Of course, the big news about e-procurement and e-sourcing players was the Ariba/FreeMarkets merger this past January. Though license revenue was off the first quarter of 2004 (not unusual for a newly merged organization), Ariba's acquisition of FreeMarkets bolsters its position in the market for online business software services.
"In the spend management space," says Aberdeen's Minahan, "the $493 million merger between Ariba and FreeMarkets is the equivalent of combining the New York Yankees and the Boston Red Sox: The deal looks very good on paper, both for the combined franchise and its customers. And it's bound to ignite a flurry of merger and acquisition (M&A) activities as rivals move to strengthen their rosters.
"Over the past two years, each company struggled to fill gaps in its bullpen and deepen its bench strength," adds Minahan. "Ariba has been taking steps to build a services organization to bolster its spend category and process expertise, as well as to identify high-margin revenue streams. FreeMarkets has worked to develop an extended sourcing application both to prove itself as a software provider and to retain customers looking to transition to a broader self-service sourcing suite. Their union accelerates these strategies."
The merged company can claim 200 sourcing customers and combined revenue of $360 million based on 2003 year-end results, making it the leader of the spend management software and services business. In addition, the combined company has 400 sourcing experts, including strong coverage in emerging markets in Eastern Europe and China. Together the companies manage $40 billion of spend per quarter and 25,000 sourcing projects per year.
Additionally, Minahan suggests, "Success in the sourcing and spend management markets will require a hybrid delivery model, which incorporates a self-service application platform combined with category-specific market intelligence and process methodologies. The union accelerates Ariba's category management strategy and enhances the company's ability to offer procurement services on a full business process outsourcing (BPO) basis, or as adjunct services designed to extend enterprise implementations of third-party procurement and sourcing applications.
"The value of the deal will be determined by how well — and quickly — the combined company can execute," concludes Minahan.
The analyst community together says Ariba customers benefit from advanced category expertise, global sourcing support and enhanced negotiation functionality. FreeMarkets' customers gain a broader integrated application suite that combines strategic sourcing and procurement execution capabilities. And, AMR's Mitchell points out that most leading-edge companies have tended to use Ariba and FreeMarkets.
But not to be blinded by the glare of the Ariba/FreeMarkets merger, several other players are doing exciting things, too.
If you now include the Ariba/FreeMarket merger in the top-tier e-sourcing pool, the top players (SAP, Oracle, PeopleSoft and now Ariba) control more than half of the e-sourcing market. "Functionality-wise the three ERP players look very similar," states AMR's Mitchell, "with SAP and Oracle probably having the strongest industry adoption of procurement and e-sourcing modules. PeopleSoft has great sourcing functionality, too, but is challenged in being able to truly offer professional services."
In fact, the greatest drawback of the traditional ERP players is their inability to come on strong with a professional services component to their offering. The combined technology and professional services offering of the Ariba/FreeMarkets deal should be a competitive win against the traditional ERP players.
Since strategic enterprises continue to view e-sourcing as the foundation of a larger total cost management (TCM) strategy, the process functionality of future systems must be based around strong negotiation capabilities, collaboration, document management, project management, demand management and analytics. "As providers attempt to build out around these key requirements, overall value of a system to today's customer can only improve," says Aberdeen's Minahan.