Ariba's Competitive Threats Are Intensifying

Aug.21.11 | About: Ariba, Inc. (ARBA)

With the plethora of companies trading on the stock market, it can be easy to forget that privately-held companies need to be monitored, as well. My company recently did a check into the competitive landscape for Ariba (NASDAQ:ARBA). It may come as a surprise that our checks revealed that an up-and-comer named Coupa is nearing the scale required to put a dent in ARBA’s lucrative procure-to-pay business. By our estimates, P2P represents 15-20% of ARBA’s revenue and a greater portion of its profits.

Coupa offers a growing suite of procurement functionality (including contract management, sourcing, network, and services), but procure-to-pay is its specialty. After several years of triple-digit growth, interest from potential customers appears to be reaching critical mass. The company is also attracting high praise with market influencers, creating a virtuous cycle.

In its procure-to-pay niche, Coupa boasts a very high (and increasing) head-to-head win rate versus ARBA. We calculate that its recent (first half of 2011) wins represented approximately 15% of ARBA’s new account signings. While that isn’t a game-changing number, it does represent a tangible percentage of business that would have likely gone to ARBA a few quarters ago.

Coupa’s geographic reach is starting to become a problem for its larger peer as well. To this point, Coupa has primarily bumped heads with ARBA domestically. However, in recent months, the company has started to gain traction in England, as well as continental Europe . We have confirmed several competitive wins in both regions.

Additional research determined that Coupa’s success has been driven by its value proposition, which contrasts starkly with that of ARBA (again, specific to the procure-to-pay segment). Industry experts to whom we have spoken lead us to believe that Coupa’s price to value ratio averages 2-3 times that of ARBA (with some cases approaching a 10x factor). This is driven by price, as well as functionality. Pricing is typically a third of ARBA’s, while its functional capabilities in procure-to-pay are reportedly moving towards parity. In fact, Coupa now scores higher than ARBA across several functional areas, according to our contacts.

As a result, the young upstart now finds itself invited to many competitive bake-offs and makes the short list in a majority of those situations. In deals with very specific profiles (i.e. a U.S.-based procure-to-pay point solution), Coupa is said to be near-unbeatable at present. Keep in mind that such profiles are in the small minority. However, its capabilities have reportedly been enough to drive its installed base from 50 customers to 200 over the past year. In the process, it has demonstrated a continued commitment to customer satisfaction. In other words, they are reaching for the brass ring and don’t appear willing to let it go.

Coupa’s momentum has strengthened its justification to hire and expand more aggressively. As a result, we estimate that the company’s growth rate is currently in the range of 200%. At its current pace, it won’t be long before the company is facing ARBA in a majority of available sales opportunities. Coupa is pushing to make this a reality via an aggressive marketing campaign against ARBA. Of course, a fair degree of its competitive claims are overstated, but you can’t knock the moxie.

The key watch factor will be Coupa’s continued product expansion. The company still has a long way to go before it can match ARBA on functionality and geographic reach. Indeed, it will likely need to make acquisitions if it ever wishes to achieve parity along these broader fronts. Alternatively, the company may choose to continue attacking ARBA’s weakest points one at a time. While this strategy would limit Coupa’s ability to match ARBA on breadth, it would certainly enable a strong growth trajectory at ARBA’s expense (particularly as it pertains to margins, since the lowest hanging fruit exists in areas that offer the greatest profitability – like procure to pay).

Coupa’s management team seems to have the appropriate pedigree to play David to ARBA’s Goliath. Its CEO is an MBA with 15 years of enterprise software experience, including management stints at SuccessFactors (NYSE:SFSF) and Siebel Systems (now a unit of Oracle - ORCL). Its VP of Sales has 20 years of enterprise software experience, including a tour of duty as the North American Vice President for Oracle’s CRM On Demand unit. Leaders of Coupa’s development team previously led ORCL’s procurement team.

At present, the company has over 50 employees and is quickly moving toward 75. From what we’ve been able to gather, a large (and growing) percentage of its headcount joined the company from Oracle (NYSE:ORCL) and/or ARBA, providing Coupa with ample talent in the areas of execution and competitive intelligence, respectively.

This could be a contributing factor to its 20+ new customer engagements over the past 3-months. ARBA reported 50 new wins in Q2, but those deals required a sales force that is likely an order of magnitude larger than Coupa’s. This clearly indicates that Coupa has a major sales-productivity advantage over ARBA. Consistent with industry history, such an advantage could lead to accelerated defections from ARBA’s sales force to Coupa’s, consequently condensing the time frame in which Coupa might overtake ARBA in terms of new customer wins.

Indeed, Coupa’s impact may already be materializing in ARBA’s results. In ARBA’s June quarter, total subscription revenue was $76.4M, up 74% versus $44M in Q2 of 2010. However, backing out the contribution from its January acquisition of Quadrem and its sharp increase in Network Fees, Subscription bookings may have decreased substantially.

Of course, ARBA has a growing base of Network Fees working in its favor. However, increased pricing has drawn the ire of suppliers, some of whom have resorted to passing these costs on to customers, thus drawing their ire. By comparison, Coupa is attacking with lower price points, quicker implementation times, and non-existent network fees. If nothing else, with a bit more visibility/scale, Coupa will represent a persistent threat to ARBA’s margins.

We are also investigating the validity of ARBA’s Network Fee revenue line. Intuitively, we find it hard to believe that such an established company has been able to grow its fees from roughly $11M to $37M on an apples-to-apples basis. Last year’s 55% fee increase only explains about $6M of the rise in Network revenue. Wall Street believes that the Ariba Supplier Network (ASN) can deliver 20-30% growth on a long-term basis. Under the circumstances, its assumptions should be questioned.

Concurrently, it’s our understanding that ARBA has been keenly focused on cloud enablement, supplier collaboration, and its network. According to consultants in the IT industry, this has distracted ARBA from efforts in its bread and butter product areas, but with good reasons:

  1. ARBA has gone relatively uncontested for quite some time and
  2. It has been seeking to fill out its global and holistic procurement vision.

The problem with this is two-fold:

  1. According to our contacts, the world doesn’t appear ready to ascribe to ARBA’s grand vision and
  2. Complacency when it comes to its more-established offerings could give competitors the opening they need to gain share.

For the time being though, Coupa appears to be ARBA’s fastest growing threat. Many vendors are rushing to follow suit, but our investigation suggests that ARBA has about 2-years in which it can respond before the competitive environment poses a critical threat to the majority of its revenue stream. Of course, market consolidation could conceivably shorten this time horizon.

Until then, ARBA’s network remains a key differentiator against the likes of SAP and ORCL, who don’t appear interested in competing on this front. Network fees aside, the total cost of software and implementation for SAP and ORCL are reportedly ~2x that of ARBA, which creates upstream cushion for the company. Thus, though ARBA’s rising network fee structure has customers grumbling, alternatives remain limited. That being said, there will be a breaking point where customers will move to those alternatives (many of which are free).

In the meantime, our data continues to observe that buyers are throwing up the caution flag on IT purchases (something we started reporting to customers several months ago) -- hardly a positive recipe for meeting Wall Street expectations.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.