| ELOYALTY CORP Item 1A Risk Factors |
| There is a range of risks and uncertainties that could adversely affect our business and our overall financial performance |
| In addition to the matters discussed elsewhere in this Form 10-K, we believe the more significant of such risks and uncertainties include the following: We depend on a limited number of clients for a significant portion of our revenue, and the loss of a significant customer or a substantial decline in the number or scope of projects we do for a significant customer would have a material adverse effect on our business |
| While our overall levels of client concentration have declined in recent periods, we derive and expect to continue to derive for the foreseeable future a significant portion of our revenue from a limited number of clients |
| See “Overview of the Results of Operations and Financial Condition” included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7, Part I of this Form 10-K The volume of services that we provide for a specific client is likely to vary from year to year, and a major client in one year might not use our services in a subsequent year |
| To the extent that any significant 7 _________________________________________________________________ [70]Table of Contents client uses less of our services or terminates its relationship with us, as may occur as clients respond to conditions affecting their own business, our revenue could decline substantially, which could seriously harm our business |
| We depend on good relations with our major clients and any harm to these good relations may materially and adversely harm our business or our ability to compete effectively |
| To attract and retain clients, we depend to a large extent on our relationships with our customers and our reputation for high quality Consulting services and Managed services |
| We design, create, implement, host, maintain and support applications and solutions that are often critical to our clients’ businesses |
| While we believe that we generally enjoy good relations with our clients, if a client is not satisfied with our services, products or solutions, including those of subcontractors we employ, it may be damaging to our reputation and business |
| Any defects or errors in our services or solutions or failure to meet our clients’ expectations could result in: • Delayed or lost revenue due to adverse client reaction; • Requirements to provide additional services to a client at a reduced or no charge; • Negative publicity, which could damage our reputation and adversely affect our ability to attract or retain clients; and • Claims for damages against us, regardless of our responsibility for such failure |
| If we fail to meet our contractual obligations with our clients, we could be subject to legal liabilities or loss of clients |
| Although our contracts typically include provisions to limit our exposure to legal claims for the services and solutions we provide and the applications and systems we develop or integrate, these provisions may not protect us in all cases |
| If we do not effectively manage the risks associated with increasingly complex client projects and new services offerings, our profit margins and our financial results may suffer |
| We may fail to accurately estimate the time and resources necessary for the performance of our services |
| It can be difficult to judge the time and resources necessary to complete Consulting projects, to deploy, support and operate hosted solutions, or to support and maintain complex contact center architectures |
| A number of different risks must be accounted for, including, without limitation, the variability and predictability of the number, size, scope, cost and duration of, and revenue from, client engagements, unanticipated cancellations or deferrals of client contracts or follow-on phases of engagements in process, collection of revenue, variable employee utilization rates, project personnel costs and engagement requirements |
| Accurate estimates as to the costs and timing of completion of engagements is particularly important for the limited number that are performed on a fixed-price or not-to-exceed basis |
| Our failure to accurately estimate these risks could reduce the profitability of, or result in a loss on, our engagements and could damage our client relationships and our reputation |
| Our ability to retain our existing professionals, and our ability to recruit additional talented professionals, are critical to the success of our business |
| We believe that our success will depend substantially on our ability to attract, train, motivate and retain highly skilled management, strategic, technical, product development and other key professional employees |
| The information technology services industry continues to be people-intensive and faces a shortage of qualified personnel, especially those with specialized skills or experience |
| We compete with other companies to recruit and hire from this limited pool |
| If we cannot hire and retain qualified personnel, or if a significant number of our current employees leave, we may be unable to complete or retain existing engagements or bid for new engagements of similar scope and revenue |
| If one or more of our key personnel were unable or unwilling to continue in their present positions, they could be difficult to replace and our business could be seriously harmed |
| This would result not only in the loss 8 _________________________________________________________________ [71]Table of Contents of key employees, but also potentially in the loss of client relationships or new business opportunities |
| In addition, there is no guarantee that the employee and customer non-solicitation and non-competition agreements we have entered into with our senior professionals would deter them from departing us for our competitors or that such agreements would be upheld and enforced by a court or other arbiter across all jurisdictions where we engage in business |
| We rely heavily on our senior management team for the success of our business |
| We rely heavily on our senior management team to manage our practices |
| Given the highly specialized nature of our services, these people must have a thorough understanding of our service offerings as well as the skills and experience necessary to manage the organization |
| If one or more members of our senior management team leave and we cannot replace them with a suitable candidate quickly, we could experience difficulty in managing our business properly, and this could harm our business prospects, client relationships, employee morale and results of operations |
| Our industry is very competitive and, if we fail to compete successfully, our market share and business will be adversely affected |
| We operate in a highly competitive and rapidly changing market and compete with a variety of organizations that offer services similar to those we offer |
| The market includes a variety of participants that compete with us at various levels of our business, including strategic consulting firms, systems integrators, general information technology services providers, web consulting firms, application service providers, and other firms that provide both consulting and systems integration services and solutions |
| New market entrants also pose a threat to our business |
| Many of our competitors have longer operating histories, more clients, and longer relationships with their clients, greater brand or name recognition and significantly greater financial, technical, marketing and public relations resources than we do |
| As a result, our competitors may have enhanced abilities to compete for specific clients and market share generally, including through substantial economic incentives to clients to secure contracts |
| Existing or future competitors may develop or offer solutions that are comparable or superior to ours at a lower price |
| In addition, our competitors may be in a better position to respond quickly to new or emerging technologies and changes in client requirements or expectations |
| They may also develop and promote their products and services more effectively than we do and be better able to compete for skilled professionals by offering substantial compensation incentives |
| We must keep pace with the rapid rate of technological innovation and change, as well as evolving industry standards, in order to build our business |
| Our industry is characterized by rapid and continually changing technologies, the introduction of many new products and services and evolving industry standards and client preferences |
| Our solutions must meet the requirements of and achieve significant acceptance among our current and prospective clients within this environment |
| Our future business will depend on our continuing ability to adapt to and incorporate changing technologies and emerging industry standards and to remain knowledgeable with respect to emerging CRM technology, customer loyalty research and applied CRM solutions |
| In addition, our future business depends upon continued growth in the acceptance and use of CRM methodologies and technologies by our current and prospective clients and their customers and suppliers |
| Their acceptance and usage in turn may depend upon factors such as: the actual or perceived benefits of adoption and implementation of CRM methodologies and technologies, including the predictability of a meaningful return on investment, cost efficiencies or other measurable economic benefits; their actual or perceived ease of use and access to such new technologies and methodologies; and their willingness to adopt new business methods incorporating a customer-centric approach |
| We cannot assure you that we will be successful in anticipating or responding to these developments and challenges on a timely or competitive basis or at all, or that our ideas and solutions will be successful in the marketplace |
| In addition, new or disruptive technologies and methodologies by our competitors may make our 9 _________________________________________________________________ [72]Table of Contents service or solution offerings uncompetitive |
| Any of these circumstances could adversely affect our ability to obtain and successfully complete substantial new client engagements that are important to maintain and grow our business |
| The recent growth of and intensifying competition within the CRM market may increase these challenges |
| We depend on our ability to rapidly learn, use and integrate software and other technology developed by third parties to successfully compete in the CRM market, and our ability to maintain and grow our business may be affected by our ability to maintain strong relationships with CRM software providers and other alliance partners |
| To provide certain of our solutions and services, we rely on third party software, telephony and other infrastructure and related services |
| If we are unable to integrate these components in a fully functional manner, we may experience difficulties that could delay or prevent the successful development, introduction or marketing of new solutions |
| We could also incur substantial costs if we need to modify our services or infrastructure to adapt to changes in these third party products and services |
| We have invested time and resources in seeking to maintain strong relationships with applicable software and technology providers and we plan to make additional investments in the future |
| The benefits we anticipate from these relationships play an important role in our future growth strategies |
| We rely on these relationships with third party vendors and alliance partners to allow us to rapidly learn about their existing and next generation technologies, to develop appropriate methods to integrate their products and services into our solutions and to obtain joint sponsorship of solution offerings |
| If we are unable to initiate and successfully maintain these relationships, we may fail to obtain the future benefits we hope to derive from them and significantly reduce our ability to successfully create and deploy new solution offerings incorporating their technologies |
| In addition, we may be adversely affected by the failure of one or more of our vendors or alliance partners, which could lead to reduced marketing exposure, fewer sales leads or joint marketing opportunities and a diminished ability to gain access to or develop leading-edge solutions |
| As our most important alliance relationships are non-exclusive, our alliance partners are also free to establish similar or preferred relationships with our competitors |
| These circumstances could adversely impact the success of our growth strategies that, in turn, could adversely affect our results of operations |
| It may be difficult for us to sufficiently access the debt or equity markets to meet our financial needs |
| We may need to raise additional funds in the future, through public or private debt or equity financings, which may not be available on terms favorable to us or at all |
| While we believe that existing cash resources will be sufficient to satisfy our operating cash needs for the next 12 months, any substantial decline in our revenue would likely cause us to use cash more rapidly than anticipated and could require us to raise additional funds |
| Future decreases in our operating results, cash flow or stockholders’ equity may impair our future ability to raise these funds as and when needed |
| As a result, we may not be able to maintain adequate liquidity to support our operations, take advantage of new service or solution offerings or business expansion opportunities or respond to competitive pressures |
| We have a limited ability to protect our intellectual property rights, which are important to our success and competitive position |
| Our ability to protect our software, methodologies and other intellectual property is important to our success and our competitive position |
| We regard our intellectual property rights as proprietary and attempt to protect them with patents, copyrights, trademarks, trade secret laws, confidentiality agreements and other methods |
| Despite our efforts to protect our intellectual property rights from unauthorized use or disclosure, parties may attempt to disclose, obtain or use our rights |
| The steps we take may not be adequate to prevent or deter infringement or other misappropriation of our intellectual property rights |
| In addition, we may not detect unauthorized use of, or take timely and effective actions to enforce and protect, our intellectual property rights |
| Existing laws of some countries in which we provide services or solutions afford more limited protection of intellectual property rights than laws in the United States |
| 10 _________________________________________________________________ [73]Table of Contents We may be required to obtain licenses from others to refine, develop, market and deliver current and new services and solutions |
| There can be no assurance that we will be able to obtain any of these licenses on commercially reasonable terms or at all, or that rights granted by these licenses ultimately will be valid and enforceable |
| Others could claim that our services, software or solutions infringe their intellectual property rights or violate contractual protections |
| Although we believe that our services, software and solutions do not infringe the intellectual property rights of others, we cannot be sure of that |
| We or our clients may be subject to claims that our services, products or solutions, or the products of others that we offer to our clients, infringe the intellectual property rights of others |
| Any infringement claims may result in substantial costs, divert management attention and other resources, harm our reputation and prevent us from offering some services, software or solutions |
| A successful infringement claim against us could materially and adversely affect our business |
| In our contracts, we generally agree to indemnify our clients for expenses and liabilities resulting from claimed infringement by our services, software or solutions, excluding third party components, of the intellectual property rights of others |
| In some instances, the amount of these indemnities may be greater than the revenue we receive from the client |
| In addition, our business includes the development of customized software modules in connection with specific client engagements, particularly in our systems integration business |
| We often assign to clients the copyright and, at times, other intellectual property rights in and to some aspects of the software and documentation developed for these clients in these engagements |
| Although our contracts with our clients generally provide that we also retain rights to our intellectual property, it is possible that clients may assert rights to, and seek to limit our ability to resell or reuse, this intellectual property |
| Increasing government regulation could cause us to lose clients or impair our business |
| We are subject not only to regulations applicable to businesses generally, but we and the solutions we offer to our clients also may be subject to United States and foreign laws and regulations directly applicable to electronic commerce, the Internet and data privacy |
| Laws and regulations in the Unites States and abroad, as well as legislative initiatives that may be considered in the future, may increase regulation of the Internet and impose additional restrictions relating to the privacy of personal data |
| We may be affected indirectly by any such legislation to the extent that it decreases acceptance or growth of the Internet or otherwise impacts our existing and prospective clients |
| Any such laws and regulations therefore could affect our existing business relationships or prevent us from getting new clients |
| Our international operations create special risks, including those relating to the economic conditions in each country, potential currency exchange and credit volatility, restrictions on the movement of cash and certain technologies across national borders, tax issues resulting from multiple tax laws, compliance with a variety of other foreign national and local laws and regulations, political instability and management of a geographically dispersed organization |
| If not adequately addressed, these risks may adversely affect our business |
| During 2005, 7prca of our revenue was derived from our international operations |
| A majority of our international revenue and costs have been denominated in foreign currencies, however we believe that a decreasing portion will be so denominated in the future |
| To date, we have not engaged in any foreign exchange hedging transactions, and we are therefore subject to foreign currency risk |
| If growth in the use of CRM technologies declines, demand for our services may decrease |
| CRM application and infrastructure technologies are central to many of our solutions |
| Our business depends upon continued growth in the use of these technologies by our clients, prospective clients and their customers and suppliers |
| If the number of users of this technology does not increase and commerce using this 11 _________________________________________________________________ [74]Table of Contents technology does not become more accepted and widespread, demand for our services may decrease |
| Factors that may affect the usage of this technology include: • Actual or perceived lack of security of information; • Lack of access and ease of use; • Congestion of Internet traffic or other usage delays; • Inconsistent quality of service; • Uncertainty regarding intellectual property ownership; • Reluctance to adopt new business methods; and • Costs associated with the obsolescence of existing infrastructure |
| Our financial results are subject to significant fluctuations because of many factors, any of which could adversely affect our stock price |
| It is possible that in some future periods our operating results may be below the expectations of public market analysts and investors |
| In this event, the price of our common stock may fall |
| Our revenue and operating results may vary significantly due to a number of factors, many of which are not in our control |
| These factors include: • Unanticipated cancellations or deferrals of, or reductions in the scope of, major engagements; • Our ability to deliver complex projects and the number, size and scope of our projects; • Our client retention and acquisition rate and the length of the sales cycle associated with our solutions; • The efficiency with which we utilize our employees, plan and manage our existing and new engagements and manage future growth; • Changes in pricing policies by us or our competitors; • Number of billing days; and • Availability of qualified employees |
| We must maintain our reputation and expand our name recognition to remain competitive |
| We believe that establishing and maintaining a good reputation and brand name is critical for attracting and expanding our targeted client base |
| If our reputation is damaged or if potential clients do not know what solutions we provide, we may become less competitive or lose our market share |
| Promotion and enhancement of our name will depend largely on our success in providing high quality services, software and solutions, which cannot be assured |
| If clients do not perceive our solutions to be effective or of high quality, our brand name and reputation could be materially and adversely affected |
| Our clients use our solutions for critical applications |
| Any errors, defects or other performance problems, including those in our proprietary software or products supplied by third party vendors, could result in financial or other damages |
| In addition to any liability we might have, performance problems could also adversely affect our brand name and reputation |
| Compliance with internal control reporting requirements could increase our costs |
| The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and the Public Company Accounting Oversight Board, required changes in the corporate governance and securities disclosure and compliance practices of public companies over the last few years |
| In the event that we need to comply with the internal control reporting requirements of the Sarbanes-Oxley Act in 2006, it would significantly increase our internal and external compliance costs |