Its final Q4 FY2012 EPS was a loss of $1.02c per share, compared with expectations of a profit of about $0.20c per share, thus failing to meet analysts’ and CSC’s own estimate. This was attributed to unspecified “additional charges” which did not change the overall grim picture. CSC has some key debt repayments due later this year, so it is vital that the hemorrhaging stop. It is also worth noting that, even after all the write-offs in FY2012, the value of the intangible assets on CSC’s balance sheet is greater than the company’s total equity. This is not a healthy situation.
Mike Lawrie, President and CEO, described the results as “unacceptable” and spent little time repeating the details. He preferred to talk about what he has learned in his initial 2 months at CSC and what he plans to do about it. Once more, he gave the impression of straight talking. It is easy to talk about problems and unacceptable situations when they have all been inherited and one can blame one’s predecessor for them. But Lawrie’ s handling of the Q&A session with the analysts showed an openness which we are not used to with CSC.
Below are some highlights of what Mike Lawrie said, with our comments in italics:
· He intends to take $1billion out of the cost base over the next 12-18 months, primarily from overheads such as G&A expense. He expects some 2000 lay-offs, but said they will not be significant in client-facing roles. It was not clear if the planned 630 person redundancy plan in UK is part of this 2000 or in addition.
· There will be major changes in top management positions in the coming weeks and months. Good news. The right decisions re which top executives are removed will help consolidate Mike Lawrie’s credibility with the workforce.
· There will be disposals and sell-offs of non-core assets, but there will be no sales of entire segments. This may cause revenue shrinkage in the short-term. This is sensible and will help the cash situation. While Mike Lawrie implied that there will be no sell-off of entire segments (eg the US Government business, or Europe as a whole), it does beg the question of the future of CSC operations in small European countries such as Austria, Switzerland, Netherlands, Belgium, Spain, Portugal etc.
· The operating model is overly complex with unclear accountabilities. This will be simplified and clarified. This has been a problem for 10 years. There are major differences between the model as defined by Corporate and the reality in practice. Most client-facing staff can give examples of major business lost because of internal infighting between different CSC operating units arguing about who owns or who has authority over what. Whether a simplified and clarified model will work or not will depend on Mike Lawrie’s willingness to force its implementation. Mike Laphen backed down or figuratively” looked the other way” when faced with opposition to the operating model from local barons determined to retain total control of everything that happened in their territory, while blaming other parts of CSC for anything that went wrong.
· Need to leverage CSC’s intellectual property and software assets. Long overdue and a key reason CSC is an also-ran in many areas of BPO despite having the software to be a leader. CSC needs to ensure its consultants are motivated to leverage software sales by identifying opportunities and working together with the product experts rather than converting major software license opportunities into small consulting engagements.
· A review has highlighted 40 large non-performing projects, the majority being in the MSS (Outsourcing, managed services) sector. The underlying causes are management failures, project management shortcomings, poor contracting and lack of coordination and hand-offs within various CSC teams involved in the projects . A new systems assurance process has been put in place to address these, with emphasis on scope and pricing disciplines prior to contract signature. Again, long overdue. CSC needs to get away from its long sequence of hierarchical reviews. It needs one joined-up bid review and systems assurance process encompassing all necessary parts of the company. Selling teams and project managers spend too much time preparing for a myriad of uncoordinated and disjointed internal reviews, are given revenue and cost “challenges” from all levels of the organization, then get blamed when things inevitably go wrong. Mike Lawrie would learn a lot if he had someone quantify all the “challenges” embedded in the bid models of a few major projects, then ask what management plans were in place to achieve them, who was accountable for achieving these “challenges”, and what the final outcome was. A big question has to be asked of previousd management. How come they did report these 40 under performing projects when Delivery Assurance (the operational audit arm) was obviouly reporting the continuing failure. You can bet that the lawyers involved in the Clas Action suits will have a field day with this information.
· CSC will transition from what Mike Lawrie called a “Holding company” approach to an “Operating company” environment. He explained that “things just sort of roll up and you report what has, in fact, happened (in a holding company). The big transition that we're making is moving to an operating company. And an operating company looks for what the anticipated results are going to be and then operates and tries to change the outcome through management actions and other disciplined processes that are installed”. Mike Mancuso said that a major issue over the past years was that by the time Corporate became aware of problems, they had already escalated into major crises. Again, this makes sense, but it will need a mind-set change in Corporate too. It needs to be done instead of, not in addition to, the interminable detailed historical numbers reviews CSC staff have suffered for years. Corporate executives need to be proactively available to play their part at the right time and assume responsibility for the consequences of their decisions. No more hiding from their responsibilities by being unavailable when needed, by leaving the field managers to make key decisions alone, then distancing themselves from the field manager and the decisions if things go wrong.
Mike Lawrie did well on this analyst call. He explained the issues and his plans in easily understandable business terms, with examples to show that he does look behind the numbers, which is another welcome change in CSC. He gave examples of “diamonds” he had found in the organization. However, I was disappointed he did not reference the retention of CSC’s top employees. Cancellation of bonuses which people believe they have earned and zero pay increases are not motivating messages. Lawrie needs to put in place a retention program for the key performers. There is a big demand for critical IT skills in the markets and our correspondents have told us that CSC’s good people are getting plenty of offers from outside. CSC needs to get them to actively want to stay with the company.
All told, Mike Lawrie’s message is not a happy picture for shareholders or for employees. His candor came as welcome change from the bullshit we have been fed in the past. Right now, he is in the fortunate position of being able to lay all the problems on Mike Laphen’s doorstep. We have to hope that Mike Lawrie is not feeding us more bullshit and that his execution will match his words and plans. .