier, but when it becomes a chief executive initiative and it becomes a top 10 priority, and it's dealt with in a much broader way, that's when that frontier will be conquered. And I think that will happen in the next 24 months.