Software CFO: Intangible Assets, Real Pains

Mercurial assets, non-linear sales, revenue recognition pitfalls -- finance chiefs at software companies have a hard job.

Finance chiefs and other senior executives at software companies are victims of their own success. Between 1993 and 2001, spending on computer applications in the U.S. grew at a compounded annual growth rate of 14 percent, according to the Information Technology Association of America. In 2001 alone, Americans spent nearly $100 billion on software products.

And therein lies the rub. During the Nineties, and particularly the latter half of that decade, software vendors could do no wrong. They sold millions of applications, and watched as their stock prices jumped at a double-digit annual clip. And they expanded operations like crazy — often through acquisitions.

But when the new economy bubble burst, so did the halcyon days for software companies — even for stalwarts like ERP vendors and business intelligence specialists. Spending on information technology — including software — hit the skids in 2001.

Things don’t look much better for 2002. As CFO.com reported in late May, corporate spending on technology will not likely increase this year. According to a recent survey of 100 U.S. and European chief information officers conducted by Merrill Lynch, corporate technology spending will be just about flat this year. That projection compares with a 2 percent increase in IT spending that the investment-banking firm was predicting at the beginning of the year.

Indeed, some CFOs report they have chosen to reinstall current versions of software — rather than upgrade to newer versions of the applications. The reasoning? It’s a lot cheaper to customize the application you have, than to buy a new one.

Learning to operate in that sort of climate is proving to be an extraordinarily difficult assignment for CFOs at software companies. Finance chiefs at traditional manufacturers can reduce costs simply by laying off employees. While painful, such layoffs don’t threaten the underlying value of the companies — fixed assets like petroleum crackers and lathes and steam turbines.

But for software companies, workers usually are the assets. “When most of your assets are your employees, you have limited flexibility,” concedes Jim Frankola, CFO of Ariba, a spend-management software vendor based in Sunnyvale, California. “Most of the time you have to get rid of your engineers and mortgage your future.”

A difficult decision at best. In fact, finance chiefs at some software companies say they must routinely make decisions to bring costs in line with revenues — while somehow coming up with the capital to fund crucial research and development projects. Without those investments — without product upgrades and new applications and breakthrough thinking — it’s very easy for a software maker to fall behind competitors, or fall out of the race altogether.

Laureen DeBuono knows the risk. DeBuono, CFO at Critical Path, an Internet messaging specialist based in San Francisco, says straight out: “We have to be very careful not to cut so deeply into our core team that we hurt ourselves in terms of new product development.”

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