IT's fallen star wipes its bad memories

The man cleaning up the scandal-hit software firm tells Stephen Pritchard why the future for the industry is greater co-operation between old rivals - and why 35-day months are a thing of the past
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The Independent Online

The board of Computer Associates, the software company hit by accounting scandals last year, has just 18 months to put its house in order.

This is the frank admission of Jeff Clarke, chief operating officer at CA and the only permanent member of the board. The company, which has been under investigation for securities fraud by the US Department of Justice and financial regulator the Securities and Exchange Commission (SEC), has been forced to part company with its chief executive Sanjay Kumar and to set aside $225m (£125m) to compensate current and former shareholders.

The terms of the deal are tough on CA, but still represent a victory of a kind for Clarke, a former chief financial officer at Compaq and a senior executive at Hewlett-Packard. CA has settled with the SEC and entered into a "deferred prosecution" agreement with the Department of Justice. The company's conduct will be supervised by a US government-approved independent examiner for 18 months.

CA will have to comply with government requests for assistance to bring cases against former members of its management team. The company has also had to tighten its accounting procedures, put in a new enterprise resource planning (ERP) system and appoint additional compliance and financial staff.

Clarke puts the cost of the ERP system at around $10m, with a "few million" on top for the extra staff salaries, and for the independent examiner, whose salary CA has to meet. Total costs are likely to run to $25m or so, say CA sources. However, under the terms of the agreement, the company will be entitled to funds recovered from its former executives (who pocketed nearly $1bn in bonuses in its heyday). As Clarke puts it, their "ill-gotten gains" will be repaid to the CA treasury.

"The new management believes in being as transparent as possible," he explains. "We believe we are the most transparent in the software industry and the most conservative of any software company. If we book a deal, we now don't recognise the subscription revenue until the next month."

The US government investigation into CA focused on irregularities such as 35-day months, which allowed the company to make its revenues appear greater than they were.

Clarke says that CA has been working with accountancy experts to ensure these irregularities can't happen again. The new management has clearly learnt a lesson from corporate scandals such as Enron. In being as open as possible with government investigators, it hopes to put the accounting problems behind it and return to business as usual.

This business is supplying software tools for companies to manage their information technology, one of the more lucrative parts of the IT industry. The research firm IDC puts growth in the management tools sector ahead of both computer hardware and applications software.

Some parts of the business, such as user provisioning - by which employees are set up on computer networks - expect to see compound annual growth of as much as 28 per cent. Security tools, another strong area for CA, will also grow at more than 20 per cent over the coming year.

Even areas that appear staid, such as software tools for mainframe computers, are healthy, accounting for about half of the company's business. According to IBM, the largest manufacturer of mainframes, the market is still growing. IBM sold 75 per cent more mainframe processing capacity last year, mostly to existing owners. This benefits CA, as when a user adds processing power to a mainframe, they have to pay more to CA in software subscriptions.

But away from the mainframe world, companies are still suffering from the IT overspend of the early 1990s. Businesses running systems based on Microsoft Windows or Unix built up their networks but even now, claims Clarke, many of these firms fully use only 20 to 30 per cent of their IT capacity. Better management tools can bring a return on that (over-) investment.

"We have also seen a trend towards a larger investment in management software than in applications," he says. "We believe this is happening as companies recognise that they have made a substantial investment in infrastructure, but that it is under-utilised, complex, costly and inefficient."

With the right management tools, Clarke believes businesses can push their IT utilisation rates to between 70 and 80 per cent of capacity - figures that are common in the mainframe world. But they can do this only if they can run management tools across their networks, regardless of who makes the equipment.

Few businesses have the range of management tools that CA can offer, Clarke claims. Manufacturers such as HP, his former employer, offer their own tools but these work best with HP kit. And businesses want to move away from buying "point solutions" from specialist software firms in areas such as security, asset management or backup and recovery, in favour of "suites", or bundles of programs.

For CA, this shift is a business opportunity. Clarke believes it will allow the company to build on its strong relationship with the IT managers responsible for mainframes (who have, by and large, stuck with CA despite its well-publicised problems). For CA, increasing revenues is as much about selling more products to existing customers, as it is about winning new ones.

The only company Clarke believes can compete head-on with CA is IBM (through its software division), but the computer giant is at the same time one of CA's most important partners. IBM engineers want CA software to run on their systems in order to maximise performance.

"Parts of IBM's hardware and mainframe businesses are very keen to work with CA to ensure that our software runs on their hardware," says Clarke. "In other areas, such as security software and systems management, they offer robust competition. But they are large enough to see that they can have both competition and co-operation."

This, he believes, is also the future for the wider IT industry. At HP he was one of the executives responsible for making the merger with Compaq work, despite misgivings on Wall Street, and among customers and shareholders. He predicts that both the hardware and software sectors will continue to consolidate, and this will force former foes to work together.

"The IT industry is moving into a world of 'co-opetition'," he says. "The next 18 months will tell whether CA is one of the companies that survives."