Breaking the mold Featured

7:00pm EDT February 24, 2008

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.”

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