By Donna Fuscaldo Dow Jones NewswiresDec. 1, 2004 12:01 am ET
CHARLOTTE, N.C. — Sarbanes-Oxley has caused headaches for some public companies, but it is a boost for technology firms looking for new avenues of growth.
Since the Sarbanes-Oxley Act of 2002 was put on the books, publicly held companies of all sizes have spent millions meeting new compliance rules. The act requires companies to retain all business records, including electronic documents and messages, for at least five years. To date, companies have used existing technology to do this, but tech-industry experts and companies reckon firms will start spending more on technology to automate their Sarbanes-Oxley work and thus lower the cost of the work.
“A lot of the implementation has been with databases, spread sheets and word documents, which is taking the cost of compliance up,” said Neal Oswald, global leader, risk-management practice at Electronic Data Systems Corp. “The second wave is: Let’s rationalize the environment.”
Public companies will spend $5.5 billion in 2004 to become Sarbanes-Oxley compliant, according to AMR Research, a Boston technology-research firm. Expect that to rise to nearly $5.8 billion next year, with 28% of the money being spent on technology alone, AMR said. Though technology represents less than a third of all spending, it is the fastest-growing area, AMR said.
The continuing nature of Sarbanes-Oxley is creating opportunities for software companies, which will be tasked with automating the processes, and hardware companies, which will have to run the new software and house the data and documents, industry observers say. For technology-services companies, it could mean an opportunity to come in and tie it all together.
“It’s not like Y2K, you do it and it’s done,” says John Hagerty, vice president of research at AMR. “It has to be done every quarter from this point forward.”
Though it is still a small market opportunity for the likes of International Business Machines Corp., which has yearly revenue of about $90 billion, any new revenue stream is welcome given that most tech companies are struggling with lackluster corporate spending. What’s more, the tech spending on Sarbanes-Oxley isn’t coming at the expense of other technology projects.
“It’s a small amount relatively speaking, but it’s money coming out of nowhere,” said Andrew Efstathiou, an analyst at Yankee Group, a Boston market-research firm.
The way IBM sees it, helping companies with compliance will not only create additional revenue for the technology powerhouse, but will serve to differentiate it from peers.
“It impacts a large portion of clients. Whether it’s outsourcing or re-engineering a process, it’s going to, in some way, shape or form, have to be Sarbanes-Oxley compliant,” said Susanne Ruschka-Taylor, global leader, business-risk management in IBM’s business-consulting services unit. “So it’s going to be very important seeking a service provider that is aware of the Sarbanes-Oxley compliance requirement.”
But IBM isn’t the only technology heavy hitter to go after Sarbanes-Oxley. Xerox Corp. , Sun Microsystems Inc. and EDS are just a few of the companies offering products and services in this market. Start-ups and smaller-size technology firms also see an opportunity.
Investors and analysts say software and storage companies will be the early and big beneficiary of Sarbanes-Oxley and other regulations because companies will need to store, automate and easily access all their documents. Storage maker Network Appliance Inc.’s chief executive, Dan Warmenhoven, said compliance in general has driven demand for storage gear. The company’s revenue for the quarter ended Oct. 29 rose 36% from a year earlier. Meanwhile, EMC Corp. also credited Sarbanes-Oxley and other regulations for growth in its hardware and software businesses.
The technology firms see Sarbanes-Oxley as just one element of a large market in offering services and products around government regulations. They point to other requirements such as the Health Insurance Portability and Accountability Act or the Basel II global banking rules that could require their technology, services and products. The tech companies stress that they aren’t in the business of advising companies on best business practices, but rather making it easier and more cost effective to meet the requirements.
“Looking out to the area of regulation, it’s not just one that we are only going after,” says Scott Clinton, director of solutions at Sun Microsystems. “Other regulations have very common elements.”
While offering services and products around Sarbanes-Oxley does mark a new business for technology companies, some investors aren’t banking on huge windfalls because of their initiatives.
John Rutledge, a portfolio manager at Evergreen Investments, says Sarbanes-Oxley isn’t going to resurrect the flagging technology sector.
“It’s already helped somewhat and will continue to help somewhat, but it’s not a huge deal. It’s not enough to move the needle substantially,” he said.
However, some think Sarbanes-Oxley may drum up other business for the technology companies.
Gerry Bollman, a portfolio manager at Great Companies LLC, an investment firm based in Clearwater, Fla., that owns shares of IBM, said offering services and products surrounding Sarbanes-Oxley will be a good marketing ploy for technology companies.
“Doing Sarbanes-Oxley cheaply, quickly and effectively for a company is a good way to showcase your business process talent,” Mr. Bollman said. “I don’t think it will necessarily be a key part of ongoing spending. It’s more of a way to demonstrate other talents.”
Write to Donna Fuscaldo at donna.fuscaldo@dowjones.com