by Steff Gelston

Why Corporate Fraud Freaks You Out, Limits to In-Flight Wi-Fi, R&D Tax Credit Extended and More

Oct 22, 200811 mins
Mergers and Acquisitions

This issue of Trendlines from the 11/1/08 Issue of CIO Magazine covers Corporate Frauds, In-Flight Wi-Fi, R&D Tax Credit, Social Software and more.

“Shotgun” M&As Put the Heat on IT

Mergers and acquisitions are not usually quick affairs. Just the due diligence process of examining a company’s enterprise IT systems—the infrastructure, applications, outsourcing deals and vendor contracts—can take up to a week, according to industry consultants.

But as Wall Street imploded in September, entire deals in financial services have closed over a weekend. Bank of America and Merrill Lynch. JPMorgan Chase buying Washington Mutual. The Wells Fargo purchase of Wachovia.

These so-called “shotgun” M&As are both a testament to Wall Street’s dire circumstance and a test of the ability of CIOs and IT staffs to analyze, prioritize and integrate systems in a hurry. “The shotgun marriages are being arranged—and there is no IT due diligence,” says Tom Casey, a vice president at Booz & Co.

That type of insight is even more important in financial services, since IT spend typically is 15 percent of overall revenue, according to Casey. “IT is the backbone of how these banks operate,” he says, “and you’re not going to get these major [M&A] synergies without addressing the IT stuff.”

M&As are tricky to get right even in normal times with appropriate due diligence, and many don’t return the expected value. According to a 2007 study by The Boston Consulting Group (BCG) of more than 4,000 completed mergers and acquisitions between 1992 and 2006, 58 percent of deals actually destroyed value for acquirers.

There are several technology-related factors that are key to M&A decision making, according to BCG’s Tom Reichert, a partner and managing director. First is post-acquisition synergies. “The synergy value should be 10 percent to 25 percent of the combined technology budgets of the two companies involved,” he says. “That is a significant part of the valuation of mergers.”

Next is whether there are significant deal breakers—”big security or regulatory issues that the acquirer is getting into in the tech environment that really need to get solved, or big contracts that exist,” Reichert says.

Booz’s Casey also points to considerations such as selecting the core systems and applications that will enable the combined company to grow, and knowing where the opportunities are to consolidate infrastructure and contracts.

Workforce issues such as layoffs are less troublesome than platform and application discussions. Casey says that power is the issue here. “If I’m an IT person or business owner of [that system], then I lose that, I lose that kind of power position,” he says.

The bottom line? CIOs must make do with what they inherit (IT staff, systems, projects) in a merger or acquisition. “Complaining about it,” he says, “does you no good.”

-Thomas Wailgum

Economy Dings Financing for Software Deals

Enterprise software investments usually involve huge capital outlays. But now that we’re living in a world of financial hurt, banks won’t dish out credit for such deals as easily as before.

What if your company needs financing help with software or services plans? One option, notes Paula Rosenblum, a managing partner at Retail Systems Research, is to look at software as a service (SaaS) for tech investments. “Over the short term, capital may be hard to come by. SaaS allows a company to buy only the number of transactions and horsepower it needs,” she writes in a report. “Nonintrusive optimization technologies can bring rapid ROI by taking sales and order information and spitting out better assortment and pricing plans.”

What if you’re a software vendor who can’t close deals because customers can’t get financing? “Enterprise software and service vendors without proper access to credit lines may find themselves unable to close deals with clients shut out from the credit markets,” says Ray Wang, a VP and principal analyst at Forrester Research. But there are solutions. He points to a deal between software maker Infor and IBM Global Financing. The deal lets customers go ahead with tech initiatives while spreading up-front payments over time, conserving cash for other investments.

Wang thinks the ability that big vendors such as IBM and others have to provide financing deals to customers is critical, given the economy. “Vendor-led financing initiatives may prove to be the lubricant that keeps tech spending moving forward,” he says.

-Thomas Wailgum

Why Corporate Fraud Freaks You Out (And It Should)

Fraud is a fact of corporate life today, as a recent Kroll Global Fraud Report notes.

The average company’s losses to fraud increased by 22 percent since last year, and the average business lost $8.2 million to fraud during the past three years. These sobering statistics are from a recent worldwide survey of 890 senior executives, commissioned by risk consultancy Kroll.

The survey found that information theft, loss or attack is the type of fraud that most worried respondents, with 25 percent feeling highly vulnerable and 47 percent feeling moderately so. And the data shows why: The fastest growing types of fraud are information theft (27 percent) and regulatory and compliance breaches (25 percent).

Yet while senior management seems to be saying they have deep concerns about fraud, they wind up underestimating the exposure their businesses actually face today.

In fact, employees working below the C-suite who are closer to an organization’s technology efforts and systems are over one-and-a-half times more likely than those at the corporate level to see their companies as highly vulnerable (31 percent versus 19 percent), according to the report.

“If senior executives are not worried about their vulnerability to information theft, they should check whether their sense of safety is based on a thorough understanding of the security deployed by the company, or ignorance of the full extent of threat,” notes the report. “In this case, too little knowledge could be a dangerous thing.”

-Thomas Wailgum

Center to Connect on Social Software

IBM recently announced the opening of the Center for Social Software in a move that it hopes will bring more of its Web 2.0 offerings to the enterprise and allow an exchange of ideas with business, technology and academic communities.

Big Blue’s Web 2.0 technologies, such as its Lotus Connections, which includes a blog and social network features, are its fastest growing software product.

“IBM has centered our infrastructure around a bigger investment in social software,” says Irene Greif, director of the center in Cambridge, Mass. “We want to work more systematically and take this research and deliver it to customers.”

The center will look for the best ways organizations can utilize social software and set policies around its adoption. Greif hopes those who interact with the center will give candid feedback about the company’s social software. “We’d like to have people from outside working with us, too,” she says.

Initial projects for the center derive from IBM labs including Beehive, an enterprise social network, and Many Eyes, a free Web-based application that allows users to visualize data in Web 2.0 formats, such as tag clouds.

While the center will mostly focus on IBM customers and software, Greif says it may work with other vendors to help provide standards around social software development. “I am expecting to see us step in and take some leadership in that area,” she says.

-C.G. Lynch

Use RFID to Track Servers and Laptops

Accurate, well-planned and highly targeted RFID deployments in tandem with IT-driven data-integration plans can deliver substantial benefits, according to a slew of recent surveys and analyst reports.

First, a survey of 186 global organizations by ABI Research found that RFID is being used or evaluated for applications across a swathe of vertical industry sectors. “Virtually every economic sector and industry where data needs to be collected or objects need to be tracked holds the potential for RFID applications,” notes ABI Research Director Michael Liard. Organizations are also increasingly using and evaluating RFID systems to improve the tracking of objects, assets, goods and materials within corporate yards and property, on campuses and in open-loop environments, according to ABI.

Another ABI report finds RFID moving into companies’ data centers. “IT assets are key infrastructure for any modern business, and IT managers need to be certain that equipment is documented, traceable and secure,” notes the report. RFID “can deliver quicker, more detailed and more accurate day-to-day management of these important operational assets.”

This is where RFID makes sense—high-value items that need to be tracked. “Managing and auditing this equipment is a serious pain point for IT departments, and automating those applications with RFID can drive clear ROI,” states ABI principal analyst Jonathan Collins, in the report. He notes that “the density of valuable equipment within a restricted area limits the cost and increases the efficiency of an RFID deployment.”

One last note comes from vendor Odin Technologies. Its IT asset tracking report shows that within the last six months, passive RFID technology delivered increased performance on servers, laptops, blades and other high-value IT assets. For instance, IT staff using RFID tags could inventory a rack of 40 servers in 12 seconds or identify all IT equipment within a typical cubicle five times faster than manual methods, with 100 percent accurate data entry.

-Thomas Wailgum

Limits to In-Flight Wi-Fi

A Delta Air Lines decision to block “inappropriate” websites from its planned in-flight Wi-Fi service could be the tip of the iceberg for airlines’ control of Internet use. Delta, which will offer Wi-Fi on some planes later this year and on its domestic fleet in 2009, has decided to prevent passengers from accessing inappropriate content, according to The Atlanta Journal-Constitution.

In-flight Wi-Fi is emerging on a few airlines and was launched by American Airlines on a limited basis in August. Both Delta and American will block VoIP, avoiding the uproar over annoying in-flight cell phone calls. But the prospect of passengers surfing the open Web at their seats raises concerns about children and others being subjected to objectionable material, such as online pornography. Delta plans to offer the GoGo service from Aircell, also used by American. Aircell says it will implement content filtering for airlines if asked.

One privacy rights advocate criticized the idea. “I don’t think it makes much sense,” says Marc Rotenberg, executive director of the Electronic Privacy Information Center. It won’t stop passengers from looking at inappropriate material stored on laptops, he says. It also opens the door to blocking content such as news or political opinions.

Another problem is also likely to come up, says analyst Jack Gold of J. Gold Associates. The thin, cellular-data pipe that passengers will share means airlines may have to throttle back heavy users. One person downloading a movie all through a flight could ruin the access others paid for.

Airlines are likely to guard against this in an automated way. “The flight crew are not going to be IT managers. The policies are going to have to be set and uploaded to the systems,” Gold says.

-Stephen Lawson

R&D Tax Credit Extended as Part of Bailout

The U.S. House of Representatives voted to extend a research and development tax credit to U.S. businesses as part of its approval of a giant bailout of the mortgage industry.

Several tech companies, including Microsoft and Texas Instruments, had called on Congress to extend the tax credit, saying it helps U.S. businesses to invest in R&D and keeps workers in the country. The credit, which would have expired at the end of 2007, will be extended for two years.

“In today’s challenging economic environment, R&D is a critical catalyst for American innovation, economic growth and job creation,” said the R&D Tax Coalition, a group representing the tech, manufacturing, chemical, pharmaceutical and other industries, in a statement. “The R&D tax credit motivates U.S.-based companies to keep cutting-edge research projects in the United States while funding high-wage and high-skilled jobs for American R&D workers across diverse industries.”

The tax credit can cover up to 20 percent of qualified R&D spending. It has expired 13 times since 1981, despite calls by tech, pharmaceutical and manufacturing groups to make the tax credit permanent. Lawmakers have resisted making it permanent largely because of its price tag of about $7 billion a year. Some critics have called the tax credit a government subsidy for large businesses.

Several tech companies and trade groups also praised Congress for passing the larger bailout bill. Brad Smith, Microsoft’s senior vice president and general counsel, said in a statement: “This crisis affects more than just the U.S. financial sector, it affects every corner of the world economy, and today’s vote will help reinstill confidence around the globe.”

-Grant Gross