When Bob Calderoni was hired as the chief financial officer of
Ariba Inc. in 2000, he thought he was leaving the world of
restructurings and repositionings behind him.
He had seen such action throughout his career in financial management roles with companies such as Avery Dennison, Apple
and IBM’s storage division, and he had tutored under accounting
giant Arthur Andersen before entering the corporate arena.
But the Ariba job was supposed to be different. It was supposed to be tackling the relatively small challenge of dealing with
growth at a small company.
It didn’t work out that way.
“The tech bubble was literally bursting just as I was walking
through the door,” says Calderoni, now chairman and CEO. “I
had always worked for large companies, and I thought I was
being hired to be part of a small, fast-growing company. I didn’t think I was being hired to reposition the company. It came
as a surprise to all of us in the company, and I just had to deal
with it.”
Six months later he was the CEO, leading the efforts to keep the
lights on and blazing a new trail toward the future.
Originally founded in 1996 as a provider of software for large-scale
corporate procurement functions, Ariba rose to the top by riding the
late 1990s’ wave of technology investment by Fortune 500 companies.
Within the sector, the company had already achieved significant
market penetration among the initially targeted client base of
Fortune 500 firms. In fact, Ariba counted seven of the top 10 Fortune
500 firms as clients. No single competitor supplied a total solution to
customers, and while there were battles yet to be won on the customer front, Ariba was better positioned to win big wars— not
smaller battles.
Calderoni says that although he previously held CFO titles, he was
trained in the early days of his career at IBM to act as more of a
chief operating officer than what was traditionally expected from
CFOs of the era. It would take all of that experience and more to
reposition Ariba for financial soundness and a new breed of midtier technology customers who required deeper solutions than software in a box and an end to technology installations that resulted
in huge cost overruns.
Saving the company
As the technology boom turned into a bust, Ariba wasn’t much
different than many of the other tech firms that were crumbling
around it.
“The organization was in a lot of trouble,” Calderoni says. “It was
a typical early stage Silicon Valley entrepreneurial firm burning
through lots of cash, saddled with a lot of cost and facing a crumbling market.
“I had to stop the bleeding or nothing else was going to matter,
so I was forced to eliminate 70 percent of the organization just to
survive. As a CEO, you really can’t worry about the future if you
aren’t even going to be there.”
To achieve the necessary cost reductions that eventually took
the firm down from 2,500 employees to 700, Calderoni initially
reviewed readily available competitive benchmarks for every function in the company. He compared Ariba’s operating budgets to the
standard expenditure level for each function, which is usually
expressed as a specific spend level as a percentage of revenue.
From there, he decreased some of the planned cuts, such as in the
research and development function, because he says he knew that
when the tech market rebounded, he would need a new suite of
client deliverables to tackle the midtier client space and to generate sales of additional services to pre-existing customers. Both
moves would require additional R&D and cash investments.
“I really don’t think that you can cut too much from a company,”
Calderoni says. “I’ve been hearing that for 20 years, and now that I
have the benefit of hindsight, I never remember a time when I said
afterward that I thought we cut too far. You have to make your cuts
quickly and decisively because there are lots of ramifications within the organization when you are making cost reductions. You can’t
move forward again until the veil of uncertainty is lifted.
“As we were making the cuts, I needed to listen to my staff
because a CEO can’t make all of the decisions. In every organization when you are making cuts, you have to make some trade-offs
and some portfolio decisions. We looked at every cut and how
those functions related to our vision of building a whole e-spend,
e-commerce solution and eliminated those areas that were not
going to take us where we wanted to go.”
Winning on demand
Despite having to make cuts to save the company, Calderoni
never lost site of innovation.
“I really worked on stabilizing the company, making us profitable
and repositioning us for growth all at once — it was simultaneous,”
Calderoni says. “I know that a lot of people were thinking, ‘Oh here
comes the bean counter, taking over and making cuts,’ but we really stepped on the gas in terms of innovation. We went from one
product to 11 products within 24 months.”
The software industry was built on hefty upfront costs, long
implementation schedules and big price tags. Customers wanted
scalable solutions, and they wanted them now. Even behemoth
Microsoft has announced plans to position that firm for the on-demand marketplace. Essentially changing the software investment platform to a pay-as-you-go enterprise for customers would
mean that Ariba would need to make significant changes.
“Many people said that it couldn’t be done, they had never seen
a software company reposition for the on-demand marketplace
and survive the transition,” Calderoni says. “We had to redevelop
all of our products, but the subscription model helped reduce cost
and headaches for our customers, and that has resulted in a net
gain of new customers.”
Calderoni says that he considers Ariba’s growing backlog of
work and addition of new midtier customers to be further validation that the transition was exactly what the customers wanted all along. More than 75 percent of the new customers Ariba
added during the fourth quarter of fiscal 2006 were small and
medium-sized businesses.
“Procurement as a function needed a lot of investment,”
Calderoni says. “They didn’t necessarily have the skills to maximize the efficiencies from the software. I think that many firms
had learned through ERP installations that software alone would-n’t solve the problems, and we were a company that had just been
pushing software.”
In answer to the need, Calderoni added a consulting division
and hired more than 300 consultants who would bring solutions
expertise to the customers. Seeing an opportunity for greater
margin and the ability to cross-sell both subscriptions and solutions, Calderoni also says that he was filling the need for knowledge and technology among the firm’s procurement customers.
“Subscription revenue in the industry was inconsequential when
I started, but everyone we competed against doesn’t exist today,
and we had 15 percent growth in our subscription revenues in the
second quarter of 2007,” Calderoni says. “Today, consulting is 50
percent of our revenue because customers are buying a solution.
“I knew it would be a challenge, but that’s what motivates me. I
think now, consciously, overinvesting in R&D has been recognized
as the right move and that we’ve proven that cost reduction and
growth are not mutually exclusive.”
Unemotional acquisitions
As Calderoni began examining what constituted the next level of
growth for Ariba, it soon became clear that despite all of the initial
repositioning efforts, providing a total solution to customers would
require acquiring some capabilities that Ariba didn’t have in-house.
From the predominately founder-led company cultures that are
commonplace within Silicon Valley, Calderoni’s business acquisition
view that, “it’s not important whether you build it or buy it,” may
startle some.
“I am unemotionally biased when I look at acquisition targets,”
Calderoni says. “My criteria for decision centers around gaps in
capabilities, and those can be technical or nontechnical. That led
to our biggest move, which was the acquisition of Free Markets.
Free Markets brought commodity expertise and sourcing capabilities, and we provided the technology capabilities that they didn’t
have.”
The acquisition also added another 400 commodity category
specialist consultants to Ariba’s growing stable of experts. Each
firm had its own technology platform, and Calderoni says that
he used the best of both to achieve technology integration. The
people side of post-acquisition assimilation plans requires a different strategy in his view.
“Only at the senior-most levels of organizations is it difficult to
merge firms,” Calderoni says. “At the lower levels of the organization, people ended up in a better place so it’s usually the management teams that feel the brunt of acquisitions. I looked at who
would fit best into Ariba going forward when deciding who to
retain from the Free Markets management team, and there were
certainly some tough calls to be made, especially early on. In some
cases, the decision of who to keep and who to let go was very
close.
“I leave emotions aside when I’m making decisions and just try
to hire the stronger of the two individuals, but people make hiring
mistakes all the time. I also act swiftly because uncertainty is bad
for organizations. The staff will fill the void left by distracted leadership with ambiguity, and I think you are better off as a CEO
making your decisions quickly and firmly and not worrying so
much about making mistakes.”
Fiscal conservatism
Calderoni says that his background as a CFO causes him to
lead with financial conservatism. His philosophy is that expenditure levels should match up to the corresponding stage of the
organization’s development, and until firms achieve consistent
cash flows, they should not take on additional debt. He says
that he is also cognizant that many customers have well-deserved concerns about the stability of technology companies, and he believes that being fiscally conservative will
attract new customers and increase revenue.
“In early stage firms, cash provides you with an appropriate
safety net, and that’s what customers want,” Calderoni says.
“We would not have been able to fund $170 million of our $300
million investment into the on-demand marketplace in cash,
without having made all of those expenditure reductions early
on.”
Calderoni says that it’s always about balance, and that goes
for investment and debt loads. Once companies hit an emerging marketplace, only then is it appropriate to break away from
a more conservative investment posture.
While Calderoni has repositioned Ariba — and the firm generated revenue of $301 million in 2007 — the expense level
does not equal the pre-bust days. Ariba has 1,700 employees,
down from the late 1990s high of 2,500, and a greater percentage of expansion costs are financed by cash from operations.
“Growth shouldn’t come by mortgaging the future of the company,” Calderoni says. “You can’t spend like a drunken sailor
hoping for a better day.”
HOW TO REACH: Ariba Inc., www.ariba.com
