Tackling a very big turnaround: as part of the new executive team at Computer Associates, Robert Davis was intrigued by the challenge and the leadership group he was joining. But the CFO has a lot on his plate--not the least of which involves complying with a deferred prosecution agreement meant to ensure CA's survival.

Two years ago, venerable computer software firm Computer Associates Inc. (CA) was in dire straits. Founder Charles Wang had stepped down as CEO, but his hand-picked successor, Sanjay Kumar, had been implicated in a massive accounting fraud and was forced to resign, as was CFO Ira Zar, who later pled guilty to securities fraud. New leadership was brought in from outside to right the Islandia, N.Y., computer giant, but cleaning up the accounting issues and reviving the finance team looked like a tall order. In fact, earnings from both 2000 and 2001 have been restated.

[ILLUSTRATION OMITTED]

Interim finance leadership from now-Chief Operating Officer Jeff Clarke, former CFO of Compaq Computer Corp. (later bought by Hewlett-Packard Co.), had started the ball rolling. Now, the task has fallen to Robert W. Davis, executive vice president and CFO. Recruited from Dell Inc., where he was chief accounting officer, just over a year ago, the 6-foot-7 Davis has a lengthy list of responsibilities and challenges.

Besides the task of upgrading and reinvigorating the financial controls, the affable Davis has been busy meeting the mandates of the deferred prosecution agreement (DPA) that CA--as the firm now prefers to call itself--entered into just over a year ago. The 18-month pact, due to expire at the end of September, was meant to allow CA time to implement the controls that regulators deemed sufficient to put its house in order; if not, it would face potentially crippling prosecution under charges of fraud and obstruction of justice.

Davis, 47, is a former accountant with PricewaterhouseCoopers and finance executive with MCI and Dell; he has been an FEI member since 2002 and serves on FEI's Committee on Corporate Reporting (CCR). He spoke to Editor-in-Chief Jeffrey Marshall about what has been happening at CA under his watch and the implications of the DPA. Excerpts from the interview follow.

Q When first contacted by a recruiter about coming to CA, what went through your mind?

A. I knew there were some issues, but frankly, I wanted to catch up with Jeff Clarke. He could have gone to a number of different places after he left HP, and his comment was that when you look at CA, there are just enormous opportunities here. We all know the difficulties the company had back in the early part of this decade, yet it continued to generate well over $1 billion worth of cash flow from operations each year.

One of the other things I learned as I interviewed and dug into the company was that we are about 21 quarters now into an extremely conservative accounting policy, a ratable accounting model. So, while there were some issues back in late 90s and maybe even the beginning of this decade, the accounting for the last five-plus years has been rock-solid and very conservative. And, in interviewing with [CEO] John Swainson, he was able to paint a vision of how he expected to see this company grow in a consolidating industry that was very exciting.

When I was with Price Waterhouse in the national office back in the early 1990s, CA was one of the fastest-growing, most admired companies. So this is a company that, except for a few executives losing their moral compass, or whatever term you want to use--until the late 90s or the first part of this decade, by and large, had a pretty distinguished heritage. Microsoft and CA were running neck in neck and ahead of Oracle and SAP as the most admired software companies as recently as the year 2000.

So, clearly we took a big fall, and we are recovering from that. But, it is not like this was a company that has had 30 years of issues. It's a company that actually had 25 years of really pretty good growth, and then a few issues, and I think we didn't have the right leadership team and focus on [those to] move forward.

Q What kind of shape was the finance team in when you arrived? I gather Jeff Clarke had already made a number of changes in his time there.

A. He brought in a lot of great talent. And, in my view, [Chairman] Lou Ranieri had done the same thing, starting with Jeff Clarke. I think the finance team was pretty good, and when I look at my senior leadership team right now, half of them--my controller, my planning guy, my CFO of the Americas, my finance operations guy--are all people that were here when I got here.

But the thing that Jeff did was really to partner better with the businesses. If you think about the way CA used to be structured, it was like development was in its silo, sales was in its silo, finance was in its own [silo], and people didn't really talk to each other or communicate as well as they should have. So, what we have done since I got here is set up controllership functions in each of the business units.

The leadership team [I inherited] was good for what the company had experienced in the past; most of the additions I have had to make came because now, instead of just being focused purely on governance and reporting, we are also very focused on partnering with the business. That really required us to expand the leadership team.

If we use five bands, or five levels, and if you look at bands three and above--which would be directors, VPs and senior VPs--I probably brought in, say, 60 people at that level. But then we have also had to [hire] a lot of band two, middle management talent, and you need people at band one. So, that's where the other 80 or 90 people have been hired.

To me, our biggest challenge when I came in was that the systems needed a lot of work. The company had grown so much through acquisitions, and had not invested a lot of money in making the systems [operate] like a single instance, which is what we are trying to get to with our ERP [enterprise resource planning] system over the next couple of years. We had disparate systems all around the world, which makes the finance team not as efficient as you would like.

Q Is that ERP rollout something that is likely in the next year or 18 months?

A. Yes, we are right now on track. We are rolling out the core finance [system] in an April/May timeframe in North America. And then it will probably be 12 to 18 months after that before it becomes really global. That is all going to be very helpful to us, but there are a lot of things you can do in Excel and Access until you do have a type of ERP.

Q You've said that you want to drive accountability deep into the organization. How important is technology per se in that, or is it more a management initiative?

A. I think the latter is the best way to describe it. What has happened here is all about empowering employees. And, then you do have to give them the technology to allow them to make good decisions.

If you think about CA, it was a typical entrepreneurial start-up, founder-based company until a few years ago. There were three or four individuals whom, basically, everything had to go up through. That is the way they wanted to run the company. But it is not very scalable.

Then you have John and Jeff and [me] coming in. If we really want to participate in the way we expect to in the software space over the next five or 10 years, we can't do it with every decision having to come through me in finance or through Jeff in operations or sales or through John for everything else. So, we have to empower the employees. And that is probably going to be our biggest challenge from a management perspective.

Q How do you feel in general about the revenue stream that CA is operating with these days and about the markets you are selling into?

A. The market is a good market. Our addressable market is growing 10 percent year-over-year in dollar terms. Our business is divided between mainframe and the distributed [computing market], the security space, BSO (business service optimization) and storage, which are areas that are growing quite fast.

So, it is actually a very nice portfolio. We have a part of the business that is very sticky, where if we have customers that have mainframe products, our products perform quite well. You could argue that IBM is the only other company that has products even close to ours in the mainframe space. That is a strong part of the market for us and it is profitable, and it helps fund the growth that we are driving in the distributed space.

I'm very comfortable with the market. I think the acquisitions have helped with [growth]. We had gone from being a company that for the first 25 years was extremely acquisitive to doing no acquisitions from about 2000 to 2004. There was some pent-up demand. I don't know that we will acquire companies at that rate on a going-forward basis, but it certainly helped fill in some gaps--in some cases large and in some cases small--in our product portfolio.

Q Revenue recognition, as I understand it, was really a big bogeyman at the old CA and, moral compass issues aside, that is a complex area for software companies. Has that been the focus of a lot of attention in your group?

A. Yes, it always is. Typically, most software companies are always pushing at the end of a quarter to sign a deal; then they basically take the bulk of the revenue recognition in that quarter. And that was the way that CA was back in the 80s and 90s.

As I said, beginning in October 2000, we shifted to this what we call our new business model, which is ratable recognition. So now, if we sign a three-year deal on the last week of a quarter, we recognize revenue over the next three years on a monthly basis. We typically will bill a customer in three annual installments, and if a customer doesn't pay its bill within 90 days, we stop recognizing revenue until we collect that bill. That is why we are also trying to get Wall Street and investors focused on a few other things, like billings and cash flow.

Our [stated] revenue is so conservative that--I don't want to say it is misleading, but--when you benchmark us against other software companies, it may be at the other end of the spectrum. It makes CA to appear to be a little bit smaller company than it really is on an apples-to-apples basis.

Q I read that you've called a lot of the DPA issues, in essence, mostly "blocking and tackling." Could you elaborate on that?

A. We are required to do things like have good internal controls. We were required to get this ERP system started by this past December. A lot of it was organizational design, where [the regulators] felt like best practices would be for us to have controllers in the various business units so that finance wasn't just isolated in its own silo. [The DPA] is like a roadmap for good governance.

I often use the description of [CA] as almost like a Phoenix rising from the ashes. We had a great company that had some issues--and we don't just want to skirt by these issues--but we want to have CA viewed as a corporate governance turnaround story that people will be writing about and reading about 10 years from now.

Q It would seem to be a real challenge, to simultaneously handle the issues raised by the DPA and still do the strategic forecasting, reporting and cost management job that a CFO has to do these days.

A. It is kind of interesting. As you are hiring a lot of people and making big improvements--as opposed to incremental improvements--it is very exhilarating. I have been working pretty hard. I travel a lot; my wife reminds me of that a lot. The good news here, too, is that because of the recent issues the company has had, there is a lot more respect or interest in governance.

I have talked a lot about three main pillars of finance that I am interested in. The first one is corporate governance, which you could argue is like table stakes; certainly at Dell, we got to the point where it was taken for granted. But, having been at MCI and seen what happened to a great company once it was acquired by World-Com, I am very cognizant of how a good company can lose its reputation very quickly just over governance issues. I feel like we are probably 90 percent of the way [toward] what we need to do to be successful around governance [at CA].

The second pillar is the business partnering and being involved in strategy and driving value for the company. Right now, I would say we are probably 35 or 40 percent done on that. We have hired a lot of good people. We have a lot of good engagement with our business partners. And we just have to continue to build that out.

The [third] pillar is what I described as finance excellence. By that, I mean I would like to have CA be on the short list when somebody graduates from undergraduate or graduate school, whether it is in accounting or [a related discipline]. You think about the Cargills, the GEs, the Dells of the world today, the Mc-Kinseys, the Bains ... I would like to see CA in that position five or 10 years from now.

We have to re-establish our reputation, the governance aspects, drive value for our shareholders through business partnerships. But then you really have to have a company where people know they will get a lot of training, have a strong career path, be mentored and be allowed opportunities for international assignments.

Q I've read that you had done probably something like eight software deals in the last two years, and another one is pending with Wiley Technology.

A. Right. This was 9 deals, for $2.6 billion.

Q Did the government raise any issues at all in terms of the deferred prosecution agreement with any of these transactions?

A. No. It would only be an issue if we bought a company that didn't have strong controls, and one of the things we definitely look for in our due diligence is companies that have the right tone at the top and with their leadership teams and have strong controls. That has been one of our big screening criteria around acquisitions.

Q How do you feel about the reaction in the investment community to what has been going on in the last six months?

A. It is interesting. We have a pretty heavy concentration of value investors; probably the top 10 investors in our company own more than two-thirds of the stock. So, we have a very concentrated shareholder base that is committed to this transformation that John Swainson is driving for the company. They have a longer-term view than the typical Wall Street analyst.

That is a positive; it makes my job a little bit easier as a CFO, because you have a little bit more time to do the right things. And we are starting to get a lot more coverage, a lot more interest from Wall Street. But what most of the analysts are saying now is, "We like the message. We like the new leadership team. We just need to see them execute."

So, it is possible that if we continue to execute the way we intend to, starting to grow the business, integrating these acquisitions, getting some organic growth going, we could start to see some of the analysts who are neutral right now upgrading the stock.