Computer Associates Case Study
BACKGROUND
Computer Associates (CA) is an independent software company. They provide network software, PC software, database and banking applications. Under a typical licensing arrangement, customers agree to pay a license fee to CA for the right to use software for a period of time. Under the old business model it was a period of three to ten years. Under the new model it is a time frame of one month to a maximum of three years. Under the old plan, licenses fees were reported as revenue once a customer signed a contract. So if a customer signed a ten-year contract then CA would report all the revenue from the license fee in that first year. Under the new plan the license fee is spread over the term of the contract. Maintenance fees in both the old in new plan are recognized over the maintenance period.
One of the main problems with the old plan was the way that commissions were calculated. Commissions were calculated quarterly and they were based on the present value of the annual license fees or contracts sold. So sales representatives would try to push contracts towards the end of the quarter. Customers knew how the commissions were calculated and would wait until the last month of the quarter to purchase so that they could receive a larger discount. After the contract was signed the sales representatives would not follow up with the customers to make sure that they were happy they would just move onto the next customer.
Under the new business model it is based around customer service. Computer Associates shortened the length of a contract period so that the sales representative would stay in contact with the customers. CA also changed the method of compensating the sales representatives; under the new plan their commission was based on not only what they sold but also their level on customer service. In also trying to revamp customer service CA added a customer relation’s organization and hired 625 new staff to run it. Because of the new way of reporting
Computer Associates (CA) is an independent software company. They provide network software, PC software, database and banking applications. Under a typical licensing arrangement, customers agree to pay a license fee to CA for the right to use software for a period of time. Under the old business model it was a period of three to ten years. Under the new model it is a time frame of one month to a maximum of three years. Under the old plan, licenses fees were reported as revenue once a customer signed a contract. So if a customer signed a ten-year contract then CA would report all the revenue from the license fee in that first year. Under the new plan the license fee is spread over the term of the contract. Maintenance fees in both the old in new plan are recognized over the maintenance period.
One of the main problems with the old plan was the way that commissions were calculated. Commissions were calculated quarterly and they were based on the present value of the annual license fees or contracts sold. So sales representatives would try to push contracts towards the end of the quarter. Customers knew how the commissions were calculated and would wait until the last month of the quarter to purchase so that they could receive a larger discount. After the contract was signed the sales representatives would not follow up with the customers to make sure that they were happy they would just move onto the next customer.
Under the new business model it is based around customer service. Computer Associates shortened the length of a contract period so that the sales representative would stay in contact with the customers. CA also changed the method of compensating the sales representatives; under the new plan their commission was based on not only what they sold but also their level on customer service. In also trying to revamp customer service CA added a customer relation’s organization and hired 625 new staff to run it. Because of the new way of reporting
References: 1. Palepu, K., & Healy,P.(2008). Business Analysis & Valuation Using Financial Statements, (4thed.) Mason, OH: Thomson. 2. CNET (November 2,2006) Former CA exec Kumar sentenced to 12 years Web Site: http://news.cnet.com/Former-CA-exec-Kumar-sentenced-to-12-years/2100-1014_3-6131943.html?tag=lia;rcol 3. All Things Digital (November 4,2008) Sanjay Kumar Goes to White Castle Prison Web Site: http://digitaldaily.allthingsd.com/20080904/sanjay-kumar-goes-to-white-castle-prison/ 4. Wikipedia (Various dates): Sanjay Kumar, Web Site: www.wikipedia.org- http://en.wikipedia.org/wiki/Sanjay_Kumar 5. Investopedia :Understanding Pro-Forma Earnings Web Site: http://investopedia.com/articles/01/103101.asp