Ariba to change operating model

Following and up-and-down economic roller coaster ride over the last year, Ariba Inc. and other e-commerce companies are looking for new ways to justify their existence to Old Economy industries.

At its next user conference in September in New Orleans, Ariba will formally announce two major changes to its operating model: the so-called verticalization of its business and the change to a value-based fee structure that sets fees according to how much money their applications can save a company.

Oracle Corp. last quarter changed its procurement fee structure, basing its fees on the number of lines in a requisition and charging a few dollars per line.

"If you run through independent savings models, charging by the number of lines is cheaper than the model that Ariba is proposing," said Jeff Caldwell, vice president for Internet procurement and exchange development at Oracle.

Ariba is setting a far different course. It will "verticalize" its efforts by focusing on five key industries according, to Larry Mueller, new chief executive officer at the company. These industries include consumer packaged goods, high technology, financial services, automotive, process manufacturing, and public sector.

"We want to do more of value-based pricing offerings as we become more strategic to these industries. For example, in consumer packaged goods, we can develop unique industry solutions from procurement to demand planning and forecasting as it applies to that particular industry," Mueller said.

With its new focus Ariba is getting back to basics, according to one industry analyst at AMR Research in Boston.

"Previously Ariba was flying so high, they were just doing the deals. Now they are saying we need to get closer to our customers and include more vertical functionality," said Bob Ferrari, research director at AMR.

Basing fees on value delivered has a formal methodology and requires an independent outside audit for monitoring and verification.

John True, vice president of industry units at Ariba, said that the company is contracting with such a third party firm to independently monitor the returns.

Although value-based pricing, also called "gain sharing," has worked in limited degrees for logistics companies like UPS and Federal Express, says one logistics expert, it is also fraught with dangers.

"In practice that [gain sharing] is exceptionally hard to do," said John Cooney, senior director product design at Transentric, a division of Union Pacific.

Cooney reels off three major problems with value-based pricing: the fact that most enterprises do not have stable metrics, the level of detail necessary to measure the value actually created does not usually exist, and how a business measures itself changes during the term of the agreement.

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