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The Sarbanes-Oxley Software Race

By Sarah Lacy Sarbanes-Oxley compliance may be costing the average large company $7.8 million, 70,000 man hours, and countless headaches. But one company's nightmare is another's gold mine.

When entrepreneur Jasvir Gill first heard about the regulation, he was already helping companies navigate auditing woes. His consultancy, Virsa, had just developed software that could monitor who was doing what on a company's financial software, making sure, for example, that someone wasn't setting up fictitious employees then "paying" them and pocketing the money. "We had sold it to five or six customers, then Sarbanes-Oxley happened, and we never looked back," says Gill.

Today, Virsa is more software company than consultancy. It's profitable, with more than 200 customers, including such diverse names as IBM, (IBM) Sony (SNE), Kellogg's (K), and International Paper (IP). As Virsa backer Ray Lane of Kleiner Perkins Caufield & Byers says, "Nothing sells software like government regulations."

LUCRATIVE LINKUP. That maxim is also true for competitors, and Virsa has a raft of them. They range from bigger rivals, such as accounting-software company ACL Services, to upstarts just out of stealth mode, such as Oversight Systems. Two others that say they go up against Virsa quite a bit are Approva and Precision Consulting. Eventually, if the market stays interesting, bigger companies like German software giant SAP (SAP) or Oracle (ORCL) may angle for an acquisition or build competing products, too.

The market is big enough that Virsa doesn't need all of it to win, says analyst Paul Proctor of Gartner Research, but some recent moves have given it some much-needed momentum just at the peak of Sarbanes-Oxley frenzy. In addition to sewing up a tidy $15 million from name-brand venture-capital firms Kleiner Perkins and Lightspeed Venture Partners last summer, Virsa is three months into a rare, and potentially lucrative, deal with SAP. Under the deal's terms, SAP is reselling Virsa's software in exchange for a healthy cut of the revenues.

Locking up a deal like this was a prerequisite to Kleiner Perkins investing, Lane says. As the former president of Oracle, Lane knows a thing or two about the marketing might of big software. With SAP's global salesforce pitching Virsa's products, Virsa could have a shot at thousands of customers within the next year. On its own, Virsa would have been doing well if it had doubled its customer base in a year -- but that would still leave it shy of 400 customers.

CHECKS AND BALANCES. It's a mantra not heard much since 1999: Get big fast. U.S. companies are racing to meet compliance standards now, and startups have to work fast to get in front of them. As competitor Lonnie Perkins, CEO of Precision Consulting, puts it: "This has been a lot like Y2K for the security industry. In another year or year-and-a-half, people will be making their choice of solution -- then it will be over."

Virsa and its competitors solve a problem techies call "segregation of duties." The software governs who has clearance to perform such tasks as writing a check to a vendor, paying an employee, or adding revenue in a given quarter. Before these products, which offer another layer of checks and balances, the same person could have added a new vendor's name and paid that vendor unchecked.

Virsa's software not only sets up who can do what but it also enforces the rules. If an unauthorized employee tries to monkey with accounts payable or to raise a quarter's revenues, the software won't let them -- and it also sends an alert to the company's compliance watchdogs. That helps prevent fraud before it occurs, in contrast to pricey and complicated after-the-fact audits.

CASH CUSHION. This type of software is a legitimate Sarbanes-Oxley spending priority, Proctor says. But because every startup desperate for sales is waving the Sarbanes-Oxley flag, a company like Virsa can easily get lost in the shuffle. "Every vendor has some compliance messaging, and many went overboard," he says. "The market has tired of that."

That's where Virsa expects a $15 million cash cushion and the SAP partnership to come in handy. Since Virsa is profitable, it doesn't need the money for operations. But a healthy balance sheet helps assure customers who might otherwise be nervous about buying from a startup.

The SAP deal is potentially a bigger leg up on the competition than all that cash. It's one of only a handful of partnerships where SAP actively sells a startup's product. "We're having some open dialogue about what we already have, those things we'll be building in the next few years, and those areas where we have a gap and need help," says John Robertson, senior vice-president for new business and partner development at SAP. "Virsa fit nicely."

Since March, SAP has closed more than 40 new customers for Virsa. The average deal size is about $400,000.

SOUR GRAPES? Competitors are loath to admit Virsa's coup. Approva, which has raised $30 million from venture-capital heavyweights including New Enterprise Associates, says it has strong referral relationships with audit firms such as Ernst & Young and KPMG. Neil Selvin, Approva's executive vice-president for products and marketing, argues that a deal with SAP could hurt Virsa's ability to sell to Oracle customers. "We didn't want SAP investing in us," he says. "We wanted to be a cross-platform environment."

Precision Consulting's Perkins is a bit more generous. He believes that some customers who are unhappy with SAP's customer service will seek out other vendors, but he admits that he won't even get a chance to court many deals because of Virsa's ties.

Precision Consulting has tangled with Virsa before. In 2004, Precision filed a patent-infringement case against Virsa that was settled in January, 2005. (Under the terms of the settlement, both companies are restricted from talking about it in detail.) Perkins sees Virsa as the No. 1 company in this market, followed closely by Approva and Precision. "We haven't gotten a bunch of VC funding, and that's what has made the biggest difference between us and Virsa and Approva," Perkins says.

For now, it's a horse race, with Virsa in the lead. But analysts point out that several laps remain. And while Virsa may not have to worry about adding customers now, thanks to its deal with SAP, the real test will be selling them new products after the Sarbanes-Oxley frenzy is over. Lacy is a reporter for BusinessWeek Online in the Silicon Valley bureau

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