The Good, The Bad And The Ugly: CEO Mike Lawrie Faces Challenge Of Transforming CSC

CSC has been undergoing a massive turnaround strategy under CEO Mike Lawrie, but is it enough to get the solution provider behemoth back on track? Analysts have mixed opinions.

Analysts who spoke with CRN outlined some positive steps forward for the Falls Church, Va., company, No. 4 on CRN’s 2014 Solution Provider 500 list. However, they also warned about missteps going forward that could derail its transformation efforts.

Lawrie was named president and CEO of CSC on March 19, 2012, and in his first earnings call in May of that year, he said CSC's performance was "poor" and "unacceptable," and he would be taking "immediate actions to begin to move in a different direction." In fiscal year 2012, CSC lost $4.3 billion and the three previous years had shown consistently declining earnings on steady sales. Lawrie attributed the company's struggles at the time to a write-off from a failed contract with the U.K.-based National Health Service, troubled managed security services contracts, poorly managed cost structure, operating model alignment and general market uncertainty.

[Related: 10 Things You Need To Know About The CSC-HPE Deal]

Lawrie instituted a bold strategy to revitalize the ailing company, with an immediate $1 billion cost-cutting plan and layoffs. The goal was to raise the company's bottom-line numbers as well as take actions to fix troubled contracts. CSC sold off multiple areas of its business in 2012, including its Australian IT staffing unit, its credit services business, and Italian IT services business.

Lawrie laid out a detailed plan for the company transformation at an investor day a few months after his hiring. In the first phase, CSC would focus on cutting costs. In the second phase, CSC would focus on revenue growth and expand margins. Lawrie predicted at the time that CSC would begin the second phase in fiscal 2015, which began in July 2014.

Since Lawrie instituted the cost-cutting measures, CSC has started to rebound its margins. In 2013, the company went from a multibillion-dollar loss to a profit of $961 million on approximately $15 billion in sales. In 2014, CSC earned $674 million on $13 billion in sales.

CRN reached out to CSC for additional insight into the company's turnaround efforts but the company did not respond to multiple requests for comment by phone and email.

Analysts CRN spoke with for this story all agreed that Lawrie has done a strong job so far helping cut costs and pivoting CSC toward profitability in the face of a changing IT services market.

"They needed a change," said Jacob Gordon, research analyst who covers CSC at Technology Business Research (TBR).

However, the next phase of the company's transition presents a massive challenge for CSC, analysts agreed. An industry source with insight into the company expressed doubt that CSC would be able to successfully turn itself toward a long-term profitable and sustainable business model; driving that doubt is the toll the cost-cutting has taken on employee morale and on execution.

"They've got margins higher, but what's happening is the effects of the cost takeout are now showing up in the form of more negative revenue churn because they've underinvested," said the source.

One effect of the cost-cutting was evident in the company's third-quarter earnings, reported Feb. 9, in which CSC reported an 8 percent decline in revenue to $2.95 billion due to what Lawrie called "execution missteps" with a major contract. In a call with analysts, Lawrie said the drop in sales was "primarily due to some unforeseen delays and execution issues" because of difficulties hiring the required personnel in time to complete contracted IBM RPG programming language work. In the future, Lawrie said he planned to raise salaries for potential job candidates to draw in the needed talent and has been in contact with partners who may have access to needed skills.

"We have to take responsibility for our execution issues," he said. "It's not a market issue. It's not a contract issue. It's not a demand issue. It is an execution issue. [Going forward], we will not have so many execution missteps. We won't have some of these execution gaps as we go into the fourth quarter," Lawrie said on the call.

The contract missteps were evidence of CSC "paying the price" for its aggressive cost-cutting efforts over the past two years, said the industry source. While the margins improved temporarily for the company, CSC's ability to succeed independently in the long term without investing internally is in doubt.

"They're in a dilemma. The dilemma is, to address the revenue problem they would have to sacrifice their margins and start investing in the business for the long haul," said the source.

On CSC's recent earnings call, Lawrie took the blame for a prolonged turnaround as key investments in cloud and Storage-as-a-Service were taking longer than expected to gain sales traction in the marketplace.

"We're reinvesting in the business so that we can ultimately drive some revenue performance and revenue growth, as well as margin expansion, and that takes investment and it takes investment today. And the one lesson I've learned here is there is a longer lead time from making some of those investments and actually seeing that show up particularly in the revenue and the profit line," Lawrie said on the earnings call. "All of these new offerings take longer than what I anticipated. That's my fault. That's my problem, in that I didn't quite figure out those relationships until recently. But we're continuing to invest, we'll continue to invest, and yes, I think it will be more of an even spread quarter-by-quarter as we go forward."

KEEPING AN EYE ON EXECUTION ISSUES

Gard Little, research director at IDC who covers CSC, is a little more optimistic about the outlook for the company.

"It's a slow transition process and I still think they've got some time," said Little. "They've got enough avenues for cost-takeout to continue to manage this cannibalization as they switch from the old types of services to the new types of services. ... If I thought they were out of tricks and had no more cost to squeeze out, that would be bad, but I think those are still there and they will continue chipping away at that. All of those things will eventually play out, whether it's one quarter from now or four quarters from now."

Little said the most recent execution issues, highlighted on the earnings call, aren't a problem if they don’t turn into a pattern.

"Overall, I'm still positive on CSC. I'd like to see those execution issues cleaned up and continue on the turnaround path, but it remains to be seen just how small those execution issues really are. That's definitely something that is going to hurt you in the long term if you can't turn that around. Obviously we'll hear in the next earnings call if that's the case. I think it's a short-term issue, but it's something to keep an eye on," Little said.

CSC has not revealed the date for its fourth-quarter earnings report; last year the company reported earnings April 22.

CSC is facing the same challenges in its transition that many others in the industry are as the market clamors for more services, said John Caucis, practice manager and senior analyst at TBR. The shift in business models caused by services, the cloud and analytics is "upending" the industry, he said, and CSC is not immune.

The challenge for CSC comes as it looks to pit itself head-to-head against industry juggernauts such as IBM and Accenture, which analysts argued are better positioned in the market right now with hefty R&D budgets and a head start on consulting.

"CSC is a leader in many different areas, but is also facing some incredibly stiff competition, and is somewhat late to the game in terms of cost-takeout. Many of its competitors started playing the cost-takeout game sooner. ... I think it's a leader in some areas, certainly cybersecurity, but in a fiercely competitive environment ... it was late to the game in terms of cost-takeout," Little said.

TBR's Gordon agreed, saying that CSC has to work to better differentiate itself against its competitors instead of attempting to face them head on.

"CSC, I think they have all the right parts, per se. They have a good big data analytics platform. They have a good set of cloud solutions. They have the vertical-specific software and experience. But, the thing is: Why CSC? Every time they are going up against IBM, HP, Dell, Accenture, what separates CSC from those companies? What is their edge? I think they're missing out on why should clients, why should buyers choose CSC?" Gordon said. "I think that's what they're running up against."

One way for CSC to overcome that differentiation hurdle, Gordon said, is to make key acquisitions that will set it apart from Accenture and IBM. The company's acquisition of enterprise cloud management company ServiceMesh in October 2013 is one example that has allowed CSC to "gain some traction," said Caucis. IDC's Little added that CSC has a strong portfolio of partnerships, offerings and public sector business.

RUMORS SWIRL OF AN ACQUISITION

Another strategy for the company, and one that has rumors flying left and right, is the possibility of being acquired. Buyout rumors have continued to swirl around CSC over the past few months, most recently with a Reuters report in late February stating the company was in talks with private equity firm Carlyle Group and fellow solution provider behemoth Capgemini. Other reports have named the Blackstone Group and Bain Capital as potential acquirers. CSC has declined to comment on all rumors so far.

Analysts said they don't put much credence in the reports.

"There are rumors all the time. ... I have been hearing rumors of CSC looking for a buyout option since probably 1990, so I don't really put too much stock into that. I have been hearing that forever," IDC's Little said.

Going forward, analysts said they would like to see CSC reinvest in the business to drive growth. IDC's Little said CSC should accelerate new offerings and clean up contract execution issues that emerged in the last quarter's earnings. He said CSC is starting to see investments "paying off" in its public sector business, and would like to see those investments continue.

"Their free cash flow is healthy and it's supporting their ability to make the transition," said Little. "I think they're on the right path. They would probably like to accelerate their progress a little bit faster than they can, but I think they're heading in the right direction and doing all the right things."

TBR's Caucis said he anticipates CSC will be a smaller organization in five years as it feels the effects of the shift to cloud and next-generation technology, the same effect that is being felt by the rest of the market. His colleague Gordon agreed, adding that he expects to see investments, and even an acquisition, in cybersecurity and developing more of its own intellectual property.

In the latest earnings call, Lawrie said he doesn't know exactly when positive growth will come for the company.

"I don't really know, to tell you the truth," Lawrie said in response to questions from analysts. "I think the first step is to begin to see some sequential growth and to see that repeat over a number of quarters. I think the second key metric for me is to see us close some more of this new offering business and begin to execute and bill that. ... The pipeline is growing. But exactly when that inflection point is? If I knew it, I'd tell you, but I don't know. But the signs are all, in my view, pointing in the right direction with the investments we've made and how they're beginning to pay off."

This article originally appeared as an exclusive on the CRN Tech News App for iOS and Windows 8.

PUBLISHED MARCH 9, 2015