Amazon's 7 Cloud Promises: Hype Vs. Reality

SAP co-CEO Jim Hagemann Snabe spent a lot of time talking about the promise of cloud-based business networks at last week's SAPPHIRE event, and now we know why. The company on Tuesday announced its intention to buy Ariba, a cloud-based business-to-business trading network, for $4.3 billion. The deal is expected to close in the third quarter, pending regulatory approval.

Based in Sunnyvale, Calif., Ariba is the largest buyer-supplier trading network, supporting more than $319 billion in B2B transactions, via collaboration, automation, and analysis tools that help the network's more than 730,000 companies do business together. Ariba's board has unanimously approved the deal, which will see the enterprise applications firm's SAP America subsidiary pay $45 per share for Ariba, a 20% premium over the company's closing price on May 21.

The deal mostly complements SAP's existing supply-chain and supplier-management capabilities. SAP said it will help Ariba exceed 1 million member companies this year, driving growth particularly in South America and Europe, where SAP has a stronger sales footprint. SAP co-CEO Jim Hagemann-Snabe also vowed to boost Ariba's real-time supplier- and deal-analysis capabilities using SAP's analytic technologies and Hana in-memory database.

The deal is expected to boost SAP's cloud-computing footprint and growth prospects. Ariba had $444 million in revenue and experienced 38.5% annual growth in 2011. As "Ariba, an SAP Company," the unit will become a stand-alone subsidiary led by the current Ariba management team.

Ariba CEO Bob Calderoni is expected to join SAP's Global Managing Board and take charge of all supplier-related cloud services and assets at SAP, just as Lars Dalgaard, CEO of SuccessFactors, recently took charge of all customer-, financial-, and employee-related cloud services.

[ Want more on SAP's cloud strategy? Read SuccessFactors Leading SAP Cloud Away From Business ByDesign . ]

Cloud hype notwithstanding, Ariba doesn't compete with the likes of Salesforce.com. Its competitors are specialized supplier-management and trading firms like Hubwoo (a current SAP partner), OB10, Transcepta, and Tradeshift. SAP is paying a premium for the strength and breadth of Ariba's network, according to Jason Busch, managing director of Spend Matters, a research and advisory firm focused on spend-management issues such as procurement.

"Forget about cloud; it's about the space that exists between buyers and suppliers," Busch told InformationWeek. "It's a ground-breaking deal that will shake things up… and it puts Oracle on the defensive because the volume of the Oracle Supplier Network is fairly trivial."

Ariba will remain an independent subsidiary in part to retain the cross-platform appeal of the network. SAP vowed that the network will continue to integrate with supplier systems of all types, including ERP and supply chain systems and applications from SAP competitors such as Oracle, Microsoft, and others.

The combination of Ariba and SAP does create overlaps, according to Busch, with notable examples including multiple supplier scorecarding, supplier management, contract management, and spend-analysis options. In some cases, the overlaps will give network members options to use on-premises or cloud-based tools, but in others, consolidation will be required. Gaps in the combined portfolio include less-than-top-tier e-sourcing and services-procurement capabilities, according to Busch.

"When it comes to the buying of temporary labor or complex categories, like marketing spend, legal spend, professional services, and business process outsourcing, Ariba and SAP have some capabilities, but they're not among the top performers," he said.

Ariba and SAP's combined assets are focused almost entirely on indirect spending--office products, IT gear, and maintenance, repair, and overhaul goods. Company-to-company connections for direct spending on materials used in manufacturing are the province of giants GXS and IBM's Sterling Commerce unit, which have largely consolidated what was the electronic data interchange market associated with direct-spending--commodities and materials used in manufactured goods.

Buyers like to have choices and suppliers have to pay fees to use Ariba' network, so there's plenty of room for rivals to compete with Ariba under SAP, Busch said. And SAP can't take for granted that members will continue to use the network unless Ariba continues to offer a competitive trading environment and an attractive suite of collaboration, deal-automation, and supplier-analysis apps and tools.

The pay-as-you go nature of the cloud makes ROI calculation seem easy. It’s not. Also in the new, all-digital Cloud Calculations InformationWeek supplement: Why infrastructure-as-a-service is a bad deal. (Free registration required.)