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CA forced to run own turnaround program
Incoming CEO must get firm to practise what it preaches in aftermath of scandal
POSTED AT 8:29 AM EST Wednesday, Feb 2, 2005

TORONTO Among companies plagued by accounting scandals, there is a particular irony in the trouble of Computer Associates Inc.

The giant software maker actually sells programs to help firms comply with financial rules. Unfortunately, the old leaders of CA opted not to use their own products.

Most of those officials, including the chief executive officer, have been fired, and the Islandia, N.Y.-based company is now spending about $80-million (U.S.) to get its house in order. But it will take a lot more to revive CA, a fact the Canadian industry veteran tapped to lead the company is quick to admit.

"We have a set of home-grown legacy systems built over the course of 29 years. Those systems are somewhere between bad and terrible," said John Swainson, the new president and CEO-elect. "As a technology oriented company, it's hard to explain why we didn't spend more on our internal use of technology, but we didn't, so we have embarked on a crash program."

Mr. Swainson, who expects to take the reins in April when the contract of interim CEO Kenneth Cron expires, knows a lot about corporate software. He spent 26 years at International Business Machines Corp., starting as a systems engineer in Toronto, before rising to head the company's Canadian research lab and eventually IBM's worldwide software sales.

"As much as I enjoyed the world at IBM, I wasn't going to get a chance to run the company," he said in an interview last week. "The real attraction for me was to come into a company that was a bit battered and to participate in and lead the turnaround."

Since joining CA in late November, Mr. Swainson has been on an intensive fact finding mission to learn what's happening inside the company, what customers think and how the financial markets regard CA.

He has learned that the accounting scandal, in which U.S. authorities accused CA of prematurely booking about $3.3-billion in sales between 1998 and 2000 to meet profit forecasts, is just one of the company's problems. At a large customer gathering in Miami this month, he found that most customers consider their relationship with CA a poor one. He described the worst of the relationships as "confrontational."

"What we used to do was quite straightforward," he explained. "We had contracts, and we showed up at the customers' [premises] every couple of years, and based on the number of [computers] they had, we said the new value of the service was 'X.' Sign here please."

But businesses have been pushing back, complaining that a large chunk of their budgets are tied up paying for renewal licences on old software, which constrains their ability to invest in new products. It's a complaint directed these days not just at CA, but across the industry, and large software vendors are having to respond.

In the past couple of years, CA has been trying to improve the way it works with customers by emphasizing its role as an adviser bringing solutions to problems. But coming from old guard management, the message has often been a hard sell. It should gain more credibility coming now from an outsider like Mr. Swainson, said Kevin Buttigieg, an analyst with A.G. Edwards & Sons in New York.

"They've come a long way. They've certainly been telling their customers that they're much more willing to do business on their own terms," he said.

Growth also remains a challenge for CA. For years, the company has bundled new products with the older software its sells for expensive mainframe computers. But mainframe sales are not a growth area and the company must find ways to sell its new products on their own merit, Mr. Buttigieg said.

CA sees growth in security products, in more compliance products to help companies meet the requirements of the Sarbanes-Oxley Act on governance, and in an emerging product category called business process management.

Perhaps the biggest ordeal for CA remains cultural. Changing the culture of the company is a long-term process, Mr. Swainson admits, but much of the work has already been done with the removal of 15 senior executives, including former CEO, Sanjay Kumar. Mr. Kumar was indicted in September on charges of securities fraud and obstruction of justice -- charges which he denies.

"A world-class management team is in place," Mr. Swainson insists. "There were very, very good people in the CA organization. This was not a widespread failure in the organization as much as it was a problem at the top."


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