Will Customers Flee CA?

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This hasn’t been the best of weeks for enterprise software maker Computer Associates . The company saw the forced resignation of chairman and CEO Sanjay Kumar on the heels of the dismissal of nine employees amid an accounting scandal.

After employees from the company’s finance and legal divisions were fired Monday, on Wednesday Kumar was forced to resign from the board of directors and CEO slots he’s enjoyed for four years. Kumar was relegated to a lesser role in the organization as chief software architect.

At the heart
of the purge is an ongoing Securities & Exchange Commission (SEC)
probe over how the Islandia, N.Y.-based company’s recognized customer contracts in financial reports. Federal regulators say the practice inflated the company’s true revenue picture.

The ousters are among a number of moves by CA to put its problems behind it, such as issuing $144 million worth of stock last fall in order to settle class-action shareholder lawsuits that hit the company over accusations of accounting improprieties stretching back to 2000.

Investors had charged that CA renewed contracts before their terms ended in exchange for larger payments up front, which led investors to believe that CA had closed more deals and incurred higher revenue than it really had.

But as CA takes steps to put the accounting scandal behind it with the recent management shake-up, competitors waiting for CA customers to come running to them may have to continue waiting, some enterprise software analysts said; then again, new customers probably won’t be an easy sell for the time being either.

“People will probably take a position of, ‘oh, if I have to deal with CA; I’ll wait until the dust settles,’ and it will certainly be difficult for CA in any deal that they are engaged in and amplify any problems they already have,” Jean-Pierre Garbani, a vice president and research director at Forrester Research, told internetnews.com.

“Many people, especially on the
technical side, don’t pay attention [to the news] but suddenly there’s so much noise around it, it’s going to stop and make them rethink [their deal].”

He went on to say CA has been dealing with its financial accounting problem for years now; yet customers are still signing up for the software. He said the troubles that could be amplified include CA’s reputation for aggressive sales tactics, too-large software solutions and customer service problems.

An initial finding of the internal audit team assembled to go through CA’s
books has found that the financial records from 2002 to the present are
unlikely to contain evidence of improper accounting. But that doesn’t
preclude the SEC from saying otherwise.

Mark Roberts, CEO of the National Association of Computer Consultant Businesses, said while scandals are never good for business, he’s never seen one of this magnitude hit the software industry.

“Obviously, any sort of scandal is going to typically affect that
company’s ability to attract talent and present problems to an existing customer base,” he
told internetnews.com.

Calls to several CA customers — Party City, J.F. Molloy, the Arizona Electric Power Cooperative and Keynote Systems — resulted in either unreturned calls or, in the case of one, a statement that it didn’t want to get in the middle of the company’s issues.

But expect customers to leverage the situation to their advantage,
said research firm Gartner Group , which Wednesday reiterated its “caution” rating for the company.

Given the intensity of competition in the software industry, customers could see pitches for better deals with CA competitors such as BMC Software , IBM and Microsoft .

“CA customers and prospects should expect protracted contract
negotiations and sales cycles, and additional competitive entrants seeking to take advantage of the situation,” Gartner’s latest report about CA said. “Gartner believes CA’s ongoing troubles — which reportedly concern revenue recognition, not the actual existence of revenue — will cause some short-term organizational instability and
loss of focus.”

It’s a feeling shared by Merrill Lynch. The investment bank, which did repeat its “Buy” rating for the software
company, also noted in a research report that it remains a little skeptical of the CA board of directors’ decision to keep Kumar on as chief software architect.

“We question what effect this will have on the ultimate disposition of the Department of Jutice/SEC investigation as they may still choose to hold him ultimately responsible for the activities,” the Merrill Lynch report said. “We believe this
could also prove to complicate the issue of hiring a new CEO, as Kumar, while
not running the company, will remain a key player in certain parts of
the decision-making process.”

That CEO decision, which will ultimately be decided by new board of
directors chairman Lewis Ranieri, will be doubly important as customers and
analysts
will
look at the new CEO as an indicator of the direction the company will
take.

“I would certainly be looking for someone who has a very strong and
clean
image
in the market who will address the situation,” Forrester’s Garbani said.

Ranieri is expected to make a decision on an interim CEO in the coming days and then begin a search for a permanent CEO in earnest afterwards.