The TSC Streetside Chat: Keith Krach of Ariba

In the surging world of B2B, most roads lead to Ariba (ARBA:Nasdaq - news - boards). With a $32 billion market capitalization, the Mountain View, Calif., company is the marketplace leader.

Ariba produces software that allows companies to buy and sell supplies and services over the Internet. Market researchers figure this is already a $200-billion-a-year industry, and that figure is doubling every year.

Ariba's premiere position in the market is reflected in the performance of its stock. Adjusted for splits, the stock, which had its IPO at 5 in June, 1999, was recently at 150 and has been as high as 183 11/32.

Sipping a Diet Coke, Keith Krach, Ariba's chairman and CEO, talked recently with Staff Reporter Joe Bousquin and Senior Editor David Dietz about how the company has managed to get on top of the market and how it intends to stay ahead of increasingly fierce competition, including arch rival Commerce One (CMRC:Nasdaq - news - boards).

---

TSC: What was it like the first time you went on a sales call for Ariba and said to a big executive, "We've got this thing and we want you to buy stuff online?"

Keith Krach: There's nothing like looking somebody eyeball-to-eyeball when you're selling them something. The first question they ask is, "Who are your other customers?" That's when you've got to look them in the eye and say, "That's the good news. You're going to be our first."

TSC: So where are you now, in this space? What are the challenges ahead of you? Give us some perspective.

Keith Krach: I think our biggest challenge is -- when you grow this fast -- it's all about leadership. A year ago when we went public we had 280 people. We've got 1,500 people now, and we have so much opportunity. We've started a leadership development program, and we're rolling that out. Just last week we had an off-site with a hundred managers, and next week we're having a second 100-manager bash. We're putting them through that program. That's the key.

---

"We've had 12 quarters in a row of positive cash flow."

---

TSC: Where are you feeling the growing pains the most? Where are you focusing potential in terms of product development in the market?

Keith Krach: Obviously, we see great opportunities globally. So we're putting tremendous investment in Europe and Asia and Latin America.

TSC: So what about the competitive landscape in B2B? Tell us a little bit about what that competition is like. And the ongoing saga of Ariba and Commerce One? The eternal comparison that's made there.

Keith Krach: I really think the results speak for themselves. If you look at what's happened over the last few quarters, I think it really boils down to leadership execution. When I talk about execution it's really in three fundamental areas. The first one is executing our overall business strategies, which have remained intact from day one. It was really to start off and capture that buying power with Fortune 100 companies. That was prong one.

That attracts the suppliers, which is prong two. Then that allows you to build a network, which is prong three. On top of that network is built the marketplace in terms of multibuyers, multisellers. The second key area is execution with the customer. We're obsessed with what we call customer satisfaction. One of the things we have here to read is what we call our playbook. It's our vision, our mission, our values, our team rules, long-term goals. It means more than just having "happy customers."

It's being able to go out there and quantifiably measure that success. That is what really separates us, I think, from everybody else. We go out there and on a quarterly basis, we measure customer satisfaction. We call it the 60 components of customer satisfaction. At our last all-employee meeting, on one of the charts I showed at the bottom right there was a customer loyalty, customer satisfaction, which leads to market share, market share leads to revenues, revenues lead to cash flow. We've had 12 quarters in a row of positive cash flow. I can't think of any other Internet company in the world that comes close to that.

TSC: Where did that measurement of customer satisfaction come from?

Keith Krach: Well, we have a little thing at Ariba that if you steal from one, it's plagiarism; if you steal from more than one, it's market research. Actually, we looked at a number of companies who have done that, and one company that does that as well as anybody else is Cisco (CSCO:Nasdaq - news - boards). They were one of our first customers, and we have a very tight partnership with them. We kind of adapted it to our Ariba model. Now we've taken it beyond that, and not only do we measure customers but now partners, suppliers, everyone else. That's part of the satisfaction index. We call it our CSI.

---

"I can tell you that if our customer satisfaction wasn't as high as it is, our revenue would probably be half of what it is."

---

TSC: What does it mean to you in terms of the bottom line?

Keith Krach: I think it's phenomenal.

TSC: Can you put a number on it?

Keith Krach: I can tell you that if our customer satisfaction wasn't as high as it is, our revenue would probably be half of what it is. Our market share would probably be half of what it is. It leads to follow-on business, great reference customers.

TSC: What are the areas your customers say you're not perfect in? Where do you want to strive to be better?

Keith Krach: I think there's a number of areas. I think it kind of depends on the area of the world, or it could be something like this particular sales guy didn't follow up like he should have. Maybe we were setting something up in Australia and we didn't get the response we wanted on a technical hotline. We're able to go in and flag that.

TSC: While we're on the subject of overseas, are there particular markets where you are not getting in?

Keith Krach: We've got operations now I think in about 25 countries around the world. One area we're really seeing explode is South and Latin America. That's really coming on strong for us. The other sector of the business that's really come on strong is what we call B2G, the government space. We just won the State of Washington, State of California, we just won the U.S. Navy.

---

"Our model is not to go out there and run a few handfuls of exchanges; it's the power of thousands of exchanges."

---

TSC: Do you see significant growth in that "B2G" area?

Keith Krach: Yes, definitely.

TSC: Where are you now in that market and where are you going to be, say, five years from now?

Keith Krach: I think five years from now the market will be 20 times what it is today.

TSC: Are you concerned about antitrust inquiries and where those might lead?

Keith Krach: I don't see it as a major threat to B2B commerce.

TSC: What really sets Ariba apart?

Keith Krach: Our model is not to go out there and run a few handfuls of exchanges, it's the power of thousands of exchanges. It's to be the Cisco of B2B commerce.

TSC: With that $32 billion company barely a year past your IPO, is Ariba at this point fairly valued, overvalued, undervalued?

Keith Krach: Half price. [Laughter] I do think what's recognized is that this is the biggest market the world has ever seen. When Congress asked me, "How big is this market?" I go, "Well, industry analysts predict by 2005, $7.2 trillion. It's the first time the "T" word's been used since we used to talk about the national debt.

TSC: Are there obstacles? How difficult is it to find qualified workers, for example?

Keith Krach: We're challenged, there's no question about that. But people come to Ariba because they love to compete and they love to win. Winners attract winners. I'd say probably 80% of the people that we hired in this company have worked with somebody else [in the company] in some way, shape or form. Almost like what I call a net gravity pull. You go walking through the halls at Ariba, I don't care if it's Singapore or Paris, or Mountain View, you see a lot of high-fives, a lot of belly laughs, maybe some cussing and swearing. People love to win and they love to compete. That's what makes this place fun.

TSC: Are you worried about a business downturn?

Keith Krach: No.

TSC: Not at all?

Keith Krach: Not at all. First of all, we have courage. Second of all, we haven't seen any downturn in our business.

TSC: What are the political winds? Will a new administration in the White House affect you?

---

"People come to Ariba because they love to compete and they love to win."

---

Keith Krach: No matter who wins, I think that both are proponents of high technology and electronic commerce. You know, it was really interesting for me when I testified before Congress to find how well briefed the members were. They asked me about research and development tax credits and what I think about having them in the B2B commerce area so we can make sure we stay ahead. I told them we don't need any tax credits. I can think of better things for the government to spend money on.

TSC: Do you advocate elimination of R&D tax credits generally?

Keith Krach: Well, I don't think B2B commerce needs that. I can't speak about others.

---