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The Makeover at Ariba

The new finance chief at the software maker discusses turnarounds, brand makeovers, and the importance of being earnest about revenue recognition.
Jennifer CaplanJanuary 18, 2002

Say this about Jim Frankola: He’s not afraid of taking a risk.

In November, with the economy mid-sputter, Frankola resigned his position as vice president of finance and business development at Fasson Roll Worldwide, a $2 billion global division of Avery Dennison, an industrial material manufacturer. The thing is, Frankola not only left a solid job–he left it to join Ariba, Inc, the struggling B2B software vendor. Whereas many in his position would have passed on the chance to join a struggling e-commerce company, Frankola saw a real opportunity.

It looks like Frankola has a good eye. Admittedly, Ariba has had a rough ride in recent months. Revenues dropped to $63 million in the fourth quarter, down a ways from the $135 million the company recorded in the year-ago quarter. But the company’s image makeover–from builder of online trading hubs to “spend management” specialist–seems to have reenergized Ariba. In fact, on Monday, Goldman Sachs upgraded the company to “market outperform,” citing a stabilizing balance sheet and an expanding product line. Ariba also recently signed big deals with IBM and defense contractor General Dynamics.

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Despite these marquee customers, Jim Frankola will have his fair share of challenges as Ariba CFO. Although the company reported a 47 percent jump in revenues in 2001–up to $409 million–the software maker still lost $88 million. In fiscal 2000, the company’s net loss was more like $30 million. In addition, founder Keith Kratch resigned as CEO In October, and was replaced by Bob Calderoni.

Still, Frankola, who has an M.B.A from NYU’s Stern School of Business and spent eleven years in the finance department at IBM, appears primed for the job ahead. He recently spoke with CFO.com’s Jennifer Caplan about taking professional risks, resuscitating a company that’s falling from grace, and selling a new image to investors. He also had a thing or two to say about revenue recognition.

You joined IBM early in your career and spent 11 years there. Do you think it was it a good career move to join such a large company early on?

In hindsight the move to join and stay at IBM worked out extremely well for me. A company like IBM has an extremely strong finance organization. Unlike many companies, finance people at IBM have authority over product pricing, and the go or no-go decision for new product development, for example. In many cases their role extends into areas that would be considered general management or marketing at other companies. It is an absolutely phenomenal training-ground for people looking to become CFOs. At IBM, I had jobs that were tailored specifically to broaden my education, gave me exposure to different parts of the business and built skills that would allow me to succeed in the long-run.

You’ve worked at both IBM and now Ariba. I take it you like the technology business?

My passion for technology goes way back to my undergraduate years, when I toyed around with getting my degree in information systems or electrical engineering. I am a finance person–but a technologist at heart.

In fact, most people were surprised when I left the technology world at IBM to join Avery Dennison. But at Avery Dennison, they were looking for a finance person who would be more than just a bean counter. They wanted someone who could be a partner to a general manager with a mission to transform a business, grow it rapidly, and look for acquisition opportunities. I felt like I could run my own shop and would be given the opportunity to help transform the business. After four years on the job, however, I felt the need to become a CFO back in the technology industry.

You joined Ariba at a time when the economy was on a downward track. What made you leave a comfortable position at Avery Dennison, and join a company that could very well have been on its way out?

I had a strong desire to get back into technology, but felt locked out by the hype that surrounded the Internet and later the high-tech industry, which I personally did not believe. Through the years, I would get calls from head hunters looking to fill positions in technology, but I could see that most of those businesses would go down. When I talked to [CEO] Bob Calderoni about the possibility of joining Ariba, I felt it was an opportunity to join a company that was at the bottom–but really had the potential to go up. I was also particularly excited by the concept of spend management. It was something that really resonated with me as a person responsible for finance.

Ariba has indeed undergone a rather fundamental shift in its business model, recently recasting itself as a provider of spend management technology. What does that shift entail?

Well, Ariba started off with electronic procurement, then during the Internet mania got into marketplaces. The company made a lot of money off that, it drove a lot of revenue, and to some extent diverted management from the original mission of helping chief procurement officers and the CFOs make money. Once the Internet bubble collapsed and sales dropped dramatically, we got back to basics. We listened carefully to what our customers wanted. I truly believe that if we execute well, spend management can be as big as customer relationship management.

As CFO, you play an important role in selling your new image and product mix to investors. Has that been challenging, particularly in an environment where people are pretty skeptical about the promises of e-business technology?

We’re having very little problem selling our concept. It really has been a budget problem more than anything else. When it came time to announce and push our spend management vision, we already had a well drawn-out map for execution. We already had live products to support the vision, as well as a large blue-chip customer list to go with it.

So it has actually been a pretty easy vision to communicate. I will say, though, that we do continue to see tight budgets, and our revenue has declined in the past year. We are by no means forecasting double-digit growth rates based on this product suite. But we are starting to see some stability and a different tone from our customers.

Revenue recognition is an extremely thorny area of accounting for finance managers at technology companies. Is revenue recognition an area of concern to you?

One of the good pieces of advice I got coming into this job was ‘Get into revenue recognition and the policies associated with it.’ Since I have come on board I have had several sessions with my internal accounting staff, as well as my external accounting partners, to get brushed up on revenue recognition as it relates to the software industry. For the software industry, revenue recognition is an entirely different animal. It is also something that gets a great degree of focus from our shareholders and the investment community.

I would say revenue recognition is the number one accounting area I spend most of my time on. I look at individual deals quite closely from a revenue recognition perspective. We also have a revenue recognition department within Ariba. It is an area we have invested a substantial amount of resources in, to make sure that we are treating these deals appropriately and are in compliance with GAAP. It is certainly a much bigger area of focus than I would have expected prior to joining Ariba.