Commentary: B2B vendors jockey for position

Ariba's purchase of Agile Software for $2.55 billion worth of stock this week was a key move that provides Ariba with the capabilities it lacked to support collaborative manufacturing in Net markets, thereby giving it a cleaner entry into the manufacturing sector.

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We believe this deal signals the start of a major consolidation among Internet-based marketplace and commerce chain vendors in which the major players--Ariba, i2 Technologies, Commerce One, and possibly SAP and Oracle--will purchase the smaller, function-oriented vendors to add Net market framework capabilities while gaining entry into new market segments.

This acquisition was a must for Ariba, which would have been challenged to offer a convincing story to manufacturing companies regarding direct goods procurement, supply chain management (SCM) and so on, particularly given i2's continued move toward independence from the IBM-i2-Ariba partnership.

Indeed, the Agile acquisition makes Ariba a much more significant challenger to the Commerce One-SAP combination (from both a product and a commerce network perspective) as well as to i2 for direct goods procurement and supply chain collaboration--let alone to Oracle, whose Product Development Exchange (PDX) story is not yet fully baked. Ariba must still create tighter bonds with a "pure" supply chain management company (such as Manugistics or Logility) to be more fully competitive with that group.

Given the progress that Commerce One and SAP have made--a bit slower than originally expected, but very focused and dedicated--in integrating their facilities for procurement (direct and indirect) and building Net markets (within Commerce One's MarketSet), Ariba has been challenged to offer capabilities that would give it credibility among companies focused on the supply chain, particularly discrete manufacturers.

Because i2 appears to be capable of providing Net market and e-procurement services to such companies on its own (that is, without the "benefit" of the alliance with IBM and Ariba), it was our belief that Ariba would soon be left out in the cold as i2 continued to make its own e-procurement and sourcing moves.

Ariba's array of alliances
To combat its incomplete story, Ariba has recently partnered in several areas (for instance, with Descartes Systems Group for supply chain planning). In particular, it recently announced partnerships with Interwoven, Vignette and Comergent (more for content management, personalization and channel management) as well as with MatrixOne (centered on providing services to e2ope.com, the high-tech Net market).

In aquiring Agile, although Ariba may have overpaid for what the competition (including i2) is calling a niche product (looking simply at revenue streams), it did buy the leader in the collaborative manufacturing arena. We believe Agile's collaborative technology, which is currently focused on the high-tech, semiconductor, and medical device industries, is a necessary component for Ariba. (The semiconductor industry in particular is an i2 stronghold.)

Ariba could have bought supply chain management capability to expand its offerings; however, this would have entailed a much larger integration effort. Ariba could ill afford the multiyear integration effort required to bring in the likes of a Manugistics. The Agile acquisition is smaller and more easily integrated. However, Ariba does need closer partnership/ownership of supply chain management functions, and we expect it to move in this direction. Further, even if it did overpay (though it is still dealing somewhat with monopoly money), it bought the leader in the field.

Ariba seems to be building a superstructure to support Net marketplaces and direct goods sourcing and procurement. Ariba and Agile have very little overlap in what they offer, and Agile's focus on supporting manufacturing is exactly what Ariba needs. The marriage also helps Agile diversify its approach to the marketplace.

Agile represents a strong combination of collaborative manufacturing (Agile Anywhere, MyAgile) and, interestingly, direct procurement (Agile Buyer) facilities. While Agile customers have mostly focused on the change management and collaboration product set thus far, Agile had begun to make inroads within its client base with Agile Buyer. This combination represents a unique ability (within the typically design-oriented collaborative arena) to integrate several processes, including component and supplier management, requisitioning and procurement, and product change management at the bill-of-materials level. Another benefit Ariba picks up is the MyAgile network, which should enable Ariba to compete better with Commerce One's Global Trading Web and Commerce One.net initiative.

Win some, win some more
For companies whose bills of materials change frequently, this integrated capability set is extremely important, and while Agile often competes with MatrixOne's eMatrix and PTC's Windchill, Agile has produced the largest number of wins for situations requiring extensive external collaboration (for instance, with contract manufacturers, OEMs and other partners). Recent partnerships between Oracle and both MatrixOne and PTC represent a recognition that such facilities must be integrated, as does the announcement late in 2000 of i2's design facilities, based on technology from the former Aspect Development.

Further, Commerce One and SAP, while busy integrating their technologies, have barely begun to crest the collaborative design and manufacturing set of capabilities. We believe the pair will offer some capabilities by the second half of the year, but they will not be as specialized or sophisticated as those provided by Agile.

The purchase also gives Ariba an advantage against Oracle. Currently, this is the weak player in the Net marketplace in terms of functional offerings, but with its strong customer base throughout supply chains, Oracle could become a strong competitor if it purchases a middleware company. Agile is particularly popular with Oracle ERP (enterprise resource planning) users, making it an obvious candidate.

In purchasing Agile, we believe Ariba has taken decisive action to add key collaborative capabilities--not only within Agile's current vertical markets, but potentially for other manufacturing companies in the future--that enable it to compete better with Commerce One-SAP, i2 and Oracle in both the e-procurement and Net market arenas. Moreover, Agile's success in collaborative manufacturing gives it a strong capability set with which to attack private Net markets.

Users will see a major shakeout in the next three years among commerce network service and software suppliers as the major players buy up the smaller, more function-oriented suppliers. Users must negotiate protection into their contracts, so that if their service or software vendor is bought out they still receive the service they need from the combined entity.

Meta Group analysts David Yockelson, David Cearley, Peter Burris, William Zachmann and Jack Gold contributed to this article.

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