Ariba vs. Commerce One
The Business-to-Business Battle
Ali Oromchian
Posted Wednesday, February 21, 2001
"Business-to-business e-commerce will rocket past business to consumer commerce and be 10 times larger . . .", according to Oracle Chief Executive Officer Larry Ellison.

As more and more corporations begin to focus on e-procurement as a legitimate revenue raising strategy, they are turning to the software industry to advance effective electronic business solutions. The two giants that have emerged, Ariba and Commerce One, subscribe to competing theories of how Business-to-Business ("B2B") e-commerce should function.

Ariba strongly believes that a software firm's role is to be a tool provider. So, as the B2B world divides into industry sponsored exchanges and independent marketplaces, Ariba avoids involvement in managing its customers' exchanges. Conversely, Commerce One believes that software makers have to do more than simply provide tools. They have formed strategic partnerships with its customers and helps manage their online marketplaces. It also convened its customers into an international trading network (Global Trading Web Council) to build critical mass and facilitate e-commerce among them. Although, Commerce One does not currently have the sales, customers, and market value of Ariba, the Global Trading Web Council may change that.

Despite their core differences, they have been successful in amassing a list of exciting customers. "Over the past two years, Ariba has sold its Marketplace system to in industrial equipment, in biochemicals, in construction management, and INC2inc in the food industry, among others.1 Meanwhile, Commerce One's MarketSite powers a host of exchanges, including Cephren in construction, PurchaseWise for Bell-South, for community banks, for medical supplies, and, a purchasing hub for medical supplies." 2 However, this impressive list has drawn the attention of the federal government, which is concerned that common marketplaces for e-procurement could operate as disguised cartels in the purchasing markets.

To briefly explain, e-procurement is the purchase and sale of supplies and services over the Internet between businesses. All requisitions and purchase orders are made electronically through an automated process which routes the requests through an approval chain using a company's intranet. Then, the approved orders go to the supplier via the Internet. However, before requisitioning, companies must determine what supplies and services they need to procure and address supplier and contract management. If the company has not kept a tight rein on the number of suppliers it uses it can be a very arduous process.

E-procurement is being widely implemented because it replaces paper requisitions and catalogs and reduces order error rates and processing costs. "In a recent survey concerning e-procurement, META Group found that organizations across the revenue spectrum received or anticipated benefits from e-procurement solutions in three distinct categories:

Correct buying: Seventy-two percent indicated improvements in purchasing the correct product or service from the correct supplier, at the correct price, at the correct time, and with the correct attributes.

Cheaper buying: Fifty-eight percent indicated a reduction in the resources (i.e., time, capital, personnel) consumed in processing and approving requisitions.

Working capital reduction: Seventy-three percent indicated the elimination of excess inventories or procurement from existing stocks."

In other words, companies expect that improved supplier management, streamlined buy-side processes, and the combination of sourcing and procurement solutions will enable them to reduce costs and thus aid their bottom line figures.

The next step in the e-procurement process is purchasing supplies through web-based exchange communities, which is at the core of the Ariba-Commerce One debate. The 19 companies that comprise the Global Trading Web Council account for more than "$1 trillion in purchasing power and represent fifty-eight new online B2B marketplaces . . . Merrill Lynch forecasts this market will rise to an astonishing $2.5 trillion in the next three years - more than the combined economic output of France, Spain, and Sweden." Ariba has taken a different approach, which Chief Executive Officer ("CEO") Keith Krach calls a "many-to-many" strategy. "Companies of any stripe can use Ariba software to buy and sell good and services online without adhering to the strictures of a quasi-bureaucratic body. Krach believes Ariba will therefore be able to sell its wares to all tribes in the B-to-B marketplace: the buyers, the suppliers, and the exchanges that are trying to bring them together." In essence, they both create software that enables companies to use Web portals to buy and sell goods and services, either directly from suppliers or through online auctions.

The U.S. Department of Justice ("DOJ") and the Federal Trade Commission ("FTC") have announced investigations into several online marketplaces, the most notable being Covisint 3, the automakers' marketplace. The government is worried about price collusion and other anticompetitive practices, which are more problematic with Commerce One than Ariba. "Suppliers want exchanges to be as neutral as possible so buyers can't gang up on them (this is what the FTC is worried about, too) and wring painful concessions out of them on pricing. By the same token, independent exchanges want to portray themselves as unbiased arbiters of online marketplaces so they can attract as many buyers and suppliers as possible." Ariba's philosophy of powering the marketplaces with its software and not running the marketplaces per se has made it more attractive to a wider range of suppliers. Commerce One's tendency to partner with major industry buyers has limited its attractiveness to suppliers who are worried about buyer bullying. Although, the government's antitrust investigation provides the largest hurdle for these two companies, there are good models that avoid many of these problems. "For example, MetalSite, an online marketplace for steel companies, has taken several common-sense steps. In a recent article, the FINANCIAL TIMES reported that MetalSite has an antitrust lawyer at every board meeting to supervise discussions and prevent even informal conversations about prices. In addition, MetalSite is building internal controls to help its employees avoid anti-competitive conduct as they handle data about sensitive customer and supplier transactions. Until that system is complete, only two of the company's 130 employees have access to the data." These sorts of proactive steps by vendors such as Ariba and Commerce One will aid in the survival of these marketplaces.

"As any trade expert will tell you, anything that makes trade freer and more efficient - whether it's a reduction in tariffs or a simplification of regulations - deserves to be championed. As trade becomes freer, prices decline, the number of people who can afford to buy increases and, hence, so does demand."

Thanks to reductions in tariffs around the globe, consumers worldwide are expected to gain between $100 billion and $200 billion every year in additional purchasing power, according to the World Bank. The result, according to FORTUNE magazine, is that free trade has done more in the past decade "to alleviate poverty than any well-intentioned law, regulation or social policy in history."

The new online marketplaces hold similar potential.

Early adopters already have seen the prices of spot commodities drop by ten-percent or more in online auctions. Additional efficiencies are expected as paperwork is reduced and excess inventory is taken out of the pipeline, freeing capital for more productive activities. In fact, in the U.S. chemical industry alone, Salomon Smith Barney projects a savings of $4 billion per year in paperwork costs and an $11 billion reduction in capital requirements. Multiplied around the world and across dozens of industries, such reductions translate into savings on a par with that generated by tariff reductions."

It is clear that e-procurement and the creation of common marketplaces will be incorporated into the long-term goals of many corporations and it is the responsibility of leading vendors such as Ariba and Commerce One to ensure its survivability. There is no doubt that decisions made by Ariba and Commerce One regarding strategies to pursue will decide the fate of e-procurement.

1 Other notable Ariba customers include FedEx, BMW, Hewlett-Packard, Cisco Systems, and Dell Computer.
2 Other notable Commerce One customers include Wells Fargo, Boeing, Eastman Chemical.

3 Auto-industry exchange using Commerce One software backed by General Motors, Ford, and DaimlerChrysler.