See this CMS Watch story which says that John Lervik has resigned from Microsoft/Fast. A Norwegian newspaper story on the resignation is here (with bad machine translation here). Stephen Arnold of Beyond Search covers the story here in a colorful post that delves into Norwegian folklore.
Since I’ve blogged extensively about the issues at Fast previously, I won’t restate everything here, but instead provide a link to my previous posts.
While speculation abounds about why Lervik resigned (e.g., links to the accounting troubles and restatement of financials, or links to last October’s police raid on Fast’s headquarters), I believe that Occam’s Razor suggests the following analysis:
Microsoft clearly knew about the serious accounting issues prior to buying Fast
Microsoft bought Fast anyway despite those issues (and at an inexplicable valuation when considering them)
You would think that if Microsoft had issues with Lervik, they would have released him either at the time of the acquisition or the police raids (i.e., they had two good opportunities to do so and didn’t).
While I don’t claim to have any special information and have no idea what actually happened, this line of reasoning leads you to conclude that Lervik didn’t like it at Microsoft and had to work through a one-year retention agreement before resigining.
Fast CTO Bjørn Olstad is said to be taking over Lervik’s position, further suggesting that the action wasn’t Microsoft trying to cut ties with Fast’s previous management team.
I’ve already spent a lot of space covering the financial issues at Fast Search & Transfer. In part that was because, prior to the Microsoft acquisition, we competed fairly often with Fast, particularly in our publishing practice. Part was because the company reminded me of MicroStrategy, against whom we had to compete at Business Objects. Part was driven by my personal interest in international software companies and the issues that un-level the reporting playing field (e.g., GAAP vs. IFRS reporting).
I burned several hours, posted something, got in the car, drove home, and deleted the post just after I arrived. Somehow, despite considerable effort, I couldn’t find what I thought was a satisfactory and appropriate way to editorialize.
Ergo, I decided simply to present the story. You can see it by pressing this link or looking at the Scribd iPaper below.
Disclaimers: I don’t speak Norwegian and can’t attest to the quality of the translation. I don’t know either Norwegian culture nor Norwegian business publications so I can’t vouch for either the legitimacy of the source publication itself or for any cultural slant present in the story.
Beneath the translated text are images of the original story with Norwegian body copy.
A few days ago I read this post, The Fast and the Furious, on CMS Watch. It was the one-too-many-eth industry analyst piece I’d read on the situation at Fast Search & Transfer that basically said “I hope all this nasty business stuff goes away so we can get back to analyzing technology.”
While I know and respect CMS Watch and its founder Tony Byrne, I don’t know Adriaan Bloem, and I don’t know the scope of his analysis. But here’s what I’d say to him and every other industry analyst on this topic:
If you are going to purely analyze technology, then I fully understand the viewpoint that business issues in any form are a distraction to that technology analysis.
If, however, your organization produces any maps (e.g., rankings, quadrants waves, charts) that include “execution” or anything akin to it, then you have extended your scope from technology analysis to overall business analysis and — like it or not — you’re going to have to analyze vendors from both technology and business viewpoints at all times. Simply put, if you’re going to include execution in your map, then you’ve given up your right to dismiss business problems, uncomfortable as analyzing them may be.
Make no mistake. This is not another post about Fast Search & Transfer (here’s my most recent one for those interested). This post is not about Mr. Bloem or CMS Watch. (Happily I’m not sure if they provide a map; maps certainly aren’t the first thing that come to my mind when I hear CMS Watch, who I associate more with comprehensive reports such as The Enterprise Search Report or the The ECM Suites Report.)
This post is about my general reaction to the “failure to analyze” displayed by most industry analysts / groups when Fast Search got in trouble. From where I sit, here’s a not-too-exaggerated parody of what the story looked like over about a 12 month period.
Phase 1: Rumblings of problems, Norwegian financial analyst starts to ask questions. Industry analysts: Yeah, but they have great technology and happy customers.
Phase 2: Quarterly misses, receivables write-downs, large operating losses. Industry analysts: they have “accounting issues” but it’s OK, it’s just accounting.
Phase 3: Restatement of earnings. Industry analysts: OK, they have more “accounting issues,” but don’t worry they’ll turn it around soon.
Phase 4: Criminal investigation. Industry analysts: Whew, all this business stuff is getting boring, can we talk about technology again?
Excerpt from CMS Watch:
I hope we’ve pretty much heard the last of it and can return to simply discussing the merits and demerits of the technology. So even though I have this lingering image of the last scene of “Carrie” in the back of my mind, after this short break, we’ll return to our regularly scheduled programming.
Again, I don’t know Mr. Bloem at CMS Watch, and if his analysis is purely technical then I have absolutely zero problem with this viewpoint. But if an analyst organization is in the business where profiles, maps, or recommendations have a vendor execution component, then the above viewpoint is simply not tenable.
Why? Because “execution” is invariably related to growth claims. Example:
Company A is $50M in revenues, growing at 50%, and profitable.
Company B is $35M in revenues, about flat in terms of growth, and has -100% operating margins.
No analyst in the world is going to rank these two vendors the same in execution. But what if company A is actually company B with a wig and lipstick?
That, ladies and gentlemen, was roughly the situation at Fast Search, and, once revealed, nary an industry analyst made a radical drop in industry map position or had an unkind note to say about their execution. To me, most industry analysts took the Fast Search investor relations messages hook, line, and sinker.
Now, let’s try and integrate the above into a single argument that serves as advice for the industry analyst business: beware the fate of the B2B computer trade press.
IT B2B trade magazines are pretty much all gone. Computerworld, InfoWorld, InformationWeek, Transform, Intelligent Enterprise, PC Week, Network World, DBMS, Red Herring, the list goes on and on. I read them every day for years. I had piles of them on my desk. We laughed when we got great customer stories and we cried when the lab panned our new product. But the magazines were everywhere. They were an integral part of IT life.
Now, seemingly in an instant, they’re all gone. (Yes, a few live on as skeletons of their former selves.)
Why are they gone? Because they didn’t add enough value.
I’m not sure how it evolved over time, and as an idealist I tend to believe that in the early days the IT pubs had real reporters and real labs and real value (it sure seemed to me like they did but I was young then), but by the time the Internet was posing a huge threat to their business, most of the IT trade press had degenerated to the following formula:
Hire 20-something English majors as IT trade journalists
Have them filter vendor press releases deciding which to cover
Write stories based on the press releases, one live analyst interview, and one to two customer interviews
Make money by selling advertising to the vendors
Don’t rock the journalistic boat too much because of the prior point
Net: they didn’t add much value. Once the Internet and Google Alerts made press releases easily accessible, the “value add” in distributing vendor news along with an added quote or two disappeared. Some say the Internet wiped out the IT trade press. I think the IT trade press wiped out the IT press. They catered too much to vendors. They cut costs and value commensurately.
And they found themselves pretty much out of business, ironically replaced by vendor press releases (which at least you know are vendor-biased), bloggers (who weren’t afraid to call it like they saw it), industry analysts, and a few hybrids like The 451 Group who live somewhere in between the previously existing boundaries.
But now that B2B trade is pretty much gone, I think the industry analysts are the next ones to experience real pressure. The M&A wave of a few years back was just the start of it, not the end.
Here’s my advice:
Keep analyzing. That’s the value-add. The IT world remains complex. Customers and vendors still need you.
Make the rough calls. Avoid the tendency towards conservative, middle-ground analysis. Take stands.
Generate a headline or two for yourselves. The old Gartner was great at stirring the pot in the days of Mike Braude. Regain that spirit. Not only should you take stands, but generate some press in so doing.
Restore the vision. The original Forrester had great vision. With all the M&A, everyone looks more or less like everyone else. In my mind, the vision niche is now
open.
Respect the intelligence of your customers. (Everyone knew that the old Aberdeen was a white paper factory. Everyone knows you have vendor clients and user clients. Take a stand on how you manage those conflicts. Disclose your vendor/user breakout percentages and your conflict-of-interest policies. Everyone’s a grown-up; they understand the tension. Show them how you manage it.)
Be scope consistent — either entirely include or exclude “execution” / business performance, but don’t include it when it’s convenient and turn a blind eye when it’s not. And if you’re goign to analyze the business, make sure your team has the skills to do it. (On a few occaisions, I felt I’ve had to explain finance/business basics to analysts who seemed not to understand revenue vs. cash, receivables write-downs, or what it means to re-state revenues.)
Don’t be afraid to present both sides of an issue. You can see both sides of the coin, explain them, and take your own stand all at the same time.
Competition. While MarkLogic is not a search engine we did end up competing with Fast at several major media (i.e. publishing) accounts, so they had my attention.
Seen this before. Fast reminded me of MicroStrategy, against whom we successfully competed at Business Objects, but whose tactics caused me more than a bit of angst over the years. (One might argue this comparison was prescient.)
Speaking out. I felt that despite the presence of evidence (e.g., financial analyst reports from a Scandinavian bank that did some pretty convincing analysis) that things were awry that everyone (i.e., industry analysts, customers) seemed to turn a willing blind eye first to the indicators of the problems and then to the problems themselves — either dismissing them entirely or as characterizing them as simple “accounting issues.”
Knew the right way. Also, from my near-decade’s worth of experience at Business Objects, I had a strong sense for what I felt was the “right way” to run a European software company. Basically, play by the same rules as everyone else — dual list on the NASDAQ and report financials under GAAP.
Anyway, with the Microsoft acquisition, I figured the story was done. While I was always amazed at the valuation — particularly for a company in the midst of an accounting scandal — the problems were well publicized and I figured Microsoft had to have looked into every angle.
A recent story in Portfolio, entitled Fast Troubles for Microsoft, suggests this was perhaps not the case. Excerpt:
Even as it agreed in January to plunk down $1.23 billion to buy a promising but problematic search company in Norway, Microsoft knew that the company had some accounting matters to address.
Now, it appears, the acquired company, Fast Search & Transfer, may have some criminal matters to work out: Suspicions about the Norwegian search-engine company’s revenue reporting are now in the hands of the Oslo police.
Norway’s financial supervisory authority, Kredittilsynet, said its review of Fast Search’s previously disclosed accounting problems not only appeared to have violated accounting standards, they may have broken the law too.
[...]
In its haste to grab Fast Search, however, Microsoft looked past the company’s problems: They include, but aren’t limited to, accounting irregularities that began to appear as Microsoft began to look over its books.
In the second quarter of 2007, Fast Search reported an operating loss of $38 million on revenue of only $35 million—a full $20 million below forecasts. The loss widened in the following quarter, leading the Norwegian stock exchange to delist Fast Search on December 12.
That same day, Fast Search said it would review its accounting for all of 2006 and 2007. The latest unaudited results show revenue growth of 7 percent for last year, which is far below Goldman’s forecast.
Kredittilsynet, the supervisory agency, was equally determined. It referred Fast Search to investigators at Økokrim, the Norwegian National Authority for Investigation and Prosecution of Economic and Environmental Crime.
Økokrim last week concurred that the nature of the irregularities and the amount by which Fast Search apparently inflated its accounts were serious matters warranting prosecution. But the agency said it was too busy to open a criminal investigation.
Rather than let the matter rest, the market supervisor turned it over to the Oslo police for investigation. Aftenposten, a Norwegian newspaper, characterized Kredittilsynet’s decision to involve the police as an unprecedented step in that country.
Dave Kellogg is Senior Vice President and General Manager of the Service Cloud at Salesforce.com. From 2004 to 2010, I was CEO at unstructured information leader MarkLogic, taking the company from zero to $80M in run-rate revenues.
Before that, I was CMO at Business Objects as we grew from 250 to over 4,500 people and $30M in revenues to over $1B. Prior to that, I was VP of Marketing at Versant, where we executed a chasm-crossing strategy that resulted in a successful IPO. I started my career in both technical and marketing positions at Ingres.
In addition, I sat on the board of big data analytics provider Aster Data until its successful sale to Teradata for $325M. I also do some angel investing and advise the chief executives of several startups.
This blog is written by Dave Kellogg and covers a mix of topics including search, big data, social enterprise, marketing, and customer service technologies along with commentary on Silicon Valley, venture capital, and the business of software.
