<![CDATA[The Red Herring Fall 2003 conference, the first event hosted by Red Herring’s new owner, Dasar, begins today. I’m sitting in a hotel on the pier in Monterey. Alex Vieux, the new publisher of the Red Herring, is explaining that the Herring was acquired at auction and will extend its coverage beyond the early-stage companies that characterized the magazine, to provide a global perspective on the technology industry. The publication is currently only on the Web. The mailing list was sold separately, so the magazine will not relaunch until fall 2004, when the exclusive on the list expires. In the meantime, the new Herring will have a year of online experimentation before it publishes again.
[Rough notes — not to be taken as verbatim or for any dietary purposes]
Jim Daly, the editor of the Herring, is about to interview Sanjay Kumar of Computer Associates.
Jim starts with a question: What are the key issues your company is looking at.
Sanjay: I believe the recovery is happening, but I am not as bullish on it as many. Buyers have been making decisions on different terms than before and they won’t change that (they are used to buying cheap and will continue it). Security is the other big area of opportunity, that security is maturing. Wireless is important, but there are security and sustainability. Healthcare and what is happening with insurance create a lot of opportunities for tech companies. He concludes with digital rights management, touching on micro-payments.
Jim: This new parsimonious buyer–what do you do about that?
Sanjay: Here’s the way we look at the high-end buyer–they have the GE Syndrome. They say, “Last year we spent $100 with you, and this year we need to spend $90 to get the same thing.” So, we have to figure out how to sell more to these people, since a company cannot sustain itself on repeat sales alone.
Jim: How about outsourcing?
Sanjay: People who outsource for the wrong reason will fail disastrously. If you have an IT department that is a disaster where the CEO is abdicating responsibility through outsourcing are making a mistake. But, where there is a service that should be managed by an outsider, like telecommunications infrastructure, that makes sense.
We don’t have any clue about how big the move to outsource back office work, which presents a macroeconomic challenge for the United States.
Jim: Will the M&A market come back?
Sanjay: We were a firm believer that the industry had to consolidate by the end of the 90s. What we got wrong–what I didn’t see-was the bubble coming. We got to the year 2000 and we’d bought the companies that we wanted to buy, and we spent time digesting those purchases. We’ll likely come back to the acquisition market, but more conservatively. Here’s what we’re interested in:
- Management software
- Extensions for wireless
- Security, specifically for the enterprise
- Linux
Jim: You’ve been investigated and criticized by customers. How is that affecting your business?
Sanjay: In late 2000/2001, we went to a sort of subscription model. Our industry is going to go to utility model. CA took a leap of faith and implemented this early. The company has most customers on month-to-month payment.
Client-server is a model for the on-demand market. The market will provide increased efficiency. When you switch on the power, you don’t care if it came from coal, hydro. You just pay for what you use. In computing, we charge for something they may not use. The on-demand market will respond to customer demands for more fairly priced services.
At CA, the month-to-month business is predominantly in new business, both with existing customers and new customers. It lets people try new services. Existing customers are buying long-term contracts to lock in a cost for budgeting purposes.
Question from the audience: What happened to sales cycles when you went to on-demand?
Sanjay: We had to put ourselves in a position where we earned the business every month. Our revenues were cut in half. We lost money on paper, because the up-front revenue vanished. but the company still produces a $1 billion in free cash every year. Sales cycles were cut in half. The longer contracts require deep discounts that we’d rather not wrestle with; the on-demand business reduces the potential for obsolescence in later years of contracts.
The market has way too many competitors. Every other industry has consolidated and the computing industry will certainly do so — middle-sized companies are going to have a hard time surviving. There is always going to be room for entrepreneurialism, but a different kind of entrepreneur who does a lot of block and tackling and works the numbers will be successful.
People are willing to pay a 12 to 15 percent premium for CA to take the risk of licensing month-to-month.
The software industry is no different than any other industry. We have to build new products for less money all the time.
I am willing to go to a customer with 50 vendors or 60 vendors and say get rid of those vendors by selling them applications at a very low cost, which is very easy to do because it is found money for us.]]>