Running Head: Final Assignment
Research Paper - Computer Associates
Joseph Payne
Assignment Presented in Final
MBA 590
Fall 2009
E-Mail:
joseph.payne@lmunet.edu
Instructor:
Dr. Jack McCann, Ph. D.
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Introduction
Computer Associates (CA) is involved in probably the most domineering market in American history, the computer software market, and has weathered management adversity and a virtual abolishment of stockholder confidence within the last 10 years. In this paper I hope to offer much of what caused adversity within Computer
Associates management structure and how they have, through aggressively pursuing strengths in it‘s approach to research and development …show more content…
(R&D) and by convincing investors and Wall Street analysts that a new business model and accounting were beneficial, maintained it‘s place as the third largest independent software company in the world.
Computer Associates (CA) began operation in 1976. Founded by a Korean American by the name of
Charles Wang in New York, and has had few competitors matching their aggressive strategy during the last 33 years of computer software development. As a major provider of information technology (IT) management software, the company develops, markets, licenses and supports the software solutions to manage all IT environments. The company 's portfolio of software products and services that includes infrastructure management, project and portfolio management, IT security management, service management, data center automation and application performance management, as well as business governance services and workload automation services. . (2009. CA, Inc)
The company primarily operates in the US. It is headquartered in Islandia, New York and employs
13,700 people. (2009. CA, Inc)
Staying ahead in the world of eBusiness requires efficiency, flexibility and speed. This means changing the way that businesses interact with each other, consumers and their employees. Business partners need to perform as if they are part of the same company. Customers expect access to the information that enables them
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to make informed buying choices. Employees need the right information at the right time to make intelligent and timely decisions.
Evaluating CA’s Resources and Competitive Position
During the 1980s and 1990s, CA recognized the importance of increasing the range of software products that could be offered and supported through CA‘s extensive distribution and service network. Acquisitions of existing software which reduced the risk of in-house development and moved products to market sooner, became
CA‘s favorite means of growth. CA‘s policy upon acquiring companies was requiring employees who wanted to keep their jobs to sign non-compete agreements. CA has a well-deserved reputation for slashing development costs and profiting from slowly-dying software products. (1994. Hoffman)
The largest acquisitions included the 1999 purchase of Platinum Technologies for $3.5 billion in cash and the 2000 purchase of Sterling Software for $3.9 billion in stock. To offer unique e-business solutions to its customers, CA also maintained strategic partnerships with over 40 companies including Microsoft, Intel, Sun,
EMC, Oracle, Cisco, Hewlett-Packard, Brocade, Compaq, and Dell. (2002. CA White Paper)
A stock option set in 1995 specified that a certain number of shares would vest when CA 's shares sustained a target price. The benchmark was met in 1998, and the three executives combined received nearly $1 billion in Computer Associates stock.
Before 1990, CA became the first software company to reach $1 billion dollars in revenues. (2009. CA
History) For the year ended March 31, 2002, CA reported annual sales of $3 billion, operating cash flow of
$1.3 billion, and ending assets of $12.2 billion. (1999. Bulkeley) By 2000, CA held 130 patents, had more than
18,000 employees in 100 countries, and sold more than 500 products to over 11,000 customers, including almost every Fortune 1000 company. (2002, CA White Paper). Once customers signed on, they tended to stay. CA
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continued to add new customers every quarter, both through direct sales and indirect channels.(2000. CA annual report) Fortune named CA one of America‘s ―most admired‖ companies in 1999, and industry publications regularly praised CA products.(2000. CA annual report)
CA reported an 81 percent drop in fourth-quarter earnings and a 60 percent fall in earnings for the full fiscal year 2005 ended March 31. For fiscal year 2005, the company reported net income of $10 million and revenue of $3.5 billion. In fiscal 2004, the vendor reported $25 million in net income and revenue of $3.2 billion.
In fiscal 2005, the company increased bookings from its indirect channel sales by 19 percent over the prior year.
Indirect sales accounted for less than 10 percent of the company 's overall sales. (2005. CA annual report)
The company recorded revenues of $4.2 billion during the financial year (FY2008) ended March 2008, an increase of 8.5% over 2007.The increase was due to the growth in revenues of subscription and maintenance, and professional services. The operating profit of the company was $8.5 billion in FY2008, compared to operating profit of $2.1 billion in 2007. Its net profit was $5 billion in FY2008, compared to net profit of $1.1 billion in 2007. (2008. CA annual report)
What accounts for a decline in revenues? One answer could be shareholder confidence. In 2000, a classaction lawsuit accused founder Charles Wang, co-founder Russell Artzt of wrongly reporting more than $500 million in revenue in its 1998 and 1999 fiscal years, in order to artificially inflate the stock price. In 2000/2001
Computer Associates filed a revenue restatement in the amount $2.2 billion dollars. (2004 Berenson). Revenue restatements are more than just accounting reversals. Their impact affects a company in every possible way.
Customers are hesitant to purchase products, investors watch stock prices free-fall, employee morale is ruined
(along with the value of employees‘ stock sometimes in bankruptcy. (2006 Martin). Computer Associates acknowledged that it had backdated $1.8 billion in contracts in the fiscal year ended March 2000, nearly 30
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percent of its total sales. But the company emphasized that the sales were real and that the problem related to the timing of revenue recognition, not to falsifying contracts. Since then, at least four other class-action suits have been filed against Computer Associates. (2001. Corporate Narc)
Wang stepped down as CEO in 2000 to become Chairman, and Kumar, who had joined the company through the acquisition of UCCEL in 1987 and had been CA‘s president since 1994, became CEO. In 2002,
Chairman and CEO Charles Wang retired.
Investor concerns intensified when the company announced in February 2002 that the SEC was investigating their past accounting practices. Short sellers, capitalizing on this investigation, spread rumors the company had adopted the new accounting method to disguise past accounting abuses that had overstated revenues and earnings. Even though the company strongly denied these allegations, investor confidence was clearly damaged. A company dissident investor announced yet another challenge to the company‘s management by filing a slate of five nominees to replace incumbent directors at a vote at the company‘s annual shareholder meeting on August 28, 2002. (2002. Presswire)
Company executives thought that through strong governance set forth by the company‘s board a strong foundation on which to rebuild investor trust and confidence would begin.
Should the company rethink its
decision to release the pro forma, pro rata numbers? Would more disclosure help or hurt? How could the company convince investors that the business and accounting changes were truly in their long-term interest?
What role should the board play in crafting this strategy?
In May 2002, the company adopted a set of new governance policies. Under these policies, the company appointed one of its directors and the former vice chairman of Salomon Brothers as the ―lead independent director.‖ Other governance changes adopted included an annual board evaluation of the company‘s CEO, adoption of New York Stock Exchange (NYSE) guidelines for deciding which directors qualified as
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independent, reducing the number of insiders on the board to three (out of a total of 12 directors), and limiting the terms of the independent directors. (2002. Guidera)
In July 2002, CA named four new directors: Kenneth Cron, CEO of Vivendi Universal Games, a division of Vivendi Universal; Robert E. La Blanc, former vice chairman of Continental Telecom Corporation and a former general partner of Salomon Brothers Inc.; Alex Serge Vieux, an international technology and software entrepreneur; and Thomas H.
Wyman, the former chairman and CEO of CBS, Inc. (2002. Guidera)
In 2004, new management reached a deal with the SEC to pay $225 million in compensation to shareholders victimized by the company 's criminal conduct. Former CEO Sanjay Kumar was formally indicted by a grand jury on counts of fraud, and obstruction.
In April 2004 Mr. Kenneth D. Cron, a director was appointed as interim chief executive succeeding
Sanjay Kumar, who resigned as chairman and chief executive. Mr. Kumar remained at Computer Associates as chief software architect, a new position. Later that same year IBM executive John Swainson became Computer
Associates‘ CEO Elect.
Even during all this shakeup, by 2002 CA had become the third-largest independent software company in the world (after Microsoft and Oracle). The company had expanded beyond mainframe utilities into PC software, database and banking applications, and network software. For the year ended March 31, 2002, CA reported annual sales of $3 billion, operating cash flow of $1.3 billion, and ending assets of $12.2 billion. (2002. CA
annual …show more content…
report)
The company recorded revenues of $4.2 billion during the financial year (FY2008) ended March 2008, an increase of 8.5% over 2007. The increase was due to the growth in revenues of subscription and maintenance, and professional services. The operating profit of the company was $8 billion in FY2008, compared to operating
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profit of $2.1 billion in 2007. Its net profit was $500 billion in FY2008, compared to net profit of $1.2 billion in
2007. (2008. CA annual report)
On September 1, 2009, CA announced the decision of CEO John Swainson to retire by December 31,
2009 and will take with him a $14 million dollar severance package. In the five years that Swainson has been with Computer Associates is credited with tuning CA‘s operations around after the $400 million dollar accounting fraud scandal. (2009. AP)
Evaluating CA’s External Operating Environment
Software licensing under the traditional two-tiered licensing model, used by almost every enterprise software company, customers would pay a large initial fee that enabled them to use the product for a year, followed by annual maintenance fees, which were typically 15% to 20% of the first year‘s fee, to continue using it and receive product upgrades and technical support. If certain key accounting criteria were met, license fees could be booked immediately if all of the following criteria were met: (a.) persuasive evidence of an arrangement existed; (b.) delivery had occurred or services have been rendered; (c.) the seller 's price to the buyer was fixed or determinable; and (d.) collectability was reasonably assured.(2001, Greenberg) The software company would recognize all of the initial licensing revenue up front and the maintenance revenue on an annual basis over the duration of the licensing agreement. Over time, software buyers became aware of this policy, and used it in price negotiations—waiting until the last minute to close a deal, forcing the software company to make larger concessions or risk losing the deal for that quarter. (2001,Greenberg)
Most software makers began to struggle with so-called ―back-end loaded‖ quarters, when they faced a mad dash to close as many deals as possible. More than half of all revenue was usually booked in the last week of the quarter, ―distorting the long-term trend and making sales revenue difficult to predict accurately. (2001,
Johannes)
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The global software market was characterized by dynamic customer demand and rapid product obsolescence. Minimal entry barriers in software development prompted intense rivalry and price competition.
Some competitors, such as IBM, Sun, HP, and Compaq had greater financial resources than CA; others, such as
Microsoft, Oracle, and SAP, were strong in particular industry sub-segments. In addition to these large rivals,
CA also faced competition from small software companies the world over who offered cheaper solutions. (2000.
GIA)
Evaluating CA’s Old Business Model and Accounting
Under a typical licensing arrangement, customers agreed to pay a license fee to CA for the right to use software for a period of three to 10 years. CA based license fees on either the aggregate capacity of all machines that used the software, or on the processing power of individual licensed machines. The license fees also reflected the number of years of the license—the longer the license period, the higher the fee. However, the incremental fee for additional years of licensing declined over time at a rate of roughly 30% per year to reflect obsolescence. Despite the fact that licenses were for multiple years, current financial reporting rules required CA to report the licensing fee as revenue once a customer had signed a contract, the software had been delivered, and collection of fees was reasonably assured. (2000. GIA)
CA also charged customers an annual maintenance fee of roughly 10%–20% of the initial license fee.
Annual renewal rates for CA maintenance contracts typically exceeded 85%. Maintenance fees, whether bundled with product licenses or priced separately, were required to be recognized ratably over the maintenance period.
(2000. GIA)
Unlike other independent software firms, CA provided its customers with the option of financing the initial license fee. As a result, CA‘s financial statements looked very different from those of its major competitors. Its balance sheet included sizable receivables—on March 31, 1999, 60% of its assets were short-or
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long-term receivables. Its income statement included effective interest from financing its customers—for 1999, effective interest amounted to $408 million, 9% of total licensing revenues. (2000. GIA)
Also, its cash inflows were steadier, since revenues were collected over time rather than at the time of sale. Problems with the Old Business Model
Despite being the standard for the software industry, the old business model had generated a number of problems. The primary problem was that customers had learned that pressure on sales representatives for CA (as well as for other software firms) to meet quarterly sales targets intensified toward the end of each quarter. By waiting until the last week of the quarter to sign a license agreement, savvy customers were able to negotiate attractive licensing-fee discounts. Consequently, CA recorded a significant portion of its sales for a given quarter in the last week of the quarter. (2000. Johannes)
This selling pattern was primarily driven by the incentives of CA‘s sales representatives and top management. Sales representatives were compensated on a commission basis, with commissions computed quarterly as a percentage of the present value of the annual license fees for contracts sold. Sales representatives‘ financial incentives were therefore tied to quarterly sales targets, and pressure to meet these targets intensified as the quarter end approached. CA‘s top management faced similar pressures, in their case to meet Wall Street quarterly revenue and earnings expectations. Management pressure to increase sales each quarter reinforced the incentives of sales representatives, particularly since the full effect of multiyear licenses was recorded as revenue when the contract was signed and the software delivered. (2000. Johannes)
Sales representatives would therefore agree to deep discounts on licenses signed in the last week of the quarter. Discounts were particularly significant for the later years of a contract, when obsolescence risk was high and the present-value implications for sales representatives‘ commissions were small. Top management went
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along with the discounting to boost reported revenues and earnings. Because the incremental costs of software production were negligible, reducing license fees for the later contract years could be argued to still be profitable for shareholders, since even minimal revenues in those years contributed toward recovering the costs of software development. (2000. Johannes)
However, there were a number of negative consequences to the pattern in sales over the quarter. First, it made it very difficult for firms in the software industry to maintain margins. There was constant pressure to lower prices. For example, it was difficult for sales representatives to deny discounts offered to customers negotiating contracts in the last week of the quarter to other customers who negotiated new contracts the following quarter. More importantly, customers who had succeeded in negotiating attractive discounts on licenses in the later years of a contract used these low rates as a base for negotiating subsequent license fees when the contract was up for renewal. (2000. Johannes)
The sales pattern also made it difficult for CA to forecast revenues and earnings for any given quarter.
Since most of the quarter‘s sales arose in the last week, management found it difficult to warn analysts and investors of any drop in revenues until after the quarter was actually over. As a result, it was difficult for analysts to forecast earnings, leading to wide stock price swings at the time of earnings announcements. CA was particularly sensitive to this problem—in July 2000 the company saw its stock price fall by 42% when it announced a quarterly earnings shortfall that was partially caused by delays in ―several large contracts, previously expected to close in the final days of the quarter. (2000. Johannes)
Finally, the current business model had several other negative implications for CA. Sales representatives tended to focus heavily on clients who were considering buying or renewing their long-term licenses. However, once a license agreement was signed, they had little incentive to follow up during the contract period, which often ran several years; their time was better spent focusing on new customers or customers whose licenses were
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about to expire. As a result, there was considerable customer dissatisfaction with CA. This dissatisfaction, coupled with reluctance by customers to experiment with new software that required another multiyear license, reduced opportunities for follow-up sales of new software products to existing customers. (2005. Galli)
Managing Internal Operations: Actions That Promote Good Strategy Execution
In October 2000, CA announced changes in its business model, including reducing software license lives, changing the method of compensating sales representatives, and revamping customer support.
By reducing software license lives from seven years to a minimum of one month and a maximum of three years, CA‘s management anticipated that sales representatives would have to meet regularly with customers and offer good service. This would be needed to ensure that customers renewed existing contracts but could also be used as an opportunity to sell new software products. Under the new arrangement, customers could experiment with new products for a minimum of one month. If they did not find them valuable, they could simply fail to renew them the following month. Also, shorter contracts were expected to reduce the opportunity for sales representatives to agree to discounts on license fees as they had in the sixth and seventh years of a long-term contract. CA was confident that the shorter contract lives would not adversely affect its economics because the renewal rates historically had been very high. Also in 2005 CA spearheaded a campaign to create a single, common open-source license to which options can be added through a template. (2005. Galli)
Under the new sales representative compensation arrangement, sales representatives were given monthly sales quotas. Commission rates were made variable, with the highest rates reserved for sales of new products to new customers, lower rates for sales of new products to existing customers, and the lowest rate being the extension of a license for an existing customer. In addition, sales representatives‘ training focused on improving customer service and satisfaction, and 20% of commissions were assigned on the basis of customer satisfaction.
To make sure that the sales representatives did not oppose the business model change, or worse still, leave the
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organization, CA‘s management promised that their total compensation under the new scheme would not be lower than their current compensation. (2005. Galli)
Finally, CA revamped its customer service organization by unifying all post-sales customer groups under a common organizational structure. In addition, the company hired 625 new staff for its customer relations organization, so that customers could have a single point of contact for all their needs.
During 2005 CA unveils its new logo along with a new global branding program to inspire the industry to
―Believe Again‖ in the power of technology to support business. This was a commitment to unifying and simplifying the management of enterprise-wide information technology (IT) to help ensure customers receive the maximum return on their IT investments. By doing this CA will build on the Company 's strengths in providing customers with the most comprehensive, vendor-neutral, integrated and modular IT management solutions in the industry. The goal of the branding program is to communicate these market differentiators and demonstrate CA 's commitment to its industry vision. (2005, Lapierre)
Change in CA’s Internal Operations: Actions - Revenue Recognition
At the same time that it changed its business model, CA changed its method of reporting revenues.
Instead of recognizing the present value of multiyear license fees in the year the contract was signed and software delivered, the company began to recognize revenues ratably over the life of the contract. CA‘s management argued that the accounting change would benefit both customers and shareholders:
Ratable recognition will help CA move away from the end-of-quarter customer “dance” that leaves both
CA and our customers unhappy—a situation that is obviously inconsistent with a business model that stresses partnership. It is well known in the software industry that the majority of deals are signed at the end of the quarter, as vendors try to make their quarterly numbers. This end-of-quarter flurry of deals—the proverbial
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“hockey stick effect”—creates an unnecessarily adversarial relationship between customers and vendors in which both parties rush to sign any deal rather than the right deal. . (2001. CA)
Ratable recognition provides shareholders with greater transparency and lower volatility in quarterly revenue and earnings. Because a majority of our contracts have historically been closed in the last few days of the quarter, CA, like other software companies, has had difficulty providing guidance on quarterly earnings.
(2001. CA)
However, since CA could not retroactively change its method of accounting, the reporting change posed a short-term challenge for investors in comparing the company‘s performance over time. Under the new method, license-fee revenues for 2001 were only $3.7 billion versus $5.6 billion for 2000, in part because 2001 revenues included only the license fees for that year and not the multiyear effect of new licensing contracts shown in 2000.
As a result, CA reported a loss of $591 million in 2001, compared with a profit of $696 million in 2000. (2001.
CA)
To help our clients meet the challenges presented by the increasingly competitive e-business economy, we are instituting a new business model highlighted by subscription based licensing. As the first enterprise software provider to move from an enterprise license to a subscription license model, our clients will not only have the freedom to use any of our software they choose over a preset period, including month-to-month, but will also be able to determine the length and dollar value of the license, with discounts determined by the length of commitment and volume of purchase. The new model will improve both the visibility of our revenue stream and quarter-to-quarter revenue predictability as well as eliminate the back-end loaded nature of our business, where most license agreements are concluded in the final days of a quarter. (Kumar. 2000)
After an accounting change, Computer Associates posted a loss of $342 million, or 59 cents a chare, in the company’s fiscal third quarter 2001 (ending December 31, 2000), compared with a profit of $401 million, or
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72 cents a share, a year earlier. But, instead of dwelling on the loss, Computer Associates touted numbers on a
“pro-forma/pro-rata” basis, presenting sales as if revenues—past, present and future—are based on the company’s new subscription based business model. Under that model, the company posted revenues of $1.4 billion and net income of $247 million, or 42 cents a share, compared with 32 cents a share on $1.33 billion in revenue a year earlier. Trying to compare numbers to historical revenues is “almost meaningless,” stated a confused analyst. Thanks to the business model switch, the company’s future is hazy. Maybe Computer
Associates has improved its performance, maybe it hasn’t. But, until the company shows some numbers that meaningfully track how it’s doing, it’s tough to be anything but fuzzy on the company’s stock prospects. (2001.
Pearlman)
While Computer Associates (CA) reported a loss according to Generally Accepted Accounting Principles
(GAAP) in its first earnings release following the switch to a new business model, on a ―pro-forma pro rata‖ basis, which the company advanced as a truer comparison, CA‘s earnings beat analysts‘ consensus estimate.
―The reported actual results are not very meaningful because of the accounting change, but the pro forma results are fantastic,‖ stated Sanjay Kumar, President and CEO of CA..(2001. Johannes)
On January 26, 2001 analyst recommendations for CA ranged from ―hold‖ to ―buy-aggressive.‖ Some analysts welcomed the change in CA‘s business model; others questioned both the effects of and motivation for the change. Positive analysts anticipated higher profit margins because CA would no longer have to make price concessions to close deals before fiscal quarters ended. (2001. Greenberg)
Tailoring a Strategy to fit CA’s Business Model
The new business model is one of our most important steps in unlocking the value of CA for our customers, shareholders, and employees. We are taking the lead in adopting a model that improves our ability to
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partner with our customers to realize value and that creates the transparency and consistency in financial results desired by investors. Our employees are highly energized by the changes we are making.
Citing a study by the consulting firm McKinsey & Company, Kumar stated that ―given all the benefits the new business model offers, we expect to see more software companies following our lead.‖ (2003. Doyle)
The company‘s board was fully involved in the company‘s business model and accounting change. While the board members strongly supported both moves, they expressed concern that investors might not fully understand the potential benefits of the proposed changes. Of particular concern to the board was the potential problem investors might face in comparing the company‘s past and future performance, given the change in accounting policy. The board‘s concern was reinforced by advice from investment bankers who indicated that time-series comparability of reported numbers was of critical importance to investors. (2003. Doyle)
To help investors compare performance across years, CA provided ―pro forma, pro rata‖ revenues and earnings for the current year (2001) and the year before (2000) under the new accounting method and under the assumption that it had always owned two companies acquired in 1999 and 2000. This information was presented in the management discussion and analysis section of the company‘s annual report. Thus, unlike the pro forma information provided by many companies in their press releases, this information was subject to attestation by the company‘s auditor, KPMG. Pro forma total revenues were $5.8 billion and $5.6 billion for 2002 and 2001, and earnings were $1,542 million and $951 million, respectively. (2003. Doyle)
CA also used the pro forma numbers in its communication with analysts and Wall Street, in its press releases, and in the information provided on the company‘s Web site. The company felt that this approach would make it easier for investors to understand the benefits of the change in business model and not misinterpret the decline in reported revenues and profits in the current year as a result of the changed generally accepted accounting principles (GAAP) accounting statements. (2003. Doyle)
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Reactions to the Business and Accounting Changes
The most immediate result is higher profit margins, because software companies no longer have to make concessions on price. It should also mean an end to those nasty earnings misses, as substantially more revenue gets locked in at the beginning of the quarter rather than the end. . . . And negotiations for big deals should go a lot smoother. At the last minute, the software company can tell haggling customers to take a hike (or at least to come back next quarter). ―Assuming there‘s a real need on the customer‘s part, they‘ll have to get the deal done th in the normal course of business rather than waiting until the 11 hour of the next quarter,‖ says John Barr of
Robertson Stephens. Adds Jack Ciesielski, publisher of The Analysts Accounting Observer: ―It‘s just a cleaner, more realistic way of recognizing revenue. They‘re looking at having more numbers we can trust.‖ (2001.
Greenberg)
IDC also supported the moves, citing the improved incentives between CA and its customers and the opportunities for the company to sell new products to its existing customers. In a bulletin, IDC concluded:
Computer Associates (CA) has taken a market-leading position with respect to software payments, moving from an annuity model to one in which it will accept payments for software licenses on a month to month basis and recognize revenue the same way, regardless of how customers buy the software. . . . The move should also take the bumps out of CA‘s revenue stream by removing incentives for customers to wait till the end of a quarter or year to close a deal in the hopes of throttling CA salespeople into providing bigger discounts.
Additionally, CA is better positioned to get access to new and competitive accounts, as well as emerging partners that need to finance nascent business models. (McHale and Restivo. 2000)
However, not all the responses were as supportive. On April 29, 2001, The New York Times published a piece on CA titled ―A Software Company Runs Out of Tricks; The Past May Haunt Computer Associates.‖
Among other things, the article challenged CA‘s pro forma financial information: (2001. New York Times)
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As measured by standard accounting rules, Computer Associates‘ sales have fallen almost two-thirds over the last six months. To cover that, the company has begun presenting its financial results in a way that confuses even the Wall Street analysts who follow it. (2001. New York Times)
On April 16, 2001, Computer Associates reported another banner quarter. ―New Business Model Rules;
Q4 Rocks,‖ it said proudly in a news release outlining its results for the three months ended March 31, 2001. The company appeared untouched by the slowdown in technology spending that hurt other big software companies like Oracle. (2001. New York Times)
Computer Associates said that on a ―pro forma, pro rata‖ basis, its revenues had risen to $1.44 billion for the quarter, from $1.39 billion in the period a year earlier. Profits were 47 cents a share, it said, up from 39 cents a share. (2001. New York Times)
The last line of the April 16 news release told a different story. There, Computer Associates reported its revenue and income according to ―generally accepted accounting principles,‖ the standard that companies are required to use in filings with the Securities and Exchange Commission [SEC] to calculate results. By those rules, revenue fell almost 60%, to $732 million, from $1.91 billion. After earning a profit of $1.13 a share, or about $700 million, last year, the company lost 29 cents a share, or about $175 million, this year. (2001.
Berenson, A.)
Analysts and investors, who viewed the company‘s accounting change and pro forma disclosure with suspicion, cited several concerns. First, they wondered whether the new revenue recognition policy meant that the company‘s previous policy was overly aggressive. Did the company overstate its revenues and earnings in previous years? This was especially troubling because top management was awarded close to $1 billion in stock compensation based on the past reported performance. Second, were the pro forma disclosures, which showed significantly better results than those reported under the current accounting policy, meant to divert investors‘
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attention from the company‘s poor performance? Third, were the new business model and accounting changes really motivated by the reasons stated by management or merely to hide that the company was no longer in a position to achieve dramatic growth acquisitions as in the past? (2001. Berenson, A.)
Corporate Culture and Leadership: Keys to Good Strategy Execution
According to Sai (Sairam) Gopalan, VP - IT Services Sales at Cybernet SlashSupport , Greater New
York City Area , ―Computer Associates business vision is to transform the way the world manages information technology (IT). The company also has a human vision -- to transform the quality of life where we live and work by using our time, talent, and technology to build strong and productive communities worldwide. From its very first year of launching the India Technology Center, Computer Associates has focused on making a significant contribution to the community specifically in the area of children’s education and health.” (2006. Gopalan)
CA‘s India Technology Center (CA-ITC) began in 2004 when he and a group of his met members of the
HOPE Foundation and participated in its activities for children. Encouraged and supported by the management, they formed a team called ―CA-Together‖ with interested and committed employees.
The team focused on to primary issues: (1) To provide quality education to the underprivileged through the ―CA HOPE School‖ and the 3E CA HOPE Learning Center. (2) To protect the environment through ―Go
Green‖ programs. (2006. Gopalan)
CA -India has, established a long-term partnership with the Hope Foundation, supporting the creation and development of a pre-primary school in Hyderabad since 2004 and a 3E CA HOPE learning center. Computer
Associates Together In Action, is a way for Computer Associates employees to join together on team-based projects with local nonprofits, was launched in the fall of 2006. I have been conducting this event and been the single point of contact for ITC from its launch at Computer Associates. Through this program that happens in the months of October and November, at least 100 volunteers participate. (2006. Gopalan)
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A division of CA, based in Great Britain received the Thames Valley Economic Partnership award in
2001 for ‗Green Commuting‘ for its encouragement and financial support to employees using greener ways to travel. The awards were sponsored by the Department of Trade & Industry and Argent Group.
The Thames Valley Economic Partnership, which promotes the Thames Valley as one of Europe‘s top business locations, launched its Smarter Working Green Commuting campaign in 1999 to monitor changes in work and travel practices and raise the profile of smarter working and its advantages to businesses.
Belinda Nahal, coordinator of green travel at Computer Associates, said, "we 're delighted to have won this award and to receive recognition for our efforts in encouraging our 900-strong workforce to use transport that is less harmful to the environment. Green commuting makes sense for us as a business, too: with plans under way to open a new training centre next year, the action we are taking now will have the benefit of relieving pressure on parking space in the future." (2002, ActTraveWise.com)
CA: Governance and Investor Communication Challenge
CA‘s business model, implemented in October 2000, was delivering sustainable competitive advantage.
Despite management‘s belief that the company had made good progress in improving its business model and governance, there remained considerable skepticism about CA in the stock market. The company‘s stock price dropped by about 60% during the first half of 2002 (2002. Hamm) (see Exhibit 1 for a comparison of the stock‘s performance versus that of the S&P 500). Investors were confused about the company‘s new accounting and were skeptical of the ―pro forma‖ numbers the company was disclosing as a way to help investors assess the impact of the accounting change. In addition, Sam Wyly, a Texas entrepreneur who had sold his company,
Sterling Software, to CA in 2001, was continuing his efforts to challenge management through a protracted proxy fight. (2001. Songini)
CA Strengths and Weaknesses
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CA is one of the world 's prominent independent providers of information technology (IT) management software. The company develops markets, licenses and supports the software solutions to govern, manage and secure the IT environments. CA has strong relationships with major brands, which strengthens the company‘s image. However, the intense competition in the industry could affect the company‘s market share. (2007Garbani
)
Strong Operating Performance
CA has reported strong operating performance during the period 2005-2008.The company‘s revenue for
FY2008 was $4,277 million, growing at a CAGR of 6% from 2005. The company recorded the operating income of $854 million during FY2008, compared to operating income of $139 million in 2005, growing at a CAGR of
83% during the same period. The net profit was $500 million in FY2008, compared to the net profit of $24 million in 2005, growing at a CAGR of 175% during the same period. (2007. Garbani )
The operating margin of the company for FY2008 was 20%, compared to 5.4% margins of 2007. The net profit margin was 11.7% in 2008, compared to 3% in 2007. The growth in the operating income was due to the decrease of total expenses of the company in 2008. The company‘s total expenses including cost of sales, selling and administrative expenses, product development costs, and amortization costs were $3,423 million, a decrease
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of 8.2% over 2007. The strong operating performance enables the company to make strategic investments, besides boosting the investor confidence. (2007. Garbani )
Strong presence in job scheduling software market
CA has strong market presence in job scheduling software market. The company was the worldwide market leader for 2008 in job scheduling software, with a market share increase of 10.9% year-over-year. The company had 19.6% share of the $1.5 billion job scheduling software market, in 2008. CA has been ranked as the market leader for the fourth consecutive year in job scheduling software. The job scheduling software, which includes workload-balancing applications, is expected to have demand as a result of a growth in virtualization.
Strong position in the presence in job scheduling software market provides the company with competitive advantage over other players.
(2007. Garbani )
Relationship with major brands
CA has strong relationships with the major global brands. The company has a broad base of partners to reach more customers, improve the expertise in niche areas and provide fulfillment and distribution. CA has formed strategic alliances with global systems integrators for their process design and planning as well as vertical expertise. The company‘s system integrator partners include Accenture, Deloitte,
PricewaterhouseCoopers, TATA Consultancy Services, Infosys, and HCL Technologies. The company also aligned with value-added partners to offer enterprise solution implementation and to market software products.
CA‘s facilities managers include CSC, HP, IBM and EDS. CA has strong technology alliances with leading vendors to provide strong product integration and technical collaboration. (2007. Garbani )
The company‘s technology alliances include Cisco Systems, Dell, Google, Intel, Microsoft, Cisco,
Oracle, and SAP. The company‘s strong partnerships with major global brands enable it to improve
its technological and management capabilities and strengthen brand image. (2007. Garbani )
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Focus on research and development
CA has strong research and development (R&D) capabilities. The company‘s product development and enhancement expenditures in FY2008, 2007 and 2006 were $516 million, $544 million, $559 million, which represented 12%, 14% and 15% of total revenue, respectively. The year-over-year declines in expenditures were primarily due to transfer of development operations to lower cost regions and reduction in the cost of restructuring activities. As of March 31, 2008, CA held over 600 patents worldwide and over 1,000 patent applications were pending worldwide for technology. (2007. Garbani )
The company‘s product development staff is located in Australia, China, the Czech Republic, Germany,
India, Israel, Japan, the UK and the US. In the US, product development is primarily performed at its facilities in
Brisbane and Redwood City, California; San Diego, California; Lisle, Illinois; Framingham, Massachusetts;
Mount Laurel, New Jersey; Islandia, New York; Plano, Texas; and Herndon, Virginia.
During October 2008, CA also planned to invest in expanding the India Technology Center‘s (ITC) research and development operations with the construction of a new 180,000 square foot building on the CA campus in Hyderabad.
The company also entered into strategic alliances to enhance research and development in some of its businesses. In February 2008, CA entered into an agreement with HCL Technologies to establish a strategic partnership in which HCL assumed all responsibilities for product development and research as well as customer support associated with the Internet Security business of CA. Strong R&D capabilities would serve as a competitive advantage to the company by providing it with new and innovative products. (Burke, 2007)
Weaknesses – Dependent on Matured Markets
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CA is highly dependent on matured markets for its revenues. The US and Europe, the two larger geographic markets of the company, accounted for 82.2% of total revenues during FY2008. It is estimated that the software and services sales growth rate in the US and Europe would be very low, with the forecasted decline of IT spending in 2009. Furthermore, the US economy is forecast to report a GDP decline of 1.6% in 2009 compared to 1.1% growth in 2008, Euro area is forecast to report a GDP decline of 2% in 2009 compared to 1% growth in 2008 and the UK is forecast to report a GDP decline of 2.8% in 2009 due to the economic crisis. High dependence on the US and Europe markets impose the company to the demand dynamics and economic risks of this region, there by effecting its revenues. (2007. Garbani )
Opportunities - Acquisitions
CA has made significant acquisitions in Identity and Access Management (IAM) space, as a plan of expanding its portfolio and presence in the emerging markets. According to the industry sources, the IAM market is forecast to grow at a Compound Annual Growth Rate (CAGR) of approximately 23% during the period 2009-2012. The demand drivers for IAM solutions include improved security, productivity and reduced administration cost. Currently, the Americas region is in the dominant position in the global IAM market.
However, the Europe Middle East African region (EMEA) and Asia-Pacific region markets are expected to grow in future, collectively accounting for approximately 62% of the market by 2012. (2009. CA Press release)
As a part of its strategy to capture the emerging IAM market, the company acquired Eurekify, an identity and role management company, which added the role-based identity and compliance management to the CA‘s security software portfolio. The company also acquired IDFocus and its identity management technology, ACE, to strengthen its Identity and Access Management suite efficiency. More recently in 2009, CA has signed a definitive agreement to acquire Orchestria Corporation, provider of data loss prevention (DLP) technology. With this acquisition, the company plans to integrate the Orchestria‘s DLP technology with CA identity and access
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management solutions, there by gaining the capabilities to meet the demand of new generation of identity and access management. (2009. CA Press release)
Acquisitions such as these enable the company to capture the emerging identity and access management market. Emerging software as a service (SaaS) market
In FY2008, CA launched an on demand SaaS (Software-as-a-Service) business unit along with three
SaaS products to meet their customers demand for SaaS. The products include CA Clarity PPM On Demand, a
SaaS version of project and portfolio management application; CA Instant Recovery On Demand service, targeting small and midsize businesses; and CA GRC Manager On Demand. In November 2008, the company selected Geminare Incorporated as its SaaS-based hosting platform, to offer business continuity managed service to the small and medium-sized business (SMB) market worldwide. CA is well positioned to capitalize on growing SaaS market. (2009, CA Press release)
The software as a service (SaaS) market is emerging with a positive growth year over year. According to the industry sources, the global SaaS market is forecast to reach $10.7 billion by 2009. The growth of 42% is projected for 2009 over 2008. While strong demand for SaaS is forecast from North America, approximately
35% of the worldwide revenue is expected from outside the US, with the positive outlook of new contracts from customers in EMEA and Asia Pacific (excluding Japan) in 2009. According to the forecasts, approximately 76% of US organizations will use at least one SaaS delivered application for their business use by the end of 2009.
(2008, Panettieri)
Threats – Competition and Changes
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CA faces intense competition from a wide range of companies including large vendors of hardware or operating system software and service providers. The company‘s key competitors are IBM, BMC, HP, Cisco,
EMC, Microsoft, Oracle and Symantec. Some of these competitors have large scale of resources in terms of financial, marketing, technological resources, distribution capabilities, and fast access to customers, which provides them with the advantage in penetrating markets, compared to CA. In addition, the company also competes with smaller companies that specialize in specific areas of software industry; with new companies entering the market; and with customers developing own products. (2007. Garbani )
It‘s still early in CA‘s SaaS game. Many are eager to see if/when CA launches an on-demand version of
ARCserve, the company‘s on-premise backup and restore program. Rival Symantec has already launched the
Symantec Protection Network – an online storage service that also integrates with Backup Exec, Symantec‘s onpremise storage management software. Given their strong positions in both storage and security management,
Expect to see CA and Symantec competing quite fiercely in the SaaS market. (2008. Panettieri)
Intense competition could diminish the demand for company‘s products, which adversely affects the financial performance of the company.
Technological changes and product defects
Technology companies face a number of challenges including constantly changing new technologies, product defects and dynamic customer preferences. It is difficult for companies operating within such sectors to predict which future product and service offerings will suit the latest trends in the technology sector and entice customers to buy their products. The distributed systems and application management markets in which the company operates are more competitive with new products entering the market, compared to traditional mainframe systems management markets. In some of distributed systems products, the company has faced long development cycles and product delays in the past. (2007. Garbani )
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The company offers highly complex and sophisticated technology based products. As a result, they may occasionally contain design defects, errors or security problems that could be difficult to detect and correct. In particular, it is common for new products to contain undetected errors when first released. Such defects, errors or difficulties may cause delays in the introduction of products, and result in increased costs. Technological changes and product defects could affect the company‘s revenues and reputation. (2007. Garbani )
Conclusion:
CA needs to ensure public trust and confidence in the CA profession and its software vendors. Restoring the public trust that was blemished by the events entering the twenty first century has been a primary goal during the past ten years and should continue to be so in the future. They can do this through establishing, influencing, monitoring and enforcing high quality accounting, auditing, assurance and ethical standards and practices, and seeking high, uniform public accounting standards.
The future of CA may depend upon its virtualization management offerings with new and enhanced products aimed at easing the tasks of implementing and securing virtualized environments. Thirty one percent of operating systems currently are virtualized, and that number will jump to fifty nine percent in 2011. In addition,
CA will need to is expand capabilities to cover virtualized environments through use of its eHealth, which includes enhanced environmental and energy monitoring. (2009. CA)
Finally the increased demand for power by IT is placing additional stress upon the already overloaded power grids that support them, and that means less power given to those organizations that are in need. Also not to be forgotten is the further proliferation of harmful green house gas emissions from fossil fuel power plants. CA is in good position to do its part in controlling and reducing the growing need for energy. On
October 26, 2009 CA launched it‘s ecoSoftware and will soon launch ecoMeter. CA ecoSoftware cuts energy costs, manage energy consumption, reduce carbon emissions and meet your environmental goals. CA
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ecoMeter visualizes, monitors and better manage the use of energy in your data centers and facilities. (2009.
CA)
Looking forward, Computer Associates International has no limit on how far it can go towards solving the needs of a growing eBusiness in a global economy and is expected to be a leader in the quest to widen tomorrow‘s information highway.
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