Sarbanes-Oxley May Not Boost Software Demand

So far, demand is weaker than expected, leading some analysts to believe that the companies competing for a slice of the so-called compliance business , from Microsoft Corp. and Oracle Corp. to small startups , may see this tech bubble burst before it's fully inflated.

The biggest driver is Section 404 of the Sarbanes-Oxley Act, which was passed in 2002 in response to the accounting and finance scandals that embroiled Enron Corp., WorldCom Inc. and others.

The 160-word section of the 66-page law is widely seen as the most challenging. Corporations must document, test and certify their internal checks and balances governing all business processes across the company, such as payroll, accounts receivable and countless others.

After two postponements, it's set to go into effect for companies with market capitalizations of more than $75 million, beginning with annual reports filed after Nov. 15.

Collecting, tracking and sorting vast amounts of disparate data are the sorts of tasks that software can handle much more efficiently than humans. But at least in the first go-round, the main beneficiaries of Section 404 appear to be consultants.

"It's not so much a technology issue, it's a business process issue. It essentially requires manpower," said Kraig Haberer, global marketing director of SAP AG, a business software provider.

And if a company determines that its existing practices are sufficient, there's no point in buying anything new, said Brian Sommer of the research firm Aberdeen Group.

"When a company becomes compliant and is meeting the requirements of the law, they're not exactly adding any real strategic value to their company. Unless, of course, they were so badly mismanaged in the first place Sarbanes-Oxley brings a new discipline to the firm," he said.

Compliance software makers believe consultants will ultimately recommend that their clients purchase new tools. The process, after all, must be repeated each year.

"You want to understand what's broken before you go and try to fix anything," said John Van Decker, a Meta Group analyst.

About two-thirds of companies surveyed by the Aberdeen Group in December said they planned to use existing systems or try to extend them. A study by the Meta Group showed about 97 percent of compliance software makers believe sales will be driven by the regulations.

Perhaps 50 software vendors , ranging from giants like Oracle and Microsoft to smaller players like Nth Orbit Inc., Movaris Inc. and OpenPages Inc. , see dollar signs in the regulatory burden.

OpenPages' SOX Express, for instance, automates the design, documentation, review, approval and testing of a company's internal controls. The software, run through a Web browser, lets users certify the accuracy of what they've done with a few clicks.

"Most companies today are just doing it manually. Literally, they've got documents upon documents and are just doing in Word or Excel," said Michael Duffy, OpenPages' chief executive. "That's not sustainable for a lot of reasons."

So far, OpenPages counts nearly three dozen companies among its customers.

Movaris also sells software to help companies get their regulatory houses in order. One of its main selling points is its ease of use and ability to send e-mail notification to managers when they need to take action , a reminder, say, when a Sarbanes-Oxley certification is almost due.

A major advantage is that the software doesn't assume its users are from the financial department.

"There's not a huge learning curve. We don't have to train people in depth on the product," said Mark Thompson, senior vice president of finance at Crown Media Holdings Inc., which uses Movaris' Certainty software. "They get their e-mail, check them off and it's incorporated back into the system."

Such programs face stiff competition from much larger software makers that are offering Sarbanes-Oxley upgrades to existing offerings.

This month, IBM Corp. showed off three packages aimed at helping customers comply with Sarbanes-Oxley and other regulations. Microsoft also recently announced the Office Solutions Accelerator for Sarbanes-Oxley.

And although the "compliance" market hasn't been the boon for software companies some had hoped for, plenty is being spent on boosting the internal work force, consultants, auditors and, yes, even some software , with estimates as high as $5 billion for 2004.

Crown Media, which owns and operates pay TV channels including the Hallmark Channel, estimates it's spending $600,000 on the first go-through with Sarbanes-Oxley regulations. It's expected to spend about half as much in successive years.

By comparison, the Commerce Department estimated in 1999 that U.S. business and government Y2K efforts would cost $100 billion from 1995 through 2000.

But Sarbanes-Oxley costs won't go away at the end of the year. And any quick fixes for the first year might come back to haunt companies in the future if their approach doesn't keep up with changes in the business, said Steve Miranda, vice president of financial applications development at Oracle.

"I really view it ... as an opportunity to revamp certain business processes and get better efficiency across your organization," he said. "If you don't, you'll be living with the Band-Aid every quarter of every year."

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