The pressure to meet or exceed investors' expectations pushes software companies to book sales in the final days of a quarter. Customers who know this often take advantage of the last-minute rush to win substantial price breaks. While the software maker and client may agree to a transaction before the quarter ends, the documents are often completed after the fact - leaving executives with the thorny decision of when to claim the agreement was concluded. Software contracts also frequently require programs to be customized for individual buyers. This means customers must sign off on projects before they are completed, and before the revenue is on the books.
Installation further prolongs the process of completing the transaction.
Such uncertainty is an obvious pitfall for a company as aggressive and driven as Critical Path, which has acquired eight companies since going public in 1999. Say a contract calls for Critical Path to sell the software for 20,000 e-mail accounts to a customer that has 15,000 employees and plans to hire another 5,000. Complicating matters is the tightening of the accounting rules that govern how software and Internet companies recognize sales. An SEC rule issued last year that more explicitly defines when and how revenues should be booked sparked an outcry from the software industry, which complained that the fluidity of their business makes it nearly impossible to abide by such rigid rules. The tightened rules mean that, as the economy slows and revenues falter, more firms are likely to run afoul of the regulators.