Sun, Nov 21, 2010 page12

• Internet catches up with company ahead of its time

  Flying high in 2000, Ariba’s share prices topped US$1,000, only to crash to US$2.20 in 2001. Ten years on, the firm is thriving

  • By Ashlee Vance / NY Times News Service
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  Back in the deranged days of dot-com mania, a company called Ariba could do no wrong.

  Ariba promised to revolutionize how businesses bought things. It would create a vast network linking buyers and sellers, so companies could purchase toilet paper, office chairs, corrugated boxes and even custodial services with unheard-of efficiency. The Internet had arrived — and purchase orders, faxes and buying consultants stood no chance against a vibrant, digitized marketplace.

  For a while, Ariba, based in Sunnyvale, California, was one of Silicon Valley’s hottest properties. In March 2000, its share price soared past the US$1,000 barrier, adjusted for two rapid-fire splits.

  Unfortunately, there was a problem with Ariba’s business model. It was a thing of beauty in theory, but few in the company’s target audience — the world’s businesses — bothered to use it.

  “They built the network, but nobody came,” recalls Dana Gardner, the principal analyst at Interarbor Solutions, a technology research company.

  By September 2001, Ariba’s share price had collapsed to US$2.20. It and about a dozen other companies vowing to build wondrous trading networks were cast aside and left for dead.

  However, unlike most of its peers, Ariba did something remarkable: It survived. So, too, did the concept of business-to-business exchanges.

  And today, the scale, reach and fluidity of the Internet have started to reshape supplier networks with a level of sophistication not foreseen even by the zealous pundits of 10 years ago. On Ariba’s exchange, companies deal in items as varied as steel, fats, oils, name badges, pickles, plastic bottles, solvents, taco seasoning and cardboard. Increasingly, companies trade in services, too, placing bids for legal and janitorial work, for example.

  Ariba’s network links about 1,000 buyers and 300,000 sellers. In the last 12 months, about US$135 billion in goods and services were sold on the system, up from about US$115 billion in the previous 12 months. Last week, Ariba paid US$150 million to acquire Quadrem and its network of 70,000 suppliers that sold US$30 billion in goods last year to customers like Alcoa, Rio Tinto and Nestle.

  Large companies like Ford Motor and Procter & Gamble (P&G) have long used homemade and purchased technology to refine their supply chains and to narrow their supplier lists. It’s all part of improving business basics, like understanding what you buy and how you buy it.

  The networks open more options for these giants, and today’s pitch from companies like Ariba and CombineNet, a specialist in complex transactions, is that littler guys can get in on this kind of goods-and-services dealing and save money in lean times.

  “If you can’t grow the top line, you can save money through improving bottom-line business efficiency issues like managing cash flow,” Gardner says. “That has been a big incentive to look at this type of electronic commerce.”

  Why are companies now flocking to technologies they disregarded a decade ago? Although trading exchanges sounded great back then, most companies weren’t prepared to engage in furious trading for their crucial supplies.

  “In 1999 and 2000, it was nothing more than an idea,” Ariba’s CEO Robert Calderoni says. “There was no substance behind the idea.”

  Businesses had yet to refine the internal technology systems needed to get their own houses in order. So the idea of performing complex reverse auctions with other companies fell -somewhere between daunting and horrifying.

  Given these constraints, Ariba reinvented itself as a seller of software to help companies analyze buying decisions. Jonathan Kirby, chief procurement officer at AstraZeneca, the pharmaceutical giant, says these techniques are a must today.

  “You want to know what you spend with whom and what you pay for it,” Kirby says. “Without that information, we couldn’t exert our influence and bring cost reductions.”

  As companies bought into this idea, Ariba slowly coaxed them onto its network and eventually reached a critical mass, Calderoni says.

  P&G exemplifies how companies can deploy today’s buying technology in all kinds of artful ways. It uses what amounts to an artificial-intelligence system, developed by CombineNet, to manage the US$1 billion it spends every year with trucking companies.

  CombineNet’s software analyzes truck routes, companies’ prices and on-time arrival rates. In essence, it can weigh cost alongside customer service, providing a level of refinement not seen in years past.

  Rick Hughes, chief purchasing officer at P&G, says suppliers now compete in all kinds of new ways because of the exchanges’ sophistication. Consider the design of P&G’s bottles.

  “In the past, we would design a bottle, take it out to the suppliers, find out what it will cost and try to negotiate that down,” he says. “Now, we have access to much broader scale and can ask suppliers what kinds of innovations they can bring to, say, optimize a bottle of Tide.”

  As Ariba and CombineNet, which is based in Pittsburgh, have moved to lower-cost models and improved technology, they have fostered more varied transactions. Three years ago, CombineNet’s average deal was US$70 million, says Rich Wilson, its president.

  “That is coming down dramatically,” he says, with some deals now under US$1 million.

  With base networks now in place, analysts like Gardner expect trades to become, well, weird. Companies seeking savings will tie more exotic transactions to their goods and services.

  Along with trading, say, toilet paper, they are beginning to trade financial contracts with third parties based on expected sales of toilet paper and the creditworthiness of the customer buying the rolls. For example, a company selling toilet paper might be able to get a favorable interest rate on a bank loan.

  “I hate to say it, but it becomes like a derivatives market,” Gardner says. “People are starting to trade accounts receivable as if they were a financial instrument.”

  It would seem that if you build it, they will eventually come, and then manipulate it in every way imaginable.
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