Sarbanes-Oxley -- Wave 2 opportunity

I attended a Sarbanes-Oxley (SOX) related conference this past week. Among other things, I wanted to learn about businesses that had been formed or refocused as a result of SOX and what opportunities remained. The SOX market opportunity alone is reported to be a $6.5B market. In addition, I wanted to get a feel for implications on Altus' portfolio companies. Ed Sims posted recently on the excesses of SOX to get another perspective. The summary of my observations follow:

• A lot of existing companies refocused their energies on SOX particularly focused on establishing controls, segration of duties and ensuring proper security was in place. One of the notable companies was Virsa that is now a Kleiner Perkins and SAP Ventures funded company. They appear to be on a hockey stick growth pattern. A lot of the companies I observed had point or "band-aid" solutions but Virsa has a broader (though not all-encompassing) offering.
  
• It's not clear that companies have realized a lot of strategic business advantage in these "Wave 1" applications (i.e., apps focused on controls & security) though they've certainly incurred a lot of expense. There are two types of "Wave 1" apps...
  

1. Business Process Management (and hence compliance) companies like OpenPages. Effectively a glorified PERT chart that tracks the "critical path" of non-compliance.
2. ERP Compliance Management, like Virsa and LogicalApps. One problem with them is that they assume that the entire world is either SAP or Oracle and that all the data that is needed resides in these systems (this is especially true for any company using partnerships to sell their offering). Fundamental departures from real life.
   
   

• From the presentations given by keynoters and talking with senior partners from both big and regional audit firms, it became clearer to me that companies seeking an "exit" (i.e., IPO or acquisition) need to give more thought to SOX than they might have previously thought. In either exit scenario, a company that isn't SOX compliant is going to face obstacles when they try to exit (i.e., delaying or scuttling plans for the exit). The challenge is that when they most need to stay focused, preserve cash, etc. it is also the best time to set up SOX-compliant processes so they can avoid re-engineering processes later. Getting some strategic SOX/governance counsel early on is a good idea. It's the classic "pay now or pay later" scenario.
  

• The firedrill to get Wave 1 processes/applications in place appears to be winding down for most public companies. "Wave 2" processes/applications will focus more on financial reporting transparency that can demonstrate to the investment community that a company has a handle on how they handle issues such as revenue recognition. Whereas Wave 1 was largely focused on blocking fraud, Wave 2 will address situations where there is no intentional fraud but where Operational and Transactional streamlining is needed. This involves actually managing day in and day out transactions for financial reporting and analysis for companies with complex revenue models, like the ones who sell through distribution channels. In other words, streamline your business, get compliance for "free".

• Let me give you an exampe -- Take a company like Symantec. They have a variety of revenue streams ranging from 2 tier distribution into retail (e.g., Ingram is distributor and CompUSA is the retailer), relationships with consumers downloading bits of Symantec servers, enterprise customers, OEM deals, etc. In addition, they have monthly and annual recurring revenue streams. Figuring out how to accurately recognize revenue quickly becomes a nightmare of dozens of spreadsheets, various datafeeds from disparate partners, etc. Throw in properly paying spiffs & commissions, handling price protection and rights of return and you have a gnarly challenge on your hands that is people intensive. The vast majority of companies have some kind of band-aid solution in place that is both costing them a lot of human resource as well as delivering sub-optimal results (i.e., either takes too long and/or has questionable accuracy). Like Virsa, I think the companies that can develop a comprehensive system that makes sense of this will prosper. The system will be closer to a supplier relationship management solution as opposed to trying to connect various spreadsheets with bailing wire and bubblegum. It's one of the reasons I saw some private equity and VC firms in attendance at the conference. Entomo was one of the companies exhibiting at the conference -- they released a whitepaper at the conference that highlights these issues. Click here to get a copy. [Full disclosure: I have advised Entomo on their business] From a customer perspective, the good news is that there is a greater opportunity to realize strategic advantage in Wave 2 applications. For example, an automated solution will help a company reduce inventory, minimize gray market activities and enable them to report revenues on a more timely basis.

I think one of the prime challenges for a company selling a SOX offering is "SOX fatigue". A lot of organizations have been in sprint mode for the last year or two and/or they have a desire to move on to something that isn't related to SOX. Like any other enterprise application, demonstration of a strong ROI story will be paramount.

Ireland a role model for how to turn around a country

I had the pleasure of meeting this week with two executives from Enterprise Ireland -- Diane Roberts and Maggie Daleo -- out of their Silicon Valley and LA offices. I originally learned about Enterprise Ireland from a fellow Irish-American -- Bill Shaughnessy (an exec at MSN/Microsoft and all-around great guy). He was as impressed as I was about how Ireland has turned what was a poor country 15-20 years ago into one of the highest per capita countries in Europe that has an economy that's growing like gangbusters. A combination of a commitment to lowering corporate taxes, encouraging foreign investment, providing free college education to those that could get into the limited # of spots and a seed investment fund have been instrumental in making Ireland a success by any measure. Enterprise Ireland is both a seed investment vehicle (the largest in Europe) and a great resource for Irish entrepreneurs via worldwide offices, etc..

Diane and Maggie are two examples of resources in their offices in 34 international locations. They provide assistance in areas such as market research/validation and tapping their strong network of useful contacts and experts that entrepreneurs can draw upon. It was clear that their market savvy would be invaluable to an Irish entrepreneur trying to tap the U.S. market. My only disappointment in the meeting was that I couldn't convince them to open up a Sun Valley office :)

An example of the sort of thing they do is they have an upcoming Irish Technology Showcase where it's a forum to bring together influential potential buyers/partners from the U.S. over to Ireland to learn more about what is being worked on by Irish companies as well as sharing their directions so that Irish companies can respond accordingly. The event is going to be held in October.

Hanging with the Dalai Lama

The Dalai Lama has been in Sun Valley for a few days. We felt like it might have been a once in a lifetime opportunity to hear a Nobel Peace Prize winner speak so we went and heard him speak with our daughter yesterday at the event focused on children. His talk was fairly short (see recap below) but the overall event was inspiring as they highlighted what various kids from around the state were doing to demonstrate the main focus of the visit – demonstrating compassion. One of the fun aspects of the event was they asked for kids to volunteer their own ideas of how to demonstrate compassion. As a proud dad I can say she had more poise than most of the high schoolers when speaking in front of 8,000 people. Here’s what she had to say -- "When people are mean, be nice back." I don't remember many people at Microsoft keeping those words in mind when I was there ;-}

The Dalai Lama started speaking in Tibetan (with a translator) but ended up doing most of his speech in English and only needed occasional help from his translator. He has quite a good sense of humor and has very unique, almost child-like mannerisms. One of the quotes from the official website of his visit is interesting to think about in the context of business (go to the website for more quotes). Perhaps that's what Sergey & Larry mean when they say "do no evil".

There are two types of competitive behavior. One is a sense of competition because you want to be at the top. You create obstacles and harm someone. That competition is negative. But there is a positive kind of competition which benefits the individual, the competitors, and the economy. Let your competitors also grow, without any sense of harming them.

The articles below recap the event if you are interested in more details.

• Recap of speech to the children
• Recap of the Dalai Lama's September 11th speech
  
• Go here for audio and images of the Dalai Lama's 9/11 speech (to be posted on September 13th)
• The Dalai Lama met with CEOs and federal legislators to discuss how to incorporate compassion into the world of business

One thing I heard a lot when we decided to move from Seattle to Sun Valley was "aren't you going to miss the cultural aspects of being in a city?" The funny thing is I've seen the Dalai Lama, countless symphonies with world-class musicians, jazz groups from all over the world, Olympic podium figure skaters doing their Turin 2006 Olympic programs in seats at a distance that would cost thousands at the Olympics not to mention seeing various Emmy/Oscar winning actors. That doesn't even include what I'm going to miss when I'm attending a Sarbanes-Oxley conference -- e.g., the Hemingway festival. The biggest difference is the hassle-factor in the city (traffic, parking, commute time, lines, etc.) in attending events -- we found it so much higher in Seattle that we weren't able to attend most of what was available.

Meanwhile, the impact on my work has been mostly positive. I'm busier than I've been in a number of years and certainly the most since I left Microsoft. One benefit of being away from a traditional office environment most of the time is I have nearly 2 hours back per day in commute time and I'm able to be super focused. How can you not be inspired when you look out your office window at this in the Fall and this in the Winter?

Missing an engineering release date can be a symptom of a larger problem

Ed Sim recounts a board meeting where they uncovered and analyzed why the product development team was missing its deadlines. The conclusion was that sales wasn't properly trained and was selling what they didn't have.

I've discussed the Enterprise Sales Learning Curve (ESLC) before on this blog. When we are working with clients analyzing their Product, Sales and Marketing readiness to find points of leverage where they could improve their readiness levels, there are usually a few high sensitivity areas. Often the ramp rate of new sales people, which is a function of training, and the ability of the product management and development team to learn from one another are two of the highest sensitivity areas in scaling the ESLC. I provided an update on the simulation tool we developed based upon input from Mark Leslie that is very effective at showing this dynamic.

The Best Startup Advice I Have

David Cowan of Bessemer Venture Partners has had a similar experience to Altus Alliance when he recounts "The Best Startup Advice I have". That is, after hearing what Mark Leslie had to say it changed the way we did business. He does a nice job of recapping Mark's principles. For more on Leslie's Enterprise Sales Learning curve, I provided an update in an earlier post.

Vision

Saw this quote today and reminded me of some people I've come across in my career.

“Vision without implementation is hallucination” Benjamin Franklin

Vision is great but you'd better know how to execute or be lucky enough to be surrounded by people who do. The fun part for me has always been putting vision through its paces in the real world. Inevitably, your vision alters and you learn a ton along the way that alters the strategy that will achieve the vision. Mark Leslie's (of Veritas fame) Enterprise Sales Learning Curve framework lays this out in detail. Here's an update on that work.