Sunday, 27 January 2013

How long will the CSC plane stay in the air?

A plane will continue flying after you switch off its engines due to its forward momentum. But only for a while.   Then gravity takes over and the plane comes crashing down to earth. 

This is our concern for CSC;  that its engines have been burned out, its navigation systems are failing, and that it may soon come crashing down to earth. 

Our view is not shared by many Wall Street analysts,  who remain bullish about CSC.  This month Stifel Nicolaus re-iterated its “Buy” rating with a target share price of $50! Goldman Sachs has upgraded CSC from “sell” to “neutral” due to the actions of CSC’s new management team.

Mike Lawrie and his new team have quickly addressed three major issues they inherited. 

  • Previous CEO Mike Laphen’s senior management team included deadwood whose main characteristic was an ability to flatter Laphen and stroke his ego.  Many of these people have now left CSC.

  • It was known that certain of CSC’s major contracts were failing, helped along by senior managers who seemed to think that if they shouted loud enough, denied reality for long enough and threatened the staff often enough, this in itself would get the problems solved.  CEO Mike Lawrie instigated project and account reviews to understand the status of the projects as a basis of corrective action. 

  • An overly complex operating model was identified by Lawrie as a major contributor to CSC’s woes. But this model was not bad in theory. It had just never been implemented. So in Europe for example there were at least four global operating models, an official Corporate  “powerpoint”  operating model, a French exception, a German difference and a UK reality. Mike Laphen and his top managers dealt with this by simply declaring the problem solved, marking down any manager or employee foolish enough to disagree with them,  and just letting the mess of complexity continue. 

Making progress on these issues was the easy part of Mike Lawrie’s task.  With no personal ownership or responsibility for these issues, he could let the world know he had inherited a tremendous mess. He was preaching to the converted anyway. He was preaching to shareholders who had seen the value of their investment crash, and employees who were tired of seeing all their work undone by top management incompetence. 

It simply took focus and determination to show improvements on these three major issues.  Nobody has suggested Lawrie lacks either focus or determination and the market has been impressed by his actions to the extent of a 60% rise in the CSC’s stock price in the past 9 months.

So why are we so skeptical?   It is because of what we hear from within and around CSC (just read the comments on this blog).

Firstly there is the ongoing bad publicity around botched projects.  Just this week came the latest bad news that a $1 billion ERP project has failed, been cancelled by the US Air Force and referred to the US Senate Armed Forces Committee for investigation. 

We are told the planned review of staffing by management level has been delayed in Europe, as CSC HR seemed to be unaware of European legal requirements around restructuring plans and employee redundancies. 

Employee morale jumped when Mike Lawrie announced his plans but has slumped again in face of unreasonably long periods of uncertainty about employees’ futures (or lack of futures)  at CSC. 

Highly skilled employees feel that knowledge transfer activities are a precursor to their being terminated.  So they ensure they keep vital information to themselves.

Many people perceive an attitude amongst CSC’s new executives that long-serving employees are  incompetent or just not good enough  simply because they were with CSC during the Laphen era.  

Mike Lawrie’s new operating model has been described as incomprehensible, with managers saying they don’t understand their responsibilities, nor the responsibilities of groups they are dependent upon, nor who will be working for them.  We were told that the operating and organization models have been designed by a firm of outside consultants, who even decide who will fill each position. We hear of managers’ frustrations at having their teams chosen for them by outside consultants “3000 miles away who can’t tell the difference between a good performer and a good talker and think that cheapest is best”

These frustrations have been building up over the past 2 or 3 months. In the meantime, managers and employees have continued to handle the backlog of sales and delivery commitments from their “old jobs”.  But the chaos point is getting closer, employee frustrations are growing and many key staff and top performers are looking at outside job opportunities.  If many of these people leave, CSC will suffer. 

That is why we do not share the Wall Street analysts’ optimism.  The stock has run up 60% in 9 months. We are unconvinced about its future growth potential, thus skeptical about the analysts’ hold or buy recommendations.

Mike Lawrie needs to restart CSC’s motors before the plane falls out of the sky. 

Posted by Littlejohn