The Newest Associate

Jeff Clarke has weathered corporate turmoil before, but at CA he faces his biggest challenge yet.
Laton McCartneyAugust 4, 2004

Thirty-five days hath September, April, June, and November. That, at least, was how Computer Associates International Inc. (CA), the world’s fourth-largest independent software manufacturer, used to view its sales calendar. And a rosy view it was — if you were among the executives who received millions of dollars in bonuses that were tied, ultimately, to quarterly results distorted by those 35-day months. The backdating of contracts triggered a whopping accounting scandal that resulted in indictments and resignations at the highest levels, including the CEO, CFO, and several other finance executives.

The tumult also created a job opening for Jeff Clarke, the former CFO of Compaq Computer and, following Compaq’s merger with Hewlett-Packard, an executive vice president at HP. Clarke was brought into CA as CFO in early April with a mandate to clean house and restore credibility. “My role is to ensure that we have a zero-tolerance policy to anything that might harm our integrity, governance, or accounting,” he says. “CA will be a customer-focused company that will set the gold standard for integrity on a go-forward basis.”

Ironically, “gold standard” was the clichÉ that then-company CEO Sanjay Kumar used in a speech on corporate governance several months before Clarke arrived, a speech in which he noted that “companies are making greater demands on their [boards of] directors.” In April, CA made a sizable demand: that Kumar step down as CEO. He briefly adopted the title of chief software architect (see “Past and Present Tense,” at the end of this article), and board member Kenneth Cron was named interim CEO. The company also named Clarke as its new COO; at press time, he retains the title of CFO, but a search is on to fill that position.

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Whatever his title, Clarke seems to have what it takes to, as Sagient Technology Group analyst Kim Caughey puts it, “stop the madness” at CA. An 18-year technology-industry veteran, Clarke served in senior-management positions at Digital Equipment Corp. before joining Compaq, where, in addition to serving as CFO, he was co-leader of the merger with HP. “From an operational and integration standpoint, it’s pretty hard to find fault in anything about the merger, and he was one of the prime movers in making it happen,” says Gordon Haff, a senior analyst with Illuminata Inc. “He’s shown he can clearly deal with difficult challenges.”

Installment Plan

Clarke had barely finished unpacking at CA when nine finance and legal staffers were fired from the company. Three senior executives, including former CFO Ira Zar, had just pleaded guilty to conspiracy to commit securities fraud or conspiracy to obstruct justice. New CA chairman Lewis S. Ranieri quickly made Clarke COO, saying that Clarke’s “superior operations and management experience” made him well suited for the role.

Aside from the obvious need to restore financial credibility with investors and financial partners, industry watchers believe that Clarke’s biggest challenge will be to hang on to customers. “As he tries to clean up, he has to keep an eye on the customer,” says Caughey. “CA has to reach out to them by having the right product and the right value in the product.”

Clarke agrees, and believes that one key means of achieving this is CA’s so-called New Business Model, which went into effect in October 2002. The model breaks three-year sales contracts into 36 monthly increments, rather than front-loading them with the customer paying full fare at the outset. “If you have a three-year contract, software companies will often book the entire three years in the quarter in which [the contract] was signed,” says Clarke. “CA recognizes only one-thirty-sixth of that contract in the month it was signed. It is the most conservative recognition method in which to record revenue in the industry.”

“I’ve talked to a number of customers at CA user conferences, and they seem very happy with the model,” adds Caughey. “Customers’ mainframe needs change all the time, and these more flexible licensing terms make it easier for them to adjust.”

In the past, CA has been perceived as a single-minded juggernaut, becoming a massive industry presence through a slew of acquisitions, and in the process accumulating enough clout so that customer care did not seem to be a top priority. Or, as analyst Haff puts it, “Historically, CA has often been viewed by many as arrogant and unresponsive.”

Clarke is losing no time in trying to make the company less insular and more accessible. Part of this initiative involves replacing CA’s “homegrown,” largely custom accounting and financial systems with an industry-standard accounting ERP system, a move that will cost between $5 million and $10 million and take more than a year to complete.

Clarke says the experience he acquired in leading the HP-Compaq merger is now bearing fruit at CA. “As co-leader of the largest merger in IT history, I brought two very different cultures, two very different sets of financial systems, and two very different sets of business models together,” he says.

More New Faces

Under Clarke, CA’s highly centralized financial structure is already being disbanded in order to provide greater accountability, as well as checks and balances throughout the company. Among his proposals: controllers for direct and indirect sales, marketing, and engineering. “There is opportunity to improve the decentralized accountability by putting strong finance executives in these operational finance roles where they will jointly report to, for example, a sales executive and the CFO while interacting with one another,” he explains.

He is also moving to ensure transparency to the board by bringing in a corporate compliance officer who will report directly to the board’s audit committee. At the same time, Clarke intends to create an expanded internal audit function and name a corporate accounting officer who will report to the corporate compliance officer.

Despite his impressive rÉsumÉ, some industry observers are dubious that Clarke can effect meaningful change. “A lot of people are frustrated with the company,” says Nell Minow, editor of The Corporate Library, a research firm that assesses corporate-governance performance. “We’ve been let down in the past with a lot of rhetoric about improving corporate governance, and it turns out to be more appearance than reality.”

Caughey is more upbeat about the impact that Clarke and the other newcomers can have. “They’ve got some huge challenges, like keeping the sales force motivated, but their fundamentals look strong,” she says. Other analysts caution that even a perfectly governed and financially flawless CA will face long-term challenges as corporate IT migrates away from the large computer systems on which CA has built a sizable share of its empire.

Laton McCartney is a New York based writer and editor.

Past and Present Tense

Saying that the company had concluded its own internal investigation into “past accounting practices” and now awaited the Securities and Exchange Commission’s completion of same, Computer Associates International Inc. interim CEO Kenneth Cron welcomed about 10,000 customers to the company’s annual user meeting in Las Vegas in late May. Although he alluded to the investigations early in his welcoming speech, Cron immediately moved on to happier matters, emphasizing everything from CA’s commitment to “putting customers first” to its pivotal role in what he dubs the “fourth phase” of computing, which fortuitously for this management-software company happens to be the “Age of Management Software.” While CA continues to do well despite its restatements, resignations, and associated investigative actions (see chart), there were signs of continued flux. Among the senior executives Cron singled out for attention was Sanjay Kumar, who had moved from the CEO’s office to become chief software architect just weeks before the conference. Yet the week after the event, Kumar ceased all involvement with CA, saying his continued presence was hampering the company’s efforts to move beyond “past issues.” —Scott Leibs