Back from the brink: John Swainson stopped the bleeding at Computer Associates. But can he help it thrive?

In November of 2004, John Swainson faced one of the toughest challenges any first-time CEO ever does--parachuting into a company in crisis, in this case Computer Associates, where previous management had engaged in a $2-billion accounting fraud. Former CEO Sanjay Kumar has just been sentenced to prison for securities fraud and obstruction charges. Swainson, who previously ran the sales operations of IBM's software division, is trying to transform the company now called CA. Here are excerpts from a conversation:

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Q. What massive accounting malpractice at Computer Associates led to hundreds of millions in fines and criminal prosecution? Where was the company's board?

All of us, particularly outsiders, have a belief that boards should be omnipotent. But if someone tries very hard, they can make it extraordinarily difficult for a board to really know what's going on.

It was the board that ultimately figured out what was going on inside Computer Associates. It probably took longer than they would have liked, but management was essentially sand-bagging them. I'm not at all negative about what our board did. When they discovered what was going on, they took extraordinary action to save the company and get it headed in the right direction. In 2004, the board essentially took over operating the company. One of the directors became interim CEO. The chairman of the board, who is still chairman, became very active, spending at least half his business time at the company. The board found the source of the problems and remedied them, including leading all the negotiations with the government regarding the deferred prosecution agreement.

Q. How have you altered the composition of the board?

In addition to myself and Laura Unger, a lawyer with an SEC background who came on just before me, we've added three new directors: Ron Zambonini, the chairman of Cognos; Bill McCracken, who has an IBM background and is on the board of IKON office products; and Chris Lofgren, CEO of Schneider National.

I've been trying to create a balance on our board of people who know the software industry, and people who have regulatory, financial and legal backgrounds to help us navigate our way through those waters.

Q. How did assembling a new management team compare? And how many people did you disinvite from the party?

The board did a fair bit of disinviting for us. They fired 15 people out of our top 35 senior leadership team. When I got here, we had no CFO. Our COO was acting as CFO. We had no one in charge of marketing. We had a brand new general counsel and a brand new head of sales. We had no one in charge of business practices. We had a whole bunch of open positions, and my priority was assembling a team that could lead the company.

Q. You brought in a number of people from other technology companies. Did you feel experience outside the IT industry wouldn't translate?

We were able to attract a very experienced team of people from companies like IBM, Oracle, Dell, Hewlett-Packard and Compaq. Our general counsel came from Altria. It's a broad mix, but by design most people have 20 or 30 years of experience in technology. I needed a team who knew how the game was played and had been part of a turnaround.

Bob Davis, our CFO, went to Dell in the mid-1990s when they hit a rough patch and did a turnaround. Our COO, Jeff Clark, was part of the HP-Compaq experience. Finding a team of people who know how to make the changes required to improve performance and yet not drive the company off a cliff is hard. As Larry Bossidy used to say, there's a ditch on either side of the road. You can drive from one ditch into the other quite easily.

Q. Was there an "aha!" moment when you first realized the depth of your challenge?

That unfolded over a period of time. I knew that I was taking on something complex and exciting that had both great opportunities and great challenges. But only when you come to understand a company and how it works from the inside out, do you really start to get a sense of everything that needs to be changed. As Lou Gerstner said, it's about changing the culture. You can change the mechanics relatively easily--put new IT systems and new rules in place. You can change management teams. But you need to transform the way people think.

Obviously, there are always tactical things you have to do. You have to change sales compensation schemes. You have to put motivation programs in place. But we also have to think about how to affect the way people think and the way they handle customers. Those are cultural issues that don't happen overnight, or even over a year. They happen over the course of many years as people see that their economic and personal self-interest is tied to a particular set of behaviors.

Q. How do you drive cultural change?

You model it for people. You articulate what you want. You write it down--this is what we believe, this is who we are, this is what we want to be. You repeat it constantly. You make sure that the systems of the business reinforce it, rather than invalidate it. And you are relentless and continual in your pursuit of those objectives.

We're trying to do that. We rewrote the mission statement in the past few months, and revised our core values to support that. We're now in the process of revising the HR systems to support it all. Everything in a business needs to reinforce other things. People need to reinforce each other. Systems need to reinforce each other. It is a very large, very complex machine that happens to have people in the middle of it, and they don't like to be thought of as machines. So you have to tailor it in such a way that people have the ability to express themselves.

Q. It's an ambitious mission statement: "To transform the way the world manages information technology."

Absolutely. That's what we do. We are in the business of managing information technology. The only reason we're in business is that we can help people do that better. You have to make mission statements aspirational; you have to make them lofty. To say that we're going to help 2.4 customers in the block between 52nd and 53rd Streets manage information technology a little bit better won't get anybody terribly excited. You have to get people to think that they have a bigger role to play in the world than just coming in to work on a project.

Q. Is consolidation making software a ruthlessly competitive industry?

Software is no tougher a business than any other business. Software has been spoiled as an industry. It was too easy for a long time for people to make too much money building inferior products. As the industry has matured, we're now in the position that every other business is in--we have to work hard, we have to deliver value to customers every day, and we have to demonstrate why we deserve to get their money.

Q. Did the management upheaval choke off your core source of technological innovation?

The technologists were insulated from that. The problem with the technologists at CA is that they weren't given the opportunity to work closely with customers to understand what they needed. It was almost as though the business said to these guys, "You just go turn out products, and we'll worry about the important stuff like selling things and collecting money."

One of the first things we did was reorganize development labs into business units. We now have business unit general managers who own not only the development side, but also the P & L and other aspects of the business, and we hold them accountable for growing that business in the marketplace. That's a very different model.

Q. Are you using models from IBM or other companies?

We looked for models that worked well at other companies or that would work well at CA. Some of what we're doing comes from IBM, some comes from Microsoft, some comes from Oracle, and some of it is completely homegrown.

We've tried to build on the things that CA has done uniquely well. I sometime take offense when people say, "Well, you just borrowed the business unit structure from IBM." IBM also borrowed it. It's been around for decades. The point is how you synthesize and integrate and make something work in your company. We'll borrow shamelessly.

Q. Did you hope to repair your image by changing the company's name?

It was symbolic. I asked, "What should we call ourselves? Should we still be Computer Associates, or should we abandon the name altogether and go for something new? Or is there some hybrid?" I talked to CEOs who had gone through similar situations.

All the data came back saying that while the Computer Associates name had been damaged, it still had considerable brand equity, especially with our targeted buyers. Building a new brand from scratch would take years and hundreds of millions of dollars. Given that data, we looked at hybrid options, one of which was taking the name that people knew us by and making that our formal name.

At the end of the day, we like to say that we're based on all the best of the past of CA, and we're looking to the future to help people unify and simplify their IT environments. That message really resonates with customers.

Q. Is your turnaround moving fast enough?

It's not a turnaround. It's a transformation. Turnarounds imply that you were driving down the road going east and now you want to go west. The reality of business transformation is never that clearcut. It's much more multidimensional. The transformation is a multiyear, multifaceted project. We had to fix very structural, mechanical, tactical things. We're working to improve our competitiveness in the marketplace and to better support and service our customers. We're now working at the next level in the transformation process. We are not bleeding anymore. We are trying to position the company for growth and leadership in our market segments. We're out of intensive care and well into ambulatory care.

Q. Where will you compete?

We're in three or four of the fastest growing segments of the software industry--the infrastructure management segment, security segment, storage management, things like that. We have a strong No. 2 or leadership position in each of these segments. So we are positioned in the right markets that are growing fast.

Q. Security is obviously a hot button issue. What do you do there better than others?

We deliver a broad range of security offerings. We're a leader in a segment that people call identity and access management, which is making sure you know who people are and giving them access to the information they need, but no more. It's a challenging problem because when you let someone in to have access to IT services, how do you make sure they have access to only those things they need? How can you change that in a timely manner? That's the area of security we're most focused on and where we have market share leadership.

Security grew at 30 or 40 percent last year. That rate of growth is sustainable for a couple of years.

Q. Is each case customized or have you been able to standardize?

It's mostly off the shelf. But implementation may be customized to a particular client. For too long, the IT industry has created customized versions of things. What you now have is all these one-off things that no one knows how to support or manage, and they become incredibly expensive to keep running. Our belief is that many of these things can be standardized.

Q. How is CA faring in other industry segments?

We deal with the storage management business, which is a reasonably fast-growing segment, where we compete against EMC. Veritas, IBM and others. It's maturing. It's got a number of large players, of which we're one. We deal with enterprise systems management, which is our largest segment. And we're the largest player there. It's also a maturing segment, but it's growing at 8 or 9 percent. It's almost half our company.

Then we have the two high-growth areas--security and business services optimization. The latter asks the question, "How do you manage IT in support of the business? How do you map IT to the business processes so that as you invest money in IT systems, you know they're actually producing the right returns?" This is an incredibly important question. You have to understand what your IT systems are doing to support your business. So like every other business, we have a portfolio of businesses, some growing faster than others.

Q. Are you going to be a consolidator in the software industry?

CA has historically been a consolidator. We will grow organically, by acquisition, and by geographic expansion. And we will expand from very large IT users to midsized IT users. Those are five-year kind of horizon statements. But I focus most of my attention on the organic growth of the business.

Q. What's your view of Oracle's buying spree and the consolidation taking place in your industry?

I can't comment on Oracle's strategy, but generally it's true that in software there are huge scale effects, if you get them right. As I said, software is a maturing industry. It used to be a cowboy industry--anybody could make money at it. Now it's only people who deliver real value for real customers who can make money.

Q. What other competitive challenges do you face?

We can be the customer's trusted provider of IT management solutions. Lots of our competitors have pieces of this portfolio, but nobody except CA has all of it end-to-end, and no one else is uniquely focused on it. This is our sole business. This is what I think about every day waking up.

Q. There's no doubt in your mind that you have a viable go-it-alone strategy?

Absolutely. This is a $4-billion company. It's a perfectly good-sized company. There are economies of scale. I don't see a need to do a combination with somebody bigger to get value for the customer.

Q. What's been the No. 1 challenge you've faced as a CEO?

Going from a large position in a large company to being a CEO is a big step to take, even when it's at a smaller company. The range of issues--from policy and board issues to governance and day-to-day operational issues--is remarkable.

Q. One surprise for many first-time CEOs is the intense need for communication. Have you experienced that?

You can never do too much of it. Obviously, you can't spend all your time as a CEO talking to people, so you have to find tools and techniques that help you communicate. I do a quarterly webcast to the whole company. We use a variety of printed mechanisms, like email blasts. I also write a blog directed at employees a few times a month and hold town hall meetings when I travel.

I try to find as many ways as I can to communicate, and I recognize that it's completely inadequate. So I've asked my management team to help me get out and talk to the organization more effectively.

Q. Has the organization bought into your vision?

The organization is in the process of buying in. As human beings, we test what we see, what's going on around us, and we're in the process of doing that.