Q. We understand there have been revenue-recognition questions over the way you have sold some deals. Is that the cause of your disappointing most recent results?
A. Sales were very eager to get deployments, and so they signed shorter forms of agreements: MOUs [memoranda of understanding]. But that created these very long payment terms which really hurt for accounting terms. We have definitely now addressed that and are being much more stringent, so we reduce DSO [day sales outstanding] etcetera. We have had a new CFO in for nine months, but we were too focused on opportunistic growth. It’s my responsibility, there are no excuses, it has not been good at all. But now we are putting a plan in place to execute on this.
Q. Aside from those issues, are there any other mistakes that you have identified?
A. We were spread too broad and operational processes were not good enough internally. We have done some things really well but 70% of our costs have brought in 90% of our revenue. The rest of our costs have gone on other things outside of the core of search. We see now that we are at a certain size where we need to be more focused and stop doing opportunistic things.
We grew very rapidly beyond $100m and we became the leader in our field; now we need to excel in our operations. Search can be so broad, but we need to focus on the replicable areas. In two years’ time some of these other areas will become more replicable but we need to focus on operational processes, procedures and controls. We have not been very good at operational excellence, in fact that’s an understatement.
Q. What else are you doing to fix the latest problems?
A. There are all sorts of initiatives. We are looking at our customer relationship management systems, for example, where we currently have two different systems, and our corporate IT infrastructure. But when you see rapid growth you need to prioritize. There are always 1,000 things you can improve. We have not always been identifying what we should have prioritized or what we have overlooked.
Q. Out of interest, what CRMs do you have and which are you going to standardize on?
A. All I will tell you is that it looks like we will end up on salesforce.com, but that’s not been finalized.
Q. Sorry, you were saying…
A. Yes, that we are focusing a lot more on operational efficiency. The good news is people say ‘that’s very easy to do’. Because it’s much harder to do great technology, and we have done that part already. But we have simply not focused on it [operational execution]. We are going to be much more focused on it especially over the next two to four quarters. In the next couple of quarters we will have a more streamlined organization.
The good news is that nothing of this has to do with our customers. They are still buying our products and we have remained focused on our customers and technology.
Q. Your arch rival, Autonomy, has made much of your accounting issues. I suppose that’s not surprising in a competitive environment?
A. We both follow IFRS and US GAAP, and we even have the same auditors. But accounting is not black-and-white. There are also judgements to make. If I did it all again I would still have prioritized the technology and our customers, but you also need to introduce operational excellence. I should have done that sooner.
You need a strong management team, too, so I also hired a new COO [Joe Krivickas] who used to be CEO of a couple of hardware companies. So we are now very strong operationally and we also have a CTO who is building out what we need, as well as [hiring] good people in sales and marketing.
Q. Is the board still behind you after these latest operational failings?
A. Of course none of us liked that [the reasons that led to the firm’s restructuring]. But it is very clear what we need to do, and the board still sees that we have a great opportunity. They have a very long-term view.
Q. And as for the technology, is there a risk that search is becoming commoditized, even in the enterprise space?
A. I think it will start to be commoditize, like nearly all things. But even now the database is starting to become commoditized, it is still a $10bn market. And search has not even really started to standardize yet. You have query languages like FQL [FAST Query Language] and AQL [Autonomy Query Language] instead of SQL as a standard.
But if you think about it, search, and the database, are fundamental building blocks, whereas ERP, knowledge management are basically a GUI on top of the database. So I think those things are becoming more commoditized.
In search and the database, there is so much core intellectual property that it can make a difference of a factor of one to 100 when it comes to business accuracy and relevance. So you are talking about it affecting the top or bottom line of a company.
Q. Is your kind of search technology competitive, or complementary, with business intelligence software?
A. The thing is, there is BI and ad-hoc BI. Hyperion, Cognos, Business Objects, they all do very well with pre-set reports, star schemas, and so on. We think you need to open all your data assets to certain customers and all your employees. It needs to be much more ad-hoc.
We built an SOA [services oriented architecture] long before anyone knew what one was, because we offer a service layer that enables you to take your data assets and make them available. And we can still add on top a BI dashboard or knowledge management portal.
In the past few years search has started to become mission-critical for media, e-commerce, compliance, reducing costs.
Procter and Gamble has 24,000 product managers, covering their toothpastes, shavers, soap: all these different things that the product managers want to test out. The default choice might have been Business Objects or similar, perhaps, but using us has given them a much broader choice of what they can get at, because the engine under the hood is much more flexible. You can ask ad-hoc queries, but still deliver the results in histograms, pie charts, graphs, or ranking lists. It’s a myth that search just gives you text lists.
Q. How does your strategy and product set differ from that of Autonomy?
A. The FAST principle is to have one unified technology platform. That has been our philosophy. Autonomy has been more building a suite of different types of solution. They are more like a CA. They are buying firms for revenue and technology.
So far 95% of our growth has been organic. We don’t have considerable workflow or content management capabilities but we have not wanted to spread ourselves too thin, we have remained much more focused. We think we can build a $1bn revenue company just in search. After all, Oracle built a many-billion dollar company just doing the database before it got into applications.
Prior to becoming CEO, Lervik served as the company’s CTO from 1997 to 2001, overseeing all of the company’s research and product development activities. Lervik holds a Ph.D. from the Norwegian University of Science and Technology.
