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Is the entrepreneurial spirit gasping for breath under the Sarbanes-Oxley Act (SOX)? The concerns some people have expressed along those lines appear to be greatly exaggerated. Venture capitalists who keep a finger on the pulse say the spirit is alive and well. "If SOX has had any effect on the level of innovation, it is only marginal," says Brooke Seawell, venture partner at Technology Crossover Ventures. Nor, according to Seawell, is the law choking the flow of capital, the lifeblood of start-ups. "I don't see VCs pulling back on investments because of SOX."
The pain, however, is real. SOX saddles all public companies with some heavy burdens: an expensive and time-consuming new layer of accounting and auditing procedures and scary criminal liabilities for CEOs and CFOs. These also have serious implications for any start-up with IPO aspirations.
"The accounting firm of one of the companies I work with said it would cost $800,000 just to get SOX compliant," says Deric Emry, partner with ABS Capital Partners, a venture firm. "I hear estimates that ongoing costs to stay compliant can be as much as $1.5 million per year." These are heady numbers for most pre-IPO firms, and it is here that SOX does change the start-up game. "It is not a sea change," says Seawell, "but it does raise the bar on taking a company public."
It also means, according to Paul Albright, former VC with Greylock Venture Partners in San Mateo, Calif., and now CMO of Informatica, that more start-ups will consider different [non-IPO] exit strategies. "The burden SOX places on small, public companies makes the acquisition alternative more attractive than ever before," says Albright. "This isn't always the best way to nurture innovation."
John W. Stodder, retired investment banker, points out that this law could also discourage early-stage investors. "The critical mass required to go public rises under SOX," says Stodder. "So private investors have to wait longer for profitable liquidity. I think this could put a chill on the private investment phase."
Anita Rao, vice president at Garage Technology Ventures, hasn't seen the chill. "Angel investors who are passionate about technology and have money are still investing," she says. Rao does agree that the "time to liquidity" is now longer, but blames natural market forces rather than SOX.
The tough new criminal penalties are most clearly defined for CEOs and CFOs who must personally certify financial statements filed with the SEC. Fines as high as $5 million and prison terms of up to 20 years are designed to discourage the kinds of abuses that came under the spotlight a few years ago in spectacular revelations of corporate mischief at firms such as Enron and WorldCom. But Albright isn't worried about the effect on start-ups. "Entrepreneurs are risk takers by nature, so these criminal penalties aren't going to stand in their way."
It is the gray area of whether board members may be penalized that might have a more immediate effect. A firm's board has new responsibilities under the law to certify to the SEC that accounting and audit procedures are SOX compliant. Some questions of board member liability, according to Jim Armstrong with Clearstone Venture Partners, are unresolved. "One of my main concerns is that it will be harder to recruit board members," says Armstrong."
Stodder agrees. "If liability spreads to the board, it will be much harder for a small company to get experienced directors."
Increased liability also sends the cost of directors' and officers' (D&O) insurance through the roof. "I have seen D&O insurance premiums go from $7million to $15million for some large public companies," says Emry. While this is not an immediate issue for most start-ups, it is one more thing to think about.
The general consensus is that SOX, while not the harbinger of the death of innovation that some predicted, does need some modification. "SOX, like most legislation," says Carter Dunlap, president of Dunlap Equity Management LLC in San Francisco, was well intentioned but ill crafted. There are some absurd provisions, such as the requirement that audit firms must rotate the senior partner in charge of a client's audit every three years. How does this give you a clearer window into financial data?"
Stodder thinks the law should be more precise in its definition of criminal activity. Emry agrees, "There need to be safe harbor provisions that say, 'If you are doing x you are covered.'"
And, more important for start-ups, Emry says the law should have some scale factors built in. "Right now, SOX holds a $50 million company to the same standard as Microsoft. I don't think this was given appropriate consideration in the drafting of the legislation." Stodder says, "They used a Howitzer here where small arms would have been more appropriate."
Defects and all, Armstrong says SOX is far better than what might have happened. "The excesses and abuses we saw a few years ago really shook things up. People don't know how close we came to having the government just step in and say, 'we'll take over all the oversight functions. It was scary."
In other words, Sarbanes-Oxley is just another chapter, or paragraph, in the story of the debate over what should be the proper role of government in regulating business, a story that goes back at least to the gilded age of the 1890s and will likely continue well into the 21st century. Mark Leon
Mark Leon [[email protected]] is a freelance business and technology reporter.
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Hyperion Solutions has introduced new versions of key products in a campaign to expand the user base of the company's flagship performance-management offerings.
Hyperion Performance Suite 8.2, based on technology acquired as part of Hyperion's 2003 Brio takeover, provides query and reporting tools and dashboard displays that complement new analytic and performance features in version 7 of the Essbase analysis engine. Together dubbed the Hyperion BI Platform, the products are targeted to users of Hyperion's business performance management (BPM) tools, to third-party analytic tool users, and to developers.
According to Paul Turner, Hyperion's director of platform product marketing, "Businesses want to standardize and deploy BPM solutions beyond finance, across the enterprise, to extend BPM capabilities to every activity." Hyperion's approach emphasizes interface usability, deepened analytic capabilities, and integration with third-party infrastructure and applications software and tools. This approach shares much in common with analytic-platform strategies articulated in the past year by leading rivals such as SAS and MicroStrategy. These vendors and others have also responded to the observation implicit in Turner's remarks (that BPM adoption beyond finance has been slow) with enhanced interfaces, beefed-up reporting systems, and more extensive integration options.
The Hyperion Performance Suite's interface innovations center on dashboards with easier IT deployment management that end-users can customize. Coupled with new Essbase triggering and alerting capabilities, an area where Hyperion is only now catching up with BI rivals, the Hyperion BI Platform is designed to meet end-user demands for interface personalization and real-time performance monitoring, according to director of product marketing Rob Berry.
New Essbase predictive analysis and forecasting capabilities plug into a new data-mining framework integrated with the Essbase OLAP (multidimensional processing) engine. These capabilities target marketing and demand-planning needs.
Essbase now sports neural network, decision, tree, segmentation, and clustering algorithms. Berry explained that Hyperion's Essbase goal is to provide "more power to power users, improved deployment, and a flexible development environment." It is worth noting that Hyperion's rival Cognos had similarly introduced data mining tools into its BI suite in the late 1990s, only to let those tools languish, presumably because real demand was low. Furthermore, Microsoft has been slow to deliver on its promise to deliver data mining integrated into its market-leading Analysis Services.
Essbase 7 supports Microsoft's Multidimensional Expressions (MDX) query language and XML for Analysis (XMLA), a Web services wrapper for MDX that is being developed by an industry council led by Hyperion, Microsoft, and SAS. Hyperion's primary goal appears to be support for third-party analytic client tools from companies such as Panorama Software and ProClarity that have close relationships with Microsoft. Hyperion staff members note that MDX newly supports features such as custom groupings and set-based analytics that should appeal to a wider variety of users, such as marketers. MDX would likely preclude, however, use of the new Essbase data mining facilities, presumably the reason that Hyperion's own client tools continue to use native APIs to access Essbase. Additionally, Hyperion staffers were able to identify only one company that currently ships tools that interoperate with Essbase via XMLA, a fact leading to the conclusion that MDX and XMLA support are impelled more by market position motives than by technical advantages.
Microsoft isn't the only company with technology links to Hyperion. Turner emphasizes that this is "the first BI platform that runs end-to-end on Linux." He adds that Hyperion embraces evolving security and integration standards and supports J2EE "throughout the technology stack."
Not coincidentally, Linux and J2EE are central to IBM's technology strategy. The two companies appear to be maintaining the close business relationship they established several years ago. IBM continues to resell Essbase, rebranded as DB2 OLAP Server. The Hyperion BI platform includes facilities to synchronize meta-information with DB2 data warehouses, including those built with DB2 Cube Views, which layers a multidimensional model on DB2 relational tables.
Hyperion continues to support data and metadata integration with enterprise ERP, CRM, sales-force automation, and other applications and with leading message-oriented middleware products that manage business-process flow. Seth Grimes
Contributing editor Seth Grimes [[email protected]] writes and consults on database and analytic technologies.
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A recent Aberdeen report says that most value chain executives, from a mix of public and private companies polled, state that their companies are incorporating new financial reporting requirements from SOX into "larger process improvement initiatives." The report goes on to say, "Most plan to satisfy [SOX] requirements with little, if any, IT investments." This finding flies in the face of what has been widely reported by the press and claimed by many consultants and vendors: that SOX is forcing significant new IT expenditure.
IT vendors, predictably, disagree with the Aberdeen findings. Felicia M. Salomon, President and CEO of Corporate Responsibility System Technologies Ltd., says, "[SOX] requires companies to take a deep look at not only their financial reporting side but their business processes, internal controls, and employee relations," a sentiment that doesn't contradict the Aberdeen report. However, Salomon says, "This can only be achieved through a system that enables staff to own the system, allowing senior management and the board to feel confident that all has been done to comply with the letter and, more important, the spirit of the law," and implies this system most likely will need to take the form of purchased technology.
"Visualize's experience has been that [in response to corporate governance laws], there's a growing trend from executive management for investing in IT projects that help companies make quicker, more accurate business decisions," said Raveen Sharma, VP of Visualize. Sharma did not provide trend statistics. Jeanette Burriesci
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Compliance Event Debuts. The IT Compliance Institute, which provides education and research on the technology effects of regulatory compliance, will hold its first IT Compliance World conference in Boston, May 17-18, 2004. Say the organizers: "IT Compliance World will equip attendees with tools and techniques that can be applied immediately to save time and money and help organizations avoid the legal consequences of noncompliance." See www.ITCinstitute.com for details.
Cartesis Freed From SOX Restrictions. PricewaterhouseCoopers divested itself of Cartesis, its business performance management company, which will allow Cartesis to expand. Under SOX, which constrains auditing firms such as PwC, Cartesis found it difficult to serve some large corporate accounts. Cartesis CEO Marie-Noelle Gauthier believes that, freed from affiliation with PwC, the company is "well positioned to become the BPM market leader."
Eclipse Community Grows. WebMethods, a Web services infrastructure company, now supports the Eclipse Foundation and has been granted a seat on the board of directors. The open-source Eclipse Platform enables integrated development environments (IDEs) to be used to create diverse applications such as Web sites, embedded Java programs, C++ programs, and Enterprise JavaBeans. "With Eclipse, our customers can leverage their current developer skill sets while [benefitting from] integration solutions enriched by a full-featured IDE," says Kristin Weller, executive VP of product development at webMethods.
Are You Zachman Award Material? The Zachman Institute for Framework Advancement is accepting applications for the annual Enterprise Architecture Excellence Awards. Entries are due June 30. Find the entry form at www.zifa.com.
Violence in Call Centers Increases. Michael Miles, president of Staff Management, which provides vendor-on-premise staffing and management solutions, says recent studies illustrate that incidents of call center violence in the United States are on the rise. Miles says, "Many employers have had to double their labor forces in order to support the growth of telemarketing and call center operations. As a result, many are hired without proper candidate screening. The concern for possible on-site violence has become more prevalent throughout the industry."
Trillium Acquires Data Profiler. Data quality vendor Harte-Hanks Trillium Software acquired data profiling vendor Avellino Technologies. The two customers already had joint customers British Telecom and Carphone Warehouse. Trillium will integrate Avellino's Discovery with the Trillium Software System to support enterprise information asset management. The joint offering that results "allows organizations to define, assess, improve, and monitor how well data meets the needs of enterprise business processes," according to a Trillium statement.
New Era Dawns in Procurement. The Automotive Industry Action Group (AIAG) expects to debut a new ERP interoperability standard this month, along with the participation of the company the standard may largely displace, Covisint. Pam Lopker, CEO of QAD, a supply-chain focused ERP vendor, proposed the core idea several years ago. It was rejected because trading hubs such as Covisint were then all the rage. Lopker projects that the AIAG model of providing an industry-standard API to make software interoperable along the whole supply chain will lead manufacturers closer to the promised land of rate-based manufacturing: adjusting rate of supply to match rate of sales. Metaldyne and its customer Bosch will perform the final testing phase in April.
Dynamic Data Warehouse Management. A new partnership aims to accelerate implementation of data warehouses, reduce their total lifetime cost, and lower risk. Ascential Software, the market leader in enterprise data integration, and Kalido, the leading data warehouse life-cycle management (DWLM) software provider, formed an alliance to provide Global 2000 companies with DWLM solutions that can increase the strategic value of business information throughout periods of change. The combined offering is designed to automate the delivery of data from multiple transactional and operational systems to a flexible, prebuilt data warehouse that is business-model-driven.
Layer 7 Technologies Grows. Layer 7, which launched its flagship product SecureSpan last fall, recently received expanded first-round investment from Shoreline Ventures and now counts Barry X Lynn, CIO of Wells Fargo & Co., among its board of directors. SecureSpan is an abstraction layer for Web services that allows security and other policies for a service to change without breaking the applications that rely on it. Toufic Boubez, Layer 7's CTO, was the chief architect of IBM's Web services initiative and was involved from an early stage in setting standards.
Informatica Intensifies Focus on Midsize Enterprises. Informatica, a giant in data integration and business intelligence software, is strengthening its focus on midsize enterprises. The MSE program encompasses new, dedicated resources and pricing options. "Midsize enterprises are a significant and growing portion of Informatica's overall business as the midmarket continues to expand," said Clive Harrison, executive VP of worldwide field operations at Informatica. "The new programs we have put in place will enable us to address the specialized needs of this market more effectively."