Software's New Twist

When the clock strikes midnight on Dec. 31, Computer Associates will have lost more than $1 billion in 12 months. CA executives see that as an aggressive debit on a brighter future; others as a sign of trouble. Either way, it's hard evidence that the software market is fundamentally changing, affecting how businesses pay for software and what they get for their money.

CA's losses stem from a move 14 months ago to a new accounting model under which it began recording software fees each quarter over the life of a contract, rather than as a lump sum at the beginning. That gives CA a more predictable revenue stream and, theoretically, reduces the high-pressure, close-the-quarter sales tactics of the past. "We would wipe out 10 weeks of goodwill with two weeks of aggressive behavior to get the deal done," says president and CEO Sanjay Kumar.

According to its pro forma financial results, CA is still profitable. However, under generally accepted accounting principles, it's racked up $1 billion in net losses over nine months, with more expected this quarter. CA was forced to defend its financial reporting methods last spring after an article in The New York Times raised questions about them.

Other vendors are grappling with their own licensing models. Two weeks ago, Oracle reported a 27% decline in software revenue for its most recent quarter, a dramatic example of what happens when big deals dry up. Since October, Microsoft's business customers have been able to choose three-year subscription licenses for the first time. IBM's Passport Advantage program, launched last summer, uses a point system to give customers discounts on volume purchases.

The changes can affect not only the vendors' revenue flow, but also contract terms for customers, including the products covered. CA now offers subscription and monthly license options, and it's pushing term contracts that are shorter than in the past. In general, deals are smaller. CA also has unbundled some of its larger platforms, making it easier to license only the parts that are needed (see "CA Breaks Unicenter Into Pieces,").

Now comes another twist: smorgasbord-style agreements that let customers use a variety of products within a specific category for a flat monthly fee. CA will begin selling its security products under the new terms in the first quarter, then follow with its desktop-management software. "We'll give you access to the product portfolio," Kumar says. "There's no commitment, no lock-in." Customers now are limited to using only applications and add-ons that are spelled out in advance.

CA's pay-as-you-go options have yet to catch on widely--they account for fewer than 5% of all contracts--but their flexibility is a way for first-time customers to try CA software, or existing customers to experiment with new products. "You can try something without getting too deep in the investment," says Bruce Peck, information security manager with St. Vincent Hospital & Health Services, a network of eight hospitals in Indianapolis. "Too often, you can get stuck with software you don't like or that you don't even use." The subscription approach also is a way to avoid up-front capital outlays.

Where's the rub? Flexibility comes at a price. CA charges a premium of up to 17% for month-to-month agreements. And while the average long-term contract signed by a customer is now less than four years--compared with more than six years only 12 months ago--not all IT managers think shorter is better.

"A monthly pricing model would be a nightmare for us," says Frank Pollard, CIO at Allstate Insurance Co. in Northbrook, Ill. "The billing system alone would bring us to our knees. And I don't need point solutions." Pollard says he's happy with the long-term contract he signed in 1995 for CA's flagship Unicenter management platform.

Kumar, who succeeded chairman and co-founder Charles Wang as CEO in August 2000, acknowledges that licensing changes alone aren't enough to keep customers happy. That's especially true for a company with a reputation for putting its interests ahead of theirs. So Kumar has tied sales commissions to customer satisfaction. And he says R&D spending will increase by up to 20% in the next fiscal year as the company puts more emphasis on innovation and quality and less on growth through acquisition. Among the products in the queue for the first half of 2002: a new version of CA's AutoSys job-scheduling tool, a major upgrade to its CleverPath portal, and new software for managing storage area networks.

Some customers notice the difference. "The change has been astonishing," says Jerry Curtis, director of systems management technology at Merrill Lynch Inc. in New York. In the past, "CA was into the big multimillion-dollar deal that was a huge capital cost, and we were never sure if we ever got it all installed," Curtis says. "After the deal, CA had no skin in the game, and it became Where's Waldo? to find someone among a sea of people. Nobody helped you." Now, however,

CA gives him price flexibility and focused attention. "I see a CA that understands its future now. Nobody can sustain a company if customers are unhappy."

CA didn't make a good impression last year on Jason Benedict, director of computer services at Fordham University in New York, when the university signed an $800 million contract for Unicenter. "CA had a cocky, dismissive attitude," he says. The license included fees for running the software on more powerful CPUs that Benedict describes as "absolute extortion." But service has gotten better. "Now there are a handful of CA folks who are indispensable to our operation," he says.

Kumar himself had to smooth the feathers of KeyCorp, the financial-services firm in Cleveland that, frustrated with CA, had decided nearly a year ago to phase out CA products. Wade Tolman, executive VP and manager of KeyCorp's Enterprise Technology Operations Group, was initially skeptical, but after meeting with Kumar for several hours, reached a deal that extended KeyCorp's contract for 3-1/2 years. Tolman will be watching CA closely. "If they're not behaving as advertised, we have multiple options," he says.

So far, it's proven to be a good move. When KeyCorp recently ran into a system problem, CA technicians flew in and spent the next two weeks working around the clock with the company's IT team to resolve it.

Kumar will be the first to admit that CA hasn't swayed all customers. Case in point: General Mills Inc. in Golden Valley, Minn., is moving away from CA software as it phases out some mainframes. Mike Meinz, director of IT, says he doesn't hear much about CA from his colleagues--or from CA itself.

Meta Group analyst Bill Snyder is impressed with what he's seen from CA, including the more flexible licensing options, but he remains cautious. "The question is whether it will be sustained," he says. "And it's real early to say that."

-- With Beth Bacheldor and George V. Hulme