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/wp-content/uploads/2012/11/global2_152948.jpgSAP just spent $4.5 bn to buy Ariba. This seems to be quite a steep price tag just to enter the OnDemand enterprise application space for Procurement. But if you look closer you will realize that what SAP really bought is the world’s largest business network. And yes, I call it business network and not supplier network, anticipating that there is more.

The foundation is huge – SAP owns the biggest business network in the world now

I’ll start with the facts. So far, Ariba managed to get about 750,000 suppliers to sign up on their network. Why did they sign up? Because their main customers (referred to as “buyers”) are on the network  and these customers want to connect to their suppliers through this network in order to streamline and optimize procurement automation. They are mainly buying indirect materials like office supplies etc.

You may ask why is this is even critical? Isn’t it far from a core process? Yes, however we need to put it in perspective as this adds up to currently more
than $350bn in commerce that is transacted over the network. And once a company manages their indirect spend over the network it is not a far stretch to go
after their direct spend as well – and Ariba has taped into this space already. Also, it’s important to note, companies like Walmart spend billions of dollars on indirect materials – this represents massive cost saving potential for those large corporations already.

Ariba has started to monetize on the network effect. Signing up as a supplier is free; transacting is free as well, until a certain volume is reached. Above this threshold, Ariba charges a small percentage of the spend volume – far less than the 2-3% that credit companies are commanding.

The Network has to deliver mutual benefits for all participants

Once a network has reached a critical mass, all types of service can be established and sold at additional cost. For example, Dynamic Invoice Discounting which helps suppliers cash in earlier, Discovery Services that help suppliers find new business that they otherwise wouldn’t know about. The network is creating value for suppliers following the conviction that a network can only be sustainable and grow when it offers mutual benefit for all participants. Ariba enables companies to join the networked economy.

Business Networks in almost every Industry

So what’s next? I said at the beginning of this blog that we are talking about a business network and not a supplier network. A business network could be defined as an extended, open value chain (across-LoB and across-industries) of interconnected business entities, systems and related people. Starting in the procurement and adjacent finance domains it is not a far stretch to enter the supply chain management domain by managing direct material spend, or the supplier collaboration, inventory visibility and management, transportation management, or collaboration with logistics partners (3PL’s).

More than 60% of the world’s transactions touch an SAP backend system at some point; now we are in a position to extend the business process excellence that SAP stands for beyond the four walls of an enterprise. Throwing in SAP’s deep industry expertise, we can start carving our industry specific use cases such as banking services, trade platforms, compliance engines etc. Finally, by combining this with SAP’s world class business intelligence capabilities, a
myriad of services that could be offered on top of the network are possible by leveraging the data that is flowing there and making sense out of it.

The business network market is a “winner-takes-all” market and with the right execution SAP can be the winner leaving the market thinking that those were         $4.5bn well spent after all.

What areas would you like to hear about going forward?

Please share your opinions on how SAP can establish thought leadership in business networks and take this to the next level.

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